The sum you owe to your company as a shareholder is known as a shareholder loan.
Typically, a shareholder receives payment from the firm in the form of dividends or a salary. Dividends are paid from corporate profits after taxes and are subject to personal taxation. To be eligible for a salary payout, source deductions must be paid on time. By the 15th of the following month, on average, the CRA must receive both CPP and income tax payments.
Apart from the payment for their services and the dividends, shareholders are permitted to use the company money for personal purposes at any given time of the year. The amount they spend is considered a loan given to them by the business. Because this loan is not subjected to tax, the shareholder must repay the amount within a given period of time, which is usually one year or include the amount in their personal income.
The corporation must add interest to any shareholder loan amount at a defined rate in order for the loan principal to be exempt from the CRA’s definition of income. Every loan must be adequately documented in a written agreement or corporate resolution that specifies the terms of repayment to the corporation.
Anthony, for instance, has a firm whose fiscal year ends on December 31, 2020. If Anthony repays the shareholder loan before December 31, 2023, he is not required to disclose it as personal income and may withdraw a shareholder loan from the firm at any time in 2020. So if Anthony took a $70,000 loan from his company in January 2020, he wouldn’t have to declare it as personal income in that year.
Anthony will yet need to pay back $70,500 (the Principal plus $70,000 multiplied by 1%) by December 2023 in order to satisfy the remaining obligations, which include returning the shareholder loan plus prescribed rate interest (currently set at 1%). As a result, Anthony was able to borrow money at a cheap interest rate for over two years from his own company.
A shareholder loan Canada, and usually may be given to your own business, a business connected to yours, or a partnership in which your business participates. Any stakeholder of the firm, as well as anyone associated with that shareholder, may get a shareholder loan from the corporation.
The Canadian Federal Government, specifically the Canada Revenue Agency (CRA), sets the interest rates for the Shareholder Loans on a quarterly basis.
From April 1, 2009, through March 31, 2018, the interest rate on the shareholder loan was 1%.
The Shareholder Loan interest rate was reduced to 1% as of July 1, 2020, as efforts are made around the globe to mitigate the damaging economic impacts of the ongoing Covid-19 Pandemic.
Any modifications to the interest rates on Shareholder Loans between 2009 and 2020 are shown above.
Similar to preferred stock, shareholder loans are a mix of debt and equity. Because they have a fixed rate of return, sponsors utilize them in transactions as a means of carrying the majority of their investment.