Imagine you own a small business (a corporation). One day, you need $20,000 for your personal use (say, to fix your car or buy a home appliance). Instead of paying yourself a salary or dividend (which triggers tax right away), the business “loans” you the money.
That loan is called a shareholder loan.
But this isn’t free money. The CRA has rules about when that loan must be taxed, how interest works, and what happens if the terms aren’t followed.
In this blog, you will learn:
- What a shareholder loan is (simple example)
- When you must charge interest, or you might owe a “benefit”
- Does paying interest mean you don’t have to repay the principal?
- What the law says (sections 15(2), 15(2.6), 80.4), but explained simply
- What must be in place for a shareholder loan to be valid
- What happens if rules are broken
- Special case: when the business owner doesn’t take salary, only dividends
- A few easy FAQs
- When you should reach out to a corporate tax accountant Scarborough or business tax accountant Scarborough, or CPA Scarborough
1. What Is a Shareholder Loan?
Let’s consider:
- Alice owns A-Corp (which is her business).
- One day, Alice needs $15,000 for a personal expense.
- Instead of paying herself a salary or dividend (which would make her pay personal income tax immediately), A-Corp “lends” her $15,000.
- Alice signs a loan agreement with the company.
That is the shareholder loan: the company gives money to its owner (shareholder) under a loan arrangement.
Why do people do this? Because it gives flexibility — you can delay when you take the money as taxable income (if rules permit).
But the CRA has rules so that people don’t abuse this (i.e. take money out forever without paying tax). Let’s see how those rules work.
2. CRA’s Main Rule: Section 15(2) (and Exception 15(2.6))
2.1 Section 15(2): The Basic Inclusion Rule
Under section 15(2) of the Income Tax Act, if you are a shareholder and the corporation gives you a loan (or you become indebted to the corporation because you are a shareholder), then that loan amount may have to be added to your personal income (i.e. taxed) — unless certain conditions are met. Government of Canada
In other words: if you borrow money from your own business, CRA may treat it as if you received income (salary or dividend) and tax you. That’s the default rule.
2.2 Exception: Section 15(2.6) — Repay Within One Year
There is an important exception under section 15(2.6): if you repay the loan in full by the end of the first year after the business’s fiscal year-end, and the repayment is not part of a pattern of repeated borrowing, then CRA may not include the loan amount in your income.
Example:
- A-Corp’s fiscal year ends December 31, 2025.
- Alice borrows $20,000 in March 2025.
- To use the exception, Alice must repay that $20,000 by December 31, 2026 (end of the next fiscal year).
- If she repays in that time and it’s a genuine loan (not a repeating trick), then CRA might not tax her on the $20,000 under section 15(2).
If she doesn’t repay by then, CRA can go back and say: “You must add $20,000 as income for 2025” — even though you thought it was a loan.
Thus, repayment on time is critical.
3. Is Charging Interest Mandatory? What Happens if You Don’t Charge It (or charge too little)?
3.1 Interest Isn’t Always “mandatory” — but there’s a cost if it’s too low
You are not always strictly forced to charge interest. But if the interest rate you charge is below the government’s “prescribed rate”, the difference is considered a taxable benefit (i.e. extra income) to you under section 80.4. Government of Canada
The government publishes a prescribed interest rate each quarter; for example, in Q4 2025, that rate is 3% for interest-free or low-interest loans. Government of Canada
So, if you gave yourself a loan for which you charge only 1% interest (when the prescribed rate is 3%), you must include the “benefit” of 2% in your personal income (i.e. 2% of the outstanding balance is taxed as extra income).
3.2 Paying interest doesn’t eliminate the need to repay principal
Charging interest (correctly) helps you avoid the “benefit” inclusion, but does not remove the requirement to repay the principal (the loan amount) under section 15(2). Even if you pay interest every year, if you never repay the principal by the deadline (or by the rules), CRA can still treat the debt as taxable.
So interest and repayment are two different challenges:
- Interest: you want to charge at least the prescribed rate (or pay yourself that benefit)
- Repayment: you must repay by the allowed time or be subject to inclusion
4. What Must Be in Place for a Shareholder Loan to Be “Valid” (from a Tax Perspective)
A loan from your corporation to you (as shareholder) must look real. CRA will examine whether it’s just a disguise. For it to stand up in audit, these conditions are very important:
- Written loan agreement / contract
- Principal amount, interest rate, repayment schedule, due dates
- Signed by you and the corporation
- Principal amount, interest rate, repayment schedule, due dates
- Recorded in corporate books
- The corporation’s financial statements and accounting records must show the loan properly
- The corporation’s financial statements and accounting records must show the loan properly
- Bona fide intention to repay
- At the time the loan is made, there must be a plan / arrangement (reasonable time) to pay it back
- If there is no genuine plan, CRA may treat the loan as income from the start
- At the time the loan is made, there must be a plan / arrangement (reasonable time) to pay it back
- Avoid repeated “draw and repay” patterns
- If you repay just before year-end (to avoid inclusion) and then borrow again soon after, CRA may see a pattern and disallow the exception
- If you repay just before year-end (to avoid inclusion) and then borrow again soon after, CRA may see a pattern and disallow the exception
- Use of funds consistent with reasonableness
- If you use the money for purely personal luxuries, that’s may be riskier
- If you use the money for purely personal luxuries, that’s may be riskier
If you don’t meet these, CRA may reclassify the loan as salary or dividend and tax you accordingly.
