Shareholder Loans: Are They Equity Or Debt?

Tudor Sales Ltd. (Re), 2017 BCSC 119 is a case from British Columbia that dealt with whether shareholder loans, as a non-arm's length transaction, are properly characterized as debt, or as equity. The Court explained that the critical determination between debt and equity requires an examination of the circumstances surrounding the economic reality of the transactions and not the superficial appearance arising from the loan documentation. The Court considered the nature of the bankrupt's liabilities and found that the loan was more consistent with equity than debt in that there was no schedule for repayment of advances, and no certain formula to determine the amount of interest.

Background