When you own and run a corporation in Canada, the line between your personal finances and the company's bank account can blur quickly. You need cash — the company has cash — so you take it. But that informal "draw" or inter-company transfer has a name in the Income Tax Act: a shareholder loan. And the Canada Revenue Agency has very specific rules about what happens when one exists.
Ignoring those rules can result in the full loan amount being added to your personal taxable income — on top of whatever salary or dividends you already declared. Understanding the shareholder loan CRA rules before your accountant flags a problem at year-end is always the better move.
A shareholder loan arises in one of two common ways. First, a corporation may lend money directly to one of its shareholders — for example, the owner-manager takes $50,000 out of the company account for a personal purpose. Second, and more often, a shareholder simply takes money from the corporation without formally declaring a salary or dividend. The corporation records the transaction as a loan owing back to it, sitting on the balance sheet under "due from shareholder."
Neither scenario is automatically a problem. Corporations can legitimately lend money to shareholders. The issue is what happens if the loan is not handled correctly — specifically, if it stays outstanding too long or carries no interest.
The core rule is found in Section 15(2) of the Income Tax Act. It states that when a corporation lends money to a shareholder (or to a person connected to a shareholder), the entire loan amount is included in the shareholder's personal income in the year the loan was made — unless a specific exception applies.
This rule exists to prevent shareholders from extracting corporate funds tax-free as informal loans, bypassing the tax consequences that would apply if they took the money as salary or dividends. The CRA treats an unresolved shareholder loan as a proxy for undeclared income until proven otherwise.
The income inclusion happens in the corporation's tax year in which the loan was made — not necessarily the calendar year. So if your corporation has a June 30 fiscal year-end and you take a loan in August 2024, that loan is treated as made in your corporation's 2024-25 fiscal year, which ends June 30, 2025.
Section 15(2) does not apply — and the loan is not included in your income — if one of the following exceptions is met:
This is the most commonly used exception and the one most often misunderstood. The loan must be fully repaid within one year after the end of the corporation's tax year in which the loan was made. Critically, the repayment must not be part of a series of loans and repayments — meaning you cannot simply repay the loan days before the deadline and immediately take the same amount back out.
Practical example: Your corporation has a December 31 fiscal year-end. You take a shareholder loan in March 2024. The loan was made in the corporation's 2024 tax year (January 1 – December 31, 2024). The one-year window runs from December 31, 2024 — meaning the loan must be repaid in full by December 31, 2025. If it is not, the full amount becomes taxable personal income on your 2024 tax return.
Note the asymmetry: even though you took the loan in early 2024, CRA does not require repayment by the end of 2024. The clock starts at the corporation's year-end, giving you up to nearly two years if you borrow early in a fiscal year.
If the shareholder is also an employee (including a shareholder-employee), and the loan is used to purchase a home for the shareholder or their family to live in, the amount is not included in income under s.15(2). The home must be for personal use — not an investment or rental property.
A loan made to allow a shareholder-employee to purchase shares of the corporation or a related corporation is also exempt from income inclusion, provided the loan is made in the ordinary course of the corporation's business (which typically applies when the company has a pattern of making such loans to employees).
Prior to 2017, loans for post-secondary education were a recognized exception. Legislative changes have made this category less relevant for most planning, but it technically remains in the Act. In practice, most advisors focus on the first three exceptions.
Even when a shareholder loan qualifies under one of the exceptions above — or is otherwise being repaid within the one-year window — there is a second issue: interest.
Under Section 80.4 of the Income Tax Act, if a corporation lends money to a shareholder and charges less than the CRA's prescribed rate of interest, the difference is a taxable benefit to the shareholder. This benefit is reported on a T4 (if the shareholder is an employee) or a T5 (if not), and it is included in the shareholder's personal income for the year.
The CRA prescribed interest rate is set quarterly. In recent years it has ranged between 4% and 5% (it reached 6% in some quarters in 2023). As of 2025, the prescribed rate has settled back to approximately 4% to 5%, depending on the quarter. If your shareholder loan carries zero interest or a rate below the prescribed rate, you will have a taxable benefit equal to the shortfall.
For example: a $100,000 shareholder loan with no interest charge and a 5% prescribed rate creates a $5,000 annual taxable benefit that must be reported as income.
When a shareholder loan is approaching the one-year deadline and repayment is not feasible, you have two clean alternatives to avoid income inclusion under s.15(2):
Declaring a salary is deductible to the corporation and taxable as employment income to the shareholder. The salary must be reasonable and arms-length. This option is often preferred when the shareholder wants to contribute to CPP or build RRSP room. The salary amount declared can be used to offset the outstanding loan balance on the books.
A dividend is not deductible to the corporation but is taxed in the shareholder's hands at the preferential dividend tax rate (eligible dividends receive a more favourable treatment). A dividend declaration does not require the cash to physically move — it can be applied directly against the shareholder loan balance. This is a common and tax-efficient way to clear the books without moving money.
The right choice between salary, dividend, and genuine repayment depends on your marginal rate, the corporation's tax position, CPP obligations, and your broader financial plan. A qualified accountant — like the team at Swift Accounting in Calgary — can model both options in the context of your full tax picture before the year-end deadline.
Regardless of how you plan to resolve a shareholder loan, documentation is essential to survive a CRA audit:
Shareholder loan issues are one of the most common areas where owner-managers face unexpected personal tax bills. The rules are not difficult once you understand them, but the consequences of missing a deadline or overlooking the prescribed rate benefit can be significant. The team at Swift Accounting Calgary regularly helps incorporated business owners structure their compensation and shareholder transactions to stay onside with CRA.
The full outstanding balance of the loan is added to your personal taxable income for the year in which the loan was made, under Section 15(2) of the Income Tax Act. This is in addition to any salary or dividends you already declared. The inclusion cannot be avoided retroactively once the deadline passes — however, if you repay the loan in a later year, you can claim a deduction under Section 20(1)(j) in the year of repayment to partially recover the situation.
No. The one-year exception explicitly requires that the repayment was not part of a series of loans and repayments. If you repay just before the deadline and immediately re-borrow the same amount, CRA will treat the repayment as a sham and the income inclusion will still apply. The repayment must represent a genuine clearing of the debt.
Technically no — but if the corporation charges less than the CRA prescribed rate (currently in the 4%–5% range for 2025), the difference between the prescribed rate and the rate actually charged becomes a taxable benefit in your hands under Section 80.4. To avoid any benefit, the corporation must charge at least the prescribed rate in effect when the loan was made, and the interest must be paid no later than January 30 of the following year.
The term "shareholder loan" is used broadly in practice, but the rules under Section 15(2) apply specifically to loans made to shareholders or persons connected to shareholders (including family members). Intercompany loans between two corporations generally fall under different rules. Director's loans are treated as shareholder loans when the director is also a shareholder. If there is any ambiguity about which rules apply to your specific arrangement, it is worth getting a professional opinion before the transaction is finalized.
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