Shareholder Loan When Leaving Canada: Part XIII and Repayment

How is a shareholder loan to a non-resident taxed?

A shareholder loan to a non-resident falls under the same test as a resident's: it is caught if it is not repaid by one year after the end of the corporation's tax year in which the loan was made. The difference is the result. For a non-resident, the amount is deemed a dividend from a Canadian corporation under paragraph 214(3)(a) and taxed under Part XIII at 25% (subsection 212(2)), unless a tax treaty lowers the rate (CRA folio, ¶1.88–1.89). Paragraph 214(3)(a) applies only for Part XIII, so an amount taxed this way is not also reported as income on a Canadian return.

What makes a case not simple:

• Loans made before you left. Subsection 15(2) counts a loan in income for the year you received it. An amount you received while resident and did not repay by one year after the end of the corporation's tax year in which the loan was made points to your resident return for that year, which may need to be changed. Amounts received after you left point to Part XIII. The CRA folio does not address a borrower who changes residence while a loan is outstanding, so the date of each withdrawal decides which rule you start from.
• The corporation owes the tax. If the company does not withhold and remit, it is liable for the tax, a penalty of 10% (20% for a repeated knowing failure) and interest (subsection 215(6); subsections 227(8) and 227(8.3)), and the non-resident borrower is jointly liable for that interest (subsection 227(8.1)). The owner abroad is often the one who has to make sure this happens.
• Two countries. The new country may also tax the deemed dividend; whether it gives credit for the Canadian tax depends on its rules.

Gather: the shareholder loan ledger with the date of every withdrawal and repayment, the corporation's year-end, your departure date, your new country and its treaty, and any NR4 slips or remittance receipts already filed.

How much Part XIII tax is withheld on the deemed dividend, and by whom?

The corporation withholds 25% of the deemed dividend, or the lower treaty rate for dividends if the borrower qualifies. Subsection 215(1) puts the duty on the payer, which here is the lending corporation (folio, ¶1.90).

No cash actually changes hands on a deemed dividend, but the corporation still has to remit the tax. Under subsection 215(6) it may recover what it paid from the non-resident. To support a treaty rate, the CRA's NR4 guide says the payer can ask the payee for Form NR301. For rates by country, see non-resident tax rates in Canada. The deemed dividend also goes on an NR4 slip, due by the last day of March after the payment year (T4061); the non-resident owners guide covers NR4 reporting and director liability.

A deemed dividend under paragraph 214(3)(a) does not count as a dividend paid for the corporation's dividend refund (folio, ¶1.98).

When does the corporation have to withhold and remit?

For a single loan, the Act deems the dividend paid when the loan is made (subsection 214(3.1)), but in practice the CRA says the non-resident cannot be deemed to receive it until one year after the end of the lender's tax year, because the one-year repayment test comes first. If the corporation remits by the 15th day of the 13th month after that year-end, the CRA charges no penalty or interest (folio, ¶1.90).

A running account with repeated loans and repayments works differently. The CRA bases the tax on the net increase in the loan during the lender's tax year, and expects it remitted by the 15th day of the month after that year-end to avoid penalty and interest (folio, ¶1.91). Part XIII on amounts actually paid, such as interest, is due by the 15th day of the following month (T4061).

Does the one-year repayment rule still protect a non-resident?

Yes. Subsection 15(2.6) applies whatever the borrower's residence: a loan repaid by one year after the end of the corporation's tax year in which the loan was made is not caught, if the repayment is not part of a series of loans or other transactions and repayments. Repaying just before the deadline and borrowing again soon after can fail that condition.

The exception in subsection 15(2.2) for loans between non-residents does not help while your corporation is resident in Canada: it needs both lender and borrower to be non-residents when the loan is made (folio, ¶1.24). If the company's residency is in question, see corporation residency after the owner moves abroad. The other exceptions are in the shareholder loans guide.

I repaid after the tax was withheld: how do I get the Part XIII tax back?

Apply in writing to the CRA under subsection 227(6.1) no later than 2 years after the end of the calendar year in which you repaid. The repayment must not be part of a series of loans or other transactions and repayments.

