Shareholder Loans: Avoiding Tax Troubles When You Take Money Out – A Complete Guide by a Montreal CPA Firm Near You

Shareholder loans in Canada are one of the most misunderstood areas of corporate

taxation. Many business owners treat their corporation’s bank account as their

own—transferring money in and out informally, borrowing from the corporation for

personal use, or paying personal expenses using corporate funds. While this may feel

convenient, CRA treats shareholder loans very seriously. If a shareholder takes money

from their corporation and does not repay it correctly, CRA can classify the amount as

taxable income, leading to penalties, interest, and double taxation. Understanding

shareholder loan rules in Canada—including repayment deadlines, documentation

requirements, and the exceptions under section 15(2)—is essential for avoiding costly

mistakes. This guide explains how shareholder loans work, how CRA audits them, and

how to structure repayments safely.

Legal and Regulatory Framework

Shareholder loans are governed by section 15(2) of the Income Tax Act. Under this

rule, if a shareholder (or a person connected to the shareholder) receives a loan or

advance from the corporation, the full amount is included as taxable income unless:

• the loan is repaid within one year after the corporation’s year-end, or

• the loan falls under a permitted exception (such as employee loans, loans for business

purposes, home purchase loans, or loans made under bona fide lending arrangements).

Even when a loan is excluded under exceptions, section 15(9) and 80.4 may apply,

requiring the shareholder to include a taxable benefit equal to interest saved if the loan

rate is below CRA’s prescribed rate. Section 246(1) governs situations where indirect

benefits arise from shareholder advantage. Corporations must record shareholder loan

transactions in the shareholder loan account on the balance sheet and disclose them

in the T2 Corporate Tax Return. These rules define how shareholder loans in Canada

are taxed and monitored.

Key Court Decisions

Courts have reinforced CRA’s strict view on shareholder loans.

In Youngman v. The Queen, the court ruled that a shareholder who used corporate

property for personal benefit received a taxable shareholder benefit—even without a

formal loan.

In Hicks v. Canada, CRA successfully taxed shareholder withdrawals that had no

documentation or repayment schedule, confirming that informal loans are generally

taxable under section 15(2).

In Sowrey v. Canada, the taxpayer claimed the loan was repaid by year-end, but

accounting entries were inaccurate. The court ruled that repayment must be real and

substantive, not just journal entries.

In Hardy v. Canada, CRA applied taxable benefits because the loan was interest-free.

The court upheld CRA’s application of prescribed interest benefit rules.

These cases show that shareholder loans must be structured carefully to avoid taxation.

Why CRA Targets This Issue

CRA aggressively audits shareholder loan accounts because they are a common

source of hidden personal withdrawals. CRA monitors:

• corporations with persistent debit balances in shareholder loan accounts

• payments of personal expenses using corporate funds

• loans that are repaid and re-borrowed in a “circular” pattern

• corporations that issue dividends only after CRA audit notices

• undocumented loans or vague journal entries

• large withdrawals close to year-end

CRA also cross-checks payroll, dividends, and T5 filings to determine if shareholder

withdrawals were disguised compensation. Because shareholder loans in Canada can

easily be misused to avoid taxes, CRA enforces strict compliance.

Mackisen Strategy

At Mackisen CPA Montreal, we help clients manage shareholder loans safely and tax-

efficiently. Our approach includes:

• reviewing the shareholder loan account to identify high-risk transactions

• structuring valid repayment plans before the one-year deadline

• determining whether withdrawals should be reclassified as salary, dividends, or

reimbursements

• applying exceptions under section 15(2) when available

• calculating taxable benefits under section 80.4 when necessary

• preparing proper documentation—loan agreements, board resolutions, and repayment

schedules

• reconciling shareholder loan balances during year-end T2 preparation

• planning multi-year strategies to prevent future issues

This structured method ensures that shareholder loans in Canada do not trigger

unexpected tax bills or CRA audits.

Real Client Experience

A business owner withdrew $150,000 from their corporation over two years, believing

they could “pay it back later.” CRA reassessed the full amount as taxable income. We

restructured the withdrawals as retroactive dividends, filed adjustments, and reduced

tax significantly.

Another corporation had multiple undocumented transactions labeled as “loan to

shareholder.” CRA challenged them. We gathered receipts, reclassified many items as

business reimbursements, and prevented taxation on most amounts.

In a third case, a home purchase loan qualified under permitted exceptions, but the

client failed to charge interest. We corrected the benefit calculation and avoided

penalties.

These examples show why shareholder loan planning is essential for compliance in

Canada.

Common Questions

Business owners often ask whether they can borrow from their corporation interest-free.

Only under specific exceptions; otherwise, interest benefits apply.

Others ask whether simply repaying the loan before year-end avoids tax. No—the rule

is one year after year-end, not the year of withdrawal.

Many ask whether journal entries count as repayment. They do only if supported by real

transactions.

Another question: Can the corporation loan money to family members? Yes, but

connected-person rules apply, making compliance more complex.

These questions highlight why understanding shareholder loans in Canada is critical for

tax planning.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

business owners stay compliant while minimizing tax liabilities associated with

shareholder loans. Whether you need help structuring loans, correcting past filings, or

managing year-end shareholder balances, our expert team ensures precision,

transparency, and protection from audit risk.