Shareholder Loans: When They Are Taxable and How to Repay

What does a shareholder loan account show?

A shareholder loan account records money moving between a corporation and its owner. If the corporation advanced money to you that you still owe, you may have a shareholder loan; if you advanced money to the corporation, it may owe you instead. A debit or negative sign alone does not settle which direction the debt runs, because account labels and software display conventions vary. Match every entry to the bank statement and the corporation's records. The CRA says the transaction's substance, rather than its accounting label, decides whether a loan exists (CRA shareholder loan folio, paragraphs 1.11–1.14).

For each withdrawal, note its date, amount, purpose and any repayment. Keep the loan agreement or corporate resolution, if one exists. A written agreement helps show a real obligation to repay; other convincing evidence can also do so. The corporation's year-end financial statements cover how the balance appears in the books.

When is money taken from a corporation taxable?

If you genuinely owe the money back because of your shareholding, the loan is generally included in your income for the tax year in which you received it, unless a statutory exception applies. The rule can also cover a loan from your corporation or a related corporation to your spouse or another connected person. If that person borrowed the money, check their return rather than assuming the loan belongs on yours. The fact that the money is called an advance, drawing or loan does not by itself create an exception (Income Tax Act, subsections 15(2) and 15(2.1); CRA shareholder loan folio, paragraphs 1.2 and 1.11–1.16).

If there was no genuine obligation to repay, the money or property may instead be a taxable shareholder benefit when received. A benefit does not gain the loan repayment exception merely because someone later posts it to the shareholder loan account (Income Tax Act, subsection 15(1); CRA shareholder loan folio, paragraphs 1.13–1.14).

What is the one-year repayment rule?

A genuine shareholder loan escapes the usual income inclusion if you repay it within one year after the end of the lender's tax year in which the loan arose, and the repayment is not part of a series of loans or other transactions and repayments. For a loan from a related corporation, use that lending corporation's year-end, not the year-end of the company whose shares you own or the withdrawal date (Income Tax Act, subsection 15(2.6); CRA shareholder loan folio, paragraph 1.71).

The deadline can fall after you file the personal return for the borrowing year. If you expected to repay but miss the deadline, you may need to amend that earlier return and pay tax plus arrears interest. If you reported the loan and later satisfy the exception, the earlier return may need an amendment to remove it (CRA shareholder loan folio, paragraphs 1.71–1.75).

Track each advance separately. Unless the facts clearly show a different allocation, the CRA applies repayments to the oldest outstanding loan first. A clean year-end balance does not prove that every earlier advance was repaid on time (CRA shareholder loan folio, paragraph 1.81).

Can salary, a bonus or a dividend clear the balance?

Yes. A salary, bonus or dividend that the corporation actually owes the borrower can be applied against that borrower's genuine loan, legally discharging that much of the debt. The CRA does not treat that kind of repayment as a prohibited borrowing cycle merely because the borrower takes another loan later (CRA shareholder loan folio, paragraphs 1.82 and 1.86).

A journal entry alone cannot turn a past withdrawal into a past salary or dividend. Identify when the pay or dividend became payable, when the debt was discharged, and what slips and remittances follow. For ongoing pay choices, see Salary or dividends; for bonus processing, see Running payroll.

Does repaying before year-end and borrowing again count?

Usually not if the new corporate loan effectively funds the repayment. The Act denies the repayment exception when the repayment is part of a series of loans or other transactions and repayments. The CRA says that paying down a loan near year-end and reborrowing can be such a series, even if a short-term bank loan sits between the two steps. Whether the new borrowing funded the repayment depends on the facts (Income Tax Act, subsection 15(2.6); CRA shareholder loan folio, paragraphs 1.83–1.85).

The CRA treats a genuine salary, bonus or dividend applied against the debt differently. Keep the declaration or payroll records and the dated loan ledger; a temporary zero balance alone is weak evidence (CRA shareholder loan folio, paragraph 1.86).

Must I pay interest on a shareholder loan?

Tax law does not require every shareholder loan to bear interest. But a loan received because of shareholding can create a taxable interest benefit while it is outstanding, even if you repay it within the one-year window. The benefit generally equals interest at the quarterly prescribed rate for the outstanding period, less interest you pay for that year no later than 30 days after your tax year ends. Paying enough interest by that deadline can eliminate the deemed benefit (Income Tax Act, subsection 80.4(2); CRA interest benefit folio, paragraphs 2.25–2.27).

The deemed-benefit rule can also be inapplicable if the loan bears at least the rate an independent commercial lender would have agreed to on comparable terms when it was made, and no one other than the borrower pays interest (Income Tax Act, paragraph 80.4(3)(a); CRA interest benefit folio, paragraph 2.14). The applicable prescribed rate can change each quarter; check the CRA prescribed interest rates for the time the loan was outstanding. A shareholder interest benefit is generally reported on a T4A. If the loan itself is included in income under subsection 15(2), the separate shareholder interest benefit rule does not apply to that loan (CRA interest benefit folio, paragraphs 2.15 and 2.40).

What if the loan was taxed and I repay it later?

If a genuine loan was included in your income under subsection 15(2), a later real repayment is generally deductible in the year you repay it. The deduction is limited to the part previously included in income and is unavailable for a repayment that is part of a series of loans or other transactions and repayments (Income Tax Act, paragraph 20(1)(j); CRA shareholder loan folio, paragraphs 1.76–1.77).

