Hi,
Basic question here, looking for the best practice.
Company has a fiscal year end from April 2023 till May 2024
During the year shareholder has made draws. Where will i be reporting those draws in this year’s T1? The company will be issuing the T5 post fiscal year end.
I believe the maximum length of an “annual” fiscal period is 53 weeks, so unless the fiscal year is something like April 26, 2023 to May 2, 2024 I’m guessing you meant May 1, 2023 to April 30, 2024?
Shareholder draws are common, but they should be “cleared” as of year-end. Otherwise, the shareholder is subject to a 15(1) inclusion - taxed at the highest marginal rate. Neither you nor the client want that. Nobody ever REPORTS such an inclusion on the T1 - it generally happens in a CRA re-assessment after an audit where the taxpayer is belligerent or un-co-operative.
In practice, you could allow the shareholder loan to be in a debit balance for ONE year (i.e. report it as such on the T2, assuming the debit balance arose in the second half of the fiscal year), but then be sure the client clears it (i.e. file a T5 to report dividends) shortly into the new fiscal year - thus fulfilling the “repayment within one year” requirement.
If you leave the shareholder loan in a debit balance, the shareholder should be paying interest to the corporation (taxable to the corporation), or reporting a taxable interest benefit on their T1 (taxable to the shareholder).
You are right on the date part.
So does this mean that for the year ended December 2023, in the shareholder’s personal tax return, we will not be reporting the drawings anywhere?
Once the fiscal year of the corporation concludes, we will then issue a T5 slip which will then be reported in the personal tax return for the year 2024 of the shareholder?
You cannot report a dividend until the T5 has been issued. There is nothing to declare on the T1 until the T5 is received.
If it made economic sense you could presumably issue some of the dividend in December of 2023 and prepare a 2023 T5 slip.
I would do a tax estimate for 2023 to determine if it makes sense to do a T5 for dividends in 2023, leave it all for 2024, or a split of some kind. You’ll want to know what other income he has for 2023 to figure that out. I would also get some sense of what 2024 will look like.
will this not be an issue as the dividend will only get reported in the T1 of the shareholder in 2023 as the amounts he would have received will be more than reported in the T1?
Yes, most likely this is the scenario that i will be doing. Just wanted to understand if it was decided to issue a T5 slip of 2024, then will we be reporting the funds withdrawn in 2023 in the personal tax return or not and if yes then how?
The T5 slip is what you report on the shareholder’s T1. If the corporation issues a 2023 T5 slip, the shareholder must report that on his 2023 T1. If the corporation issues a 2024 T5 slip, the shareholder must report that on his 2024 T1. If, in addition to a 2024 T5 slip, the shareholder reports “Other income” on his 2023 T1, CRA will not question whether the taxpayer is reporting income that doesn’t exist - they will just accept it and say thank you very much.
As is quite common in small businesses, the shareholder “withdraws” funds from the corporation throughout the year, but that is not INCOME - it is money “borrowed” from the corporation - which is why it is recorded as a debit to the shareholder loan account. The declaration of a dividend means that money is payable to the shareholder(s), which is INCOME to the shareholder(s), and that money can be used to repay the loan from the corporation. Typically, no money changes hands - it’s just a journal entry in the books (DR Dividends, CR Shareholder loan).