TaxCycle | Products | Pricing | Training | Documentation | Support | News

Shareholder Draws

A corporate client has transferred funds out of the corporation to the personal bank account…if the money is expected to be transferred back into the corporate bank accounts before the end of the fiscal period, do I have to record the withdrawal as a dividend payment? Or can I set it up as a shareholder loan? I believe I should be able to record this as loan, since the money will be paid back. Thoughts?

Yes, debit it to the Shareholder Account. If it is not paid back within the legislated time frame (by the end of the following tax year) then you would have to do either a Dividend or a Management Fee to have it taken into income.

image001.jpg

What about setting up as an actual loan to the shareholder, with a loan agreement including interest? That way I wouldn’t need to issue a dividend OR classify it as a management fee in order to reduce the personal tax amount. The shareholder pays interest for the time the money is used and no adverse personal tax issue. Yes?

I depends on the purpose of the loan. Unless it is for one of the following it must be paid back by the end of the following fiscal, and interest must be paid.

The Income Tax Act does permit certain types of loans to extend beyond the one year time limit. These types of loans may be used to:

  1. Purchase a home that you will occupy,

  2. Purchase shares of the corporation,

  3. Purchase an automobile used in the course of employment, or

  4. Purchase goods from the business via trade debt.

image001.jpg

The term you are looking for, I believe, is called “stealing”.
Taking money without authorization is also known by the term “theft”.

The Directors should pass a resolution in a duly constituted meeting to authorize a Dividend, if they wish.
Or an authorized Director or Officer of the corporation could enter into a written loan agreement with the individual in their personal capacity. Or Payroll records may need to be set up, if so authorized, Etc Etc.

However, all you have related so far is: “Money removed due to theft”.

If the authorized Director or Officer wants it to be recorded any differently, they need to provide you with the authorized source documentation.

If the corporation’s directors do not know how to draft corporate business documentation, resolutions, minutes, loans, or other legal documentation, they should hire such professional expertise as and when needed.

1 Like

Joe, with respect, in a sole shareholder business that is almost NEVER done in my experience. Certainly where others are involved you would be correct.

Generally, unless the loan is for specific purposes (per @gaywise) there are some rather messy tax rules to consider. Once the shareholder loan account is in a debit balance, both the interest and repayment clock start ticking per the Income Tax Act. It isn’t an issue for general accounting: this is a very specific tax issue.

Note that, in general, if the loan is outstanding past the fiscal year end and is still outstanding at the end of the next fiscal year end, once again, the ITA specifies that it becomes taxable - and deductible eventually upon repayment.

One should not simply “classify” it as a dividend payment at that time. Write cheques (or make transfers) back and forth between shareholder and business to record the salary or dividend (if salary, take CPP etc) and have the shareholder return the funds to the corp from such proceeds as the repayment of the loan. Minute it. That way there is a paper trail.

{sigh}, yes, we know where these people would be without guidance…

However, the fact that many Directors may not comply with the law, does not make it suddenly legal.

Robbing a bank is still robbing a bank, whether there is only one bank robber, or ten thousand bank robbers…

A corporation is a legal persona by itself, no matter if one person robs it, or ten thousand people rob it…

The fact that robbing it is common, does not make it noble or legal to do so.

The corporation’s professional advisor should always strive to encourage legal actions, not facilitate illegal ones…

And as for “where others are involved”, recall that CRA is always one “other” that is involved… :slight_smile:

In the case of a “sole director” they may have the “authority” to grant a “loan” - and if they do so, they need to write it up, evidence it with a signature, since it is MANDATORY to keep proper books and records (Section 230)…

@barbsbookkeeping56
If it is actually a dividend, it must be reported on a T5. Don’t record it as a dividend unless you’re planning to file the T5 for the client (or they show you minutes of a meeting or a resolution stating that an official dividend will be paid).

