Here are a few more relevant topics related to shareholder loans.
Change in relationship
Even if the shareholder who received the loan ceases to be a shareholder, the loan received can continue to result in a taxable benefit.Interest expense deduction
The amount of interest included as a taxable benefit can be included as part of an interest expense deduction when the proceeds of the loan were used to produce income from the business or property.
Forgiven loans
The forgiven amount must be included as income of the shareholder in the year that the year of forgiveness of the loan.
Loans to shareholder-employees
For shareholder loans, the benefit is always included in the taxable income of the actual recipient of the loan. There is a different rule for employee loans where in the benefit is always included in the taxable income of the employee even if the actual recipient is a third party.
It is required that an examination of the facts is made if a shareholder is also an employee. It should be determined whether the debt was incurred by virtue of employment or by virtue of shareholdings.
Tracking shareholder loans
Records of advances or loans must be kept in a general ledger account to proper tracking.
Converting a shareholder loan to employment income or dividends
In cases where funds are advanced to a shareholder/employee throughout the year, salary or dividends must be paid or recorded at the end of the year to clear the balance of the shareholder loan.
Note: A loan from the corporation to the shareholder is considered an asset of the corporation. If the loan is very substantial, it could disqualify a business from being a “small business corporation” meaning the business would not be eligible for the $750,000 lifetime capital gains exemption for the shareholder upon disposal of the shares.
Again, we would like to remind you that Kustom Design is here to help you with any of your concerns regarding Shareholder Loans. Please contact us today to book an appointment with one of our accountants!
Reference: http://taxtips.ca/smallbusiness/shareholderloans.htm