Shareholder Loans: The CRA Rule Every Corp Owner Should Know

If you own a Canadian corporation, you can borrow money from it. But CRA has strict rules about shareholder loans, and breaking them can result in the full loan amount being added to your personal income. An overdue loan can create a tax bill for an earlier personal tax year.

The key legislation is Section 15(2) of the Income Tax Act. Here's how it works and how to stay on the right side of it.

What Is a Shareholder Loan?

A personal withdrawal creates a shareholder loan when there is a genuine obligation to repay the corporation. It may instead repay an amount the company already owes you, or be a shareholder benefit if no debt exists. Examples requiring that classification include:

• Transferring corporate funds to pay a personal credit card
• Using the corporate bank account to buy personal groceries
• Taking a lump sum "draw" with the intention of sorting it out later

The corporation's books will show an amount in the shareholder loan account (a receivable from you, the shareholder). This is normal and expected in small corporations. The problem arises when that balance stays outstanding too long.

The rule reaches past the owner. Section 15(2) also covers a person connected with a shareholder, which means anyone who does not deal at arm's length with you: your spouse or common-law partner, your children, your parents, your brothers and sisters. A loan from a corporation related to yours counts the same way as a loan from your own. The main borrower the rule leaves out is a corporation resident in Canada (or a partnership made up only of such corporations), so money lent to your Canadian holding company is outside section 15(2). The wording is in section 15 of the Income Tax Act.

The One-Year-After-Year-End Exception

Section 15(2) generally includes a shareholder loan in income in the year it is made unless an exception applies. Under section 15(2.6), repayment within one year after the end of the lender's tax year in which the loan arose can prevent that inclusion, provided the repayment is not part of a series of loans or other transactions and repayments. The end of the next fiscal year is an accurate shortcut only when that next year is a full 12 months.

Here's the timeline:

The exception gives you until one year after the relevant lender year-end, even if the lender changes its year-end or has a short tax year. The repayment must be genuine. You can't repay the loan on December 30 and re-borrow on January 2. CRA looks at the substance of the transaction, and a series of back-to-back loans and repayments will be treated as a single outstanding loan.

When the Repayment Deadline Actually Falls

The exact test is in section 15(2.6): the loan escapes inclusion if it is repaid within one year after the end of the corporation's tax year in which the loan was made. The clock starts at the corporation's year-end, not on the day you took the money. A loan taken early in the corporation's year gets almost two years; one taken in the last weeks of the year gets just over one.

The same subsection adds a condition: it must be established that the repayment was not part of a series of loans or other transactions and repayments. That is the statutory version of the back-to-back rule above, and it is on you to show it, with dates in the books that prove when each amount went out and came back.

How It Gets Included in Income

When Section 15(2) applies, the loan amount is added to your personal income in the year the loan originated, not the year you failed to repay it. This means CRA will reassess a prior tax year, triggering interest charges on the tax that should have been paid.

If you later repay the loan, you can claim a deduction under Section 20(1)(j) in the year of repayment. But you'll have already paid interest on the reassessment, and the cash flow disruption can be significant.

Exceptions to Section 15(2)

Not every shareholder loan triggers inclusion. There are specific exceptions:

1. Loans Repaid Within the Same Fiscal Year

A genuine repayment within the same fiscal year can meet section 15(2.6), but the prohibition on a series of loans and repayments still applies. Timing alone is insufficient.

2. Loans Made in the Ordinary Course of Business

Section 15(2.3) can cover debts arising in the ordinary course of the creditor's business and loans made in its ordinary money-lending business. For the lending-business exception, at least 90% of the aggregate outstanding loans must be owed by arm's-length borrowers throughout the relevant period. Bona fide arrangements for repayment within a reasonable time must exist when the debt arises or loan is made. A company label or interest charge alone does not satisfy the test.

3. Specific Purpose Loans (Section 15(2.4))

Loans to a shareholder-employee for one of these three specific purposes are exempt, provided bona fide repayment arrangements are made at the time:

The employment conditions and bona fide repayment arrangements must be met; the dwelling category can also apply to an employee's spouse or common-law partner. A written agreement helps evidence the arrangement but does not by itself establish an exception. CRA's shareholder-loans folio explains each category.

Two details decide most of these claims. First, if you own 10% or more of any class of shares of the corporation or a related corporation, or you do not deal at arm's length with it, you are a specified employee, and only the three purposes in the table are open to you. A loan for any other purpose is exempt only for an employee who is neither. Second, it must be reasonable to conclude that you received the loan because of your employment and not because of anyone's shareholdings. When you own the company and are also its only employee, that is the hard part, so be ready to show the corporation would make the same loan, on the same terms, to an employee who owns no shares.

Deemed Interest Even When Principal Is Excluded

Even when a loan is exempt from Section 15(2) inclusion, if the loan carries interest below the CRA's prescribed rate, you'll have a deemed interest benefit added to your income. The prescribed rate is 3% for every quarter of 2026. For a shareholder loan under section 80.4(2), calculate the prescribed interest on the outstanding balance and subtract qualifying interest actually paid on time. Employment loans under section 80.4(1), including qualifying home-purchase loans, have additional rules.

