You owe your corporation money: how the shareholder loan rules work

Summary

Money drawn without salary, a dividend or reimbursement being recorded usually enters your shareholder loan account, which tracks what you and the corporation owe each other. Where your corporation owes you (e.g. you covered a supplier from your own pocket), it can repay you at any time with no tax on the repayment. Where you owe your corporation, subsection 15(2) of Canada’s Income Tax Act adds the whole amount you took to your personal income for the year you took it, taxed the same way salary is, at your top personal rate.¹

One exception covers almost every owner, and staying inside it is most of what managing a shareholder loan involves. Under subsection 15(2.6), nothing is added to your income if you repay within one year after the end of your corporation’s fiscal year in which you took the money.² Three points follow:

1. The clock runs off your corporation’s fiscal year-end (i.e. the date its financial year closes), not off the date you took the money.
2. Your corporation can repay you on paper: once it declares a dividend or a bonus it owes you that money, you already owe it the loan, and the two are offset, so the balance drops with no cheque written.
3. Repaying in cash just before the deadline and taking the same money back out afterwards normally doesn’t count, and you get no deduction for that repayment later either. A dividend or bonus applied against the balance is the exception, accepted even where you borrow again.

We generally recommend clearing the balance to zero once a year, on a schedule tied to your corporation’s year-end, using a declared dividend or bonus applied against the account. That recommendation changes where clearing it in one go would leave your corporation unable to pay its bills, in which case we pay out what it can afford this year and the rest next year.

What the account is, and how a balance builds up

Your accountant might call the same ledger account shareholder loans, due to/from shareholder, or drawings, so check which name appears in your books. A credit balance means your corporation owes you, and a debit balance means you owe your corporation, which is the direction the tax rules care about.

Most debit balances aren’t one large withdrawal, and the Canada Revenue Agency (CRA) sets out what lands in the account: cash draws, plus payments your corporation makes on your behalf (e.g. a mortgage payment, a personal purchase on the corporate card, tuition).³ A corporate line of credit used personally counts too, so if you owe your corporation $40,000, that’s a hundred small charges nobody sorted into business or personal at the time. The CRA can already see the number, because Schedule 11 of the T2, your corporation’s annual income tax return, asks how much shareholders owed at year-end.

The one-year deadline, and where it starts

Subsection 15(2.6) gives you one year after the end of your corporation’s fiscal year in which the loan was made. Your personal tax year always ends December 31, your corporation’s fiscal year can end on any date, and the deadline runs off your corporation’s rather than yours. Suppose your corporation’s year closes on December 31 and you draw $50,000 on January 5, 2026. The loan sits in the fiscal year ending December 31, 2026, so you have until December 31, 2027, almost twenty-four months. Take the same $50,000 on December 20, 2026 and the deadline is still December 31, 2027, twelve months and eleven days after you took the money. Drawing early in your fiscal year buys you roughly twice as long to repay.

Miss the deadline and the full amount you borrowed goes into your income, not whatever was still outstanding at year-end: borrow $50,000, repay $45,000 late, and the whole $50,000 gets taxed. The income lands in the calendar year you received the money, often two personal tax returns back, so you’re amending an old return and paying arrears interest from that year’s original due date.⁴ Arrears interest is what the CRA charges on tax paid late, at a prescribed rate reset every quarter and compounded daily, and the current quarter’s figure is on our CRA interest rates page.⁵

Ways to clear the balance

Three routes clear a debit balance, and each costs something.

