Government of Canada Clarifies Low-Interest Loans Following CAE

The Government of Canada provided much-needed clarity on the issue of loans from public bodies in its Fall Statement.


The Tax Court in CAE v. HMK (2021 TCC 57) found that a low-interest loan from Industry Canada fell into the legislative definition of ‘government assistance’, which reduced the Appellant’s employable deductions in the SRED context.

The Appellant received $250mil over five years from Industry Canada pursuant to the Strategic Aerospace and Defense Initiative program. The Appellant used the money to incur SRED expenditures and other research and development costs. The Appellant’s repayment obligations resulted in a 2.5% annual rate of return for Industry Canada.

The Minister reassessed on the basis that the amounts were government assistance and therefore includable as income.

The Tax Court concluded that the amounts paid by Industry Canada to the Appellant were indeed loans. However, the Court found that the loan agreement was not an “ordinary commercial agreement”. It was therefore considered ‘government assistance’ pursuant to the meaning contained in subsections 127(9) and 12(1)(x) of the Act because the low interest rate of 2.5% was less than typical market rates for comparable loans. Second, the contract confusingly excluded the usual commercial covenants. Lastly, the contract was informed by political considerations that would not ordinarily appear in a commercial agreement.

The Federal Court of Appeal agreed with the Tax Court, and the Supreme Court refused to hear CAE’s appeal.

Government Response

The Canadian Government has taken the following position with respect to low-interest public loans:

 Concessional Loans

Under the Income Tax Act, if a taxpayer receives government assistance in the course of earning income from a business or property, the amount of that assistance may reduce the amount of a related expense or the cost or capital cost of a related property or may be included in the taxpayer’s income. The amount of assistance may also reduce the amount of an expenditure on which an associated investment tax credit is based.

Historically, non-forgivable loans from public authorities were generally not considered government assistance. This position extended to concessional loans (meaning loans that do not bear interest or that bear interest at below-market rates) from public authorities. However, in a 2021 decision, the Tax Court of Canada determined that the full principal amount of a concessional loan was government assistance. This decision was affirmed by the Federal Court of Appeal in 2022.

The 2023 Fall Economic Statement proposes to amend the Income Tax Act to provide that bona fide concessional loans with reasonable repayment terms from public authorities will generally not be considered government assistance.

This amendment would come into force on the date of the 2023 Fall Economic Statement.


This is a welcomed development for anyone who borrowed from a public body at low interest and then found themselves in a situation where their investment tax credits were ground down and the assistance was included in income.

by Amit Ummat

Ummat Tax Law PC