SHAREHOLDER LOANS & TAXATION

Shareholders can withdraw funds from their corporations by way of salary, dividends, returns of capital and management fees. They may also do so as an independent contractor should they qualify. This is called a Shareholder Loan. There are many provisions in the Income Tax Act to prevent shareholders abusing this.

If a withdraw is made from a corporation from a non-shareholder or someone who relates to a non-shareholder than full tax implications are going to be made. This will be considered income and fully taxable. The following are tax exemptions:

  1. The shareholder that did the withdraw pays it back within a year from the end of the taxation year. If no payment is made than it MUST be included as income and is subject to tax
  2. Loans made to employees that do not own, or partially own, 10% of more of issued shares
  3. Loans made to an employee or spouse for the sole purpose of purchasing a home
  4. Loans made to an employee to purchase previously issued shares
  5. Loans made to an employee to purchase a vehicle

These exemptions have provisions. The loan must be made as a result of the recipient’s employment and the loan must be repaid in a reasonable time.

Repayment

Repaying the loan within two corporate years is beneficial because after the two-year mark, the loan will be added to the shareholders income and be fully taxable.

This is general comment, and you should contact Tax Partners for any questions by sending an email to info@taxpartners.ca or (905) 836-8755.

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