Shareholder Loan Account in Canada: Due To and Due From

What is a shareholder loan account in Canada, and what does "due to shareholder" mean?

A shareholder loan account is the running record of money that moves between a corporation and one owner. A due to shareholder balance is a liability: the corporation owes you. A due from shareholder balance is an asset: you owe the corporation. The CRA notes that these accounts go by several names, such as loan accounts or drawings accounts, and can record loans, payments the corporation makes to others on a shareholder's behalf, and similar items (CRA folio S3-F1-C1, para 1.11).

Direction matters most. A debit balance is the side the tax rules target (Income Tax Act, subsection 15(2)).

A case is not simple when the debit grows every year, there is more than one shareholder, a withdrawal is older than one fiscal year, personal spending is mixed into the corporate card, or the ledger does not match the bank. Gather the bank and card statements for the fiscal year, the ledger, any loan agreement or directors' resolution, and last year's balance sheet.

Which way should the shareholder loan account run: does the corporation owe me, or do I owe it?

The direction is not a choice. It follows what actually happened. If you put money in and the corporation owes it back, the account runs credit. If you took money that was not salary, a dividend or a repayment, the account is usually kept as a debit, a balance you owe the corporation, until it is cleared or shown to be something else. The CRA says whether a loan exists depends on the substance of the transaction, not on accounting entries (CRA folio S3-F1-C1, para 1.14).

The loan inclusion rule applies where a shareholder, or a person connected with one, receives a loan from or becomes indebted to the corporation, a corporation related to it, or a partnership either belongs to. The amount is included in that person's income for the year. A balance the corporation owes you falls outside those words (Income Tax Act, subsection 15(2)). A credit balance can still swing: once you take out more than the corporation owes you, the extra is money you owe it.

A debit entry is not automatically a loan. The CRA says a loan or debt can be shown by a written agreement or other convincing evidence, such as a corporate resolution setting out the terms. Without a debt to repay, the amount may instead be a shareholder benefit under subsection 15(1) (CRA folio S3-F1-C1, para 1.13). When money taken out is taxable, and the one-year rule, are in shareholder loans.

What goes into the shareholder loan account, and what comes out?

Money you lend and business costs you pay personally raise what the corporation owes you. Cash you take and personal costs the corporation pays raise what you owe it. In a single account where a credit means the corporation owes you:

The table shows one running balance. For the loan rules, keep what you lent and what you owe visible as separate lines; see netting, below.

Posting a payment the corporation made for you to the account does not make it a loan: with no agreement to repay, the amount may be a benefit instead. See personal costs the corporation paid. For costs you paid yourself, including the GST/HST claim and repayment, see business expenses paid personally.

What does not belong in the shareholder loan account?

Salary, dividends and a documented reimbursement are not loans, and each needs its own record. Share capital set up at incorporation has its own record too; see books for a new CCPC.

• Salary goes through payroll. A withdrawal does not become salary because of a later journal entry; see paying yourself a salary after the fact.
• A dividend is declared and recorded as a dividend. See recording dividends in the books.
• A reimbursement repays a business cost you paid, with a receipt. See business expenses paid personally.

Salary, dividends and reimbursements can pass through the account when the corporation pays by crediting it. The account then shows how a balance was cleared; it does not decide what the payment was.

Why is my due from shareholder balance increasing year over year?

A debit balance grows when you take out more than salary, dividends and repayments put back, and nothing clears the older amounts. Common causes: regular transfers to yourself that were never labelled, personal charges on the corporate card, personal bills paid from the corporate account, and business income deposited to your personal account (corporate income in a personal account). Each withdrawal that is a loan counts on its own. The CRA applies repayments to the oldest loan first unless the facts clearly show otherwise (CRA folio S3-F1-C1, para 1.81).

