Protecting Your Shareholder Advances: The Complete PPSA Guide for Canadian Business Owners

Introduction: The $200,000 Loan That Disappeared

A franchise owner lent their corporation $200,000 to help with expansion. They had a proper loan agreement. Interest was being charged at prescribed rates. Regular payments were being made.

Then the franchise hit financial trouble.

When creditors came calling, that $200,000 was gone. The shareholder became an unsecured creditor at the back of the line, ranking behind the bank, CRA, equipment lessors, and other secured creditors.

This scenario plays out every day across Canada. And it's entirely preventable with Personal Property Security Act (PPSA) registration.

Understanding the Critical Distinction

Most discussions about "shareholder loans" focus on one scenario: borrowing money FROM your corporation. That's about tax compliance - subsection 15(2), one-year repayment rules, prescribed rate interest.

This article is about the reverse situation: lending money TO your corporation.

This is about asset protection. And it requires completely different documentation.

What is PPSA?

The Personal Property Security Act creates a public registry of security interests in personal property. It exists in every Canadian province (Quebec has the Civil Code, which operates similarly).

PPSA allows creditors to register their security interest against a debtor's assets - creating a public record of who has claims on what property.

Think of it like a mortgage for movable property. A mortgage gives a lender security against real estate. PPSA gives a lender security against inventory, equipment, accounts receivable, intellectual property, and other business assets.

Why PPSA Registration Matters

Without PPSA registration, when a company faces financial difficulty, there's a priority order for creditors:

1. Secured creditors with registered PPSA interests (banks, equipment lessors with security agreements)
2. Preferred creditors (CRA for payroll source deductions and GST/HST, employee wages)
3. Unsecured creditors (suppliers, contractors, landlords)
4. Shareholders

Your shareholder advance, without PPSA registration, sits at the bottom - even though it's YOUR company and YOUR money.

The Real-World Impact

Scenario 1: Franchise Expansion

A franchise owner advances $150,000 for expansion:

• Proper loan documentation exists
• Board resolution approving the loan
• Loan agreement at prescribed rates
• Monthly repayments being made

Two years later, the franchise struggles:

• Landlord seizes equipment for unpaid rent
• Bank calls its $200,000 loan
• CRA files for $75,000 in outstanding HST

Without PPSA registration: In a liquidation, assets might sell for $250,000. The bank takes the first $200,000. CRA takes $50,000 for preferred claims. The shareholder's $150,000? Nothing.

With PPSA registration: The shareholder has a secured claim that participates in the asset distribution, significantly improving recovery prospects (though still subject to bank priority if the bank registered first).

Scenario 2: Seasonal Business

A retail business owner advances $80,000 to help with Christmas inventory:

• Company has no bank debt
• Proper loan documentation
• PPSA registration filed

Spring arrives and sales are disappointing. Suppliers demand payment. The company can't pay everyone.

Without PPSA: The shareholder is an unsecured creditor, competing with all suppliers for whatever assets remain.

With PPSA: The shareholder has a security interest in the inventory their money purchased. They can enforce their security ahead of unsecured suppliers.

When You Must Consider PPSA Registration

You should register under PPSA when:

→ You've advanced significant capital - "Significant" depends on your circumstances, but generally $25,000+→ Company is in growth phase - Expansion requires cash and carries risk→ Industry has seasonal cash flow - Retail, hospitality, construction→ Business carries significant assets - Inventory, equipment, receivables provide collateral→ You want to protect your investment - Especially if you've guaranteed personal assets→ Company has other lenders - Competition for assets requires security

What PPSA Registration Includes

Proper PPSA protection requires several components:

1. Security Agreement

This is the contract between you (secured party) and your corporation (debtor) that creates the security interest. It must:

• Describe the collateral securing the loan
• Grant you a security interest in that collateral
• Include the terms of the secured obligation
• Be signed by the corporation

2. General Security Agreement (GSA)

A GSA is a specific type of security agreement that charges ALL assets of the corporation - present and future. This is the broadest protection and what most banks use.

