Shareholder Loans in Canada: What Business Owners Need to Know
Many business owners believe they can borrow money from their corporation indefinitely. After all, if you can simply dip into corporate funds, why bother paying yourself a salary or dividend?
The reality is, shareholder loans in Canada come with strict rules, timelines, and tax consequences that every owner-manager should understand. Let’s walk through the basics, common misconceptions, and what happens if you don’t follow the rules.
How Shareholder Loans Work
If you borrow money from your corporation in a given taxation year, you have until the end of the following taxation year of the corporation to repay it.
Example:
Corporate year-end: December 31, 2025
Loan taken: Anytime in 2025
Deadline to repay: December 31, 2026
This means you could have between one and two years to repay, depending on when the loan was taken.
Common Questions About Shareholder Loans
1. What if I repay the loan and then borrow it back?
That doesn’t work. The CRA will view this as a “series of loans” and treat it as one continuous loan, meaning the repayment doesn’t reset the deadline.
2. Isn’t this better than borrowing from a bank since I don’t have to pay interest?
Not exactly. You must pay interest to your corporation at a prescribed rate, or else the CRA will treat it as a taxable benefit. So, it’s not a tax-free loan.
3. Is it a bad strategy to use shareholder loans?
Not necessarily. Shareholder loans can help manage short-term cash flow and defer taxes. For example, if you don’t want to pay personal tax on dividends or salary this year, borrowing can give you breathing room until the following year. However, you might end up paying more due to interest, so it’s best used as a temporary cash flow tool—not a long-term strategy.
4. What happens if I don’t repay the loan by the deadline?
If you don’t repay the loan on time, it becomes taxable income in the year you borrowed it.
Example:
Borrowed in 2025, not repaid by December 31, 2026 → You must amend your 2025 personal tax return and include the loan as income.
5. What if I repay it later?
If you eventually repay the loan, you can deduct it in the year of repayment.
Example:
Borrowed in 2025 → included in income for 2025
Repaid in 2028 → deducted in 2028
But this doesn’t always balance out. In 2025, you could be pushed into a higher tax bracket, while in 2028 you might not have enough income to benefit fully from the deduction.
Final Thoughts
Borrowing money from your corporation isn’t as simple as many business owners think. Shareholder loans can be a useful short-term tool for managing cash flow, but if not handled properly, they can trigger significant tax consequences.
Before taking money out of your corporation as a loan, speak with your accountant to make sure you’re using the strategy wisely and avoiding surprises with the CRA.
