A visitor to Canadian Tax Resource recently asked the following question:
“Is it allowable to issue an interest free loan to a director of a corporation by the corporation for the purpose of the director purchasing a residence or using it to pay down a residential mortgage?”
A corporation may from time to time advance funds to a shareholder or members of the shareholders family in the form of a loan or indebtedness.
The Income Tax Act contains rules that may have income tax consequences for the person receiving the loan. In the context of this article, the term loan means any form of debt the shareholder or family member has to the corporation. The term shareholder should be taken to mean the shareholder of the corporation or members of the shareholders family.
General Tax Rule For Shareholder Loans
The general rule is that when a corporation advances a loan to shareholder, the full value of the loan is included in the shareholders income in the year the loan was made. Now keep in mind that there is an anti-avoidance provision that prevents establishing loans through related corporations. For example:
John Smith owns 100% of ABC Corp. and ABC Corp. in turns owns 51% of EFG Corp. If EFG Corp. lends John funds, the value of the loan may be included in Johns’ income for tax purposes.
These rules apply even if the corporations are not residents of Canada.
3 Exceptions To The Shareholder Loan Rules
There are three general exceptions to shareholder loan provisions under the income Tax Act.
1. One Year Rule – If the loan is repaid by the shareholder within the year after the end of the corporations’ tax year, the loan is not included in income.
However, the loan cannot be a series of loans and repayments. On the other hand, if a current loan account is maintained in the corporation for a shareholder during a tax year and the year-end balance is repaid from salary or declared dividends the CRA will generally not consider these transactions as a series of loans or repayments.
2. The Lenders Rule - If the corporations’ business is lending money or the debt is from the normal business activities then the loan is not considered a shareholder loan, provided standard arrangements are made for repayment and are maintained.
3. Principal Residence Rule - If the shareholder is also an employee and a loan is advanced to purchase a principal residence, new shares in the corporation, or a vehicle to be used for business purposes then the loan is not considered income. In addition, the loan must be advanced due to employment and not due to shares held and standard arrangements are made for repayment are made and maintained.
Repaying A Shareholder Loan
When the loan is repaid that was previously included in income for tax purposes, it may be deducted from income of the year of payment.
If you are a small business owner and are considering shareholder loans or are concerned about the tax implications of certain transactions you may have with your corporation, you should consult with a tax professional. The information in this article is for general use only and should not be considered advice or a recommendation.
Summary
In addressing the readers question, it would appear that if the corporation advanced a loan for the purposes of purchasing a residence for personal use and bona fide repayment arrangements were made and adhered to, the loan would not have income tax consequences.
Related Articles
- Income Splitting Using Loans To Your Spouse
- Employer Loans To Employees
- Income Splitting With Loans To Your Spouse
- Specified Shareholder
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Hi Tax Guy,
I have an incorporated company of which I am the principle shareholder (with one other shareholder).
I would like to borrow money from the company for use as a downpayment on a house – for a new principal residence.
Assuming I arrange the loan with a similar interest rate as a mortgage (say 4%) would this be considered as a taxable benefit?
Given the ‘arms-length’ with the corporation, would the loan be exempt from requiring payback within 1 year?
How large of a loan is ‘acceptable’, 10k, 50k, 250k?
What sort of ‘terms’ can be arranged with the loan, ie closed/open, maximum allowable duration (10yrs?), payment (principle+interest) frequency (ie monthly/yearly?) in order to be bona fida loan.
…. or should I just personally borrow the money from the bank ….
Thanks so much.
Cedar
The loan is a taxable benefit if the interest rate charged is less than the market rate. The benefit is the difference in interest. The article should answer the rest of your questions.
Is it possible for my professional corporation to assume my student line of credit?
Thanks
Anything is possible but whether is makes sense is a different question. The corp. pays your personal expense (the loan) and it becomes taxable income in your hands.
Thank you for the response. I think I was unclear…
Is it possible to assign a student line of credit to a corporation (or rename operating line)? i.e. the corporation pays down the line of credit like an operating line of credit. Corporation is taxed at a lower rate, and as such pays down the line of credit faster (and the interest is deductible?) if the credit line became an “operating line of credit” per se.
