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Koroll & Company Blog

Are You Mismanaging Your Shareholder Loans? It Could Cost You

[fa icon="calendar"] Sep 20, 2019 11:00:00 AM / by Allen Koroll

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If you own an incorporated business, you likely know that you can withdraw funds from your corporation in one of three ways - a salary, a dividend, or a shareholder loan.

Of these, shareholder loans are the most often misunderstood and misused form of withdrawal. A fact that can result in negative tax implications for the withdrawer, if not used correctly.

To help you better understand the potential consequences and how to avoid them, it is important for you to understand the guidelines set forth for shareholder loans.

As a general rule, all shareholder loans must be paid in the taxation year following the year the loan was taken - whether they are paid to yourself, another shareholder or someone not dealing at arm’s length with a shareholder - such as a family member.

If the amount is not repaid, a T1 adjustment must be made to include the income in the year it was withdrawn. If this results in you paying more taxes, which in most cases it will, the withdrawer will have to pay interest on the amount.

Example – As a shareholder, you took a shareholder loan in February 2018. The corporation has a taxation year ending on March 31. This loan must be paid back by March 31, 2019, or else it will be added to your income from 2018 when it was originally withdrawn through a T1 adjustment.

There are, however, some exceptions.

Money lending businesses

If the loan was made through a money lending business and repayment terms have been set, the amount does not have to be included in your income in the year it was withdrawn after the one-year payback period has passed.

Employees with greater than 10% of shares

There is an additional exemption for specified employees, which is any individual who directly owns, or related individuals who together own, 10% of the business shares.

It is important to note that there are some additional criteria to be met for this exemption to apply:

  1. The loan must be provided to purchase a home, newly issued shares in the business or a car for business purposes.
  2. There must be an agreement in place for repayment in a reasonable time frame.
  3. The loan must be given with respect to employment and not their shareholdings in the company.

Employees with less than 10% of shares

If you are providing a loan to a shareholder with less than 10% of the company’s shares (individually or together with related individuals), who is also an employee, there is no restriction on the purpose of the loan. However, it must still be provided with repayment terms in place and as a result of employment.

If you are planning on providing a shareholder loan under the above exceptions, you should seek the guidance of an accounting professional, such as Koroll & Company.

This will ensure that you have effectively met the requirements related to repayment agreements, and they will also help prove that the loan was reasonably made as a result of the individuals' employment and not their shareholdings.

If you would like more information on shareholder loans or to discuss whether this is a tool you should use, contact us today.


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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.



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Topics: Small Business

Allen Koroll

Written by Allen Koroll