Shareholder Loans Revisted

This has come up a bunch lately, so thought I’d run another Shareholder Loan “ELI5.”

With interest rates in Canada heading sky-high, you might be tempted to think about grabbing a low-interest or even interest-free loan from your own business. Maybe you’ll do this to pay off some of your own high-interest debt. Maybe you’re going to loan some corporate funds to your adult kid so they don’t have to do the mortgage dance with the sleazy banks.

But hang on a sec, it’s not quite that as straightforward. (Because of course it isn’t.) So let’s chat about shareholder loans.

Imagine you’re borrowing money from your own company – that’s essentially all a shareholder loan is. Normally, you’d get paid by your company through a salary or dividends, right? But instead this time you think “I’m going to borrow money from my company, and take my time repaying that loan. That way I get the benefit of cash in my pocket, without having to pay tax on that cash. Because a loan isn’t income, right?”

(Cue grumpy-accountant face.)

No, wrong. CRA already figured that game out a long time ago, and wrote some legislation to stop you from doing exactly that.

So to avoid nerding out on the tax act: if you’re thinking about a shareholder loan, remember this golden rule: pay it back within a year of your company’s fiscal year-end. If you don’t, the CRA will want to have a discussion with you. (Subsection 15(2) is the buzzword.) More importantly, the loan will be deemed a personal income inclusion. Straight personal income to you, and zero deduction for your corporation. And don’t forget the deemed interest benefit on the balance of the loan, too. (CRA’s fancy way of saying you’ll need to include some interest related to that loan in your personal taxable income calculation.)

But hey, there are exceptions. For instance, if your company’s business is lending money, you might get more time. Or, if you’re using the loan for stuff like buying a company car or a house, you might also get a break. But, these exceptions are rare, and are often audited by CRA for their validity.

In closing, if you read any tax pro literature, you’ll find experts in tax passionately debating the finer points of doing “A” over “B”. But here’s the thing – You argue that stuff when CRA has its Sauron-like gaze on you, and you’re on your way to tax court. The smarter move? Arrange your affairs in a way that avoids these troubles from the get-go. Recognizing a potential issue and steering clear of it is often all you need to do.

So remember kids, the corporation’s money is not your money. Consider some planning before you start pulling cash out.