Loans from your corporation

In general, loans from your corporation not repaid within one year from the end of the year in which they are made must be reported as income for the year the loan was made. For example, if you borrow $10,000 from your company on June 1, 2016 and your company has a September 30 year-end, if the loan remains unpaid on September 30, 2017, you must report the $10,000 as income on your personal income tax return for the 2016 taxation year.

Some exceptions apply

Shareholders who are also employees can be exempted from the above rules. However, only certain types of loans qualify, such as a loan that enables you to acquire treasury stock in your company (or a related company) or finance an automobile to be used in performing your employment duties. There is another exception to these rules if lending money is part of your company’s ordinary business. To qualify for any of the exemptions, at the time the loan is taken out, bona fide arrangements must be made to repay it within a reasonable period. A loan to enable you or your spouse or common-law partner to purchase a home may also qualify—but the rules in this area are complex, and professional advice is recommended. If your company only employs family members, it will likely be difficult to qualify for the exception.

There is another rule to exempt loans made to an employee who owns less than 10% of any class of shares of the employer corporation and who does not deal at arm’s- length with the employer corporation.

Deemed interest benefit on “excepted” loans

If the loan qualifies for one of the above exceptions, this means only that the amount borrowed does not have to be included in your income. However, you will still have to report a deemed interest benefit. This amount is equal to the amount of the loan, multiplied by a prescribed interest rate (to the extent this amount exceeds any interest actually paid on the loan no later than 30 days after the end of the calendar year). These rules also apply to most loans to employees (see topic 33).

If you use the loan to acquire eligible investments or to earn income, as opposed to using the funds for personal purposes, you can claim the amount of the deemed interest benefit as a deductible interest expense.

The rules in this area are quite complex. Before borrowing funds from your company, you should thoroughly discuss this strategy with your tax adviser to make sure you’re aware of the rules.