Shareholder loan: duration allowed and interest payable

Hello Mr. Custeau,

The company loaned me money in June and July for a total amount of $155,000. I would like this to be considered a shareholder loan and I would like to start it on August 1, 2021 in order to facilitate its management. Also, could you give me the % of interest I should apply to pay off this loan, as well as the monthly amount to pay to pay off this shareholder loan over 15 years?

Mr. B.

Hello Mr. B.,

Thanks for your email.

Regarding the shareholder loan, it is important to understand that the company cannot lend you for more than two fiscal years, otherwise there will be serious and very penalizing tax consequences. There is indeed inclusion of the loan in the income of the shareholder according to 15 (2) Income Tax Law without any possible deduction for the company, which is disadvantageous.

You can only borrow as long as the loan is repaid before the end of the next fiscal year. You also cannot play to repay and then re-borrow quickly, as this is called a series of loans and it is not allowed. So repaying the loan over 15 years the way you want will not be possible.

In all cases, you must pay minimal interest to the company. This rate, which is called the prescribed rate, was 1% during the periods you mention. It will be this rate that will be applicable throughout the duration of the loan. See the CRA website for prescribed rates. The interest must absolutely be paid to the company maximum 30 days after the end of the financial year, it is important to have the trace of the payment on time.

Also note that it is not possible to start the loan on a date other than the date of the disbursement.

Do not hesitate to consult us for more information. This does not constitute tax advice, as we do not have all the necessary information.

Olivier Custeau, B.A.A., M. Fisc., EA

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About the author

Olivier Custeau, tax expert, B.A.A., M. Fisc., EA

Holder of a bachelor's degree in business administration (B.B.A) from Université Laval and a master's degree in taxation (M. Fisc.) from the Université de Sherbrooke, Olivier has developed expertise in American and international taxation by working in a renowned firm. Over the years, he has developed a keen interest in US taxation. In fact, he was awarded Enrolled Agent status in 2019, the highest level a professional can attain to represent clients to the Internal Revenue Service (IRS). Recognized for his rigorous, dynamic and human approach, Olivier is an asset to the team.