Shareholder loans

If you borrow money from your corporation because you’re a shareholder, the whole loan is generally added to your income for the year you received it, unless you repay it in time or another exception applies. Even a loan that’s repaid in time can create a taxable interest benefit if you pay little or no interest on it.

What counts as a shareholder loan

The rules apply when a shareholder, or someone connected with one (for example, a spouse), borrows from the corporation, from a related corporation, or from a partnership either corporation belongs to. It often shows up in a shareholder loan or drawings account: money you take out, personal bills the corporation pays for you, or advances against future salary or dividends. A line of credit or credit card counts too.

To be a loan, there has to be a real debt you owe the corporation, shown by a written agreement or other convincing evidence such as a corporate resolution setting out the loan’s terms, reflected in the financial statements. If the corporation simply pays your personal expenses with no expectation of being repaid, that’s a shareholder benefit instead. A shareholder benefit is taxable to you, can’t be deducted as a business expense by the corporation, and is reported on a T4A slip.

The main rule: the loan becomes income

When the rule applies, the full amount of the loan is included in your income for your own tax year in which you got it. For an individual, that’s the calendar year, even if the corporation has a different year-end.

The one-year repayment exception

A loan isn’t added to your income if both of these are true:

• you repay it within one year after the end of the corporation’s tax year in which you borrowed it, and
• the repayment isn’t part of a series of loans and repayments.

For example, if the corporation’s year ends December 31 and you borrow in March 2025, you’d need to repay by December 31, 2026.

The “series” test stops people from repaying just before the deadline and borrowing the money back soon after. Paying off the loan with a short-term bank loan, then borrowing from the corporation again to repay the bank, would generally be treated as a series. But repaying by applying a dividend, salary or bonus the corporation owes you is not treated as part of a series, even if you borrow again later.

Since you only know after the deadline, you may need to amend the earlier year’s return: to add the loan if it wasn’t repaid in time (with interest on the extra tax), or to remove it if it was.

Other exceptions for shareholder-employees

Some loans to a shareholder who is also an employee aren’t added to income:

• a loan to an employee who isn’t a specified employee, meaning they own less than 10% of the shares of every class (of the corporation or a related corporation) and deal at arm’s length with the corporation,
• a loan to help an employee, or their spouse or common-law partner, buy a home to live in,
• a loan to help an employee buy newly issued, fully paid shares of the corporation or a related corporation, to hold for their own benefit, and
• a loan to help an employee buy a vehicle used in their job.

For any of these, it must be reasonable to conclude the loan was made because of the person’s employment, not because of anyone’s shareholding, and there must be genuine arrangements, made at the time of the loan, to repay it within a reasonable time. The CRA looks at things like whether the corporation lends only to shareholders, whether your terms are better than other employees get, and whether you can significantly influence the corporation’s decisions.

Repaying a loan that was already taxed

If a loan was included in your income and you repay it in a later year, you can generally deduct the repayment in the year you make it. There’s no deduction if the repayment is part of a series of loans and repayments. And if the corporation forgives the loan, or settles it for less than you owe, the forgiven amount can be added to your income as a shareholder benefit.

The deemed interest benefit

If a loan isn’t included in your income, for example because you repaid it in time, but you paid less than the CRA’s prescribed interest rate, you’re treated as receiving an interest benefit. The benefit is interest at the prescribed rate on the balance for the time it was outstanding, minus the interest you actually paid in the year or within 30 days after it. The prescribed rate is set every quarter. If the loan was made because of your employment rather than your shares, similar rules for employee loans apply instead.

If you used the borrowed money to earn business or property income, you may be able to deduct the benefit as if it were interest you paid.

What to do

• Document any loan in writing, including how and when it will be repaid.
• Track the balance and mark the repayment deadline: one year after the end of the corporation’s tax year in which you borrowed.
• If you clear the balance with a dividend or bonus, see Paying yourself: salary or dividends? for how each is taxed.