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.
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.
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.
Without PPSA registration, when a company faces financial difficulty, there's a priority order for creditors:
Your shareholder advance, without PPSA registration, sits at the bottom - even though it's YOUR company and YOUR money.
A franchise owner advances $150,000 for expansion:
Two years later, the franchise struggles:
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).
A retail business owner advances $80,000 to help with Christmas inventory:
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.
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
Proper PPSA protection requires several components:
This is the contract between you (secured party) and your corporation (debtor) that creates the security interest. It must:
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:
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.
Your registration must accurately describe the collateral. This can be:
The registration must identify the debtor correctly:
Get the debtor name wrong, and your registration may be invalid.
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 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.
This is where most business owners get blindsided.
If your company has bank financing, the bank almost certainly has:
Your bank registered first. They have priority.
Even with proper PPSA registration, you're behind the bank in liquidation.
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:
I've seen this happen. The business owner was trying to protect themselves but accidentally triggered a loan default that forced liquidation.
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
Banks evaluating your security request want to know:
Strategy 1: Subordination Agreement
You acknowledge the bank has priority over you. You still rank ahead of unsecured creditors.
Pros:
Cons:
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:
Cons:
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:
Cons:
Best for: Situations where you're confident in medium-term viability but want protection if bank relationship ends.
Best Times:
Worst Times:
Timing matters enormously. Banks are receptive when things are good. They dig in when things are troubled.
The math is clear. For any advance over $50,000, proper protection pays for itself many times over.
This triggers loan defaults. Always review the bank loan agreement first.
Generic forms downloaded online often fail. Security agreements must:
If you register against "ABC Contracting" and the legal name is "ABC Contracting Ltd.," your registration may be invalid.
PPSA registrations expire (typically 5-25 years depending on jurisdiction and registration type). Expired registrations lose priority.
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.
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.
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:
No bank negotiation required.
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:
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.
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:
Step 2: Review Company's Existing Security
Step 3: Assess Whether PPSA is Feasible
Consider:
Step 4: Engage Legal Counsel
Get advice on:
Step 5: Execute and Register
If you're considering advancing money to your corporation:
Step 1: Structure It Properly From the Start
Step 2: Coordinate With Bank in Advance
Step 3: Register PPSA Immediately
Step 4: Maintain Going Forward
Shareholder advances TO the company have different tax treatment than borrowing FROM the company:
Recording the Advance:
Interest Income:
Repayment:
If Loan Becomes Uncollectable:
Your accountant should document these transactions properly to support the tax treatment.
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.