What Is the Tax Implication of Shareholder Loans in Canada?

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The thought of borrowing money from your company at no interest or a low-interest rate may be more and more alluring as Canadian interest rates continue to rise. To use a shareholder loan account, you must first grasp the associated tax implications and impact.

Shareholder loans may seem appealing at first to many small business owners, but they might not be a suitable fit for your particular circumstance. If you’re considering taking out a shareholder loan, you should first understand everything there is to know about them.

A specific amount of money a shareholder of a particular company owes to the said company is referred to as the shareholder loan. The company pays the shareholders in two ways; salaries and dividends. Dividends are paid from post-tax corporate profits and are subject to individual taxation. Paying source deductions on time is necessary for salary payments. For example, CPP and income tax payments must be made to CRA by the 15th of the following month.

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Outside of the conventional wage or formal dividend arrangements, shareholders are permitted to utilize corporate cash for personal purposes at any time of the year. These sums are regarded as loans given by the company to the shareholder. Since this money has not been subject to personal taxation, the shareholder must either repay it within a set time period, typically one year, or include it in their personal income.

A shareholder loan may be given to your own business, a business connected to yours, or a partnership in which your company participates. Any stakeholder of the firm, as well as anyone associated with that shareholder, may get a shareholder loan from the corporation.

Shareholder loans can be categorised into two categories with regards to the use. One category is “due from shareholder” loans and the next category is called “due to shareholder” loans. A loan from the corporation to you, the shareholder, is regarded to have occurred if you take funds from your incorporated business and they are not listed as wages or dividends given to you.

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Another example is spending business money on a personal thing. In both instances, money taken from the company was used for personal expenses without any personal tax being paid. Be aware that these loans are subject to certain regulations, such as the need for business repayment within a year. It is regarded as an owner contribution and is shown on the balance sheet as a debt owed by the company; the owner will eventually need to be paid back by the firm if you use personal cash to pay for business costs or if you lend money to the business as your contribution is entitled to “due to shareholder ” loan.

There are a few tax repercussions you should be aware of before taking out a shareholder loan. The shareholder loan repayment rule is the most crucial. The fundamental rule is that if you repay the shareholder loan within a year of the corporation’s fiscal year’s end, the loan’s amount will not be deducted from your taxable income. Take Company X as an example, whose fiscal year ends on December 31 and in which you own stock. You have until December 31, 2024, to pay back a loan that you took out from Company X on December 1, 2024.

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You’ll have to include the remaining sum in your income and pay income tax on it if you don’t repay the loan within that time frame. Even if you did not charge an interest rate on the loan, interest rates that are equal to the stipulated rate must be included in your taxable income. Although it is now 2%, the mandated rate is subject to change every three months. This interest, which is treated as a tax benefit for you as a shareholder, is an example of a benefit you were able to get (a loan in this instance) as a result of your shareholder status. Perks are included in your taxable personal income.