At year-end, a debit balance is money you owe the corporation. If it is a genuine loan to you as a shareholder, it is included in your income unless an exception applies, such as repaying it within one year after the end of the corporation's tax year in which the loan was made, if the Act's conditions are met (Income Tax Act, subsections 15(2) to 15(2.6)). That deadline follows the corporation's fiscal year, not the calendar year and not the withdrawal date, so every withdrawal in one fiscal year shares one deadline. A deemed year-end, such as on an acquisition of control or when the corporation stops being a Canadian-controlled private corporation, ends that year early and brings the deadline for loans made in it forward (Income Tax Act, subsections 249(3.1) and 249(4)). If no exception applies, the loan is included in your own tax year in which it was made, the calendar year for an individual, even when the corporation's year-end is not December 31 (CRA folio S3-F1-C1, para 1.16). The full rule and its exceptions are in shareholder loans.

If the deadline passes, your earlier personal return may need to be amended to include the loan (CRA folio S3-F1-C1, para 1.73). An outstanding balance can also create an interest benefit; see shareholder loan interest.

Do I keep one account per shareholder, and can I net what I owe against what the corporation owes me?

Keep one account per shareholder, with the money you lent and the money you owe on separate lines. Cash you take out up to what the corporation owes you repays that debt. Netting is different: it sets two debts against each other when no cash moves, and that does not by itself settle either one.

The loan rule looks at each person who received a loan, and each loan has its own deadline, so a shared account hides which amount is late (Income Tax Act, subsection 15(2)). For two shareholders taking different amounts, see shareholders taking different amounts.

The CRA says netting an amount due to a shareholder against an amount due from that shareholder generally does not by itself avoid the deemed interest benefit, which is covered in shareholder loan interest (CRA folio S3-F1-C2, para 2.37). A set-off counts as repaying a loan when it is a legal discharge of the loan, as shown by the circumstances, including contracts or agreements between the parties and the accounting records (CRA folio S3-F1-C1, para 1.82). If your software keeps one net balance, keep a schedule that lists each advance and each repayment.

How does the shareholder loan appear on the balance sheet and the T2?

The balance sheet shows an amount owed to you as a liability and an amount you owe as an asset, each under its own GIFI code. A corporation includes GIFI codes on the balance sheet information schedule (Schedule 100) of its T2 return (CRA RC4088).

The sub-codes run 1301 to 1303, 2181 to 2183, 2781 to 2783 and 3261 to 3263. The CRA's own sample balance sheet in RC4088 files "due to shareholders, unsecured with no fixed terms" under 3260, long-term. RC4088 lists the current and long-term codes but does not say which one a given balance takes; your accountant decides.

The T2 guide says to complete Schedule 11 when the corporation had transactions with shareholders, officers or employees, other than ordinary-course ones (CRA T2 guide; Schedule 11). The form lists payments or amounts credited to a shareholder's account that are not pay or expense reimbursement, and loans or indebtedness to shareholders, officers or employees, or persons connected with a shareholder, that were not repaid by year-end. Whether a balance belongs on it, whichever way the account runs, is for your preparer.

How do I reconcile the shareholder loan account at year-end, and what proves each entry?

Reconcile it to the bank and card statements for the corporation's fiscal year, one shareholder at a time.

1. List every transfer, card charge and payment between the corporation and the owner.
2. Label each: money lent, cost paid personally, cash taken, personal cost the corporation paid, repayment, salary, dividend.
3. Start from last year's closing balance, add the year's entries, and check the result against the ledger.
4. Date every debit, so each amount's deadline is known.
5. Decide what will clear the debit before the deadline. The year-end checklist places this step.

The CRA says a loan or debt can be shown by a written agreement or other convincing evidence (CRA folio S3-F1-C1, para 1.13). Generally, keep records and supporting documents for six years from the end of the last tax year they relate to (CRA: keeping records). Minutes of directors' and shareholders' meetings, the general ledger and any special agreement needed to understand its entries, such as a loan agreement, follow a longer rule: keep them until two years after the corporation is dissolved (Income Tax Regulations, paragraph 5800(1)(a)). Other laws can require longer.

How do I clear a balance I owe the corporation?

