Tax implications of shareholder loans

An incorporated owner manager may end up owing money to their corporation or being owed money by their company. There are tax considerations in both cases. Here is an overview.

When your corporation owes you money

If you personally pay for expenses on behalf of your company, it owes you for these personally paid corporate expenses. You can be reimbursed tax-free. 

If you deposit money to your corporation, the same situation applies—that is, you are owed money back tax-free. This situation can occur if you have to top up your corporate bank account or deposit money to be used for a real estate down payment for the company. 

The rest of this summary will focus on situations where you owe money to your corporation. 

Clearing a loan with a bonus or dividends

Some business owners take withdrawals over the course of the year from their corporation without running them through payroll. At year-end, you can address this by declaring a bonus with payroll withholding tax payable in January. This bonus has the identical tax treatment to salary, as both are reported as employment income on your T4 slip. 

The other alternative is to declare a shareholder dividend. This has no withholding tax. The tax implications will instead be a combination of corporate and personal tax. This is because unlike a salary or bonus, dividends are not tax deductible for a corporation. Since a dividend is a distribution of after-tax corporate profits, the personal tax payable is lower than a salary or bonus. 

However, the all-in tax is comparable, and in most cases, higher than paying a salary or bonus at most income levels in most provinces and territories.

Shareholder loan taxation

If you want to loan money to yourself or a family member from your corporation, this is generally considered taxable income. The default assumption by the Canada Revenue Agency (CRA) is that loans are disguised as compensation unless a specific exemption applies. 

The primary exception is if you repay the loan within one year after the corporation’s fiscal year end. For example, a loan outstanding on December 31, 2025 for a corporation with a calendar year-end needs to be repaid by December 31, 2026. If not, it will be considered taxable. 

The CRA does not like when you engage in a series of loans and repayments, either, and may treat the original loan as being taxable. So, be careful about back-to-back loans. 

Employee loans

There is a very narrow exemption for loans to employees for specific purposes like buying a work vehicle for employment duties, a home, or shares of the employer. It does not happen often in real life, and owner-managers who think they can loan money to themselves under this exception are probably out of luck. Specified employees who own 10% or more of a company cannot qualify. 

Interest and principal benefits

Business owners and their accountants often overlook the deemed interest benefit of a shareholder loan. There should be an income inclusion for the notional interest on the loan. The rate applied is CRA’s prescribed rate. As of Q1 2026, the rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans is 3%.

If a loan is forgiven, the principal may be considered a taxable benefit to the owner-manager. The problem is that the corporation may not get a tax deduction, so there is an element of double taxation that may apply. 

Inter-company loans

If an owner-manager owns more than one corporation, they sometimes lend money between two companies. You may be able to loan money between two companies you own without triggering tax. 

If you are loaning money between an operating company that is a going concern and an investment holding company, be careful about exposing shareholder loan assets owned by the operating business to company creditors. In some cases, it may be better to ensure that dividends can be paid from one company to another, either directly with the second company as a shareholder or indirectly using a trust. 

Business owner takeaways

Shareholder loans should usually be temporary as opposed to permanent. They can have unexpected tax implications, so proper planning is key. 

Owner-managers should discuss shareholder loans with their tax accountant with a proactive planning-first approach rather than after year-end when filing their tax return.

Read more from Ask a Planner:

• The tax implications of moving to Québec
• Your TFSA reset for the new year
• Should I hold my house in a trust?
• If not bonds, then what?

The post Tax implications of shareholder loans appeared first on MoneySense.