Tax Question:
I owe my company money, now what happens?
Facts:
According to ITA 15(2) of the tax act, a loan to a shareholder must be included as personal income in the year the loan is advanced unless the loan is made to you in your capacity as an employee rather than shareholder. There are 4 types of debt allowed to you as an employee/shareholder:
In each of the above exceptions, the loan must have been advanced based on employment rather than shareholdings and there must be arrangements in place for repayment of the loan within a reasonable time. If the loan meets an exception above and does not need to be included in your personal income for tax purposes you must report a taxable benefit on your personal tax return equal to the imputed interest on the loan. The imputed interest is the difference between the interest Canada Revenue (CRA) prescribes and the rate you are paying the company on your loan.
If your shareholder’s loan is repaid in full within one year from the end of the taxation year during which the loan was advanced, it does not need to be declared as income by the shareholder and does not need to meet any of the requirements above. However, if you were to pay off the balance of your shareholder loan before the end of the year, and then take another loan from the company shortly afterwards, CRA may look at these transactions as a series of loans and repayments and consider the new balance outstanding to be part of the original loan meaning the balance would need to be reported as in your personal income for tax purposes. If you declare the shareholder loan as income on your personal return and you pay back the loan later, and the repayment is not part of a series of loans and repayments, you may deduct the repayment from your income in the year it is repaid.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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