Do corporate loans count as taxable income? If shareholders or employees borrow money from a corporation, yes, that money is usually considered taxable income. But the CRA allows for some exceptions.

It is common for business owners and employees to borrow money from the organization. The Canadian Revenue Authority (CRA) treats such monies as taxable income. Unfortunately, most people end up with tax liabilities because they do not understand that the loans count as income. However, there are exceptional cases where the borrower can avoid taxation. But in what circumstances do corporate loans count as taxable income?

The Income Tax Act (ITA)

The income tax act has provisions relating to the treatment of shareholder loans. These regulations are designed to prevent people from taking tax-free corporate loans. Consequently, if a shareholder or an employee takes a corporate loan, the CRA includes it in their taxable income for the year. The regulations also apply to anyone closely related to the employee or shareholder, such as a spouse or sibling.

However, shareholders can take tax-free loans if:

• They are not specified employees of the organization. Specified employees are those who hold 10% or more of the company’s shares
• The loan was advanced due to your employment status rather than your position as a shareholder
• You have bona fide commitments to repay the loan within a short time.
• Even if you are not a specified employee, you can take tax-free loans to:
• Buy or refinance an owner-occupied home
• Buy newly issued shares of the company or associated company
• Acquire a business vehicle

However, the loan must be based on employment considerations and repayable within a reasonable timeframe. What’s more, you can avoid taxation if you repay it within a year of the end of the taxation year in which you took the loan. This provision applies irrespective of the end use of the loan.

Shareholder Loans

If you take a shareholder loan, you can escape taxation by repaying it before the end of the financial year after the year in which you took the loan. If the shareholder rules do not apply and the loan counts as income, you can reclaim the taxes by replaying the loan.

Interest Benefit Tax

If the shareholder loan provisions do not apply and you receive low-interest loan, you may be considered to have a deemed interest benefit. The CRA sets a quarterly interest rate of 1%. The CRA deducts the interest paid to the company from the deemed interest figure if it was paid within 30 days of the end of the calendar year.

Loans for Buying Homes

If you take a corporate employee loan, you get a taxable benefit of up to 5 years at a flat rate of 2%. However, the CRA stipulates that owner-managers can only take home purchase loans as employees if the facility is available to ordinary employees.

Overall, taking loans from your incorporated business is very tricky from an income tax perspective. That is why you need to work with a professional tax planner. Contact us for more insights on how to maximize your tax savings.

If you’re looking for an experienced accounting partner who will help take your business to the next level, contact us for more information. Visit our blog for more articles, news and updates about small business accounting, tax planning, CRA audits and bookkeeping.