What are the tax risks of my Ontario corporation lending money to me instead of paying salary or dividends?

If a corporation lends money to a shareholder and the loan is not repaid within one year after the end of the corporate tax year in which it was made, the full amount of the loan is generally included in the shareholder's personal income under the Income Tax Act. This is a significant trap — what looked like a temporary advance becomes a taxable benefit with no corresponding deduction to the corporation.

If the loan is repaid in time, no income inclusion occurs, but the CRA watches for a pattern of borrowing and repaying just to reset the clock each year. A series of loans that are repaid and re-advanced to avoid the one-year rule is treated as a continuous loan, and the income inclusion applies to the original advance.

Shareholder loans below fair market value interest rates can also trigger a taxable benefit equal to the difference between the prescribed CRA interest rate and the rate actually charged, even if the principal is repaid. Using a shareholder loan as a substitute for salary or dividends — especially for personal expenses like home renovations or a car — creates exactly the kind of pattern auditors look for. Proper compensation planning through salary and dividends avoids these issues entirely.