i may be overthinking this
i have defaulted shareholder loan including in 2022 t1.
should the interest component be calculated until dec 31, 2023 or until today
Well what’s your reasoning for recording the default retroactively? Is the shareholder still offside in 2023?
yes he is and won’t be able to pay back
we are going to include in 2022 t1 refile
@cheryl
#Deemed interest on shareholder loan
# Shareholder Loans Rules: Tax Implications and Compliance with CRA
by Varun Sehgal | Feb 20, 2023 | Corporate Tax,
EXPLANATION WITH EXAMPLES
" What are Shareholder Loans?
Shareholder loans are funds that a shareholder of a corporation lends to the corporation or borrows from the corporation. For the purposes of this articles, we will focus on the part of money being borrowed by the shareholder from their corporation. Shareholder loans can be a convenient way to obtain short-term financing from the business, and it may be easier to obtain and have more flexible terms than traditional loans from a financial institution.
Shareholder Loans Rules and Regulations
When a shareholder takes a loan from a corporation, there are certain rules and regulations that must be followed to ensure compliance with the Income Tax Act (ITA). The following are some important rules to keep in mind:
- The loan must be properly documented: The terms of the loan, including the amount, interest rate, and repayment terms, must be properly documented in writing.
- Interest must be charged: The loan must bear interest at a rate that is at least equal to the CRA’s prescribed rate at the time the loan is made. The prescribed rate is set by the CRA on a quarterly basis and is currently 6% up until Q2 2024.
- The loan must be repaid: The loan must be repaid in accordance with the repayment terms documented at beginning. If the loan is not repaid, the loan amount will be added to shareholder’s income in the year the loan was made (i.e. retroactive adjustment). An exception to this rule is if the entire loan is repaid within one year from the end of the taxation year of the corporation.
- Interest must be paid: Interest must be paid on the shareholder loan in accordance with the terms laid out. This interest on shareholder loan must be paid within 30 days after the end of the year. In the absence of this, the amount of interest at CRA’s prescribed rate will be added to shareholder’s income.
- Forgiveness of shareholder loans: If a shareholder loan is forgiven or cancelled, the amount of the loan will be treated as a deemed dividend to the shareholder and will be subject to tax."
Apply the interest to the periods that it is being filed for (Q1 2022, Q2 2022, etc.). It appears that you must declare this interest on the client’s 2022 return, so use the rates from that year, if you are carrying the loan to 2023.
If you are declaring the whole loan as income for 2022, then it is a dividend, as @dominique_dabolczi posted in her answer, so the interest is not applicable. It’s one or the other.
That’s not exactly true. First of all, @dominique_dabolczi 's post (which is copy/paste from some personal web blog - not CRA!) says that it will be DEEMED as a dividend IF the corporation FORGAVE the loan. I’m not sure what documentation is required to prove loan forgiveness.
It would be BEST to have the corporation DECLARE it as a dividend (i.e. assume it WAS declared in 2022, and have the lawyer paper it up as such), and thus the corporation should file a 2022 T5 (which is now late, but better late than not at all).
Without evidence that it WAS a dividend or forgiven loan, it is possible that CRA re-assesses the shareholder draw under ITA 15(1) and as such it would be taxed on the shareholder’s T1 at the highest marginal rate. I would try my best to convince my client that he/she does NOT want that to happen, and should rather try to ensure it is reported as a dividend.
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This is actually quite a complicated manner, so let me provide some general clarification on where everyone should be looking here…
2 Subsections of the act to be noted:
Subsection 15(2) - not 15(1) … deals with the subjectivity of income inclusion to the shareholder, and Subsection 80.4(2) outlines the deemed benefit of interest inclusion as an addition to the principle loan amount … this is where the accrued interest rule comes into affect.
@Nezzer Nezzer is correct in that a dividend would be deemed on forgiveness … meaning the corporation wrote down the debt at some point assuming there was bona fide agreement initially.
The flipside of loan forgiveness would be “deemed” an employee benefit, meaning you take the income subject to CPP … so you’re in the right to report the lump-sum on Line 13000.
@johanus We should clarify here that accrued interest initially should be recognized in the corporation for the eligible duration of the loan. If the loan was then defaulted on, assuming at that point interest was not paid by 30 days subsequent to the 12 month period, then the interest at that point would be an inclusion subjected to 80.4 and included along with the principle income.
As such, there are a multitude of exemptions listed out in Section 15, subsections 15(2), subparagraphs 15(2.1 onward) … it get’s quite broad… but the general principle here should be to match the reciprocal treatment on the corporate side of things if you are to remain compliant.
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LOL. Thanks for correcting me. 
Think of it as 45(2) and 45(3)… reciprocals of one another!
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wow… you are great with your responses - thank you
so $75k loan on sept 27 2022
the year end of the corp is april 30
he is the only shareholder and personal involved in corp
he is onside with reporting in 2022 T1
I will include $75k line 13000 on T1 2022
i will record the interest calculated at prescribed rate for loan for full year on T2 April 30, 2024 as income and should have in T2 2023?
so then i include interest in T1 2022 for period sept 27 2022 until what date (is today considered the forgiveness date)
I would then deduct this interest in corporate return as expense
Do i credit shareholder loan and debit bad debt? in T2 2024
i have reviewed tax tips but not 100% sure. I find all your assistance more helpful
Here are some more questions to ask:
- Was the FY2023 already filed?
- Why not declare it as a dividend in FY2023, paid in March 2023 (the six month limitation period), if not?
- If it ends up being a deemed dividend, then why not make the declaration, as per @Nezzer, regardless of fiscal year, which will then have it taxed in the owner’s hands at a lower rate, even with the corporation paying tax on its profits (which would already be accounted for, I presume)?
