Introduction
Shareholder loans run in two directions: shareholders sometimes lend money to their corporation (an injection of funds that the corporation repays over time), and shareholders sometimes borrow money from their corporation (funds drawn from the corporate account that are not formally salary or dividends).
Both arrangements exist and both are legitimate — but each has specific tax rules that must be followed. Loans from the corporation to a shareholder, in particular, are one of the most closely scrutinised areas in CRA corporate reviews.
Loans FROM the Shareholder TO the Corporation
When a shareholder lends money to their own corporation — for example, putting in $50,000 of personal savings to fund a startup's working capital — the shareholder is a creditor of the corporation.
Key points:
The loan is not income to the corporation. It is a liability on the corporation's balance sheet. When the corporation repays the loan, the repayment is not a deduction — it is the return of a borrowed amount.
Interest on the loan: If the shareholder charges interest on the loan, the corporation deducts the interest as a financing cost, and the shareholder includes the interest income on their personal return. Where the shareholder does not charge interest (a non-arm's-length loan), the CRA does not impute interest on loans in this direction — there is no deemed interest on shareholder loans to the corporation.
Repayment: When the corporation repays the loan principal, there is no income event for the shareholder — they are simply receiving their own money back. The shareholder's cost base in the loan is the original amount advanced.
Loans FROM the Corporation TO the Shareholder
This is the direction that requires careful management. A corporation that advances money to a shareholder — whether labelled as a shareholder loan, director's advance, or otherwise — is subject to the rules in subsection 15(2) of the Income Tax Act.
The one-year rule: A shareholder loan (or a loan to a person connected to a shareholder) that is not repaid within one year of the end of the corporation's taxation year in which the loan was made is included in the shareholder's income for the year the loan was made. This is a potentially severe consequence — the full loan amount becomes personal income in one year, without any corresponding cash distribution.
Exceptions to inclusion:
Certain loans are exempt from the one-year rule even if not repaid within a year, including:
Loans made to enable the shareholder to purchase a home, where the loan is repaid within a reasonable time
Loans made to finance the purchase of shares of the corporation by the shareholder
Loans made in connection with the shareholder's employment (rather than their shareholding), on terms consistent with what an arm's-length employee would receive
These exceptions require that the loan be made pursuant to a policy applicable to all employees, not just the shareholder.
The prescribed rate interest: Where a shareholder loan survives the year-end without being included in income (under one of the exceptions), the shareholder must pay interest on the loan at no less than the CRA's prescribed rate to avoid a taxable benefit. The prescribed rate changes quarterly. Where interest is not charged, the shortfall is a taxable shareholder benefit.
The Double-Inclusion Problem
If a shareholder loan is included in income under the one-year rule, and the corporation subsequently repays the loan, is there double taxation? No — section 20(1)(j) provides a deduction in the year the loan is repaid for amounts previously included in income under section 15(2). However, the deduction only applies if the original inclusion occurred. There are timing and documentation considerations that must be carefully managed.
Common Errors
Personal expenses paid by the corporation: When a corporation pays a shareholder's personal expenses — home renovations, personal credit card bills, vehicle costs — these amounts are typically posted to the shareholder loan account. If the loan balance grows over the year without repayment, the one-year rule exposure grows with it.
No repayment plan: A shareholder who has been drawing from the corporate account informally, with the balance accumulating year over year, may reach a point where the loan balance is large and has never been formally documented or managed.
Treating a salary as a loan: Some shareholders avoid payroll by booking draws as loans. This does not defer the income tax consequence if the one-year rule is triggered.
When to Speak With a CPA
The shareholder loan account should be reviewed at least annually — at year end — to ensure the balance is within manageable limits and that any amounts at risk of triggering section 15(2) inclusion are identified before the filing deadline passes. A CPA who reviews the shareholder loan account only when the T2 is being filed may be identifying problems that are already crystallised.
Rotaru CPA monitors shareholder loan balances as part of its annual corporate engagement. Book a consultation to review your shareholder loan position