Can an Ontario corporation lend money to its directors?

Ontario corporations are permitted to lend money to directors, but there are restrictions and disclosure requirements that apply. The Ontario Business Corporations Act contains provisions governing financial assistance — including loans — made by corporations to directors, officers, employees, and shareholders.

Ontario repealed its old financial-assistance restrictions in 2006, so the OBCA no longer requires shareholder approval for a loan to a director — the safeguards today are the directors' fiduciary duties, conflict-of-interest disclosure (s. 132), and any shareholder-agreement terms. Without shareholder approval, a loan to a director could be challenged as improper or result in personal liability.

There are also tax considerations. The Income Tax Act (Canada) generally requires shareholder-directors who receive loans from their corporation to repay them within one year after the end of the corporation's tax year in which the loan was made, or the full amount of the loan is included in their income. This rule catches many inter-company arrangements that owners do not initially think of as "loans." Before advancing any funds from a corporation to a director or owner, getting advice from both a corporate lawyer and a tax accountant is important to structure the arrangement properly and avoid unintended tax and legal consequences.