Understanding Shareholder Loans in Canada
As a shareholder, you might consider borrowing money from your corporation. While this can be appealing, there are important tax rules you must understand.
- Shareholder loans must be repaid within 1 year after fiscal year-end
- Unpaid loans are included in your taxable income
- Interest-free loans create taxable benefits
- Keep corporate and personal funds separate
What is a Shareholder Loan?
A shareholder loan is money you, as a shareholder, borrow from your corporation. This is different from salary or dividends, which are the typical ways to take money out of a corporation.
Types of Shareholder Loans
You borrow money from the corporation or use corporate funds for personal purchases.
You loan money to the corporation or pay corporate expenses from personal funds.
The Critical Repayment Rule
You must repay shareholder loans within one year after your corporation's fiscal year-end, or the entire loan amount will be included in your personal taxable income.
If you don't charge interest on the loan, you must add interest at CRA's prescribed rate to your taxable income as a taxable benefit.
Best Practices
- Keep corporate and personal funds separate
- Document all shareholder loan transactions
- Track repayment deadlines carefully
- Consult a tax professional before taking significant loans
Shareholder Loans Can Be Tricky
Tax Punjabi can help you navigate the rules and avoid costly tax consequences.