As a shareholder of an incorporated business, consider the possibility of issuing shareholder loans as a tool for tax planning purposes. A shareholder loan is an agreement to borrow funds from your corporation for a specific purpose. In essence, it is a form of remuneration similar to salary and dividends, where funds are temporarily withdrawn from the corporation.
What Is a Shareholder Loan in Canada?
A shareholder loan is also known as a “draw” or “due from shareholder” transaction because the shareholder loan amount is due from the shareholder to the company in the future.
Under the Income Tax Act, as it relates to shareholder loans, a shareholder may take a loan from the corporation and is not required to report it as personal income on their personal tax return for that fiscal tax year. A loan to a shareholder must be returned to the corporation by the end of the next fiscal year to ensure that the amount will not be taxed. For the loan not to be considered income, according to the CRA, interest must be charged by the corporation at a prescribed rate on any shareholder loan amount. It is vital that all loans are properly documented in a written agreement, and or documented as a corporate resolution that defines the terms of repayment to the corporation.
For example, Mark has a corporation with a year-end of December 31, 2025. Mark may withdraw a shareholder loan from the corporation at any time in 2025 and not have to report it as personal income, as long as he returns the shareholder loan by December 31, 2026. Therefore, if Mark borrowed $50,000 from his corporation in January 2025, he will not need to report it as personal income in 2025. However, he will still be required to return the shareholder loan plus prescribed rate interest (currently at one percent), thus Mark will need to return $50,500 (Principal + $50,000 x 1%) by December 2026. This allowed Mark to borrow money from his own corporation for nearly two entire years at a minimal interest rate.
Shareholder Loan CRA Rules Explained
According to CRA shareholder loans, all flows of money that a corporation loans to a shareholder are subject to taxation as taxable income, except that, in limited circumstances, these are considered as smooth capital inflows.
The loan is normally required to be repaid in less than one year, to the end of the fiscal year of the corporation, in order to avoid taxation. The loan must also be well documented, the purpose of the loan sound, and if applicable, with interest charged at a minimum rate set by the CRA.
Otherwise, with failure to pay the loan in time or even failure to satisfy the conditions, the capital amount will be counted on the personal income of the shareholder during that year. Shareholder loan repayment should be done on time with proper documentation to remain within the CRA regulations.
Shareholder Loan Repayment Rules and Deadlines
Shareholder loans must be repaid within a year after the corporation concludes the fiscal year in which the loan was given, to prevent it from being taxed as income.
The repayment can be done in either form of cash payment, declared dividends or bonuses so long as the sum in question is cleared throughout the period.
And in case the shareholder loan repayment does not meet the deadline or is not duly registered, the CRA will add the outstanding balance to the shareholder in accordance with their taxable income during the year.
Shareholder Loan Prescribed Interest Rate
The Shareholder Loan interest rates are determined by the Federal Government of Canada, more specifically, the Canada Revenue Agency (CRA) on a quarterly cadence. Below you can see any changes made to the Shareholder Loan interest rates from 2024-present:
- 2025 Q4 and Q3 – 3%
- 2025 Q2 and Q1 – 4%
- 2024 Q4 and Q3 – 5%
- 2024 Q2 and Q1 – 6%
For more information on Shareholder Loan interest rates and to view the historical Shareholder Interest rates set by the Canada Revenue Agency (CRA) visit the following CRA Website the Canada Revenue Agency (CRA) visit the following CRA Website
Benefits of a Shareholder Loan
A shareholder loan allows business owners to access funds from their corporation in a flexible and tax-efficient way. Unlike salary or dividends, a properly structured shareholder loan can let you withdraw money without triggering immediate income tax, as long as it complies with shareholder loan rules under the CRA. Below are the main benefits explained in detail.
1. Tax Deferral Opportunities
One of the biggest shareholder loan benefits is the ability to defer personal income tax. When a corporation loans money to a shareholder, the withdrawal itself is not immediately taxed if it meets CRA’s requirements.
This can be useful for short-term cash flow needs, for example, to cover personal expenses or bridge financing, while allowing time to plan for a more tax-efficient income strategy later (such as a dividend or salary at year-end).
2. Flexible Access to Corporate Funds
A shareholder’s loan offers flexibility in terms of shifting funds between the corporation and the shareholder without declaration of formal dividends or any payroll income.
It may also act as a short-term enhancement where the owners are allowed to exercise personal or business usage of the business money provided the correct records are kept and the repayment conditions adhered to. This is a good short-term financing device when used appropriately because it is flexible.
3. Lower Cost Than External Borrowing
Using the equity of your own corporation is usually cheaper than borrowing it through a bank or other financial organization.
