Shareholder Loan
What is it and how does it work? When a share holder loans money to the corporation or withdraws money from the corporation a shareholder loan is created, there are two types of share holder loans which are due from shareholder or due to shareholder. I will be writing about both types of shareholder loans.
Due to shareholder
Due to shareholder is a liability for the corporation, is created when the shareholder either personally loans the corporation money to finance its operations or incurs expenses on a personal level on behalf of the corporations. Since this was the shareholders money that they loaned the corporation they can withdraw it without any tax consequences and there is no CRA reporting required.
Due from shareholder
Due from shareholder is an asset for the corporation, it gets created when the shareholder either withdraws money that they had not previously invested into the corporation or if the corporation is making personal expenses on behalf of the shareholder.
Repayment rules
This loan is required to be repaid by the shareholder within one year after the year end of the corporation if not the loan will be added to shareholders income in the year in which the loan was made.
Shareholders can also reduce the shareholders loan account by either declaring a salary or dividend. What happens in such a scenario is that instead of taking money from the corporation the amount of the salary or dividend declared is credited from the shareholders loan and the shareholder adds the T4 or T5 to their personal income.
Exceptions
Exceptions to the one year ruled mentioned above are:
- The corporation is in the business of lending money and lends money with a bona fide repayment arrangement under which the loan is to be repaid within a reasonable time period to shareholders who are not specified shareholders.
- For a shareholder who owns more then 10% of a corporation and who is also an employee of the corporation they must meet the criteria in what is known as the ESPB test to withdraw the loan without tax consequences.
- Employment reason: For this test to be met, all employees who are on the same or similar level must be entitled to such or similar loans.
- Specified employment purpose test: for employees who are specified employees (own more then 10% of the shares of the corporation) to meet this test are allowed to only use the loan to purchase a house, acquire treasury shares (company shares) and acquire a motor vehicle for employment use.
- Bona fide arrangement for repayment: to meet this test there must be an arrangement put in place that follows normal commercial practice and is properly documented and agreement is for the loan to be repaid within a reasonable time.
*Shareholders/ employees who meet the exemptions in the 3 tests outlined above do not have to repay the loan within one year of the year end of the corporation.
Disclaimer
The information provided on this page is intended to provide general information.
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