A GSA covers:

• Inventory
• Equipment and machinery
• Accounts receivable
• Intellectual property
• Bank accounts
• Investment property
• All other personal property

3. PPSA Registration

The security agreement creates the security interest between you and the company. But to establish priority over other creditors, you must register in the provincial PPSA registry.

Registration creates a public notice of your security interest. Other creditors searching the registry will see your claim.

4. Proper Collateral Description

Your registration must accurately describe the collateral. This can be:

• Specific description: "2019 Ford F-150, VIN 1FTFW1E57KFA12345"
• Generic description: "All inventory"
• Super-generic: "All present and after-acquired personal property" (GSA)

5. Accurate Debtor Information

The registration must identify the debtor correctly:

• Exact legal name of the corporation
• Corporate registration number
• Registered office address

Get the debtor name wrong, and your registration may be invalid.

The Critical Timing: Priority Rules

PPSA priority is generally "first to register, first in right."

If you register today at 10:00 AM, you have priority over someone who registers today at 2:00 PM - even if their loan was made years ago.

This creates a critical implication: you cannot retroactively fix priority if creditors are already circling.

Example:

• Bank registers PPSA in 2020 when they fund $200,000 loan
• You advance $150,000 in 2023 and register PPSA
• Company liquidates with $300,000 in assets

Bank gets the first $200,000 (their full claim). You get $100,000 (partial recovery). Unsecured creditors get nothing.

If you had registered first, the positions would be reversed.

The Bank Complication

This is where most business owners get blindsided.

If your company has bank financing, the bank almost certainly has:

• A General Security Agreement charging all assets
• PPSA registration dated from when they funded the loan
• Loan covenants restricting additional secured debt
• Requirements for bank consent before new security interests

The Priority Problem

Your bank registered first. They have priority.

Even with proper PPSA registration, you're behind the bank in liquidation.

The Covenant Problem

Many bank loan agreements prohibit creating new security interests without bank consent.

Register PPSA without asking? You might be in default of the loan agreement.

The bank can:

• Demand immediate loan repayment
• Reduce or eliminate credit limits
• Increase interest rates
• Call the entire loan
• Refuse to renew credit facilities

I've seen this happen. The business owner was trying to protect themselves but accidentally triggered a loan default that forced liquidation.

Inter-Creditor Agreements: The Solution

An inter-creditor agreement is a contract between creditors that defines their respective rights.

When you want to register PPSA and the company has bank debt, you need an inter-creditor agreement with the bank that:

✓ Acknowledges your security interest✓ Defines priority between you and the bank✓ Establishes rights and obligations✓ Prevents loan covenant defaults✓ Clarifies what happens in enforcement

What Banks Actually Care About

Banks evaluating your security request want to know:

1. How much are you advancing? - Is it material relative to their exposure?
2. Is it new money? - New capital strengthens the company
3. What's the repayment plan? - Can the company service both obligations?
4. Will it improve cash flow? - They want a healthier borrower
5. Does it subordinate to them? - This is often the bottom line

Three Negotiation Strategies

Strategy 1: Subordination Agreement

You acknowledge the bank has priority over you. You still rank ahead of unsecured creditors.

Pros:

• Banks usually approve this
• You get some protection vs. nothing
• Relatively simple to negotiate

Cons:

• Bank takes assets first
• Your recovery depends on surplus after bank is paid
• You're relying on the company having significant value

Best for: Situations where bank loan is moderate relative to company value, or where you're advancing capital that will increase value significantly.

Strategy 2: Specific Collateral Carve-Out

Bank keeps priority on certain assets (typically A/R and inventory). You get priority on other assets (equipment, IP, specific purchased assets).

Pros:

• You have first claim on some assets
• Works well when advance funds specific purchases
• Protects both parties' interests

Cons:

• Requires detailed negotiation
• Complex to administer
• Bank may refuse if their security is already tight

Best for: Situations where your advance funds specific equipment or asset purchases that don't erode bank security.

