# Shareholders Loan to my Corporation



## camster

A quick breakdown.... Myself and my wife purchased a restaurant with our own personal money, set up a corporation and put more money into it for inventory, improvements ect.

When we set this up an Accountant told us that we would not have to pay taxes on money the company paid us until the loan we gave the company was paid back.
For example lets say we each put in 50,000 to the corporation.
Then we each got paid 25,000 from the corporation for the year.
That means it would take 2 years to pay both of us back. 
25,000 each x 2 years + 50,000 each (the loan is then paid back). After that any money we received would be income.

We were told we would not have to pay personal taxes on this money as it was a loan to the company which the company paid back to us (as opposed to income).

Now I have a different accountant who tells us this is not true and that all the money we received from the company would have to be reported as income regardless of any money we loaned the company.

So which is true? Is the money the company paid us considered paying back a loan to us (not income)? or is it income like any other time and should be reported as normal income.

Any suggestions on this would be really helpful and appreciated.

Thanks
Camster


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## dotnet_nerd

I believe the first accountant is correct. This was a shareholder loan that the company is repaying so it is not personal income for you two.

However the corporation did earn the 50,000 with which to pay you back. So this would be taxable income for the business.

There's the question of interest though. CRA might require you to charge the business at a fair (prescribed maybe?) rate and claim the interest earned personally. Of course the business could write-off this interest.

DISCLAIMER: Don't take this as accurate accounting advice; I'm just some guy on the internet.


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## OptsyEagle

The 1st accountant is correct. Maybe the 2nd accountant was talking about paying "corporate" taxes on all the profit received.

So, for example, you earn some money in the corporation. The corporation needs to declare all this profit and pay tax on it (albiet at a pretty low corporate rate). Then when the taxes are paid and it is sitting in retained earnings, you can pay it out to your wife and yourself, tax free by simply paying back a shareholder loan.

I do not believe there is any requirement to pay interest to you for making a loan to your corporation. The government usually tries to reduce the disincentives for someone to invest into small businesses (why do you think they give such a low corporate tax rate, but even the tax score up if you pay the money out to yourself instead of reinvesting it).

That being said, I would probably pay out, as a bonus (taxable) the amount required to use up your personal exemptions (about $11,000 annually) before I recorded it as a repayment of a shareholder loan. The personal exemption would eliminate the tax owed on these bonuses and would leave more of your shareholder loan tax break, for future years. If you already earn income above your personal exemptions, then this last point is mute.


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## Brenner

OptsyEagle said:


> The 1st accountant is correct. Maybe the 2nd accountant was talking about paying "corporate" taxes on all the profit received.
> 
> So, for example, you earn some money in the corporation. The corporation needs to declare all this profit and pay tax on it (albiet at a pretty low corporate rate). Then when the taxes are paid and it is sitting in retained earnings, you can pay it out to your wife and yourself, tax free by simply paying back a shareholder loan.
> 
> I do not believe there is any requirement to pay interest to you for making a loan to your corporation. The government usually tries to reduce the disincentives for someone to invest into small businesses (why do you think they give such a low corporate tax rate, but even the tax score up if you pay the money out to yourself instead of reinvesting it).
> 
> That being said, I would probably pay out, as a bonus (taxable) the amount required to use up your personal exemptions (about $11,000 annually) before I recorded it as a repayment of a shareholder loan. The personal exemption would eliminate the tax owed on these bonuses and would leave more of your shareholder loan tax break, for future years. If you already earn income above your personal exemptions, then this last point is mute.


The above is correct. The corp has to pay taxes on its income but you can withdrawal funds up to your loan amount tax free (on a personal level). 

I also agree on the bonus strategy, you will still be paying both sides of the CPP between $3,500 and $11,000 but this is relative cheap tax wise. This also assumes you have no other personal taxable income and that you expect continued corporate profits. The bonus will need to be paid, or atleast the CPP remitted to CRA, within 6 months of the corps year end.


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## marina628

I loaned my biz $130,000 in 2007 and i took $5000 a month back tax free until it was all paid back,it did not result in any taxes for the biz or for myself .


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## camster

*Thank You*

Thank you everybody for your replies. It looks like its unanimous and thats a big releif thought I might owe big money. Maybe I need to take everything to a new accountant to look over.
Thanks Again!
Camster


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## FrugalTrader

Digging up an old thread here. Question, if I were to lend money to my corporation (CCPC), what kind of paperwork is required to be recorded?


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## OptsyEagle

FrugalTrader said:


> Digging up an old thread here. Question, if I were to lend money to my corporation (CCPC), what kind of paperwork is required to be recorded?


I have never done it but I would suspect that a simple journal entry would be enough. Eventually it would get recorded on the financial statements by whoever does that for you.


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## FrugalTrader

Thanks for the reply OptsyEagle. As well, do you happen to know the process of converting a certain class of shares to another class? Say for example that I own 100 Class B shares and want to convert to 100 Class A shares?


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## OptsyEagle

I believe you need to amend your "Articles of Incorporation". This Industry Canada government link should help.

https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs02718.html


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## heyjude

FrugalTrader said:


> Digging up an old thread here. Question, if I were to lend money to my corporation (CCPC), what kind of paperwork is required to be recorded?


IANAL, but I think a company resolution would be required. Your accountant can draft this.


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## FrugalTrader

Thanks for the leads, I will take a look.


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