5. What Happens If the Rules Are Broken (Tax Consequences)
Let’s run through some key consequences if you don’t follow the rules:
| Situation | Consequence / CRA Action |
| You don’t repay the loan by the deadline (section 15(2.6) fails) | CRA can include the full loan amount in your personal income under section 15(2) — you pay tax on it. |
| You set interest too low (below prescribed rate) | CRA treats the difference as a benefit (extra income) under section 80.4. |
| You forgive or cancel the loan | The forgiven part is treated as a deemed dividend or benefit under rules, and taxed accordingly |
| Repeated pattern of borrowing/repayments | CRA may disregard the “one-year” exception and treat the loan as income despite repayment |
| Late repayment after inclusive year | You may get a deduction under paragraph 20(1)(j) in the year you repay (to offset part of the previous inclusion) |
6. Special Scenario: Shareholders Who Don’t Take Salary, Only Dividends
What if you run your company and you never pay yourself a salary—only dividends? Does that change how shareholder loans are treated? Not really; the rules still apply.
Here’s how:
- You take no salary, just dividends. You still own shares, so your loan from the corporation falls under the shareholder-loan rules. CRA doesn’t care whether you took salary or not — what matters is shareholdings and whether a loan is made because you are a shareholder.
- If you don’t repay the loan on time, CRA can include the full amount as income via s. 15(2), even if you never were an employee.
- If you later convert the loan into a dividend, you pay taxes on that dividend.
Example:
- Bob owns 100% of CorpX.
- Bob never takes a salary. He only gets dividends when money is available.
- In 2025, CorpX lends Bob $25,000.
- Bob doesn’t repay by the deadline. CRA can say: “That $25,000 is income in 2025” under section 15(2).
- If Bob then issues a dividend to repay, that dividend is taxed as dividend.
So, not taking a salary doesn’t exempt you.
7. Simplified Example Putting It All Together
Let’s use numbers to see how this works in practice.
- Corporation: MyCorp
- Fiscal year-end: December 31, 2025
- You (shareholder) borrow: $10,000 on March 1, 2025
- CRA prescribed rate for 2025 (for low-interest loan benefit) is around 4% in Q1
- You choose to charge yourself 2% interest (which is below 4%)
- You plan to repay the full $10,000 by December 31, 2026 (within one year after the year-end), and you are not doing repeated borrow-repay tricks
Outcomes:
- Because your interest rate (2%) is less than the prescribed rate (4%), CRA will treat the difference (i.e. 2% of $10,000 = $200) as a taxable benefit. You must include $200 in your personal income under section 80.4.
- If you repay the $10,000 by December 31, 2026, and you satisfy other conditions (not part of a series of borrowings), then section 15(2) may not require CRA to include $10,000 as income. The “loan stays a loan.”
- If you fail to repay by the deadline, CRA will include the full $10,000 as income for 2025 under section 15(2).
This shows that both interest rules and repayment timing rules matter.
8. When to Talk to a Corporate Tax Accountant / CPA
Because the rules around shareholder loans are tricky, you should involve a corporate tax accountant Toronto or a business tax accountant Toronto, or a CPA Toronto in these situations:
- When drafting or approving the loan agreement
- Before year-end, to ensure repayment or proper conversion
- To compute the deemed interest benefit correctly
- To plan whether to convert the loan into salary or dividend
- In a tax audit where CRA questions a shareholder loan
A professional tax accountant ensures your loan is legal, proper, and optimized — reducing the risk of surprise taxes.
FAQs – Shareholder Loan
1. Can I make an interest-free shareholder loan and avoid tax altogether?
Not always. If the loan is interest-free, CRA may impose a “taxable benefit” equal to the prescribed rate interest (section 80.4). So you may be taxed anyway on the benefit.
2. If I repay late (after the one-year window), can I correct it?
You may repay later, but CRA may have already treated it as income. You might claim a deduction under paragraph 20(1)(j) in the year of repayment to offset that earlier inclusion (not perfect but helps).
3. What if I lend money to my corporation? (i.e. shareholder → company)?
Then the rules are different — that’s the corporation’s debt to you. That’s not covered by s. 15(2) (which is from corporation to shareholder). But interest, if any, you receive would be taxable income.
4. Does it matter which province I live in for a shareholder loan?
Yes — your province’s personal tax rates, and rules on dividends may differ. But the core federal rules (section 15, 80.4) apply across Canada.
5. Can I use the loan funds to invest (e.g. rental property)?
Possibly. If you use the borrowed money to earn income (say, rent or investment), the interest you pay (if properly charged) might be deductible or offer tax benefit — subject to rules and scrutiny.
Consult a Corporate Tax Accountant Scarborough / Toronto for Shareholder Loan You Plan to Take
A shareholder loan can be a useful tool to borrow from your own company with some tax flexibility. But only if you play by the rules: charge proper interest, document the loan, and repay by the deadline. Otherwise, you risk big tax bills under section 15(2) or 80.4.
If you have a shareholder loan or are planning to make one, it’s worth having a corporate tax accountant or CPA in Canada review it.
Let’s schedule a Free Consultation with MAQ CPA firm’s corporate tax accountant Scarborough to help you build a loan agreement, compute deemed interest, or check whether you need to include income this year.
Disclaimer
The information provided in this blog is for general informational purposes only and does not constitute professional accounting, tax, financial, or legal advice. While we strive to ensure the accuracy and timeliness of the content, the information may not apply to your specific situation or reflect the most current legislative changes. Readers are strongly advised to consult a qualified legal or tax professional before making any decisions based on the content of this blog. MAQ CPA and its representatives disclaim any liability for any loss or damage incurred as a result of reliance on any information provided herein.