What to take away
- A sole proprietor’s draws are not an expense, and tax is based on net business income rather than on what you withdrew.
- In a corporation, money an owner puts in and takes out must be recorded as a specific kind of transaction, because the label affects tax.
- A reimbursement needs a receipt and a date, and a personal expense paid by the company needs to be identified, not buried.
Why owner money needs its own accounts
If every transfer between you and the business is coded to a general expense or sales account, your profit report becomes unreliable. A deposit from your personal account is not revenue, and a transfer to yourself is not a cost of doing business. Giving owner transactions their own accounts keeps the income statement about the business and the balance sheet about who has put in and taken out what.
The accounts you need depend on the structure. A sole proprietorship generally needs one for contributions and one for draws. A corporation usually needs a share capital account, a shareholder loan account, and separate handling for salary and dividends. Your chart of accounts should include these from the start rather than having them created ad hoc at year-end.
Sole proprietors: contributions and draws
For a sole proprietorship, the business and the owner are treated as one for tax and legal purposes, and the business income is reported on your personal return. That has a practical consequence for the books: money you take out for yourself is a draw, not a wage and not a deductible expense, and money you put in is a contribution, not income.
Your tax depends on the net income of the business, not on how much you withdrew. If the business earned $60,000 after expenses and you drew only $40,000, you generally still report the $60,000. The reverse also applies: drawing more than you earned does not create a deduction. The CRA also states that personal expenses cannot be deducted, so only the business part of an expense belongs on your T2125. That makes it important to code personal spending paid from a business account as a draw rather than as an expense.
Corporations: money in
A corporation is a separate legal entity, so money you put in has to be recorded as a particular kind of transaction. If you pay for shares, the amount generally goes to share capital within shareholders’ equity. If you lend the corporation money, the company owes you, and the amount is a liability recorded in a shareholder loan account.
These are different promises. A loan can generally be repaid to you later, while share capital is a contribution of ownership. Which one fits is a decision to make before the money goes in, with your accountant or lawyer, and then to document. Moving a balance from one category to another after the fact tends to produce confusion at year-end.
Corporations: money out and the label problem
When you take money out of a corporation, it can generally take one of several forms: salary, a dividend, repayment of a loan you made to the company, a reimbursement of company costs you paid personally, or a loan from the company to you. Each form is reported differently and taxed differently, and the bookkeeping entry should follow what actually happened.
The CRA is clear that an accounting entry does not decide the tax result. Its folio on shareholder loans says the existence of a loan is judged on substance, not on entries, and that where a shareholder receives money with no debtor and creditor relationship, a different benefit rule can apply instead. The CRA’s shareholder benefits guidance gives the payment of a shareholder’s personal expenses by the corporation as an example. In that case the corporation does not withhold payroll deductions, reports the benefit on a T4A slip, and cannot claim it as a business expense, while the shareholder includes the full amount in income.
An illustrative example
These numbers are round and illustrative. Suppose you put $10,000 into your corporation in January. If it was lent, your books show $10,000 cash in and $10,000 owing to you. If you bought shares, the books show $10,000 in share capital. Either way, no revenue is recorded.
In June the corporation pays $2,000 toward a personal vacation. If you did not intend that as salary or a dividend, the entry should show it openly as an amount you took from the company, not as a travel expense. If you have a loan balance owing to you, it may reduce that balance, but that depends on the facts and your documentation. A mixed history like this is the reason to raise it with your accountant before year-end rather than after.
Reimbursements and personal spending
When you pay a business cost personally, the cleanest approach is to keep the receipt, note the business purpose, and have the business reimburse you for the exact amount. Record the original expense in the right category and the reimbursement as a payment to you, not as a draw or a dividend. Without the receipt, the expense may not be supported.
The same discipline applies in reverse. A card used for both business and personal purchases makes it difficult to tell which is which. The simplest fix is a separate business account and card, a topic covered in our article on separating business and personal finances. Where the two have already mixed, list the personal items and record them as draws or shareholder amounts, rather than leaving them in expense categories.
A monthly routine that keeps it clean
At each month-end, reconcile the bank account and look specifically at transfers to and from you. For each one, confirm which account it belongs in and whether a document supports it. Then check that the owner accounts make sense: a sole proprietor’s draws should be plausible against income, and a corporation’s shareholder loan balance should be understood and noted.
Watch for these common mistakes: recording an owner deposit as sales, coding draws as wages, paying personal bills from the company account without a note, and letting a shareholder loan balance grow without anyone reviewing it. Our article on avoiding shareholder loan income inclusion explains why the last one deserves attention in a corporation.
What to bring to your accountant
Bring statements for every account the business uses, plus a list of transfers to and from you with the reason for each. Include share subscription documents or loan agreements, receipts for expenses you paid personally, and any note about salary or dividends decided during the year.
Ask which of your withdrawals have been recorded as salary, dividend, loan repayment or reimbursement, and whether any should be reclassified before filing. The best time for that conversation is before the year-end, when the facts can still be documented properly.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- What is a sole proprietorship?BDC
- Business expensesCanada Revenue Agency
- Income Tax Folio S3-F1-C1: Shareholder loans and debtsCanada Revenue Agency
- Shareholder benefitsCanada Revenue Agency
- BDC: Shareholders’ equityBDC
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.