Tax Planning for Deduction of Guarantee Payments

Tax Planning for Deduction of Guarantee Payments –Tax Lawyer Toronto Commentary

Often it will be necessary for an entrepreneur to personally guarantee the obligations of a private corporation. Our experienced Toronto tax lawyers can carry out the income tax planning, provide tax help and draft the guarantee to ensure that any guarantee payments made are tax deductible to the payer.

Generally speaking, a taxpayer who is required to honour a Guarantee is considered to have acquired a debt at the time that the Guarantee is honoured equal to the amount of payment made pursuant to the Guarantee.

Whether the debt so acquired is a bad debt is a question of fact in each case. If the Guarantee had been given for adequate consideration it will generally be considered to have been given for the purpose of gaining or producing income. Therefore, if the acquisition of a debt in these circumstances gives rise to a bad debt, any loss arising from a payment required by the Guarantor under that Guarantee will be considered to be a deductible capital loss. In certain circumstances, discussed in CRA Interpretation Bulletin 239R2, loan guarantees for inadequate consideration may also give rise to capital losses. This occurs where:

• The corporation (or partnership) which benefited from the Guarantee used the borrowed funds to earn income
• The corporation could not obtain financing at competitive rates without the Guarantee
• The corporation permanently ceased to carry on its business
• The loan from the shareholder to the corporation did not result in any undue tax advantage

From an income tax planning point of view it is generally advisable to have a written guarantee agreement drafted by one of our Toronto tax lawyers and for a reasonable fee to be charged and paid by the corporation to the guarantor. This fee can in effect be part of the annual compensation paid by the corporation to the owner-manager. It would be paid as a guarantee fee instead of as a salary or bonus. If you require tax planning advice related to a corporate guarantee contact our tax lawyer Toronto firm for tax help.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch