Can You Borrow Money From Your Business Without Paying Tax?

As a business owner, there are a variety of reasons to borrow money from your business. And when you do, the CRA will want to tax the amount in your personal income.

But, like many tax rules, there are exceptions.

Let me explain.

Shareholder Loan Rules

There are a set of tax rules that prevent a shareholder from taking money from their business without paying taxes.

These rules apply to incorporated businesses, including personal real estate corporations (PREC).

Under these rules, money borrowed from the business is included as income on the shareholder’s personal tax return. This results in a higher personal tax bill.

But within these rules are certain exceptions.

Exception #1: Repayment Within 1 Year

This exception is for a shareholder who only requires a temporary loan.

This rule allows you to exclude the loan from your personal income if it is fully repaid within one year of the end of the taxation year in which your corporation lent you the money.

Here’s a tip:

You can’t circumvent the rules by temporarily repaying the loan to meet this exception and then reborrowing the same amount in the following year.  CRA may consider this to be a series of loan and repayments and disqualify you for this exception.

Exception #2: Loans to Shareholder-Employees

If you are a shareholder who also works in the business, then you have a few more exceptions at your disposal.

These exceptions allow you to borrow money from your business to:

• Buy a home
• Buy a vehicle to perform employment duties within the business
• Buy shares of the business

To qualify, two criteria must be met:

1. You received the loan in your capacity as an employee and not as a shareholder.
2. You make arrangements to repay the loan within a reasonable time.

What If I do not Qualify for any Exceptions?

As discussed above, unpaid loans that do not qualify for an exception will be taxable to you personally.

But you may be wondering:

“Is there anything I can do to at least lessen the tax hit?”

Yes, there is!

Unlike sole proprietors, incorporated business owners have the flexibility to choose how they are paid. You have an option to treat the money borrowed from your business as a salary, dividend or a mix. The choice you make can help you reduce your taxes.

This is also the subject of the age-old debate:  salary vs dividends – which is the topic of my next blog.

As we have seen, the shareholder loan rules can be complex. Before borrowing money from your business, it is important to consult with a professional to understand the tax implications.

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The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.