Shareholder loans: the one-year repayment rule explained

Taking money out of your corporation as a loan can look like an alternative to salary or dividends. Under the Income Tax Act, a loan from a corporation to a shareholder is generally added to the shareholder’s income unless an exception applies. If no exception applies, the amount of the loan is added to your income for the year you received it, even if you plan to repay it later.

When a loan becomes income

If you are a shareholder, or connected with one, and your corporation lends you money because of your shareholding, the loan is generally included in your income. This covers more than formal loans. Amounts posted to a loan or drawings account, payments the company makes to third parties on your behalf, and revolving credit such as a line of credit or credit card can be treated as loans.

The loan is taxed in your year, not the corporation’s. For an individual, that is the calendar year in which you received the money.

The one-year repayment rule

The deadline is not the corporation’s year-end.

The loan stays out of your income if you repay it within one year after the end of the corporation’s tax year in which the loan was made, and the repayment is not part of a series of loans and repayments.

Example: your corporation has a December 31 year-end and you borrow in October 2026. The loan is made in the corporation’s 2026 tax year, so you have until December 31, 2027 to repay it.

Because it is not known whether the conditions are met until that window closes, your personal return for the year of the loan may need to be amended later.

Repaying with a new shareholder loan does not count

The rule exists to stop owners from putting off tax forever by using new loans to repay old ones. If you repay all or part of a loan before the end of the corporation’s tax year and then borrow an amount again, the CRA will generally treat the repayment as part of a series. The exception is lost, and so is the later deduction.

A repayment funded by a new loan is not treated as part of a series if you can show the new loan came from an independent source, was received for a genuine business purpose, and was not received for the purpose of repaying the shareholder loan. In one CRA example, an owner repaid part of a shareholder loan in late December with a bank loan, then took the same amount out of the company in January to repay the bank. The CRA says that December repayment would be considered to have come from the January withdrawal, unless the facts show otherwise.

Repayments made by applying a dividend, salary or bonus that the company owes you are not treated as part of a series, even if you borrow again later.

Repayments apply first to the loan you took out first, unless the facts clearly show otherwise.

If the loan was taxed, repaying it later gives a deduction

If a loan was added to your income and you repay it in a later year, you can generally deduct the repayment in the year you repay it. A repayment that is part of a series does not get this deduction.

The exceptions for employees, and how they apply to owners

The Act has exceptions for loans to employees, such as loans to buy a home, new shares of the company, or a vehicle used for work. The general employee exception, for employees who are not specified employees, is usually closed to owner-managers. A specified employee includes an employee who owns 10 percent or more of any class of the company’s shares, directly or indirectly, or who does not deal at arm’s length with it. The narrower exceptions for a home, new shares of the company or a work vehicle stay open to a specified employee, but only if the loan was made because of the employment and not the shareholding. The CRA looks at facts such as whether the company lends only to shareholders and whether the borrower can significantly influence the company’s business decisions. For all of these exceptions, when the loan is made, there must be repayment arrangements that fix the repayment period with some certainty, within a reasonable time.

The interest benefit on low-interest loans

Even when the loan itself is not added to your income, a loan at no interest or low interest can create a taxable benefit. The benefit is interest at the CRA’s prescribed rate, minus interest you actually pay in the year or within 30 days after it ends.

The prescribed rate for these loans is 3 percent for October to December 2026. The rate is set every quarter. For example, an interest-free loan of $50,000 outstanding for all of 2026 would give a benefit of $1,500.

Simply netting the loan against an amount the company owes you generally does not end the benefit. For this benefit, a loan counts as gone only when it is actually cancelled or extinguished, for example by repayment.

What to do before your corporation’s year-end

• Keep a written loan agreement or a corporate resolution that records the terms.
• Track your shareholder account through the year, not only at year-end.
• Note the repayment deadline for each loan: one year after the end of the corporation’s tax year in which you borrowed.
• Do not plan to repay in December and borrow back in January.
• Talk to us about paying yourself by salary or dividends instead, if the money is not coming back.

For how salary and dividends compare for one profession, see salary or dividends for an incorporated physician. For the wider choice of structure, see our comparison of incorporation and sole proprietorship in BC. For the personal return and slip deadlines that follow year-end, see our BC tax deadlines calendar.

FAQ

Taking money out of your corporation? Talk to us or call 778-779-4212 before the year-end.

Source: Income Tax Act, section 15 and the CRA’s Income Tax Folio S3-F1-C1, Shareholder Loans and Debts, Income Tax Folio S3-F1-C2, Deemed Interest Benefit on Shareholder Loans and Debts and the CRA prescribed interest rates.

General information only. Talk to us about your situation.