Clear it by repaying cash, by applying net salary or bonus pay or a dividend the corporation owes you, or by a documented set-off. The CRA says repayments can be made by applying dividend, salary or bonus payments against the loan (CRA folio S3-F1-C1, para 1.82).

The corporation must withhold and remit tax on salary and bonuses, so only the net pay is available to apply to the loan (Income Tax Act, subsection 153(1); CRA: bonuses).

Repaying with a new loan from the corporation can be treated as part of a series of loans and repayments, so the repayment may not count. Salary, a bonus or a dividend applied against the debt is not treated that way (CRA folio S3-F1-C1, paras 1.84 to 1.86). If a loan was already included in your income, a later repayment can generally be deducted in the year it is repaid, unless it is part of such a series (CRA folio S3-F1-C1, paras 1.76 and 1.77). The conditions and the deduction are in shareholder loans.

Example

These examples are illustrative; all amounts are Canadian dollars.

You lend the corporation money

You lend your corporation C$20,000 for startup costs and later take back C$5,000. The corporation owes you C$15,000: a liability, due to shareholder. The loan inclusion rule is not aimed at that balance. If you then took C$20,000 more with nothing else recorded, the first C$15,000 would repay what the corporation owed you, and the account would move to C$5,000 owed by you. Only that C$5,000 is money you owe the corporation, so only it can be a shareholder loan; its deadline runs from the fiscal year you took the cash.

Withdrawals with no salary or dividend

The corporation's fiscal year ends December 31. You withdraw C$3,000 a month with no salary, dividend or repayment.

• End of Year 1: the account shows C$36,000 due from shareholder, an asset. The deadline for all of it is December 31 of Year 2.
• Year 2: you withdraw C$36,000 more and repay nothing. At the end of Year 2 the account shows C$72,000. The Year 1 deadline has passed; the Year 2 amount has until December 31 of Year 3.
• After Year 2: the Year 1 C$36,000 may be included in your Year 1 income, with the return amended, if it was a genuine loan. Without evidence of a loan, it may be a benefit instead. If it was included, a later repayment may be deductible in the year it is made.

Costs paid both ways

You pay C$2,400 of corporate software on a personal card. Separately, the corporation pays C$1,000 of your personal costs under an agreement that you repay it; that is not repayment of what it owes you. Keep two lines: C$2,400 due to you and C$1,000 due from you. A net ledger balance of C$1,400 alone does not discharge either debt. Without that agreement, the C$1,000 may be a shareholder benefit, or may simply repay part of the C$2,400.

Different for you?

• Your due-from balance grew every year, or your accountant asked what a pile of withdrawals is: each entry has to be shown to be a loan, salary or a dividend, and the balance matters at the next deadline. That is a review of the full ledger against the bank statements. See bookkeeping help.
• A balance is older than one fiscal year: the deadline may have passed. See shareholder loans and bookkeeping help.
• The ledger does not match the bank, or several years were never reconciled: the entries have to be rebuilt before anyone can say what is a loan. See rebuilding books from bank statements, catching up on overdue books and bookkeeping help.
• Past withdrawals should become salary: see paying yourself a salary after the fact.
• The corporation paid your personal costs: see personal costs the corporation paid.
• Business income went into your personal account: see corporate income in a personal account.
• Two or more shareholders take different amounts: see shareholders taking different amounts.
• You are selling your shares: a sale of control ends the corporation's tax year early and can bring a loan deadline forward. See transferring a shareholder loan to a new owner.
• The corporation owes the CRA tax and you took money out: if a corporation passes money or property to a shareholder it does not deal with at arm's length, for less than its value, the shareholder can be liable for the corporation's tax up to that shortfall, and the CRA may assess at any time (Income Tax Act, section 160). See owing tax after paying yourself dividends and bookkeeping help.
• A holding company is the shareholder, or the shareholder lives outside Canada: different rules can apply, and this page does not cover them. See bookkeeping help.
• Your corporation is in Quebec: this page covers the federal rules only and does not check Quebec's. Have both reviewed together: bookkeeping help.