58 What are the Shareholder Loan Rules and Why do They Exist?
Shelley Lavigne
Shareholder Loans are debts owed to corporations from shareholder employees or partners. Normally, any amount received from a corporation to a shareholder is added to the shareholder’s income and taxed. Shareholder loans are different because they have potential for being paid back so they aren’t necessarily brought into income. This benefit is enticing, particularly for owner-managers of a corporation who want tax-free personal advances, so rules are in place to ensure shareholder loans are taxed appropriately.
General Rule A loan to a shareholder (other than a corporation that is a shareholder), as defined in ITA 15(2), will be included in income unless one of the exceptions in ITA 15(2.2) to (2.6) are met.
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Exception |
Criteria |
Why |
|
Loans between non-residents |
If the corporation and shareholder are both non-residents, the loan is not included in income under 15(2) |
There is no tax liability for debts between non-residents, so the income inclusion is not necessary. |
|
Loan given to a non-specified employee |
If the shareholder is an employee and owns less than 10% of the corporation’s shares or deals at arms length, this is considered a non-specified employee and the loan is not included in income under 15(2). |
In this case the assumption is that the loan was received by virtue of employment rather than shareholdings. |
|
Loans are given as normal business transaction |
Corporations that provide loans as a business (for example, a bank) are exempt under ITA 15(2.3) |
In this case the assumption is that the loan was received by virtue of the company’s normal business practices rather than the shareholders ownership of the company
|
|
Repayment of the loan within one year after the year end |
This rule allows loans which are repaid within a relatively short period of time to be exempt under ITA 15(2.6). Receipt and repayment of a series of loans is not allowed. |
This rule allows normal short term loans to be exempt from the income inclusion. This rule prevents numerous loans being taken and paid by borrowers without any tax paid.
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If the exemptions are not met, the loan is included in the shareholders income in the year received and subsequent repayments are deducted from the shareholders income in the year of repayment.
Imputed Interest Benefit – ITA 80.4(2) – may apply when your loan is not brought into income due to one of the exceptions listed above from ITA 15(2). In this case, that individual could be granted a benefit if the loan is issued below the prescribed rate. The benefit is calculated as follows:
|
(Amount of Loan x Prescribed Interest Rate) – Amount of Interest Paid in Year |
Refer to Article-“Example of Calculating the Taxable Benefit” (author: Government of Canada) for a helpful example on how to calculate this benefit.
References:
- ITA 15(2), IT-119R4
January 2020
