Tax consequences of shareholder loans – MoneySense

When your company owes you money

If you personally pay the costs on behalf of your company, it will owe you these personally paid business costs. You can be reimbursed tax-free.

If you deposit money into your company, the same situation applies: you get money back tax-free. This situation can arise if you need to top up your business bank account or deposit money that you can use for a down payment on real estate for the business.

The rest of this summary will focus on situations where you owe money to your business.

Repaying a loan with a bonus or dividend

Some business owners take withdrawals from their businesses during the year without having to go through payroll. You can overcome this at the end of the year by declaring a bonus with payroll tax in January. This bonus has the same tax treatment as salary, as both are reported as employment income on your T4 slip.

The other alternative is to pay a shareholder dividend. No withholding tax has been deducted from this. The tax consequences will instead be a combination of corporate and personal taxes. This is because, unlike a salary or bonus, dividends are not tax deductible for a company. Because a dividend is a distribution of corporate profits after tax, the personal tax payable is lower than a salary or bonus.

However, the all-in tax is comparable and in most cases higher than paying a salary or bonus at most income levels in most provinces and territories.

Tax on shareholder loans

If you want to lend money from your company to yourself or a family member, this is usually considered taxable income. The default assumption of the Canada Revenue Agency (CRA) is that loans are disguised as compensation unless a specific exemption applies.

The main exception is if you repay the loan within one year of the end of the company’s financial year. For example, a loan outstanding on December 31, 2025 for a company with a calendar year end must be repaid by December 31, 2026. If not, it is considered taxable.

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The CRA also doesn’t like you taking out a series of loans and repayments, and may consider the original loan as taxable. So be careful with back-to-back loans.

Loans for employees

There is a very limited exemption for loans to employees for specific purposes, such as purchasing an employment work vehicle, a house or employer stock. In real life, this doesn’t happen often, and owner-managers who think they can lend money to themselves under this exception are probably out of luck. Specified employees who own 10% or more of a company are not eligible.

Interest and principal benefits

Business owners and their accountants often overlook the supposed interest benefit of a shareholder loan. There must be an income inclusion for the notional interest on the loan. The rate applied is the prescribed rate of CRA. From the first quarter of 2026, the rate used to calculate taxable benefits for employees and shareholders from interest-free and low-interest loans will be 3%.

If a loan is forgiven, the principal amount can be considered a taxable benefit to the owner-operator. The problem is that the company may not get any tax deductions, so an element of double taxation may apply.

Intercompany loans

If an owner-manager owns more than one business, they sometimes borrow money between two businesses. You may be able to borrow money between two companies you own without incurring taxes.

If you are borrowing money between an operating company that is a going concern and an investment holding company, be careful about exposing shareholder loan assets owned by the operating company to creditors of the company. In some cases it may be better to ensure that dividends from one company can be paid to another, either directly with the second company as a shareholder or indirectly through a trust.

Takeaways for entrepreneurs

Shareholder loans should generally be temporary rather than permanent. They can have unexpected tax consequences, so proper planning is crucial.

Owner-managers should discuss shareholder loans with their tax accountant, planning proactively first and foremost, rather than post-year end when filing their tax returns.