A shareholder’s loan account is the account within a corporation that tracks the contributions (other than share equity) and drawings (other than dividends and salaries) made by a shareholder.
Typical contributions (credits) a shareholder makes to a corporation are:
- Shareholder paid expenses, such as when a shareholder uses their personal credit card for company expenses
- Company’s use of the shareholder’s home office
- Company’s use of the shareholder’s automobile
- Cash contributions / loans by the shareholder to the company
Typical drawings (debits) by a shareholder from a corporation are:
- Shareholder’s expenses paid by the company, such as fuel for a personal vehicle
- Shareholder’s use of company assets (not otherwise included as a taxable benefit in the shareholder’s employment income)
- Actual cash draws from the company not accounted for as a salary, bonus, dividend, repayment of a loan, interest, or other draws.
Shareholder Loan: CRA Treatment of Debit Balances
A shareholder is not technically allowed to borrow money from a company he or she owns without tax. If the shareholder loan is in a ‘Debit’ balance (i.e., the shareholder ‘owes’ the company money), the amount of the debit must be included in the shareholder’s income, unless the debit balance is repaid within one year after the first year end in which the debit balance arose. If the debit balance is repaid, the shareholder must include interest on the shareholder loan in their personal income, even if interest is not payable on the loan. One way that accountants clear debit balances in shareholder loan accounts is to recommend the issuance of a dividend or a bonus sufficient to clear the debit balance. This has the effect of including the amount of the debit balance in the shareholder’s income.
Shareholder debit balances must be reported on the corporation’s income tax return. A shareholder loan debit balance that exists from one year to the next can trigger a review by the CRA to determine if a shareholder had an obligation to report personal income on the debit balance.
A shareholder cannot repay the shareholder loan before year end and then re-borrow the funds after year end to subvert these rules, as this is considered to be a series of loans and repayments, and there are tax rules against that.