Why is it important to understand your Shareholder Loan account?
In this blog you will learn:
- What is a shareholder loan?
- What type of transactions go through the shareholder loan account?
- What is the tax impact of your shareholder loan?
- Potential shareholder loan risk
What is a Shareholder Loan?
As the owner of your corporation, the shareholder loan account tracks how much you have contributed to corporation vs. how much funds you withdrew from your corporation. If you have contributed more than you withdrew, the account is called Due to Shareholder. If you withdraw more than you contribute it is called Due from Shareholder. On your corporation’s balance sheet, Due to Shareholder shows as a liability while Due from Shareholder is an asset.
What type of common transactions go through the shareholder loan account?
Owner Cash Contributions:
If you deposit money to your company to cover business expenses, it means the shareholder has loaned the company funds and needs to be paid back sometime.
Owner paying for company expenses with a personal credit card:
Another common owner cash contribution is covering a business expense with your own personal card. If possible, it is recommended not mix personal and business accounts.
Owner cash withdrawals:
If you draw cash from your company which is not a dividend or salary, it is considered shareholder loan and debt owning to the company.
Owner paying for personal expenses with the company’s credit card:
If the owner pays a family trip on the company credit card it is not tax deductible. When this happens, the company cannot deduct the expense and the amount will become a debt owing back to the company. We recommend that you pay your personal expenses with a personal credit card. By doing so, you will have accurate bookkeeping records and spend less time explaining questionable transactions to your accountant or bookkeeper.
The contributions and withdrawals are shown in one shareholder account on your balance sheet. If the contributions are higher than the withdrawals it is shown as a Liability (Due to Shareholder). On the flip side, if the withdrawals are higher than contributions it shows an Asset (Due from shareholder).
What is tax impact of your shareholder loan?
If the running balance of the shareholder loan at the fiscal year end has liability (Due to Shareholder) on the balance sheet, the company owes the shareholder money, hence this balance can be paid to you tax free. If the shareholder loan running balance shows as asset, this amount would be declared as salary, dividend, or a loan from the company. You do not have to designate your cash draws until your fiscal year end.
I recommend having your accountant do tax planning scenarios for you on the best mix of salary vs. dividends, to minimize your total personal and corporate tax income.
As the owner of your corporation, you can also be an employee in your company, hence you can pay yourself a salary. The salary is a tax deduction for your company, and you would include it in your employment income. If you pay yourself a dividend, it would be included in your personal income, but at a lower rate than a salary, but a dividend is not taxable deductible from the corporation.
Potential Shareholder Loan Risk
If you don’t repay the loan from company within one year of the end of your corporation’s taxation year, the entire amount of the loan will simply be included in your personal income. This loan can not be part of a series of loans and repayments. This is a very serious penalty because the corporation receives no deduction for the loan.
Conclusion
Shareholder loans can be useful in tax planning and managing personal and business cashflow needs. If handled properly, it can be used to your advantage.