Are shareholder loan repayments taxable based on CRA?
If Canadian interest rates continue to rise, the prospect of borrowing money at zero or low interest from your company may become more appealing. A shareholder loan account may be useful, but only if you take the time to learn about the tax implications. CRA shareholder loans are an attractive option for many small business owners at first glance, but they may not be practical for your company.
What are Shareholder Loans?
Financial obligations from shareholders to their companies are known as shareholder loans. Compensation for shareholders often takes the form of salary or dividends. In other words, dividends are distributed after taxes have already been taken from the company’s earnings. Source deductions must be included in timely salary payments (i.e., CRA must receive CPP and income tax payments by the 15th of the following month, on average).
In addition to regular compensation and legal disbursements, shareholders have the right to utilize company cash for personal expenditures whenever they see fit during the year. These amounts should be seen as loans from the company to the shareholders who put them there. To avoid reporting this as personal income, shareholders frequently have to repay this money within a certain period (often a year).
A shareholder loan might be granted to your firm, an affiliated company, or a partnership in which your company has an interest. A CRA shareholder loan may be given by a firm to any shareholder or anybody related to a shareholder.
What are the tax implications of Shareholder Loans?
It would be best to look into several tax issues before receiving a shareholder loan. The most crucial need is the repayment of shareholder loans. The amount of the shareholder loan is free from taxation if it is returned within a year after the conclusion of the corporation’s fiscal year.
- Effect of Shareholder loans on taxes
You must include the outstanding balance in your taxable income and pay income tax on it if you fail to return the loan within the allotted time frame.
You must also include the permitted interest rate in your taxable income even if you did not charge interest on the loan. The current prescription rate is 2%, however, it may alter every three months. This interest is regarded as a taxable benefit since it represents a benefit you got as a shareholder (like a loan). Your taxable income is made up of taxable benefits.
- Exemption to shareholders Loan
You could sometimes be qualified for a shareholder loan with a protracted payback period. If your company’s business involves giving loans and the shareholder loan is issued in the context of that business, for instance, there are no tax repercussions and you are not required to repay the loan within a year as long as its conditions are identical to any unaffiliated borrower.
You may get a CRA shareholder loan regardless of the time frame when buying a vehicle for company usage or the shareholder’s primary property, such as a house, condo, cottage, or mobile home. For this to apply, several conditions must be satisfied i.e. must have a legitimate repayment plan with a reasonable time frame, etc.