Shareholder Loan Repayment Deadline and Tax Calculator
Money drawn from your corporation without salary or dividends is a loan, and it becomes taxable income unless it is repaid in time. Work out exactly when the deadline falls, what it costs if you miss it, and the cheapest legal way to clear the balance.
tax if it is not repaid
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The Deadline
| Item | Basis | Position |
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What It Costs if the Deadline Passes
| Item | Basis | Amount |
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Ways to Clear the Balance
| Route | What It Takes | Cost to the Corporation | Clears the Loan |
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Points That Decide This
What to Do Next
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Disclaimer: Subsection 15(2) of the Income Tax Act includes in the income of a shareholder, or a person connected with a shareholder, the amount of a loan or indebtedness owed to the corporation, subject to exceptions. Subsection 15(2.6) provides that the inclusion does not apply where the loan is repaid within one year after the end of the taxation year of the lender in which the loan was made, otherwise than as part of a series of loans or other transactions and repayments. Exceptions in subsection 15(2.4) apply to certain loans to employees, including loans to acquire a dwelling, a motor vehicle used in employment duties, and shares of the corporation, where bona fide arrangements for repayment within a reasonable time were made at the time the loan was made and, in most cases, where the loan was received because of employment rather than shareholdings. Where an amount has been included in income under subsection 15(2), a deduction is available under paragraph 20(1)(j) in the year the loan is repaid. Separately, section 80.4 and subsection 15(9) impute an interest benefit on a low or no interest loan, computed at the prescribed rate for the period the loan is outstanding and reduced by interest actually paid on the loan by the borrower no later than thirty days after the end of the year. The prescribed rate is set quarterly and the rate used here is an editable input that should be replaced with the applicable rates for the periods concerned. The deemed interest calculation on this page applies a single rate to a single period and does not model quarterly rate changes or fluctuating balances. Whether repayments form part of a series of loans and repayments is a question of fact. This page is general information, not tax advice.
Every Draw Is a Loan Until It Is Something Else
Cash taken out of a corporation is one of three things: salary, a dividend, or a loan. If nobody declared the first two, it is the third by default, and it sits on the balance sheet as an amount due from the shareholder.
That is not a problem in itself. It becomes one when the loan is still outstanding after the deadline, because the whole balance is then added to the shareholder’s personal income in the year the loan was made.
The inclusion is the full amount, not the interest on it. An eighty thousand dollar draw that misses the deadline is eighty thousand dollars of personal income, taxed at your marginal rate, in a year you have probably already filed. That is what makes this worth watching rather than discovering.
The Deadline Is Not One Year From the Draw
This is the part people get wrong. The loan must be repaid within one year after the end of the corporation’s taxation year in which it was made, not within one year of taking it.
So the timing depends entirely on where in the fiscal year the money came out. A draw taken the day after a year end has almost two years before the deadline. The same draw taken a week before the year end has barely twelve months. Same amount, same shareholder, very different runway.
| When the Draw Was Taken | Time to Repay |
|---|---|
| Just after the fiscal year end | Close to twenty-four months |
| Mid-year | Around eighteen months |
| Just before the fiscal year end | Barely twelve months |
Repaying and Redrawing Does Not Work
The obvious move is to repay the loan just before the deadline and take the money out again the following week. The legislation anticipates that: the relief does not apply where the repayment is part of a series of loans or other transactions and repayments.
What counts as a series is a question of fact, and a pattern of clearing the balance each year end and redrawing immediately afterwards is exactly what the provision is aimed at. A genuine repayment that stays repaid is a different matter.
If the inclusion does happen, it is not permanent. When the loan is eventually repaid, a deduction is available in the year of repayment. The difficulty is the timing: income in one year and a deduction in a later one leaves you paying tax now and recovering it later, which is a cash flow problem even when the arithmetic comes out even.
Interest Is Imputed Whether or Not You Pay Any
Separately from the inclusion, an interest-free or low-interest loan produces a taxable benefit. The benefit is calculated at the prescribed rate for the period the loan is outstanding, reduced by interest actually paid.
The interest has to be paid no later than thirty days after the end of the year to count. Paying it in February for the previous calendar year is too late, and that thirty-day window catches people who intended to pay but left it until the accounts were prepared.
The prescribed rate moves quarterly, so a balance carried across several quarters is calculated against several rates rather than one.
The Exceptions Are Narrower Than They Sound
There are exceptions for certain loans to employees: to buy a home, to buy a vehicle used in employment duties, and to acquire shares of the corporation. Each requires bona fide arrangements for repayment within a reasonable time, made when the loan was advanced.
And in most cases the loan must have been received because of employment rather than because of shareholdings. For a sole owner-manager that distinction is genuinely hard to establish, because the same person is both, and the CRA looks at whether an arm’s length employee in the same position would have been offered the same loan.
A verbal intention to repay is not a bona fide arrangement. The terms need to exist in writing at the time, with a repayment schedule and a rate, and the payments need to actually happen. An exception claimed on a loan with no documented terms is usually not an exception at all.
Clearing It: Salary, Dividend or Cash
Repaying with your own money is the cleanest route and costs nothing in tax, but most owners are in this position precisely because the money has been spent.
The alternatives are to declare a salary or a dividend large enough that the after-tax amount clears the balance. Both work. Salary is deductible to the corporation and creates RRSP room but attracts payroll costs on both sides. A dividend carries no payroll cost but is not deductible, so the corporation has already paid tax on the money.
What This Calculator Does Not Cover
- Quarterly prescribed rate changes across the period the loan is outstanding
- Fluctuating balances, where draws and repayments happen throughout the year
- Loans to persons connected with a shareholder, which follow the same rules
- Whether repayments form part of a series, which is a question of fact
- The optimal salary and dividend mix in the round, which depends on much more
- Loans from a corporation you do not control, where different considerations arise
The deadline is the thing to act on, because it does not move. Our corporate tax cleanup service covers working out what the balance actually is, when each advance falls due, and the cheapest way to clear it before the inclusion rather than after.
Frequently Asked Questions
Common questions on shareholder loans.
Related Calculators and Guides
More tools for owner-managers taking money out.
Clear It Before the Deadline, Not After the Assessment
Send us the shareholder loan account and the corporation’s year end. We will work out what is actually outstanding, when each advance falls due, what the deemed interest benefit is, and the cheapest way to clear the balance before it becomes personal income.