If my Ontario corporation forgives a shareholder loan, what are the tax consequences?

When a corporation forgives or cancels a loan owed by a shareholder, the forgiven amount is generally treated as a benefit conferred on the shareholder and included in their personal income under the Income Tax Act. This is separate from the salary-dividend system but arises in many small business situations where owner-managers have borrowed from their company.

The benefit is included at the amount of the debt that was forgiven and is treated as income for the year the forgiveness occurs. Unlike a dividend, there is no corresponding corporate deduction — the forgiveness is simply a taxable benefit to you with no tax reduction for the company. If the loan was used to finance the purchase of shares or income-producing property, some tracing rules may reduce the harsh result, but generally loan forgiveness is one of the most tax-inefficient ways to get money out of a corporation.

The better practice is to account for amounts owed to the corporation through proper salary, dividends, or timely loan repayment. If a shareholder loan balance has built up and cannot be repaid, address it with a tax professional before the corporation writes it off — early planning can sometimes structure the settlement in a less costly way.