Is Shareholder Loan CRA Tax Deductible In Canada?
Interest rates in Canada have been rising, which is why taking out a shareholder is appealing to many businesses. However, that does not mean that this process is risk-free. Understanding shareholder loans is necessary before taking out a loan.
You may also be thinking, “is shareholder loan CRA tax deductible” because of a lack of information. Luckily, you don’t have to wonder anymore. Here is what you must know about shareholder loans.
What Is A Shareholder Loan?
A shareholder in a company can contribute to the business assets through a shareholder loan. They can also use the same loan to borrow money from the company. Many people use this loan for tax planning and other purposes in Canada.
The shareholders can be allowed to borrow the amount through salary or dividends. This means that the individual can use the money for personal purposes. A shareholder loan is a convenient way to borrow cash without high-interest rates.
However, that does not mean there are no implications when taking out a shareholder loan. The CRA has strict rules to prevent people from abusing the tax laws.
Is Shareholder Loan CRA Deductible In Canada?
You may be wondering, “is shareholder loan CRA deductible in Canada” after all, the laws of every country vary significantly. This is why you must understand how a shareholder loan in Canada works. Typically you can take out this loan from your company without listing it as personal income.
So you will not be required to pay income tax for the loan during the first fiscal year. However, the loan is deductible by the CRA as personal income after the time limit passes. This means that you must return the money to the company within one year to avoid being taxed for it.
Besides that, the CRA also makes it compulsory for the corporation to charge interest to prevent the loan from being listed as personal income. The prescribed rate is applied to the shareholder.
The current interest rate by the CRA is 1%, so when returning the money within the fiscal year, you must return the exact amount plus the prescribed interest.
Exceptions To The Shareholder Loan
The rules for shareholder loans have some exceptions to make it easier for you to borrow money. You can take out the loan for more than a fiscal year without it being taxed as personal income if your company specializes in giving loans.
If the shareholder loan is made while conducting everyday business tasks and its terms are similar to the terms of a borrower’s loan, you can increase your time limit for paying the loan.
Besides that, you may also take out the loan without time restrictions if you intend to purchase a vehicle for company purposes. Of course, some conditions must be met before taking out the loan.
This articles provides at a high level everything you need to know about is shareholder loan CRA deductible in Canada. The CRA will charge the loan as personal income under the standard Tax Income Act if you fail to pay back the amount within one fiscal year.