If a later salary, bonus or dividend legally repays a loan already included in income, that payment still has its own tax treatment. Check the repayment-year deduction separately. This is different from a loan repaid within the one-year exception: that loan should generally be removed from the borrowing-year income instead. The amended return may also need to include a deemed interest benefit for that year. Keep the earlier personal return, proof of the income inclusion and proof of repayment so the deduction or amendment can be tied to the same debt (CRA shareholder loan folio, paragraphs 1.73–1.77 and 1.82; CRA interest benefit folio, paragraph 2.35).

Do employee home or car loans qualify for an exception?

Some genuine employee loans can escape the principal income inclusion without using the one-year repayment rule, but the conditions are narrow. A home loan must help the employee or their spouse or common-law partner acquire a dwelling to inhabit. A vehicle loan must help an employee acquire a vehicle used in employment duties. Two other exceptions cover loans to employees who are not specified employees of the lender and loans used to buy qualifying newly issued shares. In each case, the loan must arise because of employment, not share ownership, and genuine repayment terms must be set when it is made (Income Tax Act, subsection 15(2.4); CRA shareholder loan folio, paragraphs 1.37–1.39 and 1.41–1.68).

A personal car that is not acquired for job duties does not fit the vehicle exception. A home renovation or refinancing of an existing home loan generally does not fit the dwelling acquisition exception. Terms offered only to owners, or unusually favourable terms, can show that the loan arose from share ownership instead of employment. A low-interest qualifying employee loan may still create an employment interest benefit (CRA shareholder loan folio, paragraphs 1.51–1.60).

What if the corporation paid my personal expenses?

Personal expenses paid by a corporation are generally a shareholder benefit if there was no agreement that you would reimburse the corporation. If there was a genuine debt to repay, the shareholder loan rules may instead apply. Classify each charge when it arose; moving it to a loan account later does not establish a past debt (CRA shareholder loan folio, paragraphs 1.13–1.14; CRA shareholder benefits).

A shareholder benefit is generally taxable to the recipient and is not a corporate business expense. The CRA describes T4A reporting for shareholder benefits. Review the receipt, business purpose, card statement, reimbursement terms and any repayments before changing an old entry (CRA shareholder benefits).

Can I lend money to my corporation and take it back?

Yes. If you advanced your own money to the corporation and it genuinely owes you that principal, repayment of that debt is ordinarily a return of your money, not a new payment for work or a dividend. The shareholder account must show that the corporation owed you before it paid you. Reconcile the original deposit and each repayment; do not treat a withdrawal above the amount owed as repayment of your advance. If you and the corporation genuinely owe each other money, a documented set-off can discharge equal amounts of both debts. A net ledger balance alone does not cancel them; the interest benefit can continue until the loan is actually extinguished (CRA shareholder loan folio, paragraph 1.82 and example 7; CRA interest benefit folio, paragraph 2.37).

Interest the corporation pays you is separate from the principal and has its own tax treatment. The corporation's T2 filing guide handles the corporate return, while the financial statements guide handles presentation of the amount owed.

What if the corporation forgives or writes off my loan?

Forgiveness can create a separate taxable shareholder benefit. If the corporation settles or extinguishes your debt for less than the amount outstanding, subsection 15(1.2) deems the forgiven amount to be the benefit for subsection 15(1). Writing off the receivable in the books alone does not establish that the legal debt has been settled; review the agreement and the actual discharge (Income Tax Act, subsections 15(1), 15(1.2) and 15(1.21); CRA shareholder loan folio, paragraph 1.99).

If the same loan was already included in income, its later forgiveness needs review before any additional benefit is reported. Gather the loan history and earlier returns; the forgiven-amount calculation is fact-dependent. The CRA says a filed T4A cannot be changed merely to recast a real benefit as a different kind of payment (CRA shareholder benefits).

Example

Illustrative only; all amounts are Canadian dollars. A corporation with a June 30 year-end lends its owner $30,000 in March of Year 1. The owner has a real obligation to repay it. The one-year repayment deadline is June 30 of Year 2, one year after the corporation's year-end that contains the advance.

In May of Year 2, the corporation declares a $20,000 taxable dividend payable to the owner and applies it against the loan. The owner pays the remaining $10,000 from personal funds in June of Year 2. With records showing both repayments and no linked reborrowing, the full $30,000 can meet the repayment exception. The dividend is still taxable and reported on a T5; any low-interest benefit must be checked for both Year 1 and Year 2 while the loan was outstanding. If the $10,000 cash repayment had instead been funded by a new corporate loan, that part may fail the exception and be included in the owner's Year 1 income, requiring an amendment if omitted.

Different for you?

• The account spans several years or the books are behind: rebuild each advance and repayment before choosing tax treatment. See Bookkeeping help.
• You need to choose future owner pay: compare salary and dividends.
• A bonus will clear the debt: process the pay and remittances through Running payroll.
• A family shareholder received the money: Paying family members covers the separate family-income rules.
• The corporation missed T2 returns while the balance grew: see Catching up on unfiled corporate returns.
• The CRA is reviewing a loan or personal expenses: gather the ledger, bank statements, corporate year-ends, resolutions and prior personal and T2 returns; see Reviews, audits and voluntary disclosure.
• You live in Quebec: Revenu Québec also addresses shareholder loans and interest benefits, including RL-1 reporting; check its shareholder loan guidance alongside the federal rules.
• The lender is a US company: see Paying yourself from a US company.