Documenting a Shareholder Loan in Ontario: Why You Need a Promissory Note

Plenty of small business owners lend their own money to their corporation without a second thought — a transfer from a personal account to cover payroll one month, a top-up before a big order ships. It feels informal because it's your own company. Legally, though, an undocumented shareholder loan creates real ambiguity that can come back to bite you, often at the worst possible time: during a tax review, a dispute with a co-owner, or an insolvency.

Why "It's My Own Money" Isn't Good Enough

Once money moves from you personally into the corporation's bank account, the corporation — a distinct legal person, separate from you — has received it. Without paperwork, there is no clear record of:

• Whether the money was a loan (which the corporation must repay) or a capital contribution (which becomes part of the corporation's equity, with no repayment obligation).
• What interest, if any, applies.
• Whether it's repayable on demand or over a set term.
• Whether it is secured against any of the corporation's assets or unsecured.

That ambiguity doesn't just sit there quietly. It surfaces exactly when it matters most.

Where an Undocumented Loan Becomes a Problem

• Corporate records and due diligence. Corporations are expected to maintain accurate records — a minute book, along with registers and supporting documents for money owed to and by the corporation. An unrecorded loan from a shareholder is one of the more common gaps that surfaces when a corporation is later financed, sold, or reviewed.
• Multiple owners disagreeing. If two co-owners each put money into the business informally over time, and the amounts weren't equal or weren't documented, a later dispute over who is owed what — and on what terms — becomes very difficult to resolve without paperwork to point to.
• Insolvency or wind-down. If the business fails, whether a shareholder's advance counts as a loan (giving them creditor status, generally ahead of shareholders in a wind-down) or as capital (which doesn't) can make a real difference to what, if anything, that person recovers.
• Tax characterization. How an advance to a corporation is treated for tax purposes generally depends on its true nature and how it's documented — get advice from your accountant specific to your situation, since the tax rules for shareholder loans are detailed and outside the scope of general legal information.

What a Promissory Note Should Cover

A promissory note is a simple, direct way to fix these gaps. At minimum, it should set out:

• [ ] The parties (the shareholder as lender, the corporation as borrower).
• [ ] The principal amount advanced.
• [ ] Whether interest applies, and if so, the rate and how it accrues.
• [ ] The repayment terms — a fixed term, instalments, or repayable on demand.
• [ ] Whether the loan is secured against any corporate assets, and if so, whether that security is properly registered.
• [ ] What happens on default, or if the shareholder wants early repayment.
• [ ] Signatures from someone with authority to bind the corporation, and from the shareholder personally.

If the loan is meant to be secured against specific business assets — equipment, inventory, or receivables — that security interest generally needs to be registered under Ontario's personal property security regime to be effective and properly ranked against other creditors, which is a separate step from simply writing the promissory note.

A Simple Process for Documenting the Loan

1. Decide, deliberately, whether it's a loan or a capital contribution — don't let it default into ambiguity because that's what's easiest today.
2. Set the terms — amount, interest (if any), and repayment structure — in writing, before or as close as possible to when the money moves.
3. Have the corporation's board or directing mind formally authorize the loan, and record that authorization in the minute book.
4. Sign a promissory note reflecting those terms.
5. Register any security properly, if the loan is meant to be secured.
6. Keep records consistent with how the loan is treated going forward — repayments, interest accrual, and year-end statements should match what the note says.

Frequently asked questions