The tax implications of shareholder loans to corporations often need to be understood. This can lead to shareholders inadvertently getting errors on their returns or, even worse, having a CRA audit.
This blog post will discuss what happens when a shareholder loan is deemed an investment by the Canada Revenue Agency (CRA).
We’ll also discuss how these rules apply to different types of businesses, such as operating companies and professional corporations.
What is the tax implication of a shareholder loan to a corporation?
A shareholder loan to corporation is not to be considered to be a loan to the company. They are not tax-deductible, and they do not fall under any of the following categories:
- A loan to a corporation
- A dividend that is paid by a corporation to its shareholders
- A capital gain realized by a shareholder on the disposition of shares in their corporation
For example, what would be the tax implications for my company and me if I lend my company $10,000?
If you lend your corporation money and it’s repaid, the interest on that loan is an allowable business expense.
The principal may be claimed as a capital gain if you lend your corporation money and it’s not repaid. If it is not refunded within 180 days of its due date, any amount remaining unpaid will likely be considered a capital loss for tax purposes (but always check with your tax advisor first!).
However, if the loan were granted in exchange for shares of stock, then this would result in a loss of control over those shares, which could be treated as taxable income by CRA.
In all cases where shareholder loans are forgiven or canceled by the lender/shareholder-lender/corporation-shareholder-corporator, there is also an issue surrounding whether or not either party paid fair market value at inception or cancellation; therefore, care should always be taken when dealing with these types of transactions, and we strongly recommend seeking professional advice before proceeding further down this path.
Also, what are the tax implications if the money loaned to the company was taken back by me as compensation instead of being paid back as a loan?
You cannot claim the interest as a business expense or as income. You can’t claim it as a capital gain, loss, or dividend. You will be required to report the loan proceeds on your tax return and pay tax on that amount.
Shareholder loans have specific requirements and need to be handled correctly to be claimed as business expenses.
Shareholder loans have specific requirements and need to be handled correctly to be claimed as business expenses. If you’ve made a shareholder loan to your corporation, here are some things you should know about how that loan is treated for tax purposes:
- Shareholder loans are not deductible
- Shareholder loans are taxable
- Shareholder loans must be repaid within five years from the date of incorporation or within five years from the date of making a non-arm’s length shareholder loan (if it was made before incorporation)
- To claim any prior year losses on your corporation’s return, those losses must be deducted by a shareholder who borrowed money from the company.
As you can see, it’s a highly complex process that requires careful planning and record-keeping. This is why we recommend working with a professional accountant who specializes in corporate tax law.