If you’re the bookkeeper, you probably can’t stop the client from transferring funds from the corporate to personal bank accounts (or vice versa). But you still have to record the transaction, so you can reconcile the bank, right? So, yes - post it to shareholder loan, and leave the decision about dividends for the year-end accountant.

This is how it is commonly done for most small business corporations, and as accountants we are quite used to having that discussion with the client about the tax consequences. Most often, if the shareholder loan is in a debit balance at year-end, we help the client get dividend declarations done, file the T5, and provide the adjusting entry to the bookkeeper (DR Dividends paid, CR Shareholder loan).

Sorry Nezzer, I have to humbly disagree about that part… at this point, it CANNOT be a dividend, since NO authorized resolution has been provided declaring any dividend, nor for paying a dividend.

Similarly, there is so far no evidence that a person, IN THEIR CAPACITY AS A SHAREHOLDER, removed those funds.

@barbsbookkeeping56 has not mentioned whether the person removing the funds did so ACTING UNDER AUTHORITY AS DIRECTOR, or in any legitimate capacity.

Therefore, a proper (temporary) place could be a suspense Receivable account, pending further evidence as to whether it was theft, or whether a person appropriated the money with authority or without authority, and for what purpose.

If not theft, it may be (in the interim) an authorized or an unauthorized “borrowing” BY A DIRECTOR or other employee.

At year-end, hopefully SOME legitimate treatment can be sorted out…

The accountant should be making it as difficult and as awkward as possible for directors and officers of the corporation to be raiding the corporation’s assets like their own piggy-bank on a regular basis.

I would suggest perhaps that maybe @barbsbookkeeping56 could report this to the corporation’s accountant, so that an appropriate “reading of the riot act” conversation can occur… (Since it is against the individual’s interests, as well as against the corporation’s interests…)

Note that a “series of transactions” can also contribute to such things being a taxable income event…

Yes, we know that in practice that some like to do these kinds of things - but our roll is to make it so uncomfortable for them that they stop doing it…

with respect to both Joe and Nezzer:

The majority of corporations in Canada are small companies with one or two shareholders, usually related. Getting all stuffy about a draw is overkill to say the least. If it was considered theft, every single one of my clients would be going to jail. It is a normal business transaction for draws to happen over and above any payroll compensation for the shareholders. The law provides for the shareholder to be required to bring the shareholder loan account back into a credit position within 2 years.

You cannot call it a Dividend until a resolution is passed (usually initiated by the year end accountant via year end tax planning and shareholder loan being returned to a legal balance) and this requires proper documentation in the Minute Book.

Since the original poster has not indicated that this is a major corporation with more than a few shareholders, this is recorded as a shareholder loan (with or without interest) and the year end accountant will deal with the Dividend issue at the appropriate time.

1 Like

Sorry, but I believe that you may be mistaken (re business structure)…
Whist “draws” may be authorized in a PARTNERSHIP, I have not heard about any such concept for the separate legal persona of a CORPORATION…

And again also, the mere fact of “Share Ownership” (SHAREHOLDER) does not entitle one to take any money without permission. (eg, just because one might own some Microsoft shares, does not entitle one to help oneself to Microsoft’s bank account, and Bill just may call the police…:wink: )
.
.
“The law provides for the shareholder to be required to bring the shareholder loan account back into a credit position within 2 years.”

Well, no, not exactly… S15(2.6) is not quite that generous… and, more importantly, there may be no grace period whatsoever if all the conditions of S15(2.6) are not met, particularly re “series of transactions”…

:+1:
No sense getting all bent outta shape over something that is either a year-end transaction or hasn’t enough information being provided by the original author.

Thanks for all the information everyone. The funds will be returned before the end of the fiscal year. If there are any monies still owing we are treating it as a loan to the shareholder and charging interest. An amortization schedule will be prepared. The company articles do allow for the sole director to borrow corp money, as long as at least minimal interest is paid to the corp.

But the ITA does not, regretfully, unless under some very limited circumstances…

1 Like