Introduction
If you are a small business owner, you’re probably looking for ways to save money. One option is to borrow money from your corporation and use it for personal expenses, investing in the business, or even buying company shares. While it may seem like this is a good idea at first glance, many complexities must be addressed before taking such action. For example: Will this loan create income tax implications? If so, how will they affect my personal and corporate taxes? Can I make an interest-free loan?
What Is A Shareholder Loan?
A shareholder loan is a non-interest-bearing, non-secured loan that can be made to you by an investment corporation. It’s important to note that the shareholder loan isn’t any guarantee or promise from the investor; it’s simply a document stating that they have agreed to lend up to 5 million dollars for five years at zero interest.
To qualify for a shareholder loan:
- The business must be incorporated and have shares listed on an exchange or traded through an over-the-counter market (OTC). This means you’ll need at least $10 million in assets and 500 shareholders before applying for the loan. Those who still need to meet these requirements can still apply but will need two years of audited financial statements proving profitability before being approved by regulators.
How Can I Borrow From My Corporation?
As a shareholder of your corporation, you have the right to:
- Borrow money from it.
- Lend money to it.
- Buy shares from and sell them to the company.
You may also borrow from your corporation at interest rates lower than those charged by banks or other lending institutions. However, depending on what kind of business entity you have chosen and where you live, there may be limitations on how much money can be borrowed.
Should You Borrow Funds From Your Business To Purchase Ownership Shares?
When considering whether to borrow money from your corporation, it’s important to understand the risks involved. No matter how good a deal the shareholder loan seems on paper, there is always some risk that must be considered. If you need to understand these risks and their implications, your decisions will likely be based on emotion rather than sound business decisions.
A shareholder loan is a form of debt. It can be beneficial if used properly but can cause serious problems incorrectly.
Making An Interest-Free Loan To Your Canadian-Controlled Private Corporation
It can be done. You can make an interest-free loan to your Canadian-controlled private corporation (CCPC).
There are several ways to do this. For example, you can borrow money from your company and pay back the loan in shares. Or you can borrow money from your company and pay back the loan in cash. Or you can borrow money from your company and pay back the loan in a combination of cash and shares that both parties agree upon at the time of making such a shareholder loan agreement.
The tax advantages make an interest-free loan very beneficial.
- The tax advantages of an interest-free loan are a key benefit. Interest-free loans can be helpful in several ways, including allowing you to deduct the interest on your tax return and avoid paying taxes on it.
- You should structure your shareholder loan appropriately so that the lender can claim a deduction for their investment, and you can deduct the interest paid concerning your loan to them.
- To claim an eligible shareholder loan as a business expense, you must be able to show a reasonable expectation of profit or income from the borrowed money at some point in time. This means that if you borrow money from shareholders but don’t expect any profits or income from those funds (or ever), this arrangement may not work for you because it won’t help claim expenses on your tax returns.
Conclusion
You may want to borrow money or take a loan from your Canadian corporation for many reasons. It can be a useful tax planning tool and might be the only way to get the funds you need if other sources aren’t available. The important thing is to consider all the options before borrowing from your business and make sure that whatever method you choose will benefit you at this time.
