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Shareholder Loans on a Balance Sheet

Tax Question:

What are Shareholder Loans on a Balance Sheet?

Facts:

The Shareholder Loans category may appear as a short term or long term liability on a Balance Sheet. A shareholder loan is a loan by a corporation to one of its shareholders.

Discussion:

The Shareholder Loans account is a combination of funds that you have injected into the corporation and amounts that you have borrowed. As long as you injected more money than you have taken out, there are no tax consequences and you will have a credit balance in your shareholder loan account.

If you owe the company money there will be a debit balance in your shareholder loan account. This amount has to be repaid within one year after the end of the taxation year of the corporation.

For example, if the corporation has a December 31 year-end; if you borrowed money from the corporation on September 30, 2020, you have until December 31, 2021, to repay it. If it is not paid back by this date, then CRA may assess the amount as personal income and you will have to pay personal taxes. Failure to repay will also result in interest and penalties on the unpaid taxes. However, the Income Tax Act allows you to take a deduction from your personal income if this amount is repaid to the corporation at a later date.

There are other ways in which you can pay back your shareholder loan account:

  • You can take your net payroll cheque and deposit it back into the company;
  • If a shareholder has used personal funds to pay for business expenses, they may receive a credit to their shareholder loan account for reimbursement; and
  • If a corporation declares a dividend but does not choose to pay it right away with cash, it can be paid by a credit to the shareholder loan account instead. Please ensure that a shareholder’s resolution is prepared by a lawyer to document this transaction.

If you have any questions about Shareholder Loans or other Balance Sheet items, please contact a member of the EPR Maple Ridge Langley team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. EPR Maple Ridge Langley, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.


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