Shareholder Loan Interest: Prescribed Rate and Taxable Benefit

Do I have to pay interest on a loan from my corporation, or can it be zero-interest?

Tax law does not require interest on a shareholder loan, so a zero-interest loan is possible. It taxes the missing interest instead. If you are a shareholder, or connected with one (a spouse, for example, or anyone who does not deal at arm's length with a shareholder), and the corporation lends you money because of the shareholding, you are treated as receiving a benefit. The benefit is interest at the prescribed rate for each day the loan was outstanding, less interest you paid for the year no later than 30 days after year-end. For every quarter of the tax year this page covers, that is 3% a year on the balance before any interest you pay (Income Tax Act, s. 80.4(2); CRA folio S3-F1-C2, ¶2.25).

A second rule sits beside it. Under subsection 15(2), the loan itself is included in the borrower's income for the year it was received unless an exception applies. The two rules do not apply to the same loan (s. 80.4(3)(b)).

A case is not simple when the loan crosses a year-end, is repeated, grows, or is repaid with a new loan, or when the borrower is also an employee of the corporation. Each of these turns on facts and is worked out year by year.

Gather the date and amount of every advance and repayment, the bank records, the corporation's year-end and any interest paid.

What is the prescribed rate, who sets it, and how often does it change?

The prescribed rate is set by regulation and published by the CRA, and it is reset every calendar quarter, though it can stay the same. For the tax year this page covers, the CRA lists 3% for taxable benefits for employees and shareholders in all four quarters (CRA prescribed interest rates).

The regulation sets the formula: the average yield on 90-day Government of Canada Treasury Bills at the auctions in the first month of the previous quarter, rounded up to the next whole percentage (Income Tax Regulations, s. 4301). Check the CRA page for the quarter, or quarters, in which your loan was outstanding.

A loan outstanding across a quarter change is worked out quarter by quarter, each at its own rate, as in the CRA's folio example (folio S3-F1-C2, Example 2).

How is the taxable benefit worked out on a loan with no interest?

The benefit is interest at the prescribed rate on the loan balance for the part of the year it was outstanding, minus interest paid in time. A loan outstanding from January 1 to December 31 carries a full year of benefit. If the result is zero or less, there is no benefit.

The benefit is worked out again for every year any part of the loan stays unpaid, even if the borrower stops being a shareholder (folio ¶2.32). If you also lent money to the corporation, netting the two generally does not avoid the benefit: an accounting offset is not enough, and a loan stops counting only when it is actually repaid or cancelled. Forgiving the loan is itself generally a taxable shareholder benefit (folio ¶2.37; s. 15(1.2)).

A loan leaves no benefit when interest at least equal to the prescribed rate for every period the loan was outstanding is actually paid by the deadline; interest that is only charged does not count. The Act also removes the benefit where the loan's rate is at least what an arm's-length commercial lender would have agreed on the same terms. That is a judgment on the facts, so the prescribed rate is the simpler test (s. 80.4(3)(a); folio ¶2.14).

What if I borrow from my corporation for just 10 days and repay it?

A loan repaid in days is generally not included in income if it is repaid inside the one-year rule and is not part of a series, but an interest benefit can still arise for the days it was outstanding. Its size depends on the amount, the days and the rate. A loan does not have to be outstanding at year-end; one outstanding for part of the year creates a benefit for that part (folio S3-F1-C2, ¶2.33). A loan counts as received when the funds are advanced, or when the documents are signed and the borrower becomes legally obligated to repay (folio ¶2.31).

For a loan of days or weeks:

1. Record it before the money moves: date, amount, interest (or none) and repayment date, in a loan agreement or corporate resolution.
2. Move the money by bank transfer, and repay by bank transfer to the corporation.
3. Repay with money that is not a new loan from the corporation. A repayment funded by re-borrowing can count as a series.
4. Work out the benefit for the days outstanding. Either pay interest in time or report the benefit.

Repaying a loan and borrowing again soon after can be a series. In a series, the one-year exception is lost and the whole loan is taxed. Whether a repayment really came from new borrowing is a question of fact (folio S3-F1-C1, ¶1.84). The CRA's examples, and what does not count as a series, are in shareholder loans. Needing short loans more than once a year is a case for corporate tax help.

