The corporation financed its manager's buy-in, and the loan was income in his hands until it was restructured

The situation

The founder of Prairie Millwork Ltd., a Saskatchewan cabinetry manufacturer, wanted to sell his shares to Dennis, the general manager who had run the shop floor for fourteen years and owned no shares at all. The price was $650,000. Dennis could not raise that much personally — no bank would lend him that kind of money against shares he did not yet own in a company with no public market for them — so the founder's advisor proposed the obvious-looking fix: have the company itself lend Dennis the purchase price.

The problem

The plan assumed the loan would fall inside the employee-shareholder-loan exception in the Income Tax Act because Dennis was, after all, an employee borrowing to buy shares. The transaction the advisor had in mind — Dennis using company money to buy the founder's existing shares directly — was the single most natural way to structure the deal, and it is also the one transaction the relevant exception does not cover.

The numbers

$650,000, lent by the corporation to Dennis, to be applied directly to purchase the founder's shares. Without the exception, s.15(2) includes the full amount of a shareholder loan in the borrower's income for the year it is received — a $650,000 income inclusion on money Dennis still owed the company and had not yet earned a cent from.

The rule that decided it

Section 15(2) is broad: where a person who is or becomes a shareholder of a corporation receives a loan from it, “the amount of the loan or indebtedness is included in computing the income for the year” of that person. Section 15(2.4)(c) carves out one specific route — a loan to enable an employee “to acquire from the particular corporation… previously unissued fully paid shares of the capital stock of the particular corporation… to be held by the employee for the employee's own benefit.” The word doing all the work is unissued. The exception is built for a company issuing new treasury shares to an employee, not for an employee buying an existing owner's shares out of that owner's hands. Dennis was buying the founder's shares — already issued, already outstanding, already owned by someone else. The plan's natural transaction was, on that one word, exactly the transaction the exception does not reach.

It is worth noting what the exception does not require, as much as what it does. Paragraph (2.4)(a) — the general employee-loan exception — is unavailable to a “specified employee,” defined elsewhere in the Act as someone who owns, with related persons, not less than 10% of any class of shares. Paragraph (c) carries no such limit. It has to: almost anyone borrowing to buy a meaningful stake is about to become a specified shareholder by the transaction itself. The problem here was never Dennis's prospective ownership percentage. It was that the shares he was buying already existed in someone else's hands.

The outcome

The transaction was restructured into two linked steps rather than one. Prairie Millwork issued Dennis previously unissued, fully paid treasury shares, funded by the loan — a transaction s.15(2.4)(c) squarely covers, since the shares were newly issued and held for his own benefit. Separately, the corporation used available cash and a modest bank facility to redeem and cancel a corresponding block of the founder's existing shares. Dennis ended up in the same ownership position; the loan now funded a subscription for new shares rather than a purchase of old ones, and the founder was bought out through a redemption rather than a direct sale to Dennis.

What it would have cost otherwise

Closing on the original plan would have handed Dennis a $650,000 income inclusion in the year of the loan — unless it was repaid within the one-year window in s.15(2.6), which defeats the entire purpose of financing a purchase he could not otherwise afford. There is no version of the original structure that both uses the company's money and avoids that result.

The tell

The tell was in the advisor's own shorthand: describing the plan as “an employee loan to buy shares,” without asking whose shares. The exception cares about the source of the shares, not the plain-English description of the transaction.

Takeaways

• • s.15(2.4)(c) applies only to previously unissued, fully paid shares issued by the corporation — not to an employee buying an existing owner's shares.
• • Buying the retiring owner's existing shares, the single most natural succession transaction, falls outside the exception entirely.
• • Unlike the general employee-loan exception in (2.4)(a), (c) has no bar against a specified (10%+) shareholder — because almost anyone using it is about to become one.
• • The fix is structural, not documentary: fund a subscription for new treasury shares, and buy out the retiring owner through a separate redemption.

Sources

• • Income Tax Act — s.15(2) (shareholder debt income inclusion); s.15(2.4)(c) (exception for previously unissued fully paid shares); s.15(2.6) (one-year repayment window).
• • Income Tax Act — s.248(1), definition of “specified shareholder” (10% ownership threshold) and “specified employee.”
• • Treadstone Law — interest-free shareholder loans and the deemed benefit — general background on shareholder loan tax rules; the s.15(2.4)(c) “unissued shares” distinction above is the operative point for this file.