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Shareholder Loans and Personal Expenses

December 5, 2022

Question:

What are Shareholder Loans and how are personal expenses recorded?

Facts:

The Shareholder Loans category may appear as a short-term or long-term liability on a Balance Sheet. A shareholder loan is generally a loan by a corporation from one of its shareholders.   

Personal expenses are not deductible as a business expense. They are generally recorded as a reduction to the shareholder loan account. This means that the shareholder owes the company funds and is required to repay the loan.   

Discussion

The Shareholder Loans account is a combination of funds you have injected into the corporation and amounts you borrowed. As long as you have injected more money than you have taken out, there are no tax consequences and you will be able to draw out the funds owed to you at any given time. 

If you owe the company money the shareholder loan will be in a receivable balance and this amount has to be repaid within one year after the end of the taxation year of the corporation.

For example, if the corporation has a December 31 year-end; if you borrowed money from the corporation in September 2022, you have until December 31, 2023, to repay it.  If it is not paid back by this date, then the CRA may assess any outstanding amount as personal income, of which you will have to pay personal tax. The CRA also requires the Company to charge interest on shareholder loan receivables at a prescribed rate. The current rate as of November 2022 is 3%.  

There are other ways in which you can pay back your shareholder loan account:

  • A shareholder can inject personal funds back into the company.
  • A shareholder can personal funds to pay for business expenses to reduce the receivable in their shareholder loan account.
  • A corporation can declare a dividend but not pay the full amount, offsetting a portion of it with the shareholder loan receivable. Please ensure that a shareholder’s resolution is prepared by a lawyer to document this transaction.

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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