Shareholder loans: what happens when you take money out of your corporation

Money you take out of your corporation that is not salary, not a dividend and not a repayment of something you lent it is a loan from the corporation to you. You have until one year after the end of the corporation's tax year in which you took it to pay it back. Miss that and the whole amount is added to your personal income for the year you took it, with the return for that year reopened.

For a December 31 year end, a draw in March 2026 has to be cleared by December 31, 2027. The first time most owners hear this is when the year-end file shows a balance owing to the company.

How the balance builds

Nobody sets out to borrow from their corporation. The balance grows out of ordinary activity: the business card used for groceries, a transfer to cover the mortgage in a slow month, the corporation paying a personal bill, an advance against a bonus that is never formally declared. Each one is posted to the shareholder loan account, and by year end the account shows that you owe the company.

The CRA describes these as running loan accounts and looks at them the same way as a single loan. Repayments are applied to the oldest amount first unless the records clearly show otherwise.

The one-year rule

The income inclusion does not apply if the loan is repaid within one year after the end of the corporation's tax year in which it was made, and the repayment is not part of a series of loans and repayments.

The second half is the trap. If you repay the balance on December 28 and draw the same amount on January 6, the CRA treats the repayment as part of a series and the exception is lost. Its own example uses exactly that pattern: a $30,000 loan, repaid at the end of year two with short-term bank money, borrowed back from the corporation a week into year three. The full $30,000 goes into income for year one and the personal return for that year has to be amended.

What a real repayment looks like

Paying cash back to the corporation is the obvious route. Two others are accepted and far more common in practice:

• Declare a dividend and apply it against the loan. The dividend is taxed in your hands and reported on a T5, and the loan balance comes down by the same amount without cash moving
• Declare a salary or bonus and apply the net amount. Source deductions still have to be withheld and remitted, but the after-tax pay offsets the loan

Either way the amount becomes taxable income to you in the year it is declared, which is the point. The shareholder loan rule exists so that money cannot be taken out and left untaxed indefinitely. Which route costs less depends on your other income, and that is the question answered in how to pay yourself, salary vs dividends.

What it costs if you miss the deadline

The loan is included in your income for the year you received it, so the personal return for that year is amended and the extra tax carries interest from the original due date. When you later repay the loan, you can deduct the repayment in the year you make it, unless the repayment is itself part of a series. The tax is a timing cost rather than a permanent one, but a $60,000 inclusion in a single year can land in a higher bracket than two years of planned dividends would have.

There is a second, smaller charge that applies even when the one-year rule is met. An interest-free loan from your corporation carries a deemed interest benefit, calculated at the CRA's prescribed rate for each quarter the loan is outstanding. The rate is 3% for October to December 2026. The benefit is reduced by any interest you actually pay within 30 days after the end of the year, and it is reported on a T4A.

What to do before December 31

1. Pull the shareholder loan account now, not at year end. If you owe the corporation, find out which amounts date from last year, because those are the ones running out of time
2. Decide how to clear last year's balance: cash, dividend or bonus, declared and documented before the year end
3. For this year's draws, decide whether they become a dividend or salary in this year, or whether they will be repaid within the window
4. Stop the personal spending on the corporate card. A separate personal account and a regular transfer out of the corporation remove most of the problem
5. Have the dividend resolution or payroll entry in the file, not just the journal entry. The CRA accepts a set-off against a declared amount, and the paperwork is what proves it was declared

Our corporate tax work for owner-managed businesses includes a shareholder loan review in every year-end, and the mid-year check in October is when there is still time to do something about it. The Ontario small business tax rate post explains why leaving profit in the corporation is cheap, and the shareholder loan rule is the reason you cannot have it both ways.

The short version

• Draws that are not salary or dividends are loans from your corporation to you
• Repay within one year after the end of the corporation's tax year the draw was made in, or the full amount is added to your income for that year
• Repaying and re-borrowing is a series, and the exception is lost
• A dividend or bonus declared and applied against the loan counts as repayment
• An outstanding loan also carries a deemed interest benefit at the prescribed rate, 3% this quarter

All of our corporate and personal tax work

General information only, current at October 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.