Canadian Corporate Shareholder Loans

Allan Madan, CA
 Jul 17, 2014
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Corporate shareholder loans are a way for corporations to give loans to their employees. Read on to learn more.

Are you an employee looking for information on Canadian Corporate Shareholder Loans? Look no further! All corporations need a capital base to run. Without one, it cannot operate, acquire assets, or conduct business. Known as capitalization, shareholders can provide a capital base in the form of either debt or equity. We call capital provided in the form of equity, “share capital”, while capital in the form of debt is known as a “shareholder loan”. If you would like to prepare your corporation’s tax return, please visit our resource:How To Prepare Corporation Income Tax Return For Business In Canada  

Canadian Corporate Shareholder Loans – Conditions of Loan

According to section 15(2) of the Income Tax Act, loans made by a corporation to its shareholders may result in taxable benefits to the shareholder. The shareholder includes this in their personal income tax return, in the year the corporation made the loan. Resulting in a higher tax bill, this is certainly a negative. Luckily, there are exceptions that allow you to bypass it. Let us consider the main one now. Sometimes a shareholder loan is not a loan at all! To learn more, please visit When is a Shareholder Loan not a Loan?

The section does not apply to a loan with the following conditions. First, shareholders must repay within one year of the corporation’s year-end in the year it grants the loan. Second, payments cannot be part of a series of loans or repayments. If a shareholder repays near the due date and borrows a similar amount shortly after, the CRA considers it a part of a series. This will usually include the loan in the shareholder’s income. To explain, let us look at the following example. For a more basic look at CCPC shareholder loans, please visit bookkeeping essential’s CCPC Loans to Shareholders.

Illustration

Corporate shareholder loans can be quite beneficial, if you know how to use them properly. Read on to learn more.

A corporation’s year-end is December 31, 2013. They make a loan of $50,000 for personal investment on August 13, 2013. If the shareholder does not repay one year after the year-end (December 31, 2014), he CRA includes the loan in their taxable income for 2013. However, let us say they do repay the $50,000 loan in full in the 2015 tax year. This repayment allows them a deduction equal to the amount in his/her taxable income. If you’re not sure whether to pay yourself dividends or salary as a corporation, please visit our helpful article: Should I pay myself salary or dividends as a business owner?

Shareholder Employee

A corporation can lend out of its employment relationship with the employee. There are several acceptable reasons for a loan to a shareholder who is also an employee of the corporation:

  • To help the shareholder employee buy a home
  • To allow the shareholder employee in purchasing stock in the company
  • To help the shareholder employee in purchasing a vehicle for employment purposes

To qualify for the loan, shareholder employees cannot own more than 9% of the company (either alone or with others). The CRA does not include the loan in the recipient’s income, as long as the timeline for repayment is reasonable and document. The loan does not have to bear interest; if it does not the CRA will charge a taxable benefit to the employee. To learn more about corporate shareholder loans, please visit Taxtips: Shareholder Loans and their tax implications.

As a company, there can be a lot to consider before you take money out of your corporation through a loan. Before you do this, you should consult a tax expert to understand the potential implications.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 2

  1. My profile is pending approval at the moment. 😀
    In your illustration above, regarding the loan made to the owner/shareholder, how would this be handled as debit/credit so that it balances at the end of the year (if for example it was a loan made to shareholder followed by a single year end dividend payment to bring it back to zero)?

    Any possibility that there will be a video regarding this? 😀

  2. When a loan is made to a shareholder, a debit should be recorded to the Shareholder Loan Receivable account and a credit should be recorded to the Cash account for the amount of the loan. If your intent is to satisfy the Shareholder Loan Receivable through declaring a dividend payable to you (the shareholder), then record a debit to the Dividends Paid account (equity account) and record a credit to the Shareholder Loan Receivable account.

    I will try and make a video on this topic in the future.

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