When do the corporate attribution rules under section 74.4 apply to a loan or transfer my client makes to a corporation, and how is the deemed interest worked out?
Section 74.4 applies when your client lends or transfers property to a corporation that isn't a small business corporation and one main purpose is to benefit a spouse or minor family member holding 10% of a share class. Your client is deemed to receive interest at the 3% prescribed rate for 2026, less interest and grossed up dividends received.
When does 74.4(2) apply to your client?
Subsection 74.4(2) applies when an individual lends or transfers property, directly or indirectly, by means of a trust or by any other means, to a corporation, and one of the main purposes may reasonably be considered to be to reduce the individual's income and benefit a designated person. It then applies for each period after the transfer or loan throughout which three more conditions hold laws-lois.justice.gc.ca.
| Condition | What it means in practice | Where |
|---|---|---|
| Loan or transfer of property to a corporation | Cash loans, asset transfers, share subscriptions and the share exchange in an estate freeze all count | 74.4(2) |
| One main purpose: reduce your client's income and benefit a designated person | A purpose test, so one main purpose is enough | 74.4(2) |
| The designated person would be a specified shareholder | Owns 10% or more of any class, under a modified test (next section) | 74.4(2)(a) |
| Your client is resident in Canada | Deemed interest stops for periods your client is non resident | 74.4(2)(b) |
| The corporation is not a small business corporation | No deemed interest for any period it qualifies | 74.4(2)(c) |
| Not living apart from the spouse after a breakdown | No inclusion for a spouse for that period | 74.5(4) |
This is a different mechanism from the spousal rules. Sections 74.1 and 74.2 move the actual income and gains back to your client; 74.4 ignores what the company earns and deems your client to have received interest on the amount put in, whether or not the company pays anything out. For gifts and loans made straight to a spouse, see the spousal attribution rules.
Who counts as a designated person and a specified shareholder?
A designated person is your client's spouse or common law partner, or a person under 18 who either doesn't deal with your client at arm's length or is your client's niece or nephew laws-lois.justice.gc.ca. So a minor child or grandchild counts, and an adult child does not. Once a child turns 18, they stop being a designated person, and periods after that no longer meet the test in 74.4(2)(a)
laws-lois.justice.gc.ca.
A specified shareholder normally owns, directly or indirectly, at least 10% of the issued shares of any class of the corporation or of a related corporation laws-lois.justice.gc.ca. Paragraph 74.4(2)(a) reads that definition without paragraphs (a) and (d), and counts a related corporation only if it isn't a small business corporation
laws-lois.justice.gc.ca.
| Specified shareholder rule in 248(1) | Used for 74.4? | Effect |
|---|---|---|
| 10% or more of any class, directly or indirectly | Yes | A spouse holding 10% of a class of non voting shares qualifies |
| (a) shares held by non arm's length persons are deemed owned | No | Your client's own shares are not counted toward the spouse or child |
| (b) trust beneficiary owns its proportionate share | Yes | A fixed interest in a trust holding the shares counts |
| (c) partner owns its proportionate share | Yes | Shares held through a partnership count |
| (d) personal services business rule | No | Ignored |
| (e) discretionary beneficiary deemed to own every share the trust holds | Yes | A minor beneficiary of a discretionary family trust is caught |
Paragraph (e) is the one that bites in practice. A minor child named as a discretionary beneficiary of a family trust that holds 100 common shares is treated as owning all 100, so the 10% test is met even if the trust never allocates them a dollar. The way out is the trust carve out in 74.4(4), covered below.
Worked example: an interest free loan to a family holding company costs $18,000 of deemed interest
Subsection 74.4(2) deems your client to receive, as interest, interest on the outstanding amount at the prescribed rate for each period the conditions are met, minus three amounts: (e) interest your client actually receives in the year on the transfer or loan, (f) taxable dividends your client includes in income under 82(1) on shares received as consideration or as repayment that are excluded consideration, and (g) taxable dividends a designated person receives that are part of the benefit and are taxed as their split income laws-lois.justice.gc.ca. The 82(1) amount is the grossed up amount: 15% on non eligible dividends and 38% on eligible dividends
laws-lois.justice.gc.ca.
The prescribed rate is 3% in every quarter of 2026: canada.ca,
canada.ca,
canada.ca and
canada.ca. For the full rate history, see CRA prescribed interest rates 2026.
On January 1, 2026, your client lends $600,000 interest free to Holdco. Your client owns 50% of the common shares and their spouse owns the other 50%. Holdco invests the money in a portfolio, so it is not a small business corporation. The outstanding amount is the $600,000 principal, and deemed interest for 2026 is $600,000 × 3% = $18,000.
| 2026 set up (same $600,000) | Interest received, 74.4(2)(e) | Grossed up dividends, 74.4(2)(f) | Deemed interest left |
|---|---|---|---|
| Interest free loan, nothing paid | $0 | $0 | $18,000 |
| Loan at 3%, $18,000 paid during 2026 | $18,000 | $0 | $0 |
| Preferred shares instead of a loan, $15,653 non eligible dividend | $0 | $15,653 × 1.15 = $18,000.95 | $0 |
| Preferred shares, $8,000 non eligible dividend | $0 | $8,000 × 1.15 = $9,200 | $8,800 |
Left alone, the first row puts $18,000 of income on your client's 2026 return with no cash attached: $5,940 of federal tax at the 33% rate on income over $258,482 canada.ca. In every row your client reports at least $18,000, so 74.4 acts as a floor. What it doesn't touch is the return above 3%: if the portfolio earns 7%, the growth beyond the floor still builds value in the spouse's common shares.