The regulated interest on the shareholder loan (capped by the CRA) is usually lower compared to commercial rates, which makes it a lucrative alternative to short-term lending. Remitting interest at a rate not lower than the established rate also prevents further tax benefits.
4. Strategic Tax Planning Tool
Shareholder loans in Canada can play a key role in tax and cash flow management. They can be used to:
- Smooth out personal income from year to year.
- Delay taxable income until a lower-income period.
- Provide funds for investment or debt repayment outside the business.
When managed properly, this strategy can improve overall tax efficiency for both the shareholder and the corporation.
5. Repayment Flexibility and Control
Under the rule of repaying shareholders’ loans, loan repayment should generally take place within one year after the end of the fiscal year of the corporation; otherwise it will be considered a part of the income of the shareholder.
This window allows the business owners time to plan repayment, usually by declaring a dividend or modifying salary later, as opposed to being under compulsion to repay immediately.
6. Building a Record for Future Planning
The account of shareholders’ loans can be a beneficial tool that will assist in monitoring the flow of money between the corporation and the owners. This transparent record keeping facilitates the compliance of CRA and may prove beneficial in future planning particularly when corporate finances are scrutinized by new investors or accountants and auditors.
It also avoids misclassification of funds, where large withdrawals, repayments and interests are well recorded as per shareholder loan requirements CRA provisions.
Shareholder Loan Conditions
- The shareholder loan was made to you or your spouse to buy a home to inhabit, and you received the loan in your capacity as an employee of the corporation, and bona fide arrangements are met.*
- The shareholder loan was made to you to acquire a motor vehicle to be used for the business’s operations, and you received the loan in your capacity as an employee of the corporation, and bona fide arrangements are met.*
- The shareholder loan was repaid within one year after the taxation year end in which the loan was made. For instance, assuming the corporation has a calendar year-end, a loan issued February 28, 2025, would have to be repaid by December 31, 2026.**
* An employee of the corporation is actively involved in the operations and not merely a passive shareholder and the loan should in substance be in relation to your employment. A bona fide arrangement requires that the loan repayment terms and the interest rate charged is reasonable and would reflect terms similar to a contract entered into between two parties in normal business practice. Although the Act does not require that you document the bona fide arrangement, it is crucial to properly document the specifics of the loan at the time the loan is made in order to avoid any ambiguity.
** The loan cannot be part of a series of loans and repayments. For instance, if in the above example the loan was repaid merely to avoid the tax consequences and a new loan was issued on January 1, 2027, this could constitute a series of loans and repayments and the loan principal could be included in the shareholder’s income in the year the loan was originally made.
Other Shareholder Loan Tax Tips
Any loan to a shareholder that does not meet one of the conditions above is included in the shareholder’s income and no expense is allowed to be deducted by the corporation, resulting in double taxation. However, any subsequent repayment of the loan may be deducted from income in the year it is repaid. In certain circumstances, this rule creates tax planning opportunities.
As mentioned above, ensuring that you are not being penalized by the Canada Revenue Agency (CRA) for improperly withdrawing a Shareholder Loan is critical within your personal and corporate income tax planning. In the worst-case scenario, the Canada Revenue Agency (CRA) can have the full amount of the loan plus interest subsequently added to the shareholders’ income for the year of the loan and not allow a deduction at the corporate level (the way one would normally get for a salary paid). Nonetheless, planning for repayment within two corporate fiscal year ends is a reliable course of action to mitigate any worry of penalization from the Canada Revenue Agency (CRA). Having an experienced accounting team in place to not only plan, but to monitor and execute is pivotal when a corporation has transactional deposits into, and withdrawals out of, your corporation.
Risks and Penalties of Improper Shareholder Loans
Shareholder loans that are not managed properly might have severe tax implications. Unless the loan is made according to the shareholder loan provisions of CRA, or repaid within a specified period, the entire loan amount will be treated as taxable income by the shareholder.
It is also possible that the CRA will impose interests and penalties on uncollected taxes on unreported or mischaracterized loans. Repeated misuse of shareholder loans may result in an audit or be treated as abuse of shareholder benefits in certain cases which will result in tighter examination of both the corporation and the person.
To prevent such risks, always make sure the loan is duly documented, and it is charged a minimum specified rate of interest and that there is a timely repayment of shareholder loans. Having a qualified tax advisor can ensure that you remain on the right track and does not incur a high penalty.
Common Shareholder Loan Mistakes to Avoid
Many business owners use shareholder loans without fully understanding the CRA rules, which can lead to unexpected tax issues. Here are some of the most common mistakes to avoid:
1. Not repaying on time: Failing to repay the loan within one year after the corporation’s fiscal year-end will cause the loan amount to be added to your personal income.
2. Poor documentation: Not keeping a proper record of the loan terms, dates, and repayments makes it difficult to prove the transaction’s legitimacy during a CRA review.
