If you’re a business owner or self incorporated, you may have heard of shareholder loans before. But what are shareholder loans and how do you use them? We will cover the answers to these questions and more with this guide. But in a nutshell, a shareholder loan is borrowed money from a corporation to one of it’s owners. Shareholder loans can also be given from owners to the corporation to facilitate operations and expansion. In other words, shareholder loans is loaned money to and from corporations and their owners. Continue reading to learn more about the pros and cons, how to use shareholder loans and taxation considerations.

What are shareholder loans

What is a shareholder loan?

A shareholder loan is a loan from a corporation to its shareholders. Alternatively, it can be a loan from a shareholder to a corporation. More specifically, shareholders can withdraw corporate funds from their company in the form of a loan and use it for personal purposes. Or, they can inject their own cash into the company to support operations and growth.

Normally, a dividend or salary is paid to owners of a company. Dividends are paid from the after-tax profits of a company, then taxed at the personal level. As for salaries, they are subject to source deductions. Then, the net amounts need to be reported on a personal income tax return as well. 

Shareholders can withdraw money from their corporation through a shareholder loan if they require additional money outside of a dividend and salary. Alternatively, it can replace dividends and salaries in some instances. If this happens, the shareholder can either repay the amount to the company. Or, they must report it as income on their personal tax return. 

Related Reading: What is Private Debt?

How do shareholder loans work in Canada?

Normally, shareholder loans are reported and tracked on the balance sheet of the corporation. If the shareholder withdraws money from the corporation, it would be an asset to the corporation. Usually, this is called “Due from Shareholder”, or something similar. On the other hand, if a shareholder lends money to the corporation, this would be considered a liability to the corporation. This account is called “Due to Shareholder” or something similar. 

At the end of the year, the net amount for each shareholder is considered. If the net amount is positive (an asset), it means the shareholder owes money to the corporation. These amounts usually need to be repaid to the company in a year or less, otherwise the shareholder must report it on their personal return and pay corresponding tax. But if the net amount is negative (a liability), it means the corporation owes money to the shareholder and no tax obligation arises at the personal level. Technically, these amounts should be repaid to the shareholder from the corporation within a year also, but the tax rules aren’t as strict. Often, terms of repayment are defined using a note or contract either way.

What are the advantages of shareholders loan?

  • Tax deferral
  • Supplements or replaces income from dividends or salaries
  • Borrow or lend money at a lower interest rate than standard financial products

What are the disadvantages of shareholder loans?

  • Possible double taxation
  • Increases company or shareholder’s debt
  • May create conflicts of interest if there are multiple shareholders for the same company
  • Can negatively affect the financial health of a company

Related Reading: What is a shell company?

Do shareholder loans have to be repaid?

If the shareholder does not want to pay tax on the loan at the personal level, then yes, the shareholder loan must be repaid. In terms of timeframe, the shareholder must repay their loan within a year. For example, if a shareholder takes a $5,000 loan from their corporation in November of 2023, they would need to repay it by the end of October 2024. If the shareholder doesn’t repay it in a year, the shareholder would have to report it on their personal tax return and pay any tax. 

What about if the shareholder lent money to the corporation? The rules surrounding repayment of these loans is not as strict. It’s not uncommon for shareholders to inject cash into their business and not expect repayment for several years. When the company has substantial cash again, it can be repaid to the shareholder. Often, the terms of these kinds of loans is outlined in a note or contract, such as repayment terms and the interest rate (if any). These loans should be repaid at some point in the future, but there is no hard and fast deadline to meet to avoid tax.

How do I pay back my shareholder loan?

Corporations have separate bank accounts from their shareholders. To repay a shareholder loan, the shareholder simply transfers money from their personal account to their corporation’s bank account in the amount of what is owed. This can be done in any number of ways, such as through a cheque, wire transfer or electronic funds transfer (EFT). 

Can you write off shareholder loans?

Yes, you can write off shareholder loans. In the instance where the corporation owes money to the shareholder, the shareholder can forgive the debt and it can be written off. In essence, any cash put into the business would then be considered an investment that is not subject to repayment. 

On the contrary, if the shareholder owes money to the corporation but does not repay it within a year, it can be written off. In this case, the corporation would forgive the debt and the shareholder would be required to report it on their personal tax return.

Related Reading: Will Planning Guide Canada

Are loans taxable in Canada?

Per the Canada Revenue Agency, “if a low-interest or interest-free loan is provided or a debt is incurred because of employment or shareholdings, the interest benefit is taxable.” There are some instances where the interest benefit is not taxable, but you should consult a financial professional for more details. Although, forgiven debt is always taxable in the hands of the shareholder.

Can I borrow money from my corporation?

Yes, you can borrow money from your corporation using a shareholder loan. Business owners and shareholders can use these funds for personal purposes as needed. Sometimes there is a low interest rate on this form of financing, or none at all. The only condition is the loan has to be repaid within a year, otherwise it’s considered forgiven debt and is taxable in the hands of the shareholder. 

Using Shareholder Loans in Canada

Shareholder loans are a powerful tool for tax planning and cash flow management. They allow you to both borrow and lend money to and from a corporation with favorable interest rates and terms. However, it’s important you understand the rules surrounding shareholder loans, particularly taxation, so that you can optimize their functionality. Need help figuring that piece out? A wealth manager can help you. Reach out to be connected with a wealth manager today!

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