As interest rates continue to climb in 2023, the idea of taking out a loan from your corporation at no or low interest may be increasingly appealing. But before you plan to do that, it is important to understand the tax implications related to that.

If you’re considering taking out a shareholder loan, here is what you need to know before you make that decision.

What is a Shareholder Loan?

In general, your shareholder loan represents the balance of funds that you have contributed to the corporation. Or on the flip side, it also represents the funds that you have withdrawn from the company. You can loan money to your company by way of a shareholder loan or borrow money from your corporation through the shareholder loan.

Benefits of a Shareholder Loan

One of the benefits of a shareholder loan, as opposed to a salary or dividend, is the ability to withdraw money from the corporation without triggering a tax liability. When handled correctly, you can access funds for almost two years, tax-free at a low-interest rate. If you don’t pay the loan back within the year, you can take advantage of reporting the loan on your income in the following year if you’re in a lower tax bracket, thus achieving tax deferral and reducing your overall tax bill. In contrast, if the shareholder loan has a “credit” balance or is being reflected as a liability on your company’s balance sheet, you can withdraw any excess cash in your company’s bank account against the cumulative shareholder loan balance completely tax-free.

What are the tax implications of shareholder loan?

If the running balance of the shareholder loan at the fiscal year end has liability (Due to Shareholder) on the balance sheet, the company owes the shareholder money, hence this balance can be paid to you tax free. If the shareholder loan running balance shows as asset, this amount would be declared as salary, dividend, or a loan from the company. You do not have to designate your cash draws until your fiscal year end.

Things to remember before taking out a shareholder loan

Remember, your corporation is a separate entity from you; therefore, corporate funds and personal funds must be kept separately. You should also keep proper paperwork and structure your shareholder loans correctly to avoid any issues at tax time. If you don’t repay the loan from company within one year of the end of your corporation’s taxation year, the entire amount of the loan will simply be included in your personal income. This loan can not be part of a series of loans and repayments. This is a very serious penalty because the corporation receives no deduction for the loan.

Conclusion

The shareholder loan is a useful tool for tax planning and cash management between the owner and their company. If used correctly, the timing of cash draws, dividends or salary can be used to your advantage.

If you are looking for expert advice on shareholder loans, contact us today. We will get an in-depth understanding of your specific situation and make sure you are set for success!