When you are the owner or the manager of a corporation, it is incredibly important that you are aware of what shareholder loans are and how they work. When it comes down to it, these types of loans are essential to one’s business and its success. Here at Wales Accounting, our professional accounting specialists would like to explain what these loans are in detail, so you can better understand how to navigate your corporation with them.

What Is It?

Before we get into more complex, nuanced information regarding these loans, it is important that we get a general idea of what they are in case you are unaware. In simplest terms, a shareholder loan is the total amount of cash drawn from your company minus the funds you have contributed as an owner. On what is known as your balance sheet, a shareholder loan will often appear as an asset or a liability. How to determine whether or not you get it as an asset or a liability will depend on the money spent versus the money drawn. For example, your shareholder loan would be considered a liability if you contributed more cash to your company than what you drew out. Alternatively, when your owners cash draws exceed the contributions, the loan will be an asset on the balance sheet.

What Affects This Shareholder Loan?

There are a number of different transactions that affect how this shareholder loan will show up on your balance sheet. Some of the many transactions that can affect it include:

• Cash withdrawals: If the owner draws money from the bank account of the company (that is not considered dividends or salary), they are considered a shareholder loan as well as debt owed to said company. It will appear as an asset labelled as “due from the shareholder”.

• Cash contributions: When a shareholder deposits money into companies bank account, this money can pay off the money part of the shareholder tax-free at some point in time. This will mean it will show up as a liability on ones sheet, with the statement “due to shareholder”.

• Paying company expenses with a credit card: When an owner pays for company expenses via their personal credit card, this will be treated like a cash contribution as we mentioned above. The company will end up getting a tax deduction that the shareholder can then reimburse later down the road.

Avoiding Problems With The CRA

It may seem easier to simply repay the shareholder loan right before the fiscal year ends, then borrow it again during the upcoming new year, but the CRA has strict rules to make sure this type of situation does not happen. Do not get caught doing this. 

The more careful way to deal with this situation (if you owe your company money at the end of the year) is by using that one year (from your fiscal year-end date) to pay it back as a direct repayment, salary, or dividend. Be careful with this method, however, as reporting your shareholder loan as an asset on the balance sheet for two consecutive years in a row can get you in some serious trouble.

Let Us Help

Need high quality, reliable accounting in Richmond Hill? If so, our team here at Wales Accounting is ready to help with any financial situation you may be in. To find out more about our services and what we can do to help make your business become its most successful, be sure to call our experts at (905) 508-9262 today!