Should I put money into my Ontario company as a shareholder loan or equity?
Whether to contribute money to your Ontario corporation as a shareholder loan or as equity (by subscribing for shares) has both legal and tax implications that deserve careful thought.
A shareholder loan is a debt the company owes you. It can generally be repaid to you without triggering personal income tax, as long as it is repaid in a timely way and the arrangement meets the requirements under the Income Tax Act. This can make it a useful way to extract funds from the corporation tax-efficiently. However, if the loan is not repaid within the period specified under the tax rules, there can be income inclusion consequences.
Equity contributions (share subscriptions) increase your ownership stake and are not repayable as a debt. Dividends are how you return money from equity to yourself, and they carry their own tax treatment. The right mix of debt and equity depends on your personal tax situation, whether there are other shareholders, and your plans for the business.
This is a question where working with both a corporate lawyer and a tax advisor is important. The structure you choose has long-term consequences.
Key takeaways
- Shareholder loans can be repaid without income tax, subject to timing rules under the ITA.
- Equity contributions increase ownership but are not repayable as debt.
- The optimal mix depends on personal tax situation and business structure.
- Consult both a corporate lawyer and a tax advisor before choosing your structure.