3. Ignoring prescribed interest rates: If a corporation loan to a shareholder is interest-free or below the CRA’s prescribed rate, the CRA may treat the difference as a taxable benefit.
4. Treating personal expenses as loans: Using corporate funds for personal purchases without proper loan agreements can be flagged as shareholder benefits and taxed immediately.
5. Assuming repayment can be delayed indefinitely: Even if you plan to repay “eventually,” the CRA’s timeline is strict. Delays can result in the loan being taxed in full.
Employee Loans
Another valuable tax tip is to reward key employees of a corporation with automobile and housing loans. The Income Tax Act (ITA) explicitly grants corporations the ability to enter into a bona fide loan agreement with its employees in order to acquire a vehicle or a home. This is a benefit to the corporation in many ways as it creates deeper, more loyal bonds with its employees, and allows them to benefit from minimal interest rates they would not be able to receive at financial institutions or any other lender. A sense of trust is instilled into both parties, and employees have a sense of gratitude to their employer. A Shareholder Loan to an employee does have the risk that the loan can be defaulted, however, this risk should be minimal as the owner-operator of the corporation has transparency on his/her payroll, expenses, revenue, and forecasts. This will allow the owner of the corporation to easily determine what a reasonable loan amount should be. No matter your risk appetite, always remember to document and sign any agreement of a Shareholder Loan to an employee of your corporation.
A shareholder loan can be very beneficial if your employees are considering buying a home, a car, or are in need of short-term funding. And, if your employees require a loan for a vehicle or house, a Chartered Accountant from SRJCA can definitely help you plan and navigate the steps required to complete the agreement and execute an employee Shareholder Loan. It is important to speak with an accounting professional when planning for a Shareholder Loan to avoid any unnecessary penalties from the CRA that may violate the Income Tax Act (ITA). If tax planning opportunities arise, they can also be used to create value through tax savings. As Chartered Accountants in Toronto and Mississauga, we recommend you seek professional advice before contemplating the use of shareholder loans. Contact a Chartered Accountant for more tax tips by email at info@srjca.com or call us at 647-725-2537 for consultation.
FAQs
What are loans from Shareholders?
A shareholder loan is an agreement to borrow funds from your corporation for a specific purpose. In essence, it is a form of withdrawing funds from your corporation, similar to salary and dividends, albeit temporarily. A shareholder loan can be very beneficial if you are considering buying a home, a car, or are in need of short-term funding.
How do Shareholder loans work?
Shareholders may take a loan from the corporation and are not required to report it as personal income on their personal tax return for that fiscal tax year. A loan to a shareholder must be returned to the corporation by the end of the next fiscal year to ensure that the amount will not be taxed. Interest is payable on shareholder loans at the prescribed rate of interest in effect with the CRA at the time. It is vital that all loans are properly documented in a written agreement, and or documented as a corporate resolution that defines the terms of repayment to the corporation.
Can loans to shareholders be considered as income?
If not structured properly, there is a risk a shareholder loan may be considered as income to a shareholder. It is imperative that any shareholder loans meet the repayment guidelines, or are for appropriate uses in the shareholder’s capacity as an employee. All loans should be properly documented and have written agreements in place.
What happens if a shareholder loan is not repaid?
If a shareholders loan is not repaid within one year after the corporation’s fiscal year-end, the CRA will treat the amount as taxable income to the shareholder. According to shareholder loan rules (CRA), the unpaid balance must be reported on the shareholder’s personal tax return. Failing to make timely shareholder loan repayment can also lead to interest charges and potential penalties. Proper documentation and repayment are essential to keep the transaction tax-free.
Can a corporation take a loan from a shareholder?
Yes. A shareholder loan to a corporation is common in Canada, especially when a business owner injects personal funds into the company to cover expenses or improve cash flow. This creates a liability on the company’s books, showing that the corporation owes money to the shareholder. When repaid, this transaction is usually tax-free, making it a useful shareholder loan benefit for both parties if managed correctly.
Is a shareholder loan better than dividends or salary?
A corporation loan to shareholders can offer short-term flexibility compared to taking a salary or dividend, as it allows money to be withdrawn without immediate tax. However, to keep this shareholder loan benefit, it must meet shareholder loan rules (CRA), including repayment within one year or charging interest at least equal to the shareholder loan prescribed rate. For long-term planning, dividends or salary may be more sustainable, so it’s best to consult a tax professional.
How do you report a shareholder loan on taxes in Canada?
In Canada, a shareholder loan must be properly reported on both the corporation’s and shareholder’s records. If the loan meets CRA’s requirements and is repaid on time, no income needs to be reported. However, if it remains unpaid after the deadline, the shareholders loan amount must be included in the shareholder’s personal income.