Shareholder loan account taxation

You need to be continuously aware of your shareholder loan balance (personal money you contributed less repayments back to yourself).

Canadian controlled private corporations often pay tax at preferred rates on their active business income, therefore CRA is concerned that owners could take money out of their company without paying the higher personal income taxes on their drawings.

CRA specifies that if a shareholder owes money to the company on two consecutive year-end balance sheets, the principal portion of the loan must be included in the shareholder’s income tax return. Note a series of loans and repayments will be viewed as one continuous loan. This prevents the shareholder from paying the loan off just prior to year-end and then re-borrowing the money just after year-end so the loan does not show up on the balance sheet.

From a tax perspective, it is often advantageous to eliminate the amount that you owe the company by issuing a bonus or declaring a dividend to the shareholder rather than having the amount included on your personal income tax return by CRA.

The above information is of a general nature only and should not be relied upon for specific situations.  Call Marlies Y Hendricks, CPA at 416-766-3941 or submit email enquiry form below to set up a consultation.