If you have a business corporation, your income will normally consist of salary or dividends. However, given the right circumstances, your corporation may be able to lend you money tax-free.
There are some things that you need to be aware of. First, if the company extends you a low or no-interest loan, there will be a taxable benefit added to your income based on the prescribed rate (less any interest you may have paid).
Second, the Income Tax Act contains a set of rules that are designed to prevent shareholders from taking a series of back-to-back loans in place of other taxable streams of income.
Shareholder Loans
Many business owners are aware that if a shareholder loan is not repaid within one year of the corporations’ year-end, the loan will be added to their taxable income for that tax year.
For example, let’s assume you borrow money from your corporation during 2012 and your company has a December 31, 2012 year-end. You have until the end of 2013 to repay the loan. If you do not repay the loan in time, then it will be added to your 2012 personal income for tax purposes.
With proper planning around the timing of the loan, it may be possible to extend the loan beyond 12 months.
Repaying A Shareholder Loan
A shareholder loan can be cleared off the books and “re-paid” by paying yourself a salary, bonus or dividends.
Be careful if you decide to repay the shareholder loan with another loan since this may cause the loan to be added to your income.
Tax-Free Shareholder Loans
The Income Tax Act does permit certain types of loans to extend beyond the one year time limit. These types of loans may be used to:
- Purchase a home that you will occupy,
- Purchase shares of the corporation,
- Purchase an automobile used in the course of employment, or
- Purchase goods from the business via trade debt.
These types of arrangements must be bona fide, have the standard terms and conditions afforded arms-length persons, and the interest charged must be at least the prescribed rate.
In addition, the loans must be received by virtue of employment rather than as a shareholder. This has been interpreted by the CRA to mean that similar loans must be available to other, non-shareholder, employees. To make matters worse, the single owner-managed business must be able to show that the loan would be available to non-shareholder employees…This can be a challenge in a single owner-managed business or if you have only ever paid yourself dividends.
Tax Planning & Shareholder Loans
If you are using shareholder loans in your business, you should be aware of the risk of having those loans included in your personal income which may have substantial tax consequences.
Be sure that your shareholder loan accounts are reviewed and cleared before your company year-end.
When considering using shareholder loans in your business, discuss your plans with your accountant before you take the loan to ensure the arrangement has the proper structure.
Pay Less Tax!
If you have any questions regarding the structuring of shareholder loans or any income tax or business issues, do not hesitate in calling Dean Paley at 289-288-1206 or email Dean via the contact form.
