Introduction

When an incorporated business owner takes money out of their corporation without paying salary or declaring a dividend, the amount is typically recorded as a shareholder loan. On paper, it looks straightforward. In practice, it is one of the most frequently misunderstood areas of corporate tax — and one of the most common reasons incorporated business owners receive CRA reassessments.

Understanding how the CRA treats shareholder loans is not optional for any incorporated business owner.

What Is a Shareholder Loan?

A shareholder loan arises when a corporation advances money to a shareholder, or when a shareholder pays personal expenses using corporate funds without those amounts being treated as salary or dividends. The amount owed by the shareholder to the corporation — or vice versa — is recorded in a shareholder loan account on the corporation's balance sheet.

A shareholder loan can also flow the other way: when a shareholder lends money to their corporation, the corporation owes that amount back to the shareholder. This direction is generally less problematic from a CRA standpoint.

The complexity arises when the corporation is owed money by the shareholder.

The One-Year Repayment Rule

Under subsection 15(2) of the Income Tax Act, if a corporation makes a loan to a shareholder and that loan is not repaid by the end of the corporation's taxation year following the year in which the loan was made, the full outstanding loan balance is included in the shareholder's personal income for the year the loan was made.

To be clear: the shareholder does not need to have received a formal loan. Any amounts taken from the corporation that are not salary or dividends and that remain outstanding past this deadline are treated as personal income — even if the shareholder intended to repay them.

Example: A corporation with a December 31 year end. A shareholder draws $40,000 from the corporation in 2024. If that $40,000 has not been fully repaid by December 31, 2025, the CRA will include it in the shareholder's 2024 personal income.

The Repayment Trap

There is an important anti-avoidance rule worth understanding. If a shareholder repays a loan only to borrow again shortly after — a pattern the CRA refers to as a "series of loans and repayments" — the repayment may not be accepted as genuine. The CRA can look through arrangements that appear designed solely to avoid the income inclusion rule.

Repayments should be genuine, documented, and not immediately replaced by new draws.

Prescribed Rate Loans

There is an exception to the shareholder loan inclusion rule: if the corporation charges interest on the loan at the CRA's prescribed rate (which is set quarterly and published by the CRA), and the shareholder actually pays that interest by January 30 of the following year, the loan may avoid personal income inclusion.

Prescribed rate loans require proper documentation — a written loan agreement that specifies the interest rate and terms — and the interest must be genuinely paid, not simply accrued on paper.

Shareholder Loans vs. Shareholder Benefits

Shareholder loans and shareholder benefits are related but distinct concepts. A shareholder benefit (covered under section 15(1) of the Income Tax Act) arises when a corporation confers an economic benefit on a shareholder — such as paying personal expenses — without the shareholder repaying the corporation or including the amount in income. A shareholder loan that is forgiven, or that was never genuinely intended to be repaid, may be reclassified as a shareholder benefit, with significant tax consequences.

What Good Record-Keeping Looks Like

Corporations with active shareholder loan accounts should maintain a clear running record of all draws and repayments, with dates and amounts. The year-end balance should be reviewed before the corporation's fiscal year end to determine whether action is needed. Proactive management of the shareholder loan account — rather than reviewing it only at tax time — is a basic expectation of clean corporate governance.

When to Speak With a CPA

If your shareholder loan account has grown over multiple years, has not been formally documented, or has been partially repaid and re-drawn in patterns the CRA might question, it is worth a conversation with a CPA before the issue surfaces in a review or audit.

Rotaru CPA helps incorporated business owners maintain clean corporate records and avoid the compliance risks that come with poorly managed shareholder accounts. Book a consultation to review your corporate structure.