As a small business owner and perhaps sole shareholder of your business, you’ve probably heard about an account called a shareholder loan.  The company you own can loan you funds for various purposes.  Sometimes this in the form of advances you take throughout the year to pay for various personal expenses.  As a shareholder, it is fine to do this, however a trap that some of these advances can cause is when repayment is due and you don’t have any cash available to repay this loan. CRA (Canada Revenue Agency) says that the amount outstanding cannot stay on the balance sheet beyond 2 balance sheet dates without potential penalty.

If the loan is not repaid, CRA could include this amount in your income in the year it was withdrawn (and tax it just like a salary) and your company would be denied a deduction (essentially resulting in double taxation).  This penalty is pretty severe.  If this occurs, the company will also be levied with a penalty for not making the proper income tax withholdings on the “salary”.

There are rules in place as well to prevent you from simply repaying the loan with another loan from the business, CRA looks at this as a continuation of the first loan.

Therefore, if the shareholder loan account is something you regularly use, you will need to make sure you stay on-side of the rules.  Should you have withdrawn funds already, it is best to give us a call to discuss options for repayment.