Shareholder and employee loan

Shareholder benefit

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.

Employee-shareholder loan

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:

  • the loan was made to the employee or his/her spouse (or common-law partner) to enable him/her to purchase a home;
  • the loan was made to the employee to assist him/her to acquire new shares of the capital stock of the corporation;
  • the loan was made to the employee to enable him/her to purchase a motor vehicle required in the performance of his/her employment duties;
  • the loan was made to an employee who was not a "specified employee" (an employee who is not dealing at arm's length with the corporation - i.e. 10% or more shares held in the corporation).

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.

TIPS & TRAPS

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:

  • any loans received from the corporation must be documented and provided for by a Directors' resolution;
  • bona fide arrangements must be made in order to repay the loans received from the corporation. If no repayments are intended, the amount of the loan is included in the employee's income for the year the loan was made;
  • if you received a low-interest or interest-free loan from your employer, you are deemed to have received a taxable benefit equal to the interest at CRA's prescribed rates less any interest paid to the employer;
  • if the repayment of the loan is part of a series of loans and repayments (i.e. money is taken in and out of the corporate account on a frequent basis by the shareholder) the loan may be deemed as unpaid and consequently included into the shareholder's income.

Your trusted Chartered Accountant provides tax, assurance services and accounting engagements to individual and small business clients located in Calgary and area.