No - it is supposed to be INTEREST INCOME to the corporation, which is then taxable - that’s one of the stipulations to allow it to happen AT ALL - somebody has to pay some tax on it. If the corporation doesn’t report the interest income, then the employee must report the taxable INTEREST BENEFIT, which was not paid by the corporation, so the corporation does not get a deduction for it.
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CRA won’t complain about that - they let you report as much fictitious income as you like, because you pay tax on it. However, that won’t stop them from adding another $75k at the top marginal rate if they asses you under 15(2).
Basically you have 4 choices:
- Report it as a 2023 dividend (because it arose in the corp’s fiscal year ending April 2023)
- Report it as salary (i.e. employment income) for 2022 and remit the required source deductions
- Report it as a bona fide loan issued in Sep 2022 - ensure the legal agreement is properly papered up and signed by both parties
- Don’t report it, and hope that CRA doesn’t discover it until it becomes statute barred. If they do discover it, THEY will apply the 15(2) income inclusion, so YOU won’t have to figure out where to put it on the client’s T1. But, if they think that you or your client mis-reported it on purpose, somebody will be facing serious consequences.
Whatever you decide (except option 4), there is more work to do on both sides - corporate and personal (preparing T4 or T5 slips, getting a copy of the legal documentation, etc).
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Excellent explanation! Yes, combinations of 1 and 3 are what I’ve done for clients in the past. Just make sure all the declarations are done properly!
i am circling back to this issue. I understand that as an accountant I should know this but it is my first dealing with defaulted shareholder loans -
client has april 30 year end
took $$ out in Jan 2022
$$ wasn’t paid back
Nezzer mentioned # 1 above with dividend - if i issued a late T5 for 2022, refiled his T12022 would i be onside?
thx
I’ve had clients with massive shareholder loans outstanding for years. I’ve warned them about the consequences, and they just carry on. On the T2, I use the GIFI code for advances to individual shareholders, so it would be quite obvious to CRA if anyone bothered to look. Other clients know the dangers and prefer to deal with it right away. Last month, I finished a March, 2024 year end and submitted a 2024 T5 to cover the S/H account balance.
Filing a T5 over a year late and refiling a 2022 T1 will result in a lot of non-deductible penalties & interest.
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This reminds me of an interesting situation @jhd.hemeon.
Several years ago I had an elderly husband & wife couple knock on my door who got my name through another client. They owned a restaurant and tavern through a limited company along with their son, who owned 25% of the shares. They had not been involved with the business for several years, as the son ran the tavern on everyone’s behalf (or so they assumed).
The CRA had sent letters to the tavern for unpaid source deductions, unfiled GST/HST returns, as well as unfiled T2 returns. They eventually arbitrarily assessed on all accounts and put a lien on the business property.
We helped the parents get up to date with the filings (some of which were statute barred). They did end up having to sell the property to pay the hundreds of thousands in taxes that had been racked up.
We were dealing directly with a decent CRA agent in collections through the process.
During the preparation of the financial data and year end financials I noticed an overly high amount posted to “food purchases”. It seems the son had spent the $60 and registered a business name called “Sysco Foods”. He was writing cheques to Sysco Foods and depositing these cheques into this bank account. If I recall over the 4 years these payments to this account amounted to around $400,000. These funds were essentially stolen by the son.
We gave the CRA all of this information and essentially handed the son’s head on a silver platter complete with account numbers and payments. This was the lowest lying fruit they could have possibly received. At least 5 years has passed since this ordeal and dissolution of the corporation yet the son never received so much as a letter or a phone call from the CRA.
Sometimes (well… nearly always) I just don’t understand these people. 
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That is strange. Sysco distributes to the foodservice industry, among others and is nation-wide. During the pandemic, their business dropped through the floor and they started advertising to the general public. You could get a 100lb bag of flour for a good price. Or a 20kg bag of MSG. I’m surprised he was able to register Sysco as a business name.
Don’t know why CRA doesn’t go after the easy stuff. Like your client’s situation. Or those with T2 GIFI codes of 1301. Instead, a woman with a degree in Slavic Studies dreams up the UHT idea.
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That is crazy!
I think cra is more likely to find people this year.
A new client had a CRA come knocking on their door. They are following up with them every week or so to get affairs in order.
I phoned cra about my question, and the initial recommendation is to do T4a for 2024 for taxable benefits in the amount of the loan
I then asked if I had credit due from shareholders and if I should credit retained earnings.
I also asked them for what period I should charge interest on the loan relative to the T4a.
they said my ? was complicated and they would phone back and I haven’t heard yet.
Technically, yes. But, as noted by @jhd.hemeon , that will result in penalties:
$100 late filing penalty for the T5
5% late filing penalty for the T1 (based on the difference between the “new” amount payable and the original amount payable)
As well as interest at various rates - because the prescribed rates change every 3 months:
So, for example, whatever was outstanding during the month of May 2023 would have interest at 9% added to the balance, then June at 9%, then July, etc and since Jan 2024 the rate would be 10%.
That’s probably why, when you asked the CRA agent, they said it was “complicated”. But, it must have been a newbie you talked to, because they wouldn’t be allowed to “figure out” the interest rates for you and call you back (they probably discovered that after getting off the phone with you).
So, as noted by @jhd.hemeon and @snoplowguy , many of us advise our clients about the risk of the 15(2) inclusion - IF CRA catches them. Then we tell them the probability of that happening. Then, usually, the client decides to take the risk of “being offside” rather than the certainty of thousands of dollars in penalties to “get onside”.
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