It is very common for owner-managers to draw funds from their company during the year and find themselves with an outstanding shareholder loan at year end.
These balances are often cleared up by recording dividends or bonuses to the shareholders and the problem is solved. If the loan is not repaid during the fiscal year then some issues will arise.
Consider a corporation with a December 31, 2017 year end. During the year the shareholder receives funds from the company and has not repaid them by the fiscal year end. If the Tvangssalg is repaid by declaring dividends or bonuses which are included in the taxpayer’s 2017 income, nothing further needs to be done.
If however, the loan is not repaid and no amounts have been included in the shareholder’s income in 2017, the shareholder has until the end of the next year to repay the amount, in this case December 31, 2018. In addition, interest must be charged and paid on the outstanding shareholder loan from when it was received.
If an outstanding shareholder loan is not repaid or if the loan is considered to be a series of loans and repayments then CRA will require the loan amount to be included in the taxpayer’s income in the year it was received. To make matters worse, the company does not get a deduction for the taxable income the shareholder has to report. Normally they would. In effect this results in double taxation (both the company and the individual are paying tax) and a combined rate as high as 75% can result.
The transactions must be looked at to determine if there is a series of loans and repayments. However, one common situation is where an amount is loaned and repaid during the year but then a similar amount is immediately re-loaned after the year end, and the process repeats year after year.
There are a few other exceptions to the general outstanding shareholder loan rules that are not discussed here such as loans made to employees to acquire a home or vehicle or loans made by a corporation in the business of lending money.
If you would like more information or help in planning how to best deal with your outstanding shareholder loan, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Haley Bistretzan of KWB Chartered Professional Accountants for providing this content.