I owe my company money, now what happens?
According to ITA 15(2) of the tax act, a loan to a shareholder must be included as personal income in the year the loan is advanced unless the loan is made to you in your capacity as employee rather than shareholder. There are 4 types of debt allowed to you as an employee/shareholder:
- A loan to an employee/shareholder where the employee does NOT own more than 10% the shares of the corporation and deals with the corporation at arm’s length
- A loan to an employee to purchase a home
- A loan to an employee to buy shares in the newly issued capital stock of the corporation
- A loan to an employee to purchase an automobile to use in the their employment
In each of the above exceptions, the loan must have been advanced based on employment rather than shareholdings and there must be arrangements in place for repayment of the loan within a reasonable time. If the loan meets an exception above and does not need to be included in your personal income for tax purposes you must report a taxable benefit on your personal tax return equal to the imputed interest on the loan. The imputed interest is the difference between the interest Canada Revenue (CRA) prescribes and the rate you are paying the company on your loan.
If your shareholders loan is repaid in full within one year from the end of the taxation year during which the loan was advanced, it does not need to be declared as income by the shareholder and does not need to meet any of the requirements above. However, if you were to pay off the balance of your shareholder loan before the end of the year, and then take another loan from the company shortly afterwards, CRA may look at these transactions as a series of loans and repayments and consider the new balance outstanding to be part of the original loan meaning the balance would need to be reported as in your personal income for tax purposes.
If you declare the shareholder loan as income on your personal return and you pay back the loan later, and the repayment is not part of a series of loans and repayments, you may deduct the repayment from your income in the year it is repaid.
If you have borrowed money from your company and would like to discuss how the loan will be treated for tax purposes, please contact us for help on this issue. for our help on this issue.Download a copy of this issue