Shareholder Loans in Canada | The One Year Rule and How to Avoid a Surprise Tax Bill

You needed money. The corporation had money. You moved it, your bookkeeper posted it to “Due from shareholder,” and everyone went back to work.

That entry is a loan, and there is a clock on it.

Repay Before the End of the Next Fiscal Year, or the Whole Balance Becomes Your Income

Under subsection 15(2) of the Income Tax Act, money you borrow from your corporation is included in your personal income unless it is repaid within one year after the end of the corporation’s taxation year in which the loan was made.

Read that carefully, because the deadline is measured from the corporation’s year end, not from the day you took the money.

• Corporation has a December 31 year end
• You borrow $60,000 in February 2026
• The loan was made in the year ending December 31, 2026
• You have until December 31, 2027 to repay it

Miss that date and the full $60,000 goes onto your personal return as income, taxed at your full marginal rate. On a $60,000 loan at a 40% marginal rate, that is $24,000 in tax, on money you may have spent eighteen months earlier.

The good news is that this is one of the most avoidable tax problems in Canadian small business, and there are four clean ways out. You just have to act before the deadline rather than after.

We offer a comprehensive range of Tax Accountant services in Coquitlam and across other regions of British Columbia.  

The Two Directions a Shareholder Loan Runs

The same account name covers two completely different situations, and it is worth being clear about which one you are in.

You Owe the Company, the Risky One

This is where the trouble lives. Every time you take cash out without declaring salary or dividends, every time a personal expense goes through on the company card, the balance grows.

Most owners do not create this deliberately. It accumulates. A vacation charged to the business account in March, a personal insurance payment in June, a transfer to cover a mortgage payment in October, and by year end there is a $47,000 balance nobody planned.

The Company Owes You, the Useful One

If you funded the business personally, paid expenses out of your own pocket, or lent it money to start, the corporation owes you. That balance can be repaid to you tax free, whenever the company has cash, because it is a return of your own money rather than income.

This is genuinely one of the most efficient ways for an owner to take money out of a corporation, and it is regularly overlooked. If you have a credit balance in your shareholder account, use it before declaring dividends. Many owners never bother tracking the expenses they paid personally, and effectively donate that tax free capacity to the company.

Keep records. CRA will want support for the balance, and “I am fairly sure I put in about $80,000 over the years” is not support.

The One Year Rule, Precisely

Measured From the Corporation’s Year End

Say it once more, because this is the detail everyone gets wrong: the deadline is one year after the end of the corporation’s taxation year in which the loan was made, not one year after the loan.

The practical consequence is that the length of your grace period depends on when in the fiscal year you borrowed.

If you are going to borrow, borrowing early in the fiscal year gives you nearly twice as long.

Worked Example With Real Dates

Corporation with a September 30 year end. You withdraw $85,000 on November 10, 2025.

• The loan falls in the fiscal year ending September 30, 2026
• Deadline to repay: September 30, 2027
• Repay in full by that date, no income inclusion, though the interest benefit below still applies for the period outstanding
• Repay $50,000 and leave $35,000, and only the $35,000 is included in income
• Repay nothing, and the full $85,000 is income in the 2025 taxation year, the year the loan was received, which means an amended return and interest running from the original filing date

That last point catches people. The income inclusion goes back to the year you received the money, not the year you missed the deadline. So the assessment arrives with two years of arrears interest already attached.

Why Repaying and Re Borrowing Does Not Work

The obvious workaround is to repay on December 30 and take the money back on January 3. It does not work.

Subsection 15(2.6) excludes repayments that are part of a series of loans and repayments. CRA looks at the substance: was the money actually repaid, or did it come back out immediately by prior arrangement? A bank loan taken on December 29 and repaid on January 4 from a fresh corporate advance is the textbook example of what the rule targets.

What does count as genuine repayment:

• Actual cash from your own resources, staying repaid
• A declared dividend applied against the balance
• A declared bonus or salary applied against the balance
• Offsetting a legitimate amount the corporation owes you

What Happens If You Miss the Deadline

Three things, in sequence.

1. The full unpaid balance is added to your personal income in the year the loan was made. Full marginal rate, no dividend tax credit, no capital gains treatment.
2. The corporation gets no deduction. This is the part that makes it genuinely punitive. Salary would have been deductible. A 15(2) inclusion is not. The same dollars are taxed in your hands with no offset in the company.
3. Interest and penalties run from the original filing deadline of the year in question, which by the time this is discovered is often two years back.