Strategy 3: Standstill Agreement

You agree not to enforce your security while the bank loan is current. You can enforce if the bank accelerates or if certain events occur.

Pros:

• Bank comfortable since you won't interfere
• You're protected if bank exits
• Can enforce if company stabilizes and repays bank

Cons:

• No protection while bank is engaged
• Bank still has practical priority
• Complex triggering events

Best for: Situations where you're confident in medium-term viability but want protection if bank relationship ends.

When to Have the Bank Conversation

Best Times:

• Before you advance significant capital
• When company is refinancing or renewing credit
• If you're planning a series of advances
• When bank relationship is strong and company is performing well
• During regular bank review meetings

Worst Times:

• After company shows signs of financial stress
• When bank is already concerned about exposure
• After you've already registered PPSA
• During covenant violation discussions

Timing matters enormously. Banks are receptive when things are good. They dig in when things are troubled.

The Cost vs. The Risk Analysis

Costs of Proper PPSA Protection:

• Security agreement drafting: $1,500-$3,000
• PPSA registration fees: $50-$500 (varies by province)
• Legal advice on bank coordination: $1,000-$3,000
• Inter-creditor agreement negotiation: $2,000-$5,000
• Total investment: $4,550-$11,500

Risks Without Protection:

• Losing six-figure advances: Common
• Becoming unsecured creditor: Certain
• Recovery rate for unsecured creditors: Typically 0-10 cents on dollar
• Emotional and financial impact: Devastating

The math is clear. For any advance over $50,000, proper protection pays for itself many times over.

Implementation Mistakes to Avoid

Mistake 1: Registering Before Checking Bank Covenants

This triggers loan defaults. Always review the bank loan agreement first.

Mistake 2: DIY Security Documents

Generic forms downloaded online often fail. Security agreements must:

• Properly describe collateral
• Include appropriate representations and warranties
• Address specific risks of your situation
• Comply with provincial law variations

Mistake 3: Wrong Debtor Name

If you register against "ABC Contracting" and the legal name is "ABC Contracting Ltd.," your registration may be invalid.

Mistake 4: Forgetting to Renew

PPSA registrations expire (typically 5-25 years depending on jurisdiction and registration type). Expired registrations lose priority.

Mistake 5: Not Coordinating Multiple Advances

If you advance $50,000 in Year 1 and another $100,000 in Year 3, both should be covered by the same security. Otherwise you're creating administrative complexity.

The Professional Team You Need

This is not DIY territory. You need:

Corporate Lawyer: Drafts security agreements and GSAs

Banking Lawyer: Negotiates with bank and drafts inter-creditor agreements (may be the same lawyer as above)

Accountant: Advises on tax implications, documents the loan properly, ensures corporate formalities

Possibly Insolvency Advisor: If company is already showing stress, specialized advice on creditor rights and priorities

The cost of professionals is far less than the cost of losing your advance.

When PPSA Without Bank Coordination Works

PPSA registration is straightforward when:

→ Company has no bank debt→ Only unsecured suppliers and trade credit exist→ You're the first secured creditor→ Company is profitable and low-risk→ No loan covenants restrict security creation

In these situations:

1. Draft security agreement / GSA
2. Execute it properly
3. Register PPSA
4. Maintain records
5. Renew before expiry

No bank negotiation required.

Special Considerations for Franchise Owners

Franchise financing often involves:

Franchisor Rights: Many franchise agreements give the franchisor security interests or rights to assetsEquipment Financing: Multiple lenders may have security in specific equipmentLandlord Liens: Landlords often have statutory liens on fixtures and equipmentCompeting Interests: Multiple secured parties makes coordination essential

Before advancing capital to a franchise, understand:

• What security interests already exist
• What rights the franchisor has
• Whether equipment is owned or financed
• What the lease requires

Province-Specific Variations

Each province has slightly different PPSA rules:

Ontario (PPSO): Personal Property Security Act, registry called PPSAAlberta (PPSA): Personal Property Security ActBritish Columbia (PPSA): Personal Property Security ActQuebec: Civil Code provisions instead of PPSA

Registration requirements, fees, and search procedures vary. Use lawyers familiar with the relevant province.

