Shareholder loans – Taxable?

If you are a shareholder or someone who is dealing at non-arm’s length with a shareholder of a corporation and you obtained a loan from it, the loan is treated as income received by you in the year of the loan.  Furthermore, there are rules to prevent certain back-to-back loans (i.e., repay and loan it again).

Fortunately, there are some exceptions to the shareholder loan inclusion rule, including:

  • Loan from a moneylender, i.e., the loan was made in the ordinary course of business, where a corporation whose business is the lending of money.
  • Repayment within one year, from the end of the corporation’s taxation year in which it was made, and the loan is not part of a series of loans and repayments.
  • Loans to certain employees.

However, if the loan inclusion rule does not apply, the imputed interest rules on shareholder loans may apply if the loan carries no interest or is at a rate below the prescribed rate of interest.

If the shareholder loan inclusion rule applies, there is an offsetting deduction in the year in which you repay the loan.  Generally, the CRA agrees that repayments are applied first to the oldest loan on a first-in, first-out basis unless the facts clearly indicate otherwise.

This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.