When you borrow money from your corporation (i.e. shareholder loan), the amount borrowed is included in your income for the year, unless you repay the loan within 1 year of the corporation’s year-end.
For example, assume you borrowed money from your corporation on September 26, 2013, and your corporation’s year-end is December 31, 2013. In this case, you must repay the loan by December 31, 2014. Otherwise, the loan amount will be included in your personal income for the 2013 taxation year. If the loan is taken interest free or at very low interest rate, then there will be taxable benefit (equal to the interest savings) included in your personal income for the year.
The interest savings is calculated as the difference between the Canada Revenue Agency’s (CRA) prescribed rate of interest (i.e. 2%) and the interest paid on the loan. We recommend that the CRA’s prescribed rate of interest be charged on shareholder loans to avoid a taxable benefit.
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.