As a business owner and manager, you work hard and it is nice to be compensated for all that effort. After all, you got into the business to make money. There are several ways to get paid. 1. Salary 

2. Dividends 

3. Management fees 

4. Shareholder loan 

Each form of this payment carries its own tax implications. Today we will explore a shareholder loan. 

What is a shareholder loan? A shareholder loan is when you borrow money from the corporation that you own shares in. It's like borrowing from yourself, but with restrictions and tax implications. In this post, we'll answer some of your questions about shareholder loans, including how they work and what types of businesses qualify for them. 

A shareholder loan is issued from a company that if is repaid one year from the end of the taxable year, it is not necessary to include this as income of the borrower. So, first, you need to look at the fiscal year-end of the company. This is usually December 31, but not always. As an example, if the loan is issued on March 20, 2021, and the year-end of the company is December 31, the borrower has until the end of 2022 to repay. 

However, if the loan is not repaid within that time period, the full amount of the loan is taxable to the borrower. This is designed to keep the owner from just withdrawing amounts by loans without paying taxes. 

If you miss that one-year deadline, you can repay the loan, and all interest, in the future and then deduct the repayment from your personal income that year. This may mean the opportunity for an income split. 

It's hard to have a rule without exceptions and here is this one. A loan is made to a shareholder who is also an employee (or the employee's spouse or common-law partner), but the loan is not made to the person as a shareholder, plus the money is used to purchase a principal residence, a vehicle for business purposes, or to buy shares in the company, it falls in this exception area.

If all of this sounds complicated, that's because it is. Don't undertake this operation on your own. Consult with a tax attorney, CPA, or other professionals to be sure all the rules are followed and it will be to the best tax advantage of the company and the borrower. 

Paper Trail 

One important element of ensuring legality is demonstrating a paper trail. To start with, it must be created by the director’s resolution and approved. It has to be an arms-length arrangement. All the paperwork must be in order and signed. It has to be recorded in the company ledger. It must be recorded in a general ledger for this specific purpose. It cannot be tracked like an advance or loan. That way if the CRA questions anything, you will have all the documentation available to show the legitimacy of the loan. 

Also, from a corporate standpoint, withdrawals can present complex tax issues. In addition to all the paperwork, the loan needs to be tracked, especially if the interest charged will be tax deductible for the shareholder. 

As mentioned earlier, this is hardly an ordinary transaction. It should be considered carefully and only with the advice of professionals who have dealt with the issue in the past.

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