# Self Employed and Shareholder Loan



## thegoose (Feb 25, 2012)

I own a fifth of the company that currently employs me. I earn a good salary and pay an average of 33% tax. If I start up a second company that I own 100% and employ myself through the second company. I hope to save tax by taking out a reduced salary from my second company and giving myself an annual shareholders loan to pay off my mortgage. Is this possible or is it a trap? What are the rules and how does the shareholders loan amount get taxed? I suspect somewhere down the line the company has to pay tax? Thanks!


----------



## natalie_d (Nov 25, 2009)

I could be wrong but I think the consequences would be the following:

If you receive a shareholder loan in 2012, and do not repay it by December 31, 2013, then the amount of the loan would be added back to your personal income for the 2012 tax year. The company can't take a deduction for the loan amount, which results in double taxation.

If you do pay it back within one year, then there is no taxable benefit.


----------



## Homerhomer (Oct 18, 2010)

The shareholder loan is not an answer, usually what happens is to cover the shareholder loan the dividends are declared to cover it, and obviusly you claim the dividends on your personal tax return.

However, since you are also an employee, and this is very important since this will be an employee loan and not a shareholder loan, the company can loan yourself money at the very low rate (prescribed rate is 1% right now I believe), with the loan from the company you can pay down the mortgage at much lower rate than what you would get from the bank. Company would claim the interest income, but over the term of the loan you do have to repay it.

There are number of issues to watch out here to make sure you pass the employee test, and it is prudent to have all the papers in order (mortgage on the house from the company, repayment terms, and be actually repaying it).

It is usually used to purchase a house, I am not sure right now if CRA woud have issues if it was used to pay down mortgage on the existing property.


----------



## Cal (Jun 17, 2009)

Probably worth the money and time to consult with an accountant.


----------



## thegoose (Feb 25, 2012)

Thanks for the replies. I am talking to the tax accountant next week.


----------



## agladders (May 9, 2010)

A related concern - the small business limits are calculated across related companies - so if either company throws you (and your assumedly cofounders in company 1) above that the amount over it gets taxed at a higher %.


----------



## marina628 (Dec 14, 2010)

I have taken a shareholder loan from a business i own 49% of and my accountant rule is it Must be received and repaid in the same corporate year end or that outstanding amount has to go on my t4.I expect this is the way CRA likes it as well.


----------



## Homerhomer (Oct 18, 2010)

marina628 said:


> I have taken a shareholder loan from a business i own 49% of and my accountant rule is it Must be received and repaid in the same corporate year end or that outstanding amount has to go on my t4.


It doesn't have to go on the T4, actually it often is covered by dividends and in that case you get a T5.


----------



## marina628 (Dec 14, 2010)

This is why people need to go to an accountant , every situation is different.I take a paycheck and pay taxes as employee so I get a T4 But in my case I usually get short term loans and pay them back in 2-3 months.


----------



## Homerhomer (Oct 18, 2010)

marina628 said:


> This is why people need to go to an accountant , every situation is different.I take a paycheck and pay taxes as employee so I get a T4 .


As a shareholder of a small corp one of the benefits is that you can employ yourself and pay yourself wages but you can also draw dividends, combination of the two is often most beneficial, but obviously each case is unique and one has to stick to what works for them.

I can't even imagine anyone having a corporation and not deal with an accountant they can trust.


----------



## marina628 (Dec 14, 2010)

I will take dividends at a later time.I am making so much on my poker playing I do not need to take a income but I do as I do not want to be tagged a professional poker player and have to pay taxes on my wins lol.


----------

