If you are a shareholder of a private corporation, a loan from your corporation can be an easy way to access cash for your personal needs, at least in the short term. However, before you borrow, you should understand the shareholder loan rules because they can turn that tax-free advance into taxable income.
Note that the shareholder loan rules apply to amounts received based on your status as a shareholder. Different rules apply if a loan was received based solely on your status as an employee. If you are both a shareholder and an employee, CRA would likely take the position that the restrictions imposed on shareholders would be applicable.
The shareholder loan rules apply regardless of whether the loan is made directly to you or to a person that does not deal at arm’s length with you.
How can I avoid having the loan added to my income?
To prevent a shareholder loan from being added to your income, you must repay it within 23 months of the advance.  A repayment can be in the form of cash, or as a dividend declared. However, if you are advancing and repaying amounts on an ongoing basis, it could be deemed that there is a series of loans and repayments, and the advances could be treated as income when received.
Note that if a shareholder loan is added to your income, any subsequent repayment of it can be deducted from your income in the year you make the repayment.
What else do I need to consider?
You should pay interest on the loan at a rate at least equal to the Canada Revenue Agency’s quarterly prescribed rate to avoid a taxable shareholder benefit that is added to your income. The benefit is calculated at the prescribed interest rate, minus any interest you have paid during the year or within 30 days after the end of the year (i.e. by January 30th).
Are there any planning opportunities?
Despite the rules, shareholder loan advances offer a short-term financing opportunity. A shareholder loan repaid within 23 months of the advance, is not added to your income, provided that you are not receiving a series of loans and repayments. If you stay onside with the rules, a shareholder loan can provide you with short-term financing for up to two years.
As an example, assume your corporation has a December 31 year-end. You borrow funds on January 1, 2024. Provided the loan is repaid by November 30, 2025, it will not be included in your income. Be aware that there is also an interest benefit to consider, as discussed above.
It is also good practice to document the loan terms with a written loan agreement.
Do you need help with your 2023 corporate tax planning? The experienced team of professionals at Ernst and Company CPA is available for personalized assistance. Please contact us today.
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