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Shareholder Loan Debit Balances

July 20, 2012

Tax Question:

Why should I be concerned about a shareholder loan account debit balance? (that is when the shareholder owes the company money)

Facts:

If a shareholder borrows money from the corporation, under ITA 15(2), the amount of the loan should be included in the shareholder’s income.

Discussion:

Whenever you inject money into the corporation or borrow money from the corporation, the amount involved is tracked in the shareholder loan account. As long as you have injected more money than you have taken out, there are no tax consequences. However, if you have borrowed more money than you have injected, you will have a debit balance in your shareholder loan account. This is a significant concern and should be dealt with as soon as possible.

Under ITA 15(2.6) if the shareholder repays this loan within one year after the end of the taxation year of the corporation it will not be assessed as income. So for example, the corporation has a December 31, 2012 tax year. You borrowed money on January 1, 2012, you have until December 31, 2013, to repay it. Likewise, if you borrowed money on December 30, 2012, you would still have to repay it by December 31, 2013. Failure to repay will mean an assessment on your personal tax return treating the loan as income, as well as interest and penalty charges on the unpaid taxes. However, under ITA 20(1)(j) if you repay this loan at a later date it may be deducted from income.

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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