If I pay interest, how much and by when?

Interest paid for the year no later than 30 days after year-end reduces the benefit dollar for dollar (s. 80.4(2)). For an individual with a calendar tax year, the deadline is January 30 of the next year. The CRA's folio example counts a January 10 payment toward the earlier year's interest (folio S3-F1-C2, Example 2).

Interest actually paid by then, in an amount equal to the benefit, leaves it nil; paying part of it reduces the benefit by that part. A fixed rate written into the loan does not follow the CRA's quarterly changes, so compare what you paid with the amount worked out at each quarter's rate. The Act counts interest paid, so keep the bank record. Interest that a corporation pays on your behalf is not interest you paid: it is a taxable benefit to you instead (folio ¶2.29). The corporation includes the interest it receives in its income (s. 12(1)(c)).

If you used the borrowed money to earn business or property income, the benefit counts as interest you paid and may be deductible (s. 80.5; folio ¶2.39).

Is the benefit the shareholder rule or the employee rule, and whose income is it?

The borrower's income. For a loan received because of shareholding, subsection 80.4(2) applies, and the benefit counts as a benefit conferred on a shareholder (s. 15(9)). The borrower can be a shareholder, a person connected with one (such as someone not at arm's length with a shareholder), or a member of a partnership or a beneficiary of a trust that holds the shares. The lender can be the corporation, a corporation related to it, such as a sister company or the operating company of a holding company, or a partnership that one of them belongs to (s. 80.4(2) and (8)). A corporation resident in Canada that borrows is outside both this rule and subsection 15(2) (s. 80.4(2); s. 15(2)).

For a loan received because of employment, subsection 80.4(1) applies instead, and the benefit is employment income (s. 6(9)). The corporation then reports it on a T4 (box 14, code 36), not a T4A (T4130). Which rule applies is a question of fact. Loans made only to shareholders point to shareholding. The same terms offered to employees who are not shareholders point to employment (folio S3-F1-C2, ¶2.21 to ¶2.23).

An owner who is also an employee needs this settled for each loan: it also decides whether any employee exception to the loan inclusion can apply (s. 15(2.4)). The exceptions are in shareholder loans.

Is the loan itself taxed, and how does the one-year rule fit with the benefit?

Yes, unless an exception applies. The loan is included in the borrower's income for the year it was received. The main exception is repayment within one year after the end of the lender's tax year in which the loan was made, when the repayment is not part of a series (s. 15(2.6)). The corporation's year-end counts, not the borrower's. The rule has no interest condition, so paying interest does not by itself take a loan out of subsection 15(2).

The deadline can pass after the borrower has filed, so the return for the borrowing year is amended either way: add the loan and remove the benefit if the deadline is missed, or remove the loan and add the benefit if the loan was included and then repaid in time (folio S3-F1-C2, ¶2.34 and ¶2.35). Interest is charged on tax added by an amendment (folio S3-F1-C1, ¶1.73). A loan that was included in income and is later repaid, outside a series, can be deducted in the year of repayment (s. 20(1)(j)). Whether a withdrawal is a loan at all, and how to clear one, is covered in shareholder loans.

Does a loan for a home change the rate?

Do not assume the rate is fixed when you borrow. First check the loan itself: a home loan received because of your shares and not repaid within the one-year rule is included in your income in full, and then no interest benefit applies. The employee home-loan exception needs a loan made because of employment, not shareholding (s. 15(2.4)(b) and (e)). The rate question matters only for a loan that escapes that inclusion.

A fixed rate is clear for an employee's home loan but not for a shareholder's, and the sources do not line up, so work the benefit at each quarter's rate unless the fixed rate has been confirmed for your loan. The Act caps the benefit on a home purchase loan at the prescribed rate in effect when the loan was received, but the cap is written for the employee rule in subsection 80.4(1) (s. 80.4(4)). The shareholder rule, subsection 80.4(2), has no matching sentence, and the CRA's shareholder-loan folio works the benefit at the rate for each period the loan was outstanding (folio S3-F1-C2, ¶2.25 and ¶2.27).

