Initial Share Capital vs Shareholder Loan Calculator
Money you put into your own corporation can go in as shares or as a loan, and the choice decides how easily it comes back out, whether the capital gains exemption is available, and what happens if the business fails. Work out the split before the first dollar moves.
recoverable without tax
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Getting the Money Back Out
| Route | How It Works | Amount |
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Shares Against Loan, Side by Side
| Feature | Share Subscription | Shareholder Loan |
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What Happens at Exit
| Item | Basis | Amount |
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Points That Decide This
What to Do Next
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Disclaimer: Amounts subscribed for shares generally form part of the paid-up capital of those shares, which can be returned to a shareholder without giving rise to a deemed dividend under subsection 84(2) or subsection 84(4); amounts advanced by way of loan are a debt of the corporation and its repayment is not income to the lender. Interest paid on a shareholder loan is deductible to the corporation only where the borrowed money is used for the purpose of earning income and the interest is reasonable, and is taxable in the hands of the shareholder as interest income; an interest-free loan from a shareholder to their own corporation is generally permitted, although a loan from a corporation to a shareholder engages subsection 15(2) and is a different matter entirely. Where the lender is a specified non-resident, the thin capitalisation rules limit the deductibility of interest by reference to a prescribed debt-to-equity ratio and deny the excess, which may also be recharacterised as a dividend. The lifetime capital gains exemption is available on the disposition of qualified small business corporation shares and is not available on the repayment or disposition of a debt; whether shares qualify depends on asset, holding period and ownership tests that must be satisfied at the relevant times. An allowable business investment loss may arise on shares of, or on a debt owing by, a small business corporation, subject to the conditions in the Act, and is deductible against income from any source rather than only against capital gains. The lifetime exemption amount and the capital gains inclusion rate used in this calculator are defaults that should be replaced with the current figures before being relied on, as both have changed. This page is general information, not tax advice.
The Decision Nobody Makes Deliberately
Most corporations are set up with a hundred dollars of share capital because that is what the incorporation package suggested, and then the owner transfers whatever the business actually needs into the bank account. That transfer is a shareholder loan whether or not anyone wrote it down.
The accidental version usually works out, because a loan is the more flexible of the two. But the decision deserves five minutes of thought, because it is far easier to structure at the start than to unwind later.
A shareholder lending to their own corporation is ordinary and safe. The rule people half-remember, subsection 15(2), applies to a corporation lending to its shareholder, which is the opposite direction and genuinely dangerous. Money flowing in creates no such problem.
The Loan Comes Back Out More Easily
Repaying a shareholder loan is not a taxable event. The corporation returns money it borrowed, the lender receives their own capital, and nothing is reported as income. It can be done at any time, in any amount, whenever the corporation has cash.
Share capital is stickier. Paid-up capital can be returned without a deemed dividend, but doing so requires a formal reduction of capital or a wind-up, with corporate resolutions and filings. It is available, but it is an event rather than a transfer.
| Getting Money Out | Shareholder Loan | Share Capital |
|---|---|---|
| Timing | Any time | On a capital reduction or wind-up |
| Formality | A cheque and a ledger entry | Resolutions and filings |
| Tax on the way out | None, it is a repayment | None up to paid-up capital |
| Partial amounts | Straightforward | Possible, but formal each time |
Document the loan when it happens, not when it is questioned. An undocumented advance repaid years later looks exactly like a distribution, and the burden of showing it was a loan sits with you. A simple written agreement and a consistently maintained shareholder loan account is all that is required, and it has to exist contemporaneously.
Only Shares Carry the Capital Gains Exemption
This is the argument on the other side, and for a business that might be sold it is a large one. The lifetime capital gains exemption applies to qualified small business corporation shares. It does not apply to the repayment of a loan, and it does not apply to selling a debt.
That does not mean funding everything through shares. The exemption applies to the gain on the shares, and the gain is proceeds less cost. Shares subscribed for a hundred dollars that later sell for a million produce a gain of nearly the whole million, all of it potentially exempt. Funding the same business with a million of share capital instead produces a far smaller gain, and wastes exemption room on capital that could have come back as a loan repayment anyway.
Low share capital plus a loan is usually the efficient combination. The loan comes back tax-free whenever there is cash, and the shares carry a low cost base so that as much of the growth as possible sits inside the exemption. That is why the accidental structure so often turns out to be the right one.
If the Business Fails
Both routes can produce an allowable business investment loss, which is unusually valuable because it is deductible against income from any source rather than only against capital gains. Shares of a small business corporation qualify, and so can a debt owing by one.
The conditions differ though, and a debt claim needs care: it generally has to be established as bad, and loans made for no business purpose or on terms nobody would accept can be challenged. Documentation matters here for the same reason it matters everywhere else in this analysis.
Interest Is Usually Not Worth Charging
A shareholder can lend interest-free, and most do. Charging interest moves money from the corporation, which deducts it at the corporate rate, to the shareholder, who pays tax on it at their personal rate. Where the personal rate is higher than the corporate rate, which it usually is, the transaction costs money.
It occasionally makes sense, where the corporation has losses it cannot use or where the shareholder has low income in a particular year. But the default of charging nothing is normally correct, and it avoids a T5 and a deduction to defend.
Non-Residents Face a Ratio
Where the lender is a specified non-resident, the thin capitalisation rules limit how much debt the Canadian corporation can carry relative to its equity before interest deductions start being denied. The excess interest is disallowed and may also be treated as a dividend.
That changes the calculus considerably for a foreign owner. A structure that is obviously right for a Canadian resident, minimal share capital and a large loan, can put a non-resident owner straight through the ratio, and the equity side has to be sized deliberately.
What Usually Goes Wrong
- The loan was never documented, so a repayment years later looks like a distribution
- The shareholder loan account was never reconciled, mixing genuine advances with personal expenses
- Large share capital subscribed unnecessarily, using up exemption room and locking the money in
- Paid-up capital confused with stated capital, which matters enormously on a wind-up
- Interest charged without thinking, moving income to a higher rate for no reason
- A non-resident structure ignoring the ratio, with interest denied and recharacterised
Set the split at incorporation, when it costs nothing. Our incorporation service covers the share structure, the funding split, the loan documentation and the paid-up capital record that a future wind-up or sale will depend on.
Frequently Asked Questions
Common questions on funding a new corporation.
Related Calculators and Guides
More tools for setting up and funding a corporation.
Get the Split Right Before the Money Moves
Tell us how much you are putting in, what the business will do and how you expect to exit. We will set the share structure, size the funding split, document the shareholder loan and keep the paid-up capital record that a future sale or wind-up will depend on.