• Repay in cash from your own money. Nothing is added to your income and nobody can argue about whether the repayment was genuine. On the flip side, you need the cash personally, which is usually why the loan exists.
• Declare a dividend and apply it against what you owe. Declaring is a decision your directors make and record in a resolution (i.e. a signed written decision of the company’s directors). Once it’s made your corporation owes you the money, so the two amounts cancel and no cash moves. What it costs is personal tax in the year the dividend is paid or applied against the account. A dividend doesn’t reduce your corporation’s taxable income the way salary does, so the company gets no tax relief for paying it. Take a $10,000 non-eligible dividend, which is what a small private corporation usually pays. You report $11,500 of income, being the dividend plus a 15% top-up. You then take a federal credit of $1,038 off the federal tax you owe, being nine-thirteenths of that $1,500 top-up, with a provincial credit on top.⁶ The top-up and credit stop the same profit being taxed twice, and the upshot is that a dividend costs you less personal tax than the same salary. Your corporation doesn’t need past profits banked up to declare a dividend. What it needs is to stay solvent: it can’t pay one that would leave it unable to meet its bills as they come due, or leave what it owns worth less than what it owes plus the capital its shareholders paid in.⁷
• Declare a salary or bonus and apply it against what you owe. A bonus offset works the same way as a dividend, your corporation gets a deduction against its own income, and you gain registered retirement savings plan room plus a T4 slip a mortgage lender can read. However, Canada Pension Plan contributions come due on both sides: for 2026, 5.95% from you and 5.95% from your corporation on the slice of salary between $3,500 and $74,600, a maximum of $4,230.45 each, plus 4% from each of you on the slice from $74,600 to $85,000, up to $416 each.⁸ Contributions run from age 18 to 69, and Quebec employment falls under the Quebec Pension Plan instead, at a higher rate this page doesn’t cover. Both halves go to the CRA in real cash, along with the income tax withheld on the bonus, even though the bonus itself never leaves the company.

Repaying and then borrowing again

Subsection 15(2.6) only protects you where the repayment isn’t part of a series of loans and repayments, a phrase covering a balance cleared just long enough to meet the deadline and then drawn straight back out. The CRA’s position is that a cash repayment shortly before your corporation’s year-end, followed by fresh borrowing afterwards, would ordinarily be treated that way, though the CRA is also explicit that the answer turns on the facts.⁹ A dividend, salary or bonus offset is carved out of that position, which is why it’s our default route.¹⁰

Funding the repayment with a new loan stays outside the series rule only where the new loan came from an independent lender, was taken out for a real business purpose, and wasn’t taken out in order to repay the shareholder loan. Borrowing from a bank at year-end and drawing from the corporation afterwards to repay that bank can form the prohibited series, even though the bank itself is independent.⁹

Getting caught costs you twice: the loan goes into your income for the year you took it, and paragraph 20(1)(j) denies a deduction for the repayment that formed part of the series.¹¹ A later repayment that stands on its own is still deductible.

How often we’d revisit the balance

We’d look at a shareholder loan balance twice a year, two months before your corporation’s year-end and again when the corporate return is prepared. We’d look sooner when any of these happens.

• Your corporation changes its year-end, or has a tax year shorter than twelve months. A short year happens in a corporation’s first year, its final year, or when the year-end date is moved, and it can shorten the repayment window for loans made in that short year, without resetting an earlier loan’s deadline.
• Somebody else borrows. Subsection 15(2) reaches anyone connected with a shareholder, so a loan to your spouse or adult child who owns no shares is caught the same way.
• You’re selling the business or raising money. A buyer will want the balance cleared at closing, out of the sale proceeds or with a dividend in the year of the sale. A lender reading your financial statements treats money you owe the company as a mark against you.

Several things sit outside this article: a shareholder living outside Canada, a loan between two corporations, a balance outstanding when a shareholder dies, the subsection 15(2.4) rules that can exempt a loan to a shareholder-employee buying a home, a car for work or newly issued shares. Two others: the smaller separate charge on interest you don’t pay your corporation while a balance is inside its deadline,¹² and whether a balance with nothing in writing behind it is a loan at all, given that the CRA can treat it as a benefit you received as a shareholder, taxed in full with no one-year window.¹³

Closing thoughts

Shareholder loan balances get expensive because nothing about the account announces itself. No slip arrives, nobody sends a bill, and the account builds a few hundred dollars at a time until somebody finally looks at it. A serious balance rarely comes from bad advice, and far more often from never being shown the number. If you do one thing after reading this, ask whoever keeps your books for the current balance, the dates behind it, and your fiscal year-end.

How we handle it

We pull the shareholder loan balance and the dates behind it two months before your corporation’s year-end, then decide whether it’s cleared with a dividend, a bonus or a mix. The directors’ resolution gets signed, and the T5 slip reporting a dividend or the T4 reporting salary is filed by the last day of February following the calendar year the money was paid. Your corporate and personal returns are prepared in the same file, so the balance on the corporate return matches the amount we report on your personal one.