I think the answer is so obvious that I have confused myself.
Situation:
Sole shareholder of a corp. Corp’s YE is Dec 31. Last filed T2 is for Dec 31, 2021 (filed by another firm). The corp will be dissolved on Dec 31, 2023 or shortly right after.
As of Dec 31, 2021, there was a balance of $100K in the due from shareholder account. No repayment of the balance was made in 2022. Shareholder accumulated the balance by pulling money from corp for personal use. No formal agreement in place between corp and shareholder for the amount withdrawn.
Since we are getting ready to dissolve the corp, I need to deal with this balance which will not be paid back to the corp. Do I just dividend it out in 2022 (T5) or is it treated as a loan forgiveness (T4A).
In most of my clients, I would just dividend out any receivable balance at the end of the year and call it a day, but now I am second guessing myself.
For what its worth… we do not have enough info to provide you with guidance.
When did the balance happen?
It is likely that extra $ taken out should have been included as Wages in past years. More research on how and when that balance came to be is necessary before attempting to Clear the books.
Also, you cannot dividend out if you do not have:
a) profit in the corporation… ( that is what a dividend is)
AND
b) legal paperwork completed stating that dividends will be paid out… Shareholder declaration. This is supposed to be done before withdrawing funds.
I would request from previous accountant details on the deficit balance in the shareholder loan account. If you cannot, you need to have past years bookkeeping records to determine how the previous accountant came to that conclusion.
In my experience, the prior accountant is usually very forthcoming with this information.
It is extremely likely you will be amending tax returns and the client should be made aware of this sooner rather then later.
There could also be deemed interest as a taxable benefit depending on how/when it transpired.
If this is outside your wheelhouse, maybe a good idea to pass the file on…If you are unfamiliar but wish to learn… please take the time to research. Forums are great for bouncing ideas but we cannot provide client specific answers as we truly do not have all the background info on your client.
Absolutely true… we can advise the clients on various tax consequences on various options. We can advise on the “rules” i.e. Income Tax Act.
At end of day… it is always the taxpayer if Sole Prop or Director (corporation) who makes these decisions.
Precisely why before handing out dividends a Shareholder Declaration of Dividends is required.
I understand you may wish to advise clients that monies they took out of the Corp could be considered Dividends but technically the paperwork has to show that was the intention.
Of course, a Corporation with a negative Retained Earnings Balance cannot issue dividends.
While it is often interpreted that way, most BCA’s do not actually SAY that. eg. from the Alberta BCA:
43 A corporation shall not declare or pay a dividend if there are reasonable grounds for believing that (ed: emphasis mine)
(a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or
(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.
A corporation that has an ongoing business operation can certainly have a negative retained earnings balance and issue dividends where it is reasonable to believe that the forthcoming period will provide income sufficient to ensure that its creditors are paid. On time.
Obviously not an issue in this case, but in an ongoing, shareholder-financed business, this has never been an issue in my experience with CRA. Corporate law and tax law are two different worlds.