Discover all you need to know about shareholder loans in Canada in recent and upcoming years, how to prepare your taxes if you use shareholder loans in Canada and follow CRA rules when taking and offering such loans.
If you’re a Canadian business owner, you must understand the idea of shareholder loans. Tax implications on shareholder loans may exist, and they can impact the health of your business’s finances. In this article, we’ll look at what a shareholder loan is, how it works, and what you’ll need to know when it comes to shareholder loans for the year 2025.
Shareholder loans occur when a shareholder lends money to or takes a loan from his or her corporation. This financial transaction benefits both the corporation and the shareholder, assuming they handle it properly and avoid tax issues.
The CRA requires you to repay a loan from your corporation within one year of the corporation’s fiscal year-end. If you don’t repay the loan within this time frame, the CRA will treat it as personal income and tax it accordingly. But there are exceptions, like if the loan was for buying a house or a loan which is part of a registered retirement savings plan (RRSP).
If your corporation gives you money it has to lend you, the CRA should expect you to pay back the amount, at least with interest on the loan, at a rate not lower than the prescribed rate of the CRA, as this rate may vary with time. As of March 2025, the interest rate prescribed is 4%. The CRA may consider the amount over this rate as a taxable benefit if you pay less than this rate.
You should thoroughly document shareholder loan repayments. Accurate accounting records show that the borrower repays the loan as planned, which ensures it isn’t considered income. Failure to repay within the time limits the CRA sets will result in tax penalties.
The CRA will consider a shareholder loan not repaid as income that will be taxed at the shareholder’s marginal tax rate. Such an overpayment of interest and tax on the loan amount can be massive. Such a loan won’t provide a deduction to the corporation nor will the shareholder be out of the woods, so both could be paying for it.
The CRA taxes unpaid or outstanding shareholder loans as income unless you repay them within the required time frame or they are exempt. Assuming there is good documentation, for instance, such as both sides of the transaction for an investment in shares in a company or a loan to purchase a vehicle that you use for business, they wouldn’t be subject to tax as income.
In addition to taxing these loans the CRA has the authority to impose penalties for using loans to postpone pay tax. You have to be compliant to avoid the legal and financial repercussions.
The CRA may increase scrutiny of shareholder loans in the coming years as it introduces new tax policies and monitors fluctuations in interest rates, even though federal tax rules once effectively exempted these loans from disclosure. The federal government has indicated that it may, indeed, limit shareholders’ ability to take advantage of tax avoidance through the use of shareholder loans. Therefore, shareholders and corporations need to be informed if any changes occur in tax laws that may modify the way shareholder loans are taxed.
A shareholder loan in Canada can be a useful and flexible financial tool for both a business and a shareholder, provided you handle it properly. Poor management can lead to tax penalties, but if you manage the loan well, you can fully enjoy its benefits. Ensure you always stay on top of CRA regulations and speak with a financial pro to remain compliant.
Keep an ear out for any tax changes that could impact your loans for 2025 and beyond. By following best practices, you can use shareholder loans effectively and minimize the likelihood of unexpected taxes or penalties.
