Avoiding shareholder loan income inclusion in Ontario

When a shareholder loan becomes income

Under subsection 15(2) of the Income Tax Act, a loan or debt that you receive from a corporation because you are a shareholder, or because you are connected with one, is generally included in your income for the year in which you receive it. The CRA’s folio on shareholder loans applies this to individuals and to people connected with a shareholder, so a loan to a spouse can be caught too.

Revolving credit such as a line of credit or a credit card is generally treated as a loan or debt. Whether you have a loan depends on substance rather than bookkeeping entries. The folio says the tax consequences follow what taxpayers actually did, not what they intended.

What is a loan and what is not

The CRA says a loan can be established by a written agreement or by other convincing evidence, such as a corporate resolution setting out the terms that is also reflected in the corporation’s financial statements. A written agreement is preferable but not strictly required.

If there is no convincing evidence of a debtor and creditor relationship, and you simply receive money or property, subsection 15(2) does not apply, but subsection 15(1) may. That rule generally includes the value of a benefit conferred on a shareholder, for example when a corporation pays personal expenses with no agreement to be reimbursed. Calling a personal withdrawal a loan does not make it tax-free, and failing to document one does not make it a better outcome. See our entry on shareholder benefits for the second rule.

The one-year repayment exception

The main exception in subsection 15(2.6) applies when the loan is repaid within one year after the end of the lender’s tax year in which it was made, and the repayment is not part of a series of loans or other transactions and repayments. The relevant year is the corporation’s tax year, not your personal calendar year.

As an illustration, suppose a corporation has a December 31 year-end and lends you $20,000 in March 2026. The 2026 tax year ends on December 31, 2026, so repaying the full amount by December 31, 2027 can satisfy the timing test. If you instead take the loan in December 2026, the deadline is the same. A loan taken early in the corporation’s year therefore gives no more time than one taken at the end of it.

Because you will not know until a year after the corporation’s year-end whether the exception applies, you may file on one basis and amend later. The CRA explains that if you excluded the loan expecting to repay it and then did not, you must amend the earlier return to include it, with interest on the extra tax.

The series rule that undoes quick fixes

The exception does not apply if the repayment is part of a series of loans or other transactions and repayments. The CRA says the purpose is to stop people from deferring tax indefinitely by using new loans to repay old ones. A repayment made just to clear the balance, followed by re-borrowing shortly afterwards, is generally viewed as part of a series.

The folio gives an example in which a shareholder repays $30,000 on December 28 using a short-term bank loan, then borrows $30,000 from the corporation on January 6 and repays the bank. The CRA would generally view that as a series, so the original loan is included in income. Using a new loan from an independent source to repay can work only if that loan was for a genuine business purpose and not obtained to repay the shareholder loan.

Repayments made by applying a dividend, salary or bonus owed to you are not treated as part of a series, even where you borrow again afterwards. That is a narrow statement about those repayment methods, not a licence to cycle money.

Ways to repay, and what each costs

You can repay in cash, by transferring property worth its fair market value at the time of transfer, or by applying a dividend, salary or bonus against the balance. Repayments are generally applied first to the oldest loan unless the facts clearly show otherwise.

Each source has its own tax result. Salary is deductible to the corporation but taxable to you, with payroll obligations. A dividend is not deductible and has its own personal tax treatment. Repaying with after-tax personal money has no new tax cost, but it needs cash you may not have. Our guide on salary versus dividends compares the first two; the loan repayment is a separate decision about timing.

If a loan was already included in income and you later repay it, the CRA says you can generally deduct the repayment in the year you repay it, unless the repayment is part of a series.

Other exceptions, and their limits

Subsection 15(2.4) can exclude certain loans to shareholder-employees where the loan is for a specific purpose: acquiring a dwelling, acquiring shares of the corporation or a related corporation to be held for your own benefit, or acquiring a motor vehicle used in your employment duties. Separate conditions apply to employees who are not specified employees.

All of these require that it is reasonable to conclude that the loan was made because of your employment and not because of your shareholding, and that bona fide arrangements for repayment within a reasonable time were made when the loan was made. The CRA looks at whether other non-shareholder employees receive loans on similar terms. A loan to renovate a home generally does not qualify under the dwelling exception.

These are fact-based tests, and the exception conditions must generally be met when the loan is made. Do not rely on one without written terms and advice.

The interest benefit when there is no inclusion

Even where the loan is not included in income, a low-interest or interest-free loan can create a separate deemed interest benefit. The CRA says the benefit generally reflects the extent to which your interest rate is lower than the prescribed rate, and the prescribed rate is set quarterly by reference to 90-day Government of Canada Treasury Bills.

If you are a shareholder-employee, the benefit may arise under the employment rule instead of the shareholder rule, depending on why you received the loan. Paying interest at least equal to the prescribed rate, in the year or within 30 days after it ends, avoids a deemed benefit on that loan. Check the prescribed rate for each quarter rather than assuming a figure.

Records to keep and what to bring

Keep a written loan agreement or a corporate resolution with the date, amount, interest rate and repayment terms, and keep the repayment evidence: bank records, dividend resolutions and journal entries. Ask your bookkeeper to keep the shareholder loan account separate from expense accounts so that personal items are not buried in business categories.

Before the corporation’s year-end, bring the account’s full transaction history to your accountant and ask three things. Which balance would be included if nothing changes? What is the cheapest way to clear it? How should withdrawals be handled during the next year? See our guide to recording owner contributions and withdrawals for the bookkeeping side.