Lending Your Own Money to Your Ontario Corporation: How Repayment Is Taxed

Many Ontario business owners put personal money into their own corporation at some point — to get it through a slow season, fund an expansion, or simply because the corporation's bank account ran dry before a big invoice came in. When that happens, it matters a great deal whether the money went in as a loan or as a capital contribution, because the tax treatment on the way back out is completely different.

This is the flip side of the more commonly discussed scenario where a corporation lends money to its shareholder. Here, the shareholder is the lender and the corporation is the borrower — and getting the structure and paperwork right up front avoids confusion (and potential CRA scrutiny) when the money eventually comes back.

This guide covers how a genuine shareholder loan to a corporation should be documented, how interest on it is taxed, and what happens when it's repaid.

Loan or Capital Contribution? Why the Label Matters

Money a shareholder puts into their corporation can be treated in more than one way, and the difference isn't just accounting formality:

• A genuine loan creates a debt owed by the corporation to the shareholder. Repaying the principal is simply returning money that was always the shareholder's — not income to anyone.
• A capital contribution increases the shareholder's investment in the corporation. Getting that value back out later generally has to go through the corporation's share capital or surplus, which can trigger different — and sometimes less favourable — tax consequences.

CRA looks at substance, not labels. A "loan" that has no interest rate, no repayment terms, no promissory note, and is carried on the books as equity rather than a liability may not be respected as a loan if it's ever challenged. Treat the distinction as a real decision made at the time the money goes in, not something to sort out later.

How Interest You Charge the Corporation Is Taxed

If the loan carries interest, the tax treatment runs in both directions:

• To the corporation, interest paid on a genuine, reasonable business loan is generally deductible as a business expense, reducing the corporation's taxable income.
• To the shareholder, that same interest is fully taxable as interest income on their personal return — at their full marginal rate, with none of the preferential treatment that applies to dividends or capital gains.

This is an important contrast with dividends: a shareholder receiving interest on a loan they made to their own corporation doesn't get any gross-up or dividend tax credit. It's ordinary income, taxed like any other interest you'd earn.

Getting Your Principal Back

Repayment of the loan's principal is not, on its own, taxable income to the shareholder — it's simply the return of money they lent. This is the main tax advantage of structuring the arrangement as a genuine loan rather than a capital contribution.

A few situations complicate this:

• If the corporation forgives the loan instead of repaying it, that forgiveness is generally treated as a benefit to the shareholder with its own tax consequences — it isn't a tax-free way to walk away from the debt.
• If the arrangement isn't genuine — no real expectation of repayment, no documentation, funds moving back and forth informally — CRA can look past the "loan" label and recharacterize the transactions.
• Loans between related parties (including family members who are also shareholders) tend to draw more scrutiny than arm's-length lending, so the documentation matters even more.

Documentation That Supports "Loan" Treatment

• [ ] A written loan agreement or promissory note, signed when the funds are advanced
• [ ] A stated interest rate and repayment schedule, even if the rate is modest
• [ ] The loan recorded as a liability on the corporation's financial statements, not as contributed or paid-up capital
• [ ] Repayments actually made in accordance with the agreed terms
• [ ] Interest income reported on the shareholder's personal tax return each year it's earned

When to Get Advice

A shareholder loan to a corporation is usually simple when there's one owner, one corporation, and straightforward terms. It gets more complicated — and more worth a professional's time — when:

• Multiple shareholders or family members are involved and the loan isn't proportionate to ownership
• The corporation is going through a broader reorganization where the loan's characterization could shift
• The interest rate charged is unusually high or low compared to what an arm's-length lender would charge
• There's any possibility the "loan" will later be forgiven or converted into shares

Frequently asked questions