While shareholders must claim any loans from the corporation as income, whenever the loan is paid back, the shareholder can claim a deduction for the same amount. Whatever is still remaining of the loan can be declared a dividend.
As long as an owner withdraws more than what he/she initially contributed to the business, he/she can withdraw the balance of the shareholder loan account on a tax-free basis. If the owner draws too much money from the business so that he/she ends up owing the corporation money, he will have one year from the fiscal year-end date to pay it back. This can be repaid either via direct repayment, salaries or dividends. If the amount is not repaid, the amount of the loan will be included in full on his/her personal income tax return.
Interest does not have to be paid on the amounts owing by the corporation to the shareholder; however, if interest is paid, then a legal contract should be drawn up stating an obligation to pay interest and the actual amount of the interest. The interest paid on the shareholder loan is then deductible to the corporation and taxable to the shareholder.
CRA has specific rules about corporate shareholder loans. Since corporations often pay tax at preferred rates, CRA is concerned that owners could take money out of their company without paying personal income tax on it. 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. It also notes that 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.
Shareholder benefits are almost always to be avoided. Where a corporation provides a “benefit” to a shareholder, other than those that involve using specifically authorized tools, such as dividends, salary, and the repayment of loans, the shareholder needs to include the value of that benefit in their income. “Benefit” is intentionally broad, including, but not restricted to, shareholders taking money from the company, underpaying for the company’s services, or having the company cover their personal expenses. As for the corporation, it cannot claim a corresponding deduction—resulting in “double taxation.”
