The purpose of the shareholder benefit tax provisions is to prevent shareholders from using corporate property (including money) for their personal use. The value of any benefit conferred by the corporation to the shareholder is included in the shareholder's income. There are some exemptions to the shareholder income inclusion such as payment of dividends, reduction of paid-up capital of shares, redemption of shares etc.
Another provision of the Income Tax Act deals with shareholders' borrowings from their corporation. If the borrowing is included in the shareholder's income, a corresponding deduction is allowed when a repayment is made. There is no income inclusion if the loan was paid by the end of the second taxation year of the corporation in which the loan was made.
Further, there is no income inclusion if bona fide arrangements were made for the repayment of the loan and the loan was made under one of the following circumstances:
In a small business setup where the owner is also an employee (maybe the only one), it is always a question of fact if a loan made by the corporation is a shareholder benefit or an employee loan. A loan is considered an employee loan if it would be reasonable to conclude that the loan would not have been given to the individual except by reason of employment. In CRA's view, a loan is made to an employee if it can be considered part of a reasonable remuneration package.
The shareholder loan is an important area especially in a small business tax setup. Professional advice must be sought, as the consequences of being assessed under the shareholder loan provisions can be very punitive. For instance, if a shareholder benefit is assessed (versus a shareholder loan), the benefit is included in the shareholder's income with no corresponding deduction for the corporation or shareholder (in case the benefit was repaid to the corporation).
To avoid undesired tax consequences, consider some of the following:
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