Two gotchas. First, 74.4(2)(e) counts interest received in the year, so the January 30 grace period that saves a spousal loan under 74.5(2) does not help here. Second, the deemed interest uses the prescribed rate for each period, so it floats every quarter. A loan fixed at 3% in 2026 leaves a shortfall for any later quarter in which the prescribed rate is 4%.
Why the small business corporation exception can disappear
No deemed interest arises for any period the corporation is a small business corporation laws-lois.justice.gc.ca. That is a Canadian controlled private corporation where all or substantially all of the fair market value of its assets is used principally in an active business carried on primarily in Canada, or is shares or debt of connected small business corporations, or a mix of both
laws-lois.justice.gc.ca. The CRA reads all or most as 90% or more of the fair market value of the assets
canada.ca.
The test is applied period by period, so an operating company can drift out of it. Take an Opco worth $3,000,000 with $400,000 of surplus cash invested in a portfolio. Active assets are $2,600,000, or 86.7% of the total, which is under 90%, so deemed interest runs on the outstanding amount until the company is purified back above the line. Paying a dividend to move the portfolio up to a holding company is the usual fix, but a holding company with only investments will never be a small business corporation itself.
Note the related corporation twist. A designated person who holds 10% of a related holding company still counts unless that holding company is itself a small business corporation. For the asset test you also run on a sale, see the QSBC shares test; for how passive income erodes the small business deduction, see the passive income grind.
Does an estate freeze into a family trust trigger 74.4?
It can. In a freeze, your client exchanges their common shares for fixed value preferred shares, which is a transfer of property to the corporation. The preferred shares are excluded consideration, so the outstanding amount is the full value frozen, and the spouse, the minor children or a family trust then subscribe for new common shares. For the full mechanics and a $2,000,000 freeze worked through the 74.4 math, see the section 86 estate freeze.
Subsection 74.4(4) switches off the main purpose test for a designated person when all three conditions hold: their only interest in the corporation is a beneficial interest in shares held by a trust; the trust terms say they can't receive or otherwise obtain the use of any trust income or capital while they're a designated person; and they haven't received or used any, nor has the trust deducted any amount paid or payable to them under 104(6) or 104(12) while they were a designated person laws-lois.justice.gc.ca.
The carve out fails the moment the trust allocates income to a minor beneficiary, and it doesn't help for a spouse beneficiary unless the deed bars the spouse for as long as they are a spouse. If the deed lets the trustees pay minors, plan for the deemed interest instead, by paying dividends on the freeze shares that cover the 3% each year. For how the trust itself is taxed, see family trust tax.
How does 74.4 interact with TOSI, separation and back to back loans?
TOSI is handled inside 74.4, not by the general exception. Subsection 74.5(13) turns off 74.1(1), 74.1(2), 74.3(1) and 75(2) for amounts in a specified individual's split income, but it doesn't list 74.4 laws-lois.justice.gc.ca. Instead, 74.4(2)(g) reduces the deemed interest by taxable dividends the designated person receives as part of the benefit that are included in their split income
laws-lois.justice.gc.ca. See TOSI rules for when a family member's dividends are split income.
Separation stops it for a spouse. Under 74.5(4), no amount is included under 74.4(2) for a spouse or common law partner for a period they live separate and apart because of a breakdown of the relationship laws-lois.justice.gc.ca.
Routing doesn't help. Under 74.5(6), property your client lends or transfers to a third party who then lends or transfers property to a designated person, or to a non small business corporation in which a designated person is a specified shareholder, is deemed lent or transferred by your client. Under 74.5(7), a guarantee your client gives on a third party's loan is treated the same way laws-lois.justice.gc.ca.
Sources
Does a prescribed rate loan to the company get my client out of 74.4?
Only for as long as the interest keeps up with the current rate. The 74.5(2) prescribed rate loan exception covers 74.1 and 74.2, not 74.4 laws-lois.justice.gc.ca. Under 74.4, interest your client receives in the year simply reduces the deemed interest, which is recalculated at the prescribed rate for each period
laws-lois.justice.gc.ca. At 3% through 2026, interest of $18,000 received in 2026 on a $600,000 loan clears it.
Does the deemed interest stop when the youngest child turns 18?
Yes, for that child. A person 18 or older is no longer a designated person unless they are your client's spouse, so periods after the birthday drop out of 74.4(2) laws-lois.justice.gc.ca. If a spouse or another minor still holds 10% of a class, the deemed interest continues for them.
Do eligible dividends reduce the deemed interest more than non eligible ones?
Yes, per dollar paid. The reduction in 74.4(2)(f) is the amount included under 82(1), which grosses up eligible dividends by 38% and non eligible dividends by 15% laws-lois.justice.gc.ca. To cover $18,000 of deemed interest, your client needs $13,044 of eligible dividends ($13,044 × 1.38 = $18,000.72) or $15,653 of non eligible dividends.
Is an operating company that is a small business corporation ever caught?
Not while it qualifies. Deemed interest arises only for periods the corporation isn't a small business corporation laws-lois.justice.gc.ca, and the CRA reads that test as 90% or more of asset value in active business use in Canada
canada.ca. Check it each year end, because surplus cash and investments can push the company below 90%.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.