Your shareholder loan account is made up of all capital that you contribute to the corporation and all purchases made on behalf of the corporation using personal funds or personal credit cards netted against cash withdrawals and personal expenses paid by the company on your behalf.
As long as you do not withdraw more than what you initially contributed to the business, you can withdraw the balance of your shareholder loan account on a tax-free basis. If you draw too much money from your business so that you end up owing the corporation money, you have one year from your fiscal year-end date to pay it back. This can be repaid either via direct repayment, salaries or dividends. If the amount is not repaid, the amount of the loan will be included in full on your personal income tax return.
Withdrawals from your shareholder loan account include cash, personal expenses paid by the corporation, and property transferred to you personally. If you take property out of the corporation be sure that you transfer the asset at the fair market value just as if you purchased it from a company that you had no interest in.
Interest does not have to be paid on the amounts owing to the shareholder however, if interest is paid, then a legal contract should be drawn up stating an obligation to pay interest and the actual amount of the interest. The interest paid on the shareholder loan is then deductible to the corporation and taxable to the shareholder.
CRA has specific rules about corporate shareholder loans. Since corporations often pay tax at preferred rates, CRA is concerned that owners could take money out of their company without paying personal income tax on it. CRA specifies that if a shareholder owes money to the company on two consecutive year-end balance sheets, the principal portion of the loan must be included in the shareholder’s income tax return. It also notes that a series of loans and repayments will be viewed as one continuous loan. This prevents the shareholder from paying the loan off just prior to year-end and then re-borrowing the money just after year-end so the loan does not show up on the balance sheet.
You need to be continuously aware of your shareholder loan balance. From a tax perspective, it is often advantageous to eliminate the amount that you owe the company by issuing a bonus or declaring a dividend to the shareholder rather than having the amount included on your personal income tax return by CRA.
For more information on shareholder loans, please contact your EPR office.
Reprinted with permission from EPR Canada.