Shareholder Loans: what are they, how to treat them and what to be aware of?
What are shareholder loans?
As a shareholder, there are a few ways to withdraw funds from your corporation, such as: paying yourself a salary, dividend or a bonus. A shareholder loan is another way, and if done right, will not result in a taxable benefit (i.e.: you will not be required to pay tax on it).
How to do it right and things to be aware of:
There are a few rules that you, as a shareholder, must follow to ensure your loan will not get taxed:
1) Pay it in full within 1 year of the corporation’s year-end. For ex: your corporation’s year-end is June 30 and your loan was withdrawn in May 31st, 2020. You will have until June 30, 2021 to repay it in full
2) Interest payments must be made at a rate that’s at least equal to the prescribed interest rate as set by CRA no later than 30 days after year-end (https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2020/interest-rates-third-quarter.html)
3) Make sure you have documented an agreement between the corporation and yourself
In addition to the above, shareholders must be aware they cannot treat this as a series of loans, meaning: they cannot pay back the amount before the end of the year just to borrow it again at the beginning of the next year. The best way to clear the shareholder loan balance is to pay yourself a salary, dividend or bonus.
In conclusion, shareholder loans that are not repaid on time and treated properly, will be included in the shareholder’s personal income (hence, taxable). Some of the implications would be income tax payable, interest and penalties.
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