Shareholder Loan and HELOC

Tax Topics
1

Here is an interesting situation which I could use some help in seeing if its allowed by the CRA and if its a good idea.

Client had a nice year for income and made over 400k after expenses. He withdrew 200k from the corporation and currently shareholder balance has a debit position of 200k (meaning he will have to declare a dividend of 200k on his t5) for Dec 31 2022.

Can the client get a HELOC on his personal house for 75k and then transfer the 75k from the personal bank account to the corporation bank account in Dec 2022 and therefore the shareholder balance will now be 125k and this he will only have to declare a dividend of 125k on his t5) for Dec 31 2022.

Thanks and I appreciate in advance the help and comments and suggestions if this is good idea.

The client then has 2 options in 2023:

  1. Pay back the HELOC in Jan 2023 and show the 75k as dividend in 2023 as 2023 his corporation will breakeven or run at loss

  2. KEEP the HELOC and pay the monthly personal interest

2

Your first option is not an option that you should attempt. It amounts to a series of advances and repayments and would be reversed by CRA. Then, rather than allow a dividend to clear the s/h loan, it would be treated as an appropriation of corporate assets and taxed as regular income at the highest personal rates. Plus, no deduction in the company, so, double taxation. Best bet is to declare a dividend for part of the advance in year one and a dividend for the balance in year two. S/H loans have to be cleared by the year end following the year advanced.

1 Like
3

He can essentially do both - but it needs to be done, and papered, properly.

$200K payment in 2022 could be papered and booked as a dividend of $125K and a loan to shareholder of $75K.

The $75K shareholder loan then needs to be repaid:

  • take a HELOC in whichever year you want repayment to occur and maintain the loan personally; or

  • Pay a dividend (or salary, of course) in the repayment year and redeposit the cheque to the corp to retire the loan in full; shareholder pays tax on the dividend that year

Nonetheless, shareholder amounts need to be adjusted for interest charged on the shareholder loan, if there is a debit balance in the account of course.

1 Like