Shareholder Loans
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The loan provided to the shareholder of the business corporation is treated as part of the personal income. It is highly advisable to maintain
an accurate shareholder account containing details of:
- investments made by the shareholder of the business corporation
- business expenses paid by the shareholder of the corporation
- personal expenses of the shareholder paid by the corporation
- withdrawal of funds by the shareholder
Adding the first and second and subtracting the last two items results the shareholder account balance that is either due by the shareholder, or by the corporation.
It has been widely common for the business owners to use their powers to take funds from the corporation, or, make the corporation pay personal expenses such as
home renovation or credit card bills.
Not wishing to declare it as personal income, but rather state that it was a loan that will be paid back later.
On the other hand, the employed person would have paid same expenses with after-tax dollars from their personal salary.
Section 15 of the Income Tax Act (ITA) outlines the CRA’s position on loans advanced to shareholders/directors. Any
benefit provided by the company to the shareholder/director shall be included in his/her taxable income. Section 15(2) deals with “shareholder debt” saying
that where the shareholder, or any person connected to the shareholder received a loan “amount of loan or indebtedness is included in computing the
income for the year of a person…”;
The shareholder being also an employee of the business may be able to take advantage of the Home Purchase Loan that is allowed by the CRA for the term of 5 years,
with the renewal option.
According to Income Tax Act, the loan should be ”... acquired for the sole purpose of acquiring right to inhabit a dwelling … … where the dwelling is for the habitation of
(a) the individual by virtue of office or employment the loan is received or the debt is incurred
(b) specified shareholder of the corporation by virtue of whose services the loan is received or the debt is incurred, or
(c) a person related to a person described in (a) or (b)…”
The loan must bear interest, and its principal does not have to be included in income of an individual, for the amount not exceeding what was actually
paid for residence purchase during the year. S. 80.4(1); 80.4(7). The loan must be taken for the term not exceeding 5 years, and the “prescribed” interest
rate must be paid.
Automobile purchase loan option is also available, shall it be received for the reason of employment, as opposed to shareholdings.
Important notice(1): The information above may reflect a subjective interpretation by the author(s), who, by no means may accept any responsibility or
liability whatsoever for the results of proper or improper use of the above information, whole or in part, it as well is explicitly stated that
whatever information provided by authors, may not suit specific purpose of specific reader, and it alone may not be relied upon to produce decision.
In each individual case professional advice must be obtained.