Shareholder loans may be an effective tax planning strategy for those who own a portion of a corporation. The interest rate on these loans is usually lower than the corporation could get from a bank or financial institution.
Potential CRA tax issues with shareholder loans need to be considered before entering into this type of arrangement. This blog post will explore those potential issues and provide some guidance on how to avoid them.
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A shareholder loan is a loan made by a company’s shareholder to the company itself. The loan may be in cash, property, or services and must be repaid with interest. The shareholder may be liable for the outstanding balance if the company cannot repay the loan.
Shareholder loans can be an important source of capital for small businesses. However, they can also pose a risk to shareholders if the company becomes insolvent. If the shareholder is not repaid, they may be required to pay taxes on the forgiven debt. In addition, if the company is wound up, the shareholder may be required to pay back any outstanding loans before receiving any assets from the estate.
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As such, it is important for shareholders to carefully consider the risks and benefits of lending money to their company. They should seek professional advice if they are unsure about anything.
There are a few potential CRA tax issues you should be aware of.
First, if the loan is not repaid within one year, it will be considered a taxable dividend to the shareholder. Second, the interest rate on the loan must be at least equal to the government’s prescribed rate, or else the interest payments will be considered a taxable benefit to the shareholder.
Finally, if the shareholder is also an employee of the corporation, any salary or bonuses paid to them in relation to their employment could be subject to payroll taxes.
To avoid potential tax issues, it is important to ensure that the terms of the loan are laid out properly in writing and that both parties agree to them. The loan should also be stipulated and structured in a way that it can easily be repaid, preferably within a year or two. If you have any concerns or doubts about whether or not a shareholder loan is right for your situation, it is always best to speak with a qualified tax professional beforehand.
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It is important to keep good records when it comes to shareholder loans. The shareholder loan CRA can assess penalties if they feel that the documentation is not up to par. Furthermore, any interest charged on the loan must be reasonable in order for it to be deductible.
Then, if a shareholder loan is forgiven, the CRA may treat it as a dividend. As such, it would be subject to dividend tax rules. However, there are exceptions to this rule, so it is best to speak to a tax professional before taking any action.
However, if a shareholder dies or becomes incapacitated, the outstanding loan balance may be treated as a distribution from the corporation. This could have implications for estate planning and tax consequences. Again, it is advisable to seek professional advice before proceeding.
Final Thoughts
There are a few potential CRA tax issues to be aware of when it comes to shareholder loans. If you are using your shareholder loan to finance personal expenses, the CRA could deem it to be income and tax accordingly. While there can be some benefits to taking out a shareholder loan, it’s critical to be aware of these potential tax implications before doing so.