The prescribed rate is set each quarter, so a loan that runs across a rate change is worked out quarter by quarter. CRA publishes each quarterly notice: Q1, Q2, Q3 and Q4. The deemed-interest folio explains the calculation and exclusions:

An individual's tax year is the calendar year, so "no later than 30 days after the year ends" means interest for 2026 must actually be paid by January 30, 2027 to reduce the 2026 benefit. Paying interest at the prescribed rate by then brings the benefit to zero.

The deemed interest and the section 15(2) inclusion never stack. Section 80.4(3)(b) switches the deemed interest off for any loan that has been included in income, so once a loan fails the repayment deadline, you are taxed on the principal and not on imputed interest as well.

Worked Example: A $50,000 Loan, Repaid in Time or Not

A BC CCPC with a December 31 year-end lends its sole shareholder $50,000 on March 1, 2026. No interest is charged. The loan falls in the corporation's 2026 tax year, so the section 15(2.6) deadline is December 31, 2027.

Scenario A: repaid in full on November 15, 2027
  s.15(2) inclusion                              none
  s.80.4 benefit for 2026
    $50,000 x 3% x 306 days / 365              $1,258
  s.80.4 benefit for 2027
    same method, at the rate CRA sets for
    each quarter of 2027, up to repayment

Scenario B: still owing on December 31, 2027
  Added to 2026 income under s.15(2)          $50,000
  s.80.4 benefit for this loan         none (s.80.4(3)(b))
  CRA reassesses 2026, with arrears interest
  Repaid later: s.20(1)(j) deduction
    in the year of repayment

The 306 days run from March 1 to December 31, 2026. In Scenario B, the inclusion replaces any deemed interest already reported on the 2026 return for this loan.

Scenario B is nearly always worse than paying a salary or a dividend in the first place. The $50,000 is taxed as ordinary income with no dividend tax credit, the corporation gets no deduction for it the way it would for salary, and the reassessed year carries arrears interest; the CRA rate on overdue tax is 7% for October to December 2026. The section 20(1)(j) deduction on repayment only reverses the inclusion if the repayment is not part of a series of loans or other transactions and repayments.

Best Practices for Managing Shareholder Loans

Track every personal withdrawal. Classify personal payments when made. Do not assume an expense becomes a genuine loan merely because it was booked to a shareholder account.

Reconcile monthly. Don't wait until year-end to discover a $50,000 shareholder loan balance. Monthly reconciliation lets you course-correct early.

Repay before year-end. If you have an outstanding balance as your fiscal year-end approaches, repay it before the year-end date. Declare salary or dividends to cover the repayment if needed.

Document everything. If you're relying on a Section 15(2.4) exception, have a formal loan agreement in writing. Include the amount, interest rate, repayment terms, purpose and employment basis. Charging at least the prescribed rate and paying it on time can eliminate a deemed-interest benefit, but it is not itself a statutory condition for every principal-inclusion exception. CRA will want to see this documentation if they audit.

Don't play the circular repayment game. Repaying a loan right before year-end and re-borrowing immediately after is called "back-to-back loans." CRA has successfully challenged these arrangements. The repayment must be genuine.

Mistakes That Turn a Loan Into Income

• Counting the year from the day you took the money. The window runs from the corporation's year-end, so work the deadline out from the table above, not from the withdrawal date.
• Forgetting the deemed interest on a loan you do repay in time. Repaying before the deadline avoids the section 15(2) inclusion, but section 80.4 still applies for every day the loan was outstanding at less than the prescribed rate.
• Booking loans and ordinary draws in one undated pile. If the books cannot show when each amount went out and when each repayment came in, you cannot prove a repayment met the deadline or was not part of a series.
• Relying on a section 15(2.4) exception without the paperwork. The repayment arrangement has to exist when the loan is made, and the loan has to come from your employment, not your shares.
• Clearing the balance with a bonus that is never paid. A bonus must legally be paid or set off, with payroll obligations met, to repay a loan. The loan-repayment deadline and the separate day-180 corporate deduction rule are different tests; a 179-day target is an internal safety margin, not the statutory loan deadline. A year-end dividend credited to the loan account works too, as long as it is properly declared and recorded. For which of the two costs less, see salary versus dividends.

A withdrawal that was never meant to be repaid is a different problem. When the corporation simply pays for something personal and no loan exists, the amount can be a shareholder benefit under section 15(1), included in your income with no deduction for the corporation.

How Ledg helps

Ledg keeps money you put in and take out separate from revenue and expenses, under Owner Deposit and Owner Withdrawal, so the totals your accountant needs to work out your shareholder loan balance are one handoff pack away. Ledg does not track the section 15(2) deadline for you; put that date in your calendar.