Your Shareholder Loan Isn't Free Money: What It Actually Means for Canadian Business Owners
Every fall I have the same conversation with at least a handful of incorporated owners.
We're looking at their year end numbers, and there's a line on the balance sheet called "shareholder loan" or "due to/from shareholder". They've never really looked at it. Then they find out what it means, and the next question is always some version of "wait, I owe my own company money?"
Between September 8 and October 8 this year, it came up in at least nine of our client meetings.
Sometimes yes. Sometimes it's the other way around and your company owes you. Either way, it matters more than most people think, and it's one of the easiest things to get ahead of before your year end.
Here's the plain version.
What a shareholder loan account is
When you own a corporation, you and the company are two separate taxpayers. Money moving between you and your company has to be tracked, and the shareholder loan account is where that tracking lives.
Think of it as a running tab between you and your corporation. Every time money goes from you to the company, or from the company to you, without being salary or dividends, it lands on that tab.
The tab can go two ways.
When your company owes you
This happens when you've put money into the business. Maybe you paid for a laptop on your personal card. Maybe you lent the company money to get through a slow month. Maybe you covered the first year of software before the business had its own account.
In that case, your company owes you. And here's the good news: you can take that money back out of the company tax free, because you're just being paid back. It's not income. It's your own money coming home.
This is why it pays to keep good records of what you've put in. If you can't show it, you can't easily take it back out tax free.
When you owe your company
This is the one that catches people.
It usually happens slowly. Personal expenses go on the business card. You transfer money to your personal account when you need it and plan to "figure it out at year end". You pay yourself without running payroll or declaring a dividend.
All of that money is the company's money until it's properly paid to you. So when you take it without labelling it as salary or dividends, it sits on the tab as money you owe the company.
CRA has rules here, and they're not gentle.
The one year rule
If you borrow money from your corporation and don't pay it back within one year after the end of the corporation's tax year when you borrowed it, CRA can add the whole amount to your personal income for the year you took it.
Here's what that looks like. Say your corporation's year end is December 31, 2026, and you took $10,000 out in March 2026 without it being salary or dividends. You'd need to pay that back by December 31, 2027. If you don't, that $10,000 can be taxed as your personal income for 2026, and there's no deduction on the corporate side to soften it. If you pay it back in a later year, you can usually claim a deduction then, but you've paid the tax in the meantime.
And no, you can't pay it back on December 30 and take it right back out on January 2. CRA looks at a series of loans and repayments as one ongoing loan.
There can also be a taxable benefit for the interest you didn't pay while you had the money, based on CRA's prescribed interest rate, which changes every quarter.
If you want to read it straight from CRA, it's all in Income Tax Folio S3-F1-C1, Shareholder Loans and Debts.
None of that is the end of the world if you catch it in time. It's just expensive if you don't.
Michelle
How it usually gets fixed
At year end, your accountant looks at the balance and you decide together how to clear it. The common options:
- Option 1Pay it back.
Put the money back into the company before the deadline.
- Option 2Declare a dividend.
The company pays you a dividend, and the dividend clears what you owe. You pay personal tax on the dividend.
- Option 3Pay a salary or bonus.
Same idea, through payroll, with CPP and source deductions.
Which one makes sense depends on how much is owing, what you've already been paid this year, and what you need. That's the year end conversation.
What to do before your year end
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If you're a sole proprietor
This one doesn't apply to you, and that's a nice thing. As a sole proprietor, you and your business are the same taxpayer. The money you take out is a draw, and you're taxed on your business profit whether you take the money out or leave it in the account. There's no loan to your business and no one year clock.
What does apply to you is keeping business and personal spending separate, so your profit is right and your write offs hold up if CRA ever asks. Our sole proprietor bookkeeping post walks through what to track.
The short version
Your shareholder loan is a running tab between you and your company. If the company owes you, that's money you can take back tax free. If you owe the company, there's a deadline, and missing it can turn that money into personal income.
If you're incorporated and want someone to look at your shareholder loan and sort out your year end before it becomes a problem, we'd love to help. You can book a discovery call with our corporate team right on our corporate page.
This post is general information, not tax advice for your specific situation.
I'm a CPA, a mom of three and the founder of Arnason Accounting & Co. Here for the questions you're too embarrassed to ask.
Follow along @michellearnasoncpa
