Bookkeeping
What is a Shareholder Loan?
Ali Ladha, CPA, CA / May 15, 2023
What is a Shareholder Loan?
In this blog post we will cover what is a shareholder loan and how one is created. Shareholder loans can be quite confusing, but if you’ve ever paid for expenses on behalf of your company or if you’ve invested money into your company – you’re going to want to understand what and how shareholder loans work
What is a shareholder loan?
A shareholder loan is a loan that you as the shareholder (owner) of a company owe to/from your company.
The “to/from” distinction here is quite important.
A shareholder loan owing from your company is money the company owes you. This is commonly referred to a “Due to Shareholder” balance.
A shareholder loan owing to your company is money you owe to the company. This is commonly referred to a “Due from Shareholder” balance.
How is a shareholder loan created?
In Canada, there are two ways to get paid from your corporation. You can either take a (1) Salary, or a (2) Dividend.
If instead, you take money from your company and do not designate it as a salary or as a dividend, this is a shareholder loan. Any amount that is taken out of your company as a shareholder loan, must be repaid to the company within one year.
Due from Shareholder:
A due from shareholder loan balance is created when:
- Withdrawing cash from your company
You take money out of your company that is not designated as a salary or a dividend.
- Paying for personal expenses using the company’s money
You pay for certain personal expenses using the company’s money. Personal expenses are defined as any expense that is not incurred by the company to generate profit.
Due to Shareholder:
A due to shareholder loan balance is created when:
- You made a cash contribution into your company
You invest personal funds into the company and don’t get any common shares in return. Usually this “investment” is not an equity investment, but a temporary loan given to the company.
- Paying for company expenses personally
You pay for the company’s expenses personally. At some point, the company will need to reimburse you (i.e. the shareholder) back for these expenses.
Examples of a shareholder loan
Due from Shareholder:
You pay for a pair of designer jeans worth $100 using your company credit card. Since this pair of designer jeans will likely be worn by you for personal reasons, you need to pay the company back $100. This will create a balance owing from you to the company or a Due from shareholder loan balance.
Due to Shareholder:
You as a shareholder pay for a Gmail subscription for your business using your own personal credit card for $20. Since you paid for this company expense personally, you should be reimbursed for this expense. This will create a balance owing from the company to you or a Due to shareholder loan balance.
The “Church and State” Separation
When it comes to your company, our advice to a lot of business owners is to consider their company as a completely different legal entity. You should treat your company like a person. If you’re borrowing money from your company, then just like you would repay your friend, you need to repay your company.
Although it’s tempting to think that your company’s cash is your cash, that’s not entirely true. The company’s cash belongs to the company and only becomes your cash once it’s distributed appropriately to you (i.e. via a dividend and/or salary)
Therefore, we encourage a lot of business owners to think about the division between the company’s affairs and their personal affairs similar to the way governments have a division between “Church and State”.
Tax Consequences of a shareholder loan
The general rule about shareholder loans is that if you take a loan from your company, you should repay it back to the company within one year.
What happens if I don’t repay a shareholder loan?
If you don’t repay the loan to your company, the CRA requires that you recognize the amount of the loan as income on your personal tax return. Moreover, your company will not be able to get a tax deduction for the loan it has made to you.
You’d like to avoid this situation because if your company can’t deduct the loan amount and if you have to include the loan amount in your income, both you and your company will be paying more tax than you would have paid if the amount was taken as a salary. When you take a salary from a corporation, although you will need to include it in income, your company gets the benefit of a tax deduction.
When do I need to repay a shareholder loan?
The guideline to payback a shareholder loan is that it needs to be repaid within one year from the end of the fiscal year of the corporation.
Let look at example to understand this a bit better:
Your company has a December 31 year end. You take a loan on November 1, 2022 for $10,000. When does this loan need to be repaid?
The end of the fiscal year for 2022 is December 31, 2022. Hence, the loan needs to be paid back before December 31, 2023.
If it’s not repaid by then, the amount of the loan needs to be included on your tax return for the tax year 2022 – the year in which the loan was taken from the company.
Can I take a loan and repay it within one year and then take it again?
Unfortunately, No. The CRA knows that business owners might be tempted to do this. So, you can’t simply take the loan, repay it withing a year, and then take it out again.
In our example above, if your intention was to repay the loan on December 30, 2023, then take it again on January 2, 2024, this will be considered a series of loans and repayments and the CRA will force you to include the loan as part of your income.
Can I take a shareholder loan to buy a car or a house?
Yes, in theory but in practice, this is hard to do.
The CRA allows you to take a loan from your company to buy a car or a house, but this benefit should be received by you by virtue of your “employment” not “shareholding”.
This implies that you could take the loan if it was offered to you as an employee of the company – which means, that this benefit should be offered to all employees of your company. So, you must ask yourself, are you going to be giving loans to all of your employees to buy cars and/or houses? Usually, the answer to this question is “No” hence, quite hard to do in practice!
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The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.