Do Shareholder loans have to be issued from corporate retained earnings, or can it be issued from corporate debt like an equity line of credit? My accountant wasn't sure if there were implications with CRA either way.
Do you mean repaying money the shareholder loaned to the corp, or the corp loaning money to the shareholder? I think you're talking about the former. In that case, I don't think there is any restriction on how the repayment is financed (corp can borrow to repay).
Just be careful that it doesn't start to look like a personal bank account. CRA tends to frown on that. Make sure you classify exactly what the loan to the corporation is for to make it easier in an audit.
Do Shareholder loans have to be issued from corporate retained earnings, or can it be issued from corporate debt like an equity line of credit? My accountant wasn't sure if there were implications with CRA either way.
It can be from debt. Just be careful to check with your financer if the corp has any debt as there can be restrictions on repaying shareholder loans both from retained earnings and credit facilities.
I want to take a shareholder loan from my corporations equity line of credit over to me personally to invest with and the repay back the corporation within the year. Is this ok?
Because if I do it this way, the corporation pays the interest on the equity loan with 10% taxed money, while I use the funds to invest personally and earn dividends and pay no tax under the dividend tax credit for individuals.
Wouldn't this loan from the corporation to a shareholder be a taxable benefit for the shareholder? Unless you are planning to pay it back in the next fiscal year?
Another benefit will be deemed to have been received by the shareholder under s. 80.4(2), unless interest has been paid on the loan in an amount greater than or equal to interest calculated at the prescribed rate. The payment of interest must be made no later than 30 days after the the end of the year. If the entire loan is repaid before the end of the year, any unpaid interest will still be a deemed benefit under s. 80.4(2) if it is not paid within 30 days after the end of the year.
There will be no taxable benefit related to the interest on any debt or loan on which it is reasonable to conclude that the rate of interest is the same as or greater than that which would have been agreed upon by parties dealing at arm's length, having regard to all the circumstances, including the terms and conditions of the debt.
As I understand it, so long as the loan is repaid within 1 fiscal year, the shareholder who received the loan has no interest to pay. However, since the corporation loaned the money from an equity line and not retained earnings cash, it will have an interest payment back to the holding institution.
The kicker is that the corporation income needed to pay on that interest is only 10-12%, while personally it would be much higher. Also, since the lending is coming from an equity line in the corporation, the rate is nearly comparable to a personal equity line. My corporation line is 4.5% and my home equity line would be a point lower.
If the loan is for less than the prescribed rate (currently 1%), the difference between the actual rate and the prescribed rate is a taxable benefit.
Repaying within 1 year prevents the principal of the loan from being included in income. Ie, if you took a loan of $10,000 for more than one year, you would have an increase in taxable income of $10,000.
From my reading of it there are 2 taxable benefits that may come into play:
1 - the loan itself (principal) becomes a taxable benefit if not repaid in the next fiscal year (also note that a 2nd loan to pay off the 1st and avoid this issue is not allowed)
2 - the interest also becomes a taxable benefit, if interest at the prescribed rate (or greater) is not paid back to the corporation within 30 days of the fiscal year end
Anyone have experience with this?
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