As business owners, we’re sure you’re aware that there’s a difference between your company’s funds and your personal funds – even if you have complete ownership over your company. It is, problematic to withdraw funds from your own company for the purpose of a personal expense without going through the proper procedures. The proper way for you to withdraw some money from your corporation is through payment of salary to yourself, through the declaration of a dividend to self, or, through borrowing funds from the company for a limited period. However, it must be said that the Canadian Revenue Agency or the CRA has their own rules when it comes to borrowing of this nature to prevent tax evasion – our tax specialists can help you understand how that works. For now, our intent is to explain what a shareholder loan is, alongside its significance.

Shareholder Loans – Meaning and Significance

The section 15(2) of the Income Tax clearly lays out the meaning and limitations of shareholder loans in Canada. Firstly, it’s important to clarify that such a loan to a shareholder (the owner/manager) from the company will result in straight taxable benefits to that shareholder. This is because the shareholder will be adding the loan to their personal income tax return applicable to that year – and that’s certainly not a good thing for your interests. Also, just to clarify, this doesn’t merely apply to you withdrawing money from the company; the same is also applicable for any payment that the company makes on your behalf.

Applicability

It is imperative for you to know that the payment of that loan must be made within 12 months from the time of borrowing the sum. And second, the CRA accountants don’t consider the loan repaid if you go on to borrow a similar sum at the commencement of a new year. For example, if the due date to the repayment of the loan is 30th November, then paying the money before the deadline only to borrow the same in December isn’t accepted as the CRA considers that a part of a series of borrowing and repayment.

Alternative Means to Clear

Although the most straightforward means to clear the shareholder loan is direct repayment of the sum, tax specialists will tell you other means do clear the same loan. However, the complexity of the shareholder loans makes it necessary for us to factor in the relevant considerations. As a constant factor, it’s important for you to remember that the payment must be registered or recorded in the books of accounts before the year ends.

• You may choose to repay the loan against a salary to yourself. In that case, the company must also remit the necessary income tax, Canada Pension Plan contributions, insurance premiums, etc. accordingly. A standard remitter will remit these contributions and taxes before the 15th of the month after the payment of the requisite salary. Also, the company must remit the payroll tax within a period of 15 days following the closing of the year
• In case you opt to settle the loan against payment of dividend to yourself, you must ascertain that the T5 slips are filed before the deadline
• If you are paying bonus in order to offset the shareholder loan, then it must be noted  that the bonus must be paid within 180 days of the end of the company’s financial year

Exceptions to the Rule

Shareholders may be allowed to borrow the requisite sum for longer periods under certain situations. These conditions are as follows:

• All withdrawals made for the purchase of a dwelling place are exempt from the rule. Shareholders can seek an extended ‘shareholder loan’ when it’s meant for the purchase of a dwelling place. These dwelling places may include a modular home, a cottage, an apartment, or a home. This dwelling place doesn’t necessarily have to be located in Canada. However, it must be stated that this exception is only applicable if the shareholder resides in that property. For instance, this exemption won’t be granted for the purchase of a rental property
• Another exemption is for the purchase of further shares within the corporation
• The purchase of a motor vehicle is also exempted under the laws set forth by the Canadian government
• The shareholder can also borrow sums for longer periods if it is marked out as a trade debt. A trade debt refers to the amount a business owes to any other business. The business may owe the sum after the sale of any goods or services that they deal in. However, the terms of a trade debt must remain consistent regardless of the person or entity borrowing the sum. In essence, the terms of the trade debt will remain equal for a shareholder and a regular customer
• An exemption may also be applicable if the corporation itself is in the business of lending money. This is applicable for financial institutions

It must be noted that the shareholders who have borrowed a sum may be subjected to a taxable benefit. That is, if they haven’t charged themselves with the requisite interest rates that were applicable during the period. It’s best to consult with a tax specialist to be more certain about the finer details.

As a parting note, we would also like to emphasize the importance of paying back the loans within the prescribed period. If you fail to repay back the loans within the prescribed period, it will be counted as ‘personal income’ for that year. Furthermore, additional taxes and penalties are applicable if that happens. To understand more about the complexities that surround shareholder loans, get in touch with a reputed financial management firm such as Altitude Accounting.