Essential Facts about Shareholder Loans for Incorporated Small Business Owners

There are three primary ways in which you, as an owner-manager, can withdraw funds from your corporation.  You can pay yourself a salary, you can declare a dividend or you can borrow money from the corporation.  When you borrow money from your own corporation the Canada Revenue Agency (CRA) has put into place strict rules as to when you have to repay the loan.  This is essentially to ensure that the owner-manager does not avoid paying taxes indefinitely. 

The basic rule for shareholders loans is that they must be paid in the fiscal year following the year in which the loan was taken.  For example, if your fiscal year end is December 31 and you borrow money in 2011, then it must be repaid before December 31, 2012.  Failure to repay will result in the loan amounts being included in the shareholder’s income in the year in which the loan was taken, which in this case would be 2011.  The loan must also not be considered to be a series of loans and repayments eg. Repaying an amount at the end of 2011 only to borrow again in early 2012. 

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