There is one relieving provision. When you eventually repay a loan that was previously included in income, you get a deduction under paragraph 20(1)(j) in the year of repayment. So it is not permanent double taxation. But you have paid the tax years earlier, you have lost the time value of that money, and you have had a very unpleasant conversation with CRA in between.

The Prescribed Interest Benefit While the Loan Is Outstanding

Separate from the one year rule, and easy to forget: an interest free or low interest loan from your corporation creates a taxable benefit under section 80.4.

The benefit is the amount of interest calculated at CRA’s prescribed rate, less any interest you actually pay. The prescribed rate is set quarterly and has been in the 3% to 5% range recently. Interest you do pay must be paid within 30 days of the calendar year end to count.

On a $100,000 loan at a 3% prescribed rate, that is a $3,000 taxable benefit on your T4 each year, roughly $1,200 of tax at a 40% marginal rate.

This benefit applies even if you repay within the one year window. It applies to the period the loan was outstanding, full stop.

Two useful details:

• If the loan proceeds were used to earn income, for example to buy investments, the imputed interest may be deductible as an interest expense, offsetting the benefit.
• For qualifying home purchase loans, the prescribed rate is effectively locked at the rate in effect when the loan was made, for up to five years. In a rising rate environment that is a meaningful advantage.

The Exceptions That Let a Loan Stay Outstanding

Subsection 15(2.4) provides exceptions where a loan can remain outstanding beyond the deadline without the income inclusion. All of them have conditions, and all of them are conditions CRA actually checks.

Home Purchase Loans

A loan to an employee shareholder to acquire a home for their own occupation. The classic use case. Note the requirement is acquisition, not renovation, not refinancing, not a vacation property.

Vehicle Loans

A loan to an employee shareholder to buy a motor vehicle used in the performance of their employment duties. Personal use has to be incidental.

Share Purchase Loans

A loan to acquire previously unissued fully paid shares from the treasury of the corporation or a related corporation, to be held for the borrower’s own benefit.

The Conditions That Apply to All of Them

Every exception requires two things, and both are commonly missed.

1. The loan must be received because of employment, not because of shareholdings. In practice this means you must be a genuine employee of the corporation, drawing a salary, doing real work. A pure holding company shareholder with no employment relationship generally cannot use these exceptions.
2. There must be a bona fide arrangement for repayment within a reasonable time, made at the time the loan was granted. That means a written loan agreement with a repayment schedule, an interest rate, and evidence that payments are actually being made.

That second condition is where most claimed exceptions fall apart on review. A verbal understanding and an entry in the general ledger is not a bona fide arrangement. Get the agreement written and signed at the time the loan is made, and follow the schedule.

Cleaning Up a Loan Before Year End: Four Legitimate Routes

If you have a balance and the deadline is approaching, here are the four ways out, in rough order of preference.

Repay in Cash

The cleanest option. You transfer personal funds back to the corporation and the balance goes to zero. No tax consequences, no deduction lost, no argument.

The constraint is obvious. You need the cash, and the money was borrowed for a reason.

Declare a Dividend

The corporation declares a dividend and applies it against the loan balance. No cash needs to move.

Advantages: no CPP, no payroll remittances, no payroll account required. Dividends are taxed at a lower personal rate than salary because of the dividend tax credit.

Disadvantages: not deductible to the corporation. Does not create RRSP room. Does not build CPP entitlement. And if you have family shareholders, TOSI may apply, potentially taxing the dividend at the top marginal rate.

Declare a Bonus or Salary

The corporation declares a bonus and applies it against the loan.

Advantages: fully deductible to the corporation, which is a large advantage. Creates RRSP room at 18% of earned income. Builds CPP. Straightforward and rarely questioned.

Disadvantages: payroll source deductions must be remitted in cash, which is the catch. On a $60,000 bonus, the income tax, CPP and EI withholdings have to be paid to CRA in actual dollars, even though the bonus itself was applied against a loan. The corporation also pays employer CPP. Plan the cash for the remittance.

A useful timing feature: a bonus accrued at year end can be paid within 180 days of the corporate year end and still be deducted in the earlier year. That gives you flexibility to deduct now and fund the remittance later.