Action Items: Protecting Existing Advances

If you've already advanced money to your corporation without PPSA protection:

Step 1: Document the Loan

If you don't have a formal loan agreement:

• Create one now
• Include interest at prescribed rates
• Establish repayment terms
• Have proper board resolution

Step 2: Review Company's Existing Security

• Obtain copies of bank loan agreements
• Identify other secured creditors
• Search PPSA registry for existing registrations
• Understand covenant restrictions

Step 3: Assess Whether PPSA is Feasible

Consider:

• Is the advance amount significant enough to justify cost?
• Will you trigger bank covenant violations?
• Is the company's financial condition stable enough for bank negotiation?
• Do you have leverage to negotiate inter-creditor terms?

Step 4: Engage Legal Counsel

Get advice on:

• Drafting security documentation
• Coordinating with existing creditors
• Negotiating inter-creditor agreements
• Provincial registration requirements

Step 5: Execute and Register

• Execute security agreement / GSA
• Obtain bank consent if required
• Register PPSA properly
• Maintain documentation
• Diarize renewal dates

Action Items: Planning Future Advances

If you're considering advancing money to your corporation:

Step 1: Structure It Properly From the Start

• Draft loan agreement before advancing funds
• Include security agreement provisions
• Establish interest and repayment terms
• Obtain proper board approval

Step 2: Coordinate With Bank in Advance

• Disclose your plans to the bank
• Negotiate inter-creditor terms before advancing money
• Ensure no covenant violations
• Get written bank consent

Step 3: Register PPSA Immediately

• Register as soon as security agreement is executed
• Don't delay - priority is based on registration time
• Verify registration is correct
• Keep copies of registration confirmation

Step 4: Maintain Going Forward

• Keep security documentation with corporate records
• Diarize renewal dates
• Update for additional advances
• Monitor company financial condition

The Tax Implications

Shareholder advances TO the company have different tax treatment than borrowing FROM the company:

Recording the Advance:

• Creates a receivable on your personal balance sheet
• Company has a payable to you
• No subsection 15(2) implications (that's for loans TO shareholders)

Interest Income:

• Interest you charge is taxable income to you
• Interest company pays is generally tax deductible
• Use prescribed rates as minimum

Repayment:

• Repayment of principal is not taxable income
• It reduces your receivable balance
• Company records reduction in payable

If Loan Becomes Uncollectable:

• You may have an allowable business investment loss (ABIL)
• ABIL is 50% deductible against other income
• Requires the company to be a small business corporation
• Must establish that debt is actually bad

Your accountant should document these transactions properly to support the tax treatment.

The Bottom Line

When you advance money to your corporation, two separate risks exist:

Risk 1: Tax ComplianceIf the company lends TO you, subsection 15(2) creates tax risks. That's a different article.

Risk 2: Asset ProtectionIf YOU lend TO the company, you risk losing your investment without security. That's what PPSA solves.

A loan agreement says the company owes you money.

PPSA registration ensures you can actually collect it.

In 30 years, I've learned: hope is not a recovery strategy. Business difficulties happen to good companies with good owners. Economic downturns, industry disruption, key customer losses, unexpected competition - these aren't failures of management, they're realities of business.

If you've advanced significant funds to your corporation, protect yourself properly.

Because when financial trouble hits, being right doesn't matter if you're not secured.

Rob Lockie helps Canadian business owners navigate complex corporate finance situations and protect their investments. With 120 years of combined experience, Côté and Associates Professional Corporation specializes in owner-managed businesses and franchise accounting in London, Ontario.

Have questions about protecting advances you've made to your corporation? Let's discuss your specific circumstances and whether PPSA registration makes sense for your situation.