The refund is the lesser of:

1. the Part XIII tax paid on the loan or the part repaid, and
2. the Part XIII tax that would apply to a dividend equal to the amount repaid, paid at the time of repayment.

The CRA applies repayments to the oldest loans first unless the facts clearly show otherwise, and can set the refund against any amount you owe the government (folio, ¶1.93–1.97). Miss the window and the refund is lost.

I owe the company money on the day I leave: what should I do first?

Decide before your departure date, because each choice is taxed differently.

Clearing a balance with salary or a dividend, and its paperwork, is covered in the shareholder loans guide. A dividend or salary paid after you become a non-resident is a different case; see paying yourself from your corporation after moving abroad. Departure tax on your shares is in the leaving Canada guide.

The CRA folio does not say whether a low- or no-interest loan to a non-resident also creates a taxable benefit under section 80.4; see shareholder loan interest for the resident rules.

The company owes me money: can it pay me back after I leave?

Repaying money you actually lent the corporation is generally a return of your own money, not a dividend, so the rules above do not apply to it. How that repayment and any interest on it are taxed once you live abroad is covered in paying yourself from your corporation after moving abroad.

Which records prove the loan and the repayment?

Keep records that show the timing and purpose of every amount, because the one-year test and the refund both turn on dates and on whether repayments were part of a series.

• The shareholder loan ledger, with each withdrawal and repayment dated
• Bank statements showing each repayment came from you, not from the corporation
• Any loan agreement or board resolution, with its terms
• Dividend or bonus resolutions used to clear a balance
• Proof of your departure date and new residence
• Part XIII remittance receipts, NR4 slips and Form NR301
• A copy of any subsection 227(6.1) refund application and the CRA's reply

For bookkeeping entries, see the shareholder loan account guide.

Example

These examples are illustrative and use Canadian dollars.

Borrowing after the move

In Year 1 an owner becomes a non-resident and borrows C$80,000 from her corporation, which has a December 31 year-end. Her new country's treaty rate on dividends for individuals is 15% in this example. She has not repaid by December 31 of Year 2, so the C$80,000 is a deemed dividend. The corporation remits C$12,000 (15%), supported by her Form NR301, by January 15 of Year 3 (the 15th day of the 13th month after the Year 1 year-end), and reports it on an NR4.

Repaying two years later

She repays the full C$80,000 in Year 5, not as part of a series of loans. She applies under subsection 227(6.1) by December 31 of Year 7. The refund is the lesser of the C$12,000 paid and the Part XIII tax on a C$80,000 dividend at repayment, so C$12,000 if the treaty rate on dividends is still 15% when she repays.

Clearing the balance before leaving

Another owner borrowed C$40,000 from his corporation earlier in the same tax year, so it is still inside its one-year repayment window. Before his departure date, the corporation declares a C$40,000 dividend credited to his shareholder account, clearing it. He reports the dividend on his departure-year return at resident rates; the loan counts as repaid, so neither subsection 15(2) nor Part XIII applies to it. Had the balance already been included in income in an earlier year, clearing it would instead give a deduction in the repayment year, as the shareholder loans guide explains.

Different for you?

• You leave with a debit balance on the shareholder account: whether each amount is taxed as resident income or under Part XIII can depend on when it was borrowed, and the CRA has not published guidance on a change of residence, so get corporate tax help before you go.
• You repaid and want the Part XIII tax back: the application has a fixed window and turns on the ledger dates, so get corporate tax help to prepare it.
• The loan was already taxed on a resident return and you repay it after leaving: see the shareholder loans guide; the refund on this page applies only to Part XIII tax.
• Your new country also taxes the deemed dividend: get cross-border tax help.
• The corporation never withheld or remitted Part XIII tax: penalties and director liability may follow; see non-resident owners of a Canadian corporation and get corporate tax help.
• You still live in Canada: use the shareholder loans guide.
• You want to take money out regularly from abroad: see paying yourself from your corporation after moving abroad.
• The CRA found personal use of company money in an audit: see shareholder benefit found in an audit.
• You are selling your shares: see transferring a shareholder loan to a new owner.