What is a shareholder loan and how does it work in an Ontario corporation?

A shareholder loan is money that flows between a corporation and its shareholder — either the shareholder lends money to the corporation, or the corporation advances money to the shareholder. Both are common in owner-managed businesses.

When you lend money to your own corporation (for example, to fund startup costs), the corporation owes that amount back to you. It shows as a liability on the corporate balance sheet and as a receivable in your personal finances. Repayment of that loan to you is not taxable income because it is a return of capital you already paid.

The more closely watched scenario is when the corporation advances money to you — you take money out without formally declaring a salary or dividend. The Income Tax Act has specific rules: if such an advance is not repaid by the end of the corporation's taxation year following the year in which the loan was made, the full amount is generally included in your personal income for the year the loan was made. This is an anti-avoidance rule designed to prevent shareholders from using corporations as personal bank accounts without paying tax.

Proper documentation of shareholder loans — a written loan agreement, clear accounting entries, and consistent repayment — is important to avoid CRA reassessment.