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Tax Implications of Shareholder Loans

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Shareholder loans refer to loans made by shareholders of a corporation to the corporation. The tax implications of such loans will vary depending on the jurisdiction, but usually, they are not considered taxable income to the shareholder.

One must be careful, for if the loan is not repaid or forgiven, it may be considered a taxable distribution to the shareholder.

To simplify things, make sure loans to shareholders are not outstanding past the corporation’s year-end.

Prescribed Interest Rates

Prescribed interest rates for calculating taxable benefits from low-interest and interest-free loans to employees and shareholders are set quarterly and can be found in the CRA’s table of prescribed interest rates

Deemed Benefit From a Shareholder Loan that is Not Repaid

A loan by a corporation to one of its shareholders may result in a deemed taxable benefit to the shareholder.

Deemed Benefit From Unpaid Interest

Another benefit will be deemed to have been received by the shareholder unless interest has been paid on the loan in an amount equal to or greater than interest calculated at the prescribed rate for the period in the year during which the loan was outstanding.

Tracking Shareholder Loans

Advances or loans that are made to shareholders should be recorded in a general ledger account specifically set up for this purpose.  If the interest is tax deductible for the shareholder, it is important to track this loan separately from other advances or loans.

Other considerations that you should be aware of:

  • Interest expense deduction regarding shareholder loan interest
  • Forgiven shareholder loans
  • Loans to shareholder-employees
  • Converting a shareholder loan to employment income or dividends
  • Salary or dividend paid to offset shareholder loan
  • Shareholder loan effect on the lifetime capital gains exemption

As the rules and regulations regarding shareholder loans can be complicated, it is extremely important to consult a tax professional for specific advice. You can reach out to our office at any time for assistance on this, and any other matter.

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Sunday, 25 February 2024