Care must be taken in the timing of salary or dividend payments to clear shareholder loans. If a corporation has a December 31st year end, then for the shareholder loan to be cleared by a payment of salary, the salary payment must be made, or recorded in the books of the corporation as having been paid, in December.
Income taxes, and any applicable employment insurance or Canada Pension Plan contributions must be remitted based on the remittance due date of the employer, which will either be the 10th or the 15th of January for salaries paid or recorded from the 22nd to the 31st of December. A payment by cheque is not necessary, but only the net amount of the salary amount can be used to offset against the shareholder loan balance.
If a dividend payment is made to the shareholder in order to clear the shareholder loan, this payment must be made, or recorded in the books of the corporation as having been paid, in December in order to clear the shareholder loan balance for a December 31st year end. T5 information slips must be filed no later than the end of February. Dividends, of course, are not a deductible expense for the corporation.
If a bonus to the shareholder is accrued for year end, but the bonus is not paid or recorded as having been paid prior to the end of the taxation year, it will have no effect on the outstanding shareholder loan until it is actually paid. Any bonus accrued for year end must be paid within days of the taxation year end.
This can be done by recording a payment of the bonus by a debit to the "bonus payable" general ledger account and offsetting credit to the shareholder loan account, which would be reduced by any withholdings for income tax and CPP. These withholdings must be remitted to CRA. Otherwise the bonus will not be deductible in the year it was accrued. If it is paid after the days, it will be deductible in the taxation year in which it is paid.
Keep in mind that a loan from the corporation to the shareholder is considered an asset of the corporation. ITR2 Archived Benefits to individuals, corporations and shareholders from loans or debt Loans received because of shareholdings Loans - Interest-free or low-interest Prescribed interest rates T5 information return Tax Tips: To keep things simple, make sure loans to shareholders are not outstanding past the year end of the lender corporation.
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CRA discussion on debt of shareholders which explains each provision in detail. Keep in mind that, with respect to loans made to shareholders for the above purposes, a taxable benefit may arise for the shareholder if market rates of interest are not charged on the loans or one of the conditions is not met. A shareholder loan account should be created as a current liability on the balance sheet.
All withdrawals that are personal in nature should be allocated to this account including cash withdrawals and purchases of a personal nature made through the corporation. For example the portion of airline tickets that may have been purchased for a spouse accompanying you on a business trip or the personal portion of telephone expenses would be reflected in this account. This can be offset reduced by repayments by the shareholder in cash, or expenses paid personally by the shareholder that relate to the business including gas, repairs, business portion of dues and subscriptions, travel expenses, home office expenses etc.
The total in the shareholder loan account at the year end previous to the current year end, once all transactions have been entered and adjustments reflected, should then be cleared out by declaration of a dividend or by payment of a bonus or a salary. Note that the net amount of the bonus or salary should be sufficient to cover the shareholder loan balance. The journal entry for a shareholder loan that is loaned by the corporation to the shareholder is as follows:.
Debit: Shareholder loan receivable or payable it is best to have one shareholder loan account which is either a receivable depending on whether it is more often an asset or a liability.
It is important for small business owners to understand that, although they may borrow funds from the corporation, they must repay these amounts by the end of the following fiscal year either via a direct repayment or via salaries or dividends. If not, the amount of the loan will be included in your income for the year in which the loan was taken, which can result in significant taxes payable as well as interest and penalties.
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This benefit creates planning opportunities but unfortunately it also creates more opportunities and incentives for shareholders to abuse the rules. Also, it is imperative that your loan meets one of the following conditions to avoid a costly or unintended tax consequence.
A bona fide arrangement requires that the loan repayment terms and the interest rate charged is reasonable and would reflect terms similar to a contract entered into between two parties in normal business practice. Although the Act does not require that you document the bona fide arrangement, it is crucial to properly document the specifics of the loan at the time the loan is made in order to avoid any ambiguity.
However, any subsequent repayment of the loan may be deducted from income in the year it is repaid. In certain circumstances, this rule creates tax planning opportunities. Our Chartered Accountants at SRJCA can help your corporation by passing on vital tax savings through proper tax planning initiatives as we are doing with thousands of corporate and personal clients every year. As mentioned above, ensuring that you are not being penalized by the Canada Revenue Agency CRA for improperly withdrawing a Shareholder Loan is critical within your personal and corporate income tax planning.
Nonetheless, planning for repayment within two corporate fiscal year ends is a reliable course of action to mitigate any worry of penalization from the Canada Revenue Agency CRA. Having an experienced accounting team in place to not only plan, but to monitor and execute is pivotal when a corporation has transactional deposits into, and withdrawals out of, your corporation. Another valuable tax tip is to reward key employees of a corporation with automobile and housing loans.
The Income Tax Act ITA explicitly grants corporations the ability to enter into a bona fide loan agreement with its employees in order to acquire a vehicle or a home. This is a benefit to the corporation in many ways as it creates deeper, more loyal bonds with its employees, and allows them to benefit from minimal interest rates they would not be able to receive at financial institutions or any other lender.
A sense of trust is instilled into both parties, and employees have a sense of gratitude to their employer. This will allow the owner of the corporation to easily determine what a reasonable loan amount should be. No matter your risk appetite, always remember to document and sign any agreement of a Shareholder Loan to an employee of your corporation.
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