Shareholder loan forgiveness: the forgiven amount is income, 15(1.2)

How is a forgiven shareholder loan taxed?

Subsection 15(1.2) says that when an obligation issued by a debtor is settled or extinguished, the value of the 15(1) benefit is deemed to be the forgiven amount at that time laws-lois.justice.gc.ca. So the forgiven balance goes into your client's income as a shareholder benefit, in the year of the forgiveness. The CRA's folio on shareholder loans points to the same three provisions, 15(1), (1.2) and (1.21), for a loan settled for less than what's owed or for nothing (paragraph 1.99) canada.ca.

The result depends on the capacity your client received the loan in and on whether 15(2) has already taxed it. The CRA's audit manual says a 15(1) benefit gets no corporate deduction under 18(1), while an employee benefit under 6(1)(a) is deductible if reasonable canada.ca.

Three kinds of debt usually reach the forgiveness stage without having hit 15(2) first: a debt arising in the ordinary course of the corporation's business under 15(2.3), a loan that met one of the 15(2.4) employee exceptions, and a loan owed by a corporate shareholder resident in Canada, which the opening words of 15(2) exclude laws-lois.justice.gc.ca. Those are the files where 15(1.2) actually produces a number. The 15(2) side, with its repayment deadline table, is on the shareholder loan CRA rules page.

How is the forgiven amount measured under 15(1.21)?

Subsection 15(1.21) borrows the forgiven amount definition from 80(1), with four changes: the debt is treated as a commercial obligation even if it isn't one, no amount included in income because of the settlement counts except a 6(1)(a) amount, paragraphs (f) and (h) of the B list are ignored, and 80(2)(b) and 80(2)(q) are ignored laws-lois.justice.gc.ca. The first change matters most. An interest free loan your client spent on a cottage would never be a commercial debt under section 80, but 15(1.21) treats it as one, so the forgiveness is still measured.

The 80(1) formula is A minus B. A is the lesser of the amount the debt was issued for and its principal. B includes the amount paid to settle the principal, any amount included under 6(1)(a) or 15(1) because of the settlement, and the principal of an excluded obligation laws-lois.justice.gc.ca. An excluded obligation includes a debt whose proceeds were included in the debtor's income. A loan already taxed under 15(2) fits that description, so its forgiven amount comes to nil.

The CRA's audit manual puts the same result in plain terms: the forgiven amount is the outstanding obligation settled, less what your client paid on settlement, less the amount included in their income when the obligation arose canada.ca. If your client pays $6,000 on a $30,000 loan and the corporation forgives the rest, the forgiven amount is $24,000.

The employee version mirrors it. Subsection 6(15) deems a benefit enjoyed when an obligation issued by any debtor, the employee included, is settled or extinguished, and values it at the forgiven amount as computed under 6(15.1) laws-lois.justice.gc.ca.

What happens when the same $24,000 loan is forgiven to an employee and to the owner?

Opco has a December 31 year end. On January 1, 2025 it lends $24,000 interest free to each of two people: Sam, an employee who owns 5% of the shares and deals at arm's length with Opco, and Dana, who owns the other 95%. Sam's loan meets the 15(2.4)(a) exception for an employee who isn't a specified employee, with bona fide repayment terms. Dana's loan has no exception. Nobody repays anything. On June 30, 2026 Opco forgives both loans.

Sam's $357.04 uses the 3% prescribed rate for employee and shareholder loans, which applied from January to March 2026 canada.ca and April to June 2026 canada.ca, and still applies from October 1 to December 31 canada.ca. The CRA treats a forgiven employee loan as cash remuneration, so you withhold income tax, CPP and EI, and it lists box 14, box 26 and code 40 for the slip canada.ca.

Dana's result is the trap. The 15(2.6) exception requires the loan to be repaid within one year after the end of the lender's tax year in which it was made, and a forgiveness doesn't repay anything laws-lois.justice.gc.ca. On the wording of the Act, the $24,000 belongs in 2025, the year of the loan, and 15(1.2) then has nothing left to tax. Because the amount was included in income, 80.4(3)(b) switches off the interest benefit for it laws-lois.justice.gc.ca. Dana also gets no 20(1)(j) deduction, which needs an actual repayment canada.ca.

Shareholder or employee: who decides the capacity, and what changes on the slips?

The CRA's position is blunt: forgiven loans to employees or shareholders are always taxable, and a loan received because of shareholdings that's later forgiven isn't employment income, even if the shareholder is also an employee when it's forgiven canada.ca. Capacity is fixed by why the loan was made, not by your client's job title on the forgiveness date.

For the T4A, the CRA's shareholder benefits page lists code 028 (other income) and code 117 (loan benefits), says you don't withhold payroll deductions, and sends your client to line 13000 or the business income lines canada.ca. Its loans page ties code 117 to the interest benefit and says the forgiven amount goes on the T4 or T4A for the year it's forgiven, without naming a separate code for the forgiven principal canada.ca.

The audit manual's capacity test asks whether the benefit was available to employees generally or only to shareholders, how much control the shares give, and how the benefit compares with pay canada.ca. An owner manager with no arm's length staff rarely wins the employee argument. The full test is on the section 15(1) benefit page, and the interest benefit side of employee loans is on the employee loan page.

Why section 80 does not also apply to the forgiven loan

Section 80 is the debtor's rule for a forgiven commercial debt, and in theory it could reach your client if they used the loan to earn income. It doesn't, because B in the 80(1) forgiven amount subtracts any amount included under 6(1)(a) or 15(1) because of the settlement laws-lois.justice.gc.ca. Once 15(1.2) or 6(15) taxes the forgiveness, nothing is left for section 80 to grind against your client's losses or cost base. The audit manual says it directly: if a forgiven amount is included as a 15(1) benefit, the debt forgiveness rules in section 80 don't apply to the principal canada.ca.

A loan already taxed under 15(2) is also outside section 80, through the excluded obligation item in the same formula. The order of reductions, the 80(13) inclusion and the 61.3 and 61.4 relief apply when a corporation itself is the debtor; see debt forgiveness rules for that side.

The corporation that forgives the loan doesn't get a loss either. Paragraph 40(2)(g)(ii) denies a loss on the disposition of a debt unless it was acquired to earn income from a business or property laws-lois.justice.gc.ca. An interest free loan to a shareholder usually wasn't, so forgiving it gives the company no capital loss to claim. Record the write off against the shareholder loan account and show the forgiveness on T2 Schedule 11.

Is a dividend or bonus set off cheaper than forgiving the loan?

Usually, yes. The folio accepts repayment by applying a dividend, salary or bonus against the loan (paragraph 1.82) canada.ca. That turns a benefit with no relief into income the tax system integrates.

Take a $24,000 balance owed by a 100% owner whose loan hasn't been taxed under 15(2), cleared three ways in 2026. A non eligible dividend is grossed up 15% on the T5, and the federal dividend tax credit is 9/13 of the gross up, or 9.0301% of the taxable amount canada.ca.

The forgiveness route taxes $24,000 at full rates with no credit, after Opco already paid corporate tax on the profit it lent out. The dividend gets the credit that recognizes that corporate tax, and the bonus gives Opco a deduction. A bonus set off clears only the net after withholding, so gross it up if the whole balance must go. Paper the dividend or bonus properly; see the dividend resolution page and salary vs dividends.