Shareholders of corporations in Canada and worldwide often choose to make a shareholder loan to pay for their own expenses by taking cash from the corporation.
Financially, shareholder loans are extremely tax positive. Individuals who own the companies borrow money temporarily to pay for their expenses and subsequently pay it back.
If you want to know all about what the shareholder must pay for taking a loan in Canada, read on to find out about the contents.
What is a participating loan and is it common?
If you have little fiscal and economic knowledge, you may not know what shareholder loans are. Don’t worry, below, we will detail it to perfection.
It is a cash withdrawal from the company in which you own a stake by introducing capital in its beginnings. Many of the owners of companies usually resort to the shareholder loans since their fiscal benefits are too many, among them, not to pay tax since it is not considered, fiscally, as a salary.
The money due from shareholder must be paid within one fiscal year (depending on the company, it may change its fiscal year) to avoid paying tax and declare it as personal income
What are the benefits of a shareholder loan?
As mentioned above, the best benefit of a shareholder loan is that it does not pay taxes unlike a monthly salary since, fiscally, it is not considered an income for the tax authority, the CRA (Canada Revenue Agency).
The shareholder loans must respect different conditions, which are:
- To buy a house to live in. They must be granted in good faith (respecting repayment terms and the interest rate set by the CRA).
- To purchase a personal vehicle to be used for commercial purposes.
- The shareholder loan must be repaid within a company’s fiscal year. Each company has its own deadlines, but if the company has an accounting fiscal year from January 1 to December 31, the balance due from shareholder must be repaid before the end of the fiscal year.
How much money must a person pay when taking out a shareholder loan?
To explain how much you must pay in case of obtaining a shareholder loan we will give you an example.
If you are a shareholder of a corporation, you can apply for a loan and always pay it back in a timely manner before the end of the fiscal year. Let’s assume that, the fiscal term of the company is from January 1, 2023 to December 31, 2023.
If you borrow $60,000 in February 2023, you will have time to pay it back until December 31, 2023. If you exceed this date, you will have to declare the money as personal income with the CRA (Canada Revenue Agency).
And, how much do I have to pay? You must pay back the requested money plus interest. In Canada, according to the new 2020 regulations by the CRA, the interest rate is 1%. If you take out $60,000 you must pay back $60,600 before December 31.
Interest rate changes on shareholder loans
Every quarter, the tax authority, the CRA, visualizes and determines the interest rate for loans.
From 2009 to date, the Canada Revenue Agency has maintained the interest rate at 1%, but may change it when necessary. You should be aware