If this is impossible could I lend my corporation money out of my personal student line of credit to pay business expenses. The corporation pays me interest at the prescribed rate, but this interest paid to me is tax deductible within the corporation (as it is lent for business purposes). It is not cash damming but it is similar.
Forgive me if I am still unclear,
Joe
Joe,
If you assign it to the corporation, the corporation will be deemed to have paid your loan and you will be required to include the full amount of the loan in your income.
That’s what I figured, thank you for the advice I appreciate it1
Hello,
Me and another shareholder are in the process of opening up a company and somehow imputing our house (which we just purchased but do not live in) as an asset or through trust (not sure of the details just yet)
We are in the process of applying for permits where the cost could exceed $15,000. Now my other shareholder wants to take out a line of credit (he does not have the cash) whereas i have the cash.
So i want to use my personal cash in the endavour but receive this cash back at the end of our project (1.5 years).
If i loan the $15,000 can i loan it as a shareholder loan, and after the sale of our property (through the company) get it back tax free? (through dividends or salary?)
i hope this is clear….
tHANKS
Its not clear what you are doing or wanting to achieve. I can tell you that you that you should engage a professional as you may end up paying thousands of dollars in tax.
I don’t know if this is the right forum for this question but my future employer has loaned me money in advance of my starting work with them to help cover expenses for further training. This sum is to be repayed within 6 months of my starting work with them. Is this loan considered taxable and should I report it as income (i.e. professional income)?
There will be a benefit if it’s interest free. It’s difficult to say in the forum
However.
I don’t have a good credit record and my husband wants to open a company in his own name but will make me a 50% shareholder.Is this wise and how does it work,I will be running the company full time,what I want to know is should we separete what happens interms of the business,do I get my share or he can just buy me out without my consent.
Thanks Honey.
If you go bankrupt personally, your shares will be part of the bankruptcy. His company could end up being owned partially by your trustee. 49% would be a better proportion.
Yes he can redeem your shares but likely he would not be able to do that without killing the company.
Hi Tax Guy,
I am a sole practitioner chartered accountant through an Alberta professional corporation (though not a tax specialist, hence the question). My principle residence mortgage is due to renew in a couple of months. Would it make sense to use the principle residence rule to loan myself the money to refinance my home and then set up a repayment schedule with market interest to pay it back over time?
Thanks,
Dave
I am to be paid out a dollar value from the corporation – which I loaned money to in order to see the business prosper – the corp wants to now pay me back – do I pay taxes on my money I have loaned the corporation ( i loaned the money to the corporation oer 20 years )
Hey,
I have couple of questions for you and your advice is highly appreciated
1st Q: If I want to incorporate a business that will be specialized in trucking services and distribution only, me as the only director of the business and owner, can I give or lend my business a loan with interest from my personal funds??
For example: when I open the business, I give my business a loan ( or can we call it a shareholder loan) in the amount of $ 50,000 payable in one year with interest of 10%, so after one year I will take the $ 50,000 back plus $ 5000 interest.
So, is that possible to do, or the loans are only acceptable with interests from the Financial Institutions (like banks)?? If its allow to do that by the director or the shareholders of the business, so this interest income of $ 5,000 will be considered as Interest Expense to the business and Interest income to the director, so do the business has to issue a T5 for this income or no, and how the director can report this income in his income tax T1 ??
2nd Q: As for the CCA, I know that the Auto Class is 10.1 which allow the maximum cost to capitalize of $ 30,000 at the rate 30%. So if the business bought a truck for $ 50,000, we only allow expensing $ 30,000 at 30% or the truck has a different class and cost allowance??
Have a good day
Sam
You can lend a corporation money. It can pay you interest. The interest is tax deduction for the corporation and you include the interest in your income. Repayment of the loan is just that…no tax consequences.
If you have trucking business, I would suggest the truck is not a passenger vehicle and therefore class 10 not restricted by 10.1.
You should consider getting professional advice in these matters! The advice is well worth the cost.
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