The CRA's employer guide, in its home purchase loan part, adds that the same treatment also applies to a shareholder or a person related to one (T4130). For an employee's home loan the fixed rate lasts five years, and a balance still owing then counts as a new loan received on that date (s. 80.4(6); T4130). Because the Act's text and the CRA's employer guide differ, have the rate confirmed for your loan before the money moves, with corporate tax help. For the wider choice of dividend, salary or loan to fund a home, see retained earnings for a home purchase.

What records and entries do I need?

Keep enough to show each loan's terms, every dollar that moved, and how the benefit was worked out:

• The loan agreement or corporate resolution: date, amount, interest rate (or none) and repayment terms. The CRA accepts a written agreement or other convincing evidence that a loan exists (folio S3-F1-C1, ¶1.13).
• Bank records for the advance, each repayment and each interest payment, with dates.
• The corporation's tax year-end, which sets the one-year deadline, and the borrower's tax year, which sets the 30-day deadline.
• The benefit calculation for each quarter the loan was outstanding, and the T4A the corporation issues.

Advances and repayments go through the shareholder loan account, and interest paid is income in the corporation's books. The entries are in the shareholder loan account guide.

Example

Illustrative only. All amounts are Canadian dollars. Assume the prescribed rate is 3% throughout, every year has 365 days, the corporation's year-end is December 31, and the borrower is an individual with a calendar tax year.

A 10-day loan

A shareholder borrows $20,000 in June and repays it 10 days later with personal funds. The benefit is $20,000 x 3% x 10 / 365, or $16.44. If no interest is paid, $16.44 is reported. If the shareholder pays $16.44 of interest to the corporation by January 30 of the next year, the benefit is nil.

A full-year loan

A shareholder borrows $50,000 on January 1 of Year 1 and repays it early in Year 2 with personal funds, inside the one-year rule. The Year 1 benefit is $50,000 x 3%, or $1,500, and the few days outstanding in Year 2 add a smaller benefit the same way. Paying $1,500 of interest to the corporation by January 30 of Year 2 removes the Year 1 benefit, and the corporation reports $1,500 of interest income.

A loan carried two years

A corporation with a December 31 year-end lends $40,000 at no interest to a shareholder on March 1 of Year 1. The one-year deadline is December 31 of Year 2.

• Year 1: the shareholder files without the loan in income, expecting to repay in time, and reports the interest benefit for March 1 to December 31: $40,000 x 3% x 306 / 365, or $1,006.03.
• Year 2: the loan is still owing on December 31. The Year 2 return and the corporation's slip are both due after that date, so no benefit is reported for Year 2.
• After December 31 of Year 2: the one-year exception is lost. The whole $40,000 is included in the shareholder's Year 1 income, not only a benefit. The Year 1 return is amended to add the loan and remove the $1,006.03 benefit, with interest charged on the added tax. The loan is now included in income, so no benefit applies to it in any year. If the loan is later repaid outside a series, the repayment is deductible in that year.

Different for you?

• The loan crosses a year-end, is repeated, grows or is repaid with a new loan, a one-year deadline has passed, or you are also an employee: the one-year rule, the series test and the shareholder-or-employee question all turn on facts, and the answer sets whether the loan or only a benefit is taxed each year. A missed deadline means amending a filed return. Get corporate tax help before the benefit is reported or the deadline passes, or to amend after it has.
• The loan comes from a related company, or the shares are held through a holding company, partnership or trust: who the borrower is decides whether the rule applies, and who pays the interest changes the result. Bring the structure to corporate tax help.
• You are not sure the money is a loan, or want to clear it: see shareholder loans.
• You want to replace the loan with pay: compare declaring and paying a dividend and salary or dividends.
• The loan went to a spouse or family member: the rule reaches a person who does not deal at arm's length with a shareholder, and the benefit lands on the borrower. Review it with corporate tax help.
• The loan account is behind, or dates cannot be shown from bank records: rebuild it first with bookkeeping help.
• The CRA sent a letter about personal costs or a loan: see shareholder benefits found in an audit and bring the letter to corporate tax help.
• You are selling your shares with a loan outstanding: see transferring a shareholder loan to a new owner. A change of control ends the corporation's tax year early (s. 249(4); deemed year-end), which can bring the one-year deadline forward.
• You live in Quebec, or the borrower or lender is outside Canada: this page covers the federal rules only. Bring the facts to corporate tax help.