Offset Against Amounts the Company Owes You

If the corporation owes you for expenses you paid personally, unpaid management fees, accrued interest on a loan you made to the company, or a credit balance from prior years, those amounts can be offset against what you owe.

Free money in the sense that it is your money already. It is also the most commonly overlooked option, because most owners have never properly tallied what they personally spent on the business.

Comparison

For most owner managers with a meaningful balance, the answer is a blend: offset whatever the company already owes you, then split the remainder between salary and dividends based on your other income for the year, your RRSP strategy and whether CPP is worth building at your stage.

Documentation CRA Expects

If your shareholder loan account is reviewed, here is what should exist.

• A written loan agreement for any loan intended to rely on an exception, dated when the loan was made, with an interest rate and a repayment schedule
• Directors’ resolutions for every dividend and bonus declared
• A detailed ledger of the shareholder account showing every advance and repayment with dates and descriptions
• Support for personal expenses paid by the corporation that were properly charged to the account
• Support for business expenses you paid personally that created a credit balance
• Proof of actual repayments, meaning bank records, not just journal entries
• T4 or T5 slips for any amounts applied as salary or dividends

The single most valuable habit is monthly. Have your bookkeeper flag personal transactions as they occur and post them to the shareholder account with a clear description, rather than sorting through twelve months of transactions in a panic at year end.

Frequently Asked Questions

Is a shareholder loan reported on a T slip?

The loan itself is not. But an income inclusion under 15(2) is reported, typically on a T4A, and the imputed interest benefit under section 80.4 is reported as a taxable benefit on your T4. If you clear the balance with a dividend you get a T5, and with a bonus a T4.

What if my spouse is the shareholder and I took the money?

Subsection 15(2) reaches loans to a shareholder or a person connected with a shareholder. Spouses, children and other non arm’s length parties are all captured. Routing the money through a family member does not solve the problem.

Can I have a shareholder loan with a holding company?

Yes, and the same rules apply. In fact holding company loans are riskier, because the employment based exceptions in 15(2.4) usually are not available. There is generally no employment relationship with a pure holdco.

How long can a shareholder loan stay outstanding?

Up to two years in practice, depending on where in the fiscal year you borrowed, and indefinitely only if it fits one of the 15(2.4) exceptions with a genuine written repayment arrangement.

Is a shareholder loan taxable income?

Not if it is repaid within the deadline. If it is not repaid and no exception applies, the full amount becomes taxable income in the year the loan was made.

Shareholder loan versus dividend, which is better?

A loan is not a way to take money out, it is a way to defer the decision. Eventually you have to convert it to salary, dividends or cash repayment. Using a loan as a short term bridge is fine. Using it as a compensation strategy is not.

Can I charge myself interest to avoid the benefit?

Yes. Pay the corporation interest at or above the prescribed rate, within 30 days of the calendar year end, and there is no benefit. The corporation reports the interest as income, so there is a cost in the company, and the calculation needs to be documented.

What if the corporation lent money to my other company?

Loans between corporations are generally outside subsection 15(2) where the parties are corporations, but there are anti avoidance rules and the analysis depends on the relationship between the entities. Get specific advice rather than assuming it is clean.

Does it matter if the loan was for business purposes?

If you used the funds to earn income, the imputed interest may be deductible, which neutralises the 80.4 benefit. It does not change the 15(2) repayment deadline.

What if I cannot repay and cannot afford the tax on a bonus?

Talk to your accountant early. Options include a partial repayment to reduce the inclusion, a staged plan across two fiscal years, or a bonus accrued at year end and paid within 180 days to give you time to fund the remittances. These all require lead time.

Clean Up Your Shareholder Account Before Year End

Shareholder loans are not a trap so much as a deadline. Manage it and the account is a useful, flexible tool. Ignore it and it turns into a five figure tax bill on money you spent two years ago, with no corporate deduction to soften it.

Three habits prevent almost every problem: code personal transactions monthly, know your balance at all times, and review it with your accountant two to three months before your fiscal year end rather than after.

Maxpro Financials provides corporate tax, bookkeeping, payroll and owner compensation planning to businesses across BC, Alberta, Saskatchewan and Ontario.

This article is general information current as of 2026 and is not tax advice for your specific situation. Prescribed rates change quarterly and the rules have important technical details, so speak with a CPA about your circumstances.