If you are curious about using a shareholder loan and want to know the potential fallout that it could have for you in terms of taxes in Canada, it is important to educate yourself about these issues well in advance of facing a problem.
What Is A Shareholder Loan?
A shareholder loan is a kind of financing similar to debt that is given by shareholders. The loan, therefore, is owned by shareholders, but might be viewed as equity because of its structure.
What Are the Tax and Risk Implications Associated with A Shareholder Loan?
The CRA could consider a shareholder loan as a distribution to the shareholder. In the event that the loan is not paid back on time or properly recorded, this could have negative shareholder loan tax consequences for the entire company.
If shareholder loans are not paid back on time or properly recorded this could have negative effects on the tax planning done by the accountant for the company and these should always be discussed carefully. Although owners occasionally borrow funds from their businesses, this could be seen more as a compensation payment or an otherwise taxable event.
If A Shareholder Loan Ends Up Being Considered A Dividend, How Would That Be Taxed?
Some of the most important ways to avoid a shareholder loan tax complication include taking the cash as a dividend, repaying the loan or taking the cash as a salary or wage. Dividends are taxed at lower rates than employment income, so it is possible to avoid double taxation with your shareholder loan in this way.
There is usually very little difference in the total tax amount paid when calculating it as dividends versus salary. Shareholder loans can be a powerful way to manage short term personal cash needs, but the tax implications should always be evaluated by the company first.
How Do I Minimize the Risk of My Shareholder Loan?
Make sure that you always pay the loan back on time to show that it was clearly a loan or choose instead to take the cash as a dividend or as a salary or wage.
Who Can Help with When My Shareholder Loan Has Been Considered A Dividend?
Tax attorneys can help those people in Canada who currently have shareholder loans that might have been classified as a dividend. A Canadian tax lawyer can help you with making sure your shareholder loan is properly filed and planned for.
Why Does Taxation Shareholder Have Tax and Risk Implications?
The CRA might be a distribution in the form of what you considered a loan to actually be a taxable event if the loan is not repaid on time or not repaid at all.
Taxation Shareholder Loans FAQ
Is interest on shareholder loan tax deductible?
If the proceeds of that shareholder loan were used to produce income from property or business, then the amount of interest included as a taxable benefit can be calculated as a part of an interest expense deduction.
Are loans tax deductible?
The CRA enables you to claim a non-refundable tax credit based on the interest that was paid in student loans, but the interest paid on a shareholder loan is also deductible to the corporation while being taxable to the shareholder because the CRA has very rigid rules about corporate shareholder loans.
How do you calculate interest on a shareholder loan?
The general interest rate for shareholder loans in Canada was 1% between 2009 and 2018, except for a period at the end of 2013 when it was 2%. The interest benefit is computed by applying a prescribed rate to the principal amount of the loan outstanding during that relevant year in question.