A shareholder loan is money given by a corporation to a shareholder, or to someone who does not deal at arm’s length with the shareholder. If certain conditions are not met, the loan amount may become a taxable benefit to the shareholder, meaning that person will have to pay tax on the amount because it is now income in the shareholders hands. If the proper conditions are met, then the loan amount will not be income in the hands of the shareholder or related party.
Under subsection 15(2) of the Income Tax Act, the loan amount is included in the income of the shareholder or related party for the year in which the loan is made. However, 15(2) does not apply if the loan amount is repaid within one year after the end of the lenders taxation year.
For example if Scott took out a shareholder loan during his corporation’s 2010 taxation year, it must be repaid by the end of the the corporation’s 2011 taxation year.
Series of Loans or Other Transactions and Repayments
If a corporation loans a shareholder funds and the Canada Revenue Agency (CRA) thinks that the loan is part of a series, they can and will reassess the loan amount to become income in the hands of the shareholder or related party.
Subsection 80.4(2) of the Income Tax Act deems the interest owing on the shareholder loan to be a taxable benefit, and thus income, unless the interest is actually paid at the prescribed rate. Furthermore, it must be paid no later than 30 days after the end of the year. This applies even if the original loan amount is repaid within the proper timeframe (i.e. interest must always be paid or a deemed benefit will occur).
Forgiving Shareholder Loans
If a corporation forgives a shareholder loan, the amount is included as income in the shareholder’s hands in the year that it has been forgiven.
If you have been assessed a shareholder benefit because of unpaid loan amounts, or you think you might be, give us a call today!
Dindial v. The Queen, 2003 CanLii 1655 – Series of Loans or Other Transactions and Repayments
Newmont Canada Corporation v. Canada, 2012 FCA 214 – Shareholder Loans on Account of Income or Capital
Rogers Estate v. The Queen, 2014 TCC 348 – Shareholder Benefits
Detailed case law analysis may be found here
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.