A Landscaper's Undocumented Draws Trigger a CRA Reassessment

The situation

Raymond had run his landscaping corporation for nine years, building a small crew that handled residential and light commercial contracts across the Fort Erie area. Two consecutive seasons had been rough — a wet spring cut into mowing contracts one year, and a slow start the next meant fewer signed contracts before the busy months hit. Through both stretches, Raymond kept the business afloat by drawing money out of the corporation to cover his household bills, the same way he always had when cash was tight, then paying some of it back once invoices came in and the season picked up.

His bookkeeper recorded the movements the simplest way she knew how: as entries in a running "due to shareholder" account, tracking what the corporation owed Raymond or what Raymond owed the corporation depending on which way the balance tipped that month. There was no loan agreement, no fixed repayment date, no interest charged either way. Nirosha, who worked as a hairdresser and kept her own finances separate from the business, was not involved in any of it. To Raymond, it was simply how a small owner-operated corporation worked — money moved back and forth as the business needed it, and he always intended to settle up.

The corporation's return for the second of those two years was selected for a routine review. The reviewer's attention landed quickly on the shareholder loan account, which by that point showed a peak balance of roughly $42,000 owed by Raymond to the corporation, with only partial repayments recorded against it at irregular intervals. The review escalated into a proposed reassessment of Raymond's personal income tax, and that was when he called Treadstone Law.

The legal problem

The Income Tax Act treats money a shareholder borrows from their own corporation differently from an ordinary loan between strangers, for an obvious reason: a shareholder and their corporation are not at arm's length, so a "loan" between them can just as easily be a way of pulling profit out of the company without reporting it as income. The general rule is that if a shareholder loan is not repaid within a set window — measured from the end of the corporation's taxation year in which the amount was advanced — the outstanding balance is added to the shareholder's personal income for the year it was originally withdrawn, not the year the review happens to catch up with it.

There are recognized exceptions. A shareholder loan can avoid inclusion if it is part of a genuine, ongoing pattern of borrowing and repayment that a bank or arm's-length lender would recognize as a real loan — bona fide terms, an actual intention and ability to repay, and a repayment history that supports that intention, rather than money going out with no plan for it to come back except when convenient. The exception exists to protect legitimate business practice, not to give every draw a free pass simply because some of it eventually got paid back.

Raymond's account had a genuine problem sitting inside it. Some of the withdrawals had, in fact, been repaid within the required window, through real transfers back into the corporation once revenue picked up. But the bookkeeping did not distinguish which repayments applied to which withdrawal, there was no note or agreement fixing repayment terms at the time the money went out, and roughly $25,000 of the peak balance had no repayment against it at all inside the relevant period, some of it dating back to the earlier of the two rough seasons. Without documentation showing bona fide terms at the time each amount was advanced, the reviewer had a reasonable basis to treat the entire $42,000 as a personal income inclusion for that year — a result that would have added a five-figure personal tax bill to a household already stretched from two slow seasons.

What we did

1. Reconstructed the shareholder loan account transaction by transaction. Working from the corporation's bank records and bookkeeping entries, we built a proper chronology showing exactly when each withdrawal happened, when each repayment happened, and which taxation year each fell into — information the running balance alone did not show.
2. Separated the amounts that qualified for the repayment exception from the amounts that did not. Roughly $17,000 of the withdrawals had genuinely been repaid to the corporation within the required window, supported by bank transfers that lined up with the timing the exception demands. That portion had a real basis for exclusion from Raymond's income, regardless of the missing paperwork around it.
3. Prepared a written submission to the CRA reviewer. The submission laid out the reconstructed timeline, argued for excluding the properly repaid portion, and did not attempt to argue away the remaining balance where the facts did not support it — a submission that overreaches on the weak parts of a file tends to lose credibility on the strong parts too.
4. Put formal terms in place going forward. For any future draws, we prepared a promissory note between Raymond and the corporation setting a fixed repayment schedule and interest at the prescribed rate the Income Tax Act requires for a shareholder loan to be treated as a genuine loan rather than a disguised distribution.
5. Restructured how Raymond took money out of the business. Rather than continuing informal draws, we recommended a combination of salary and declared dividends, both of which are taxed in the year they are paid and do not carry the same repayment-timing risk a loan account does.
6. Arranged a payment plan for the tax that remained owing. Once the reassessment was finalized on the reduced amount, we helped Raymond set up an installment arrangement with the CRA so the resulting tax bill did not have to be paid in a single lump sum during another tight season.

The outcome

The reviewer accepted the reconstructed timeline for the $17,000 that had been genuinely repaid within the required window, and that portion was excluded from Raymond's personal income. The remaining roughly $25,000, which had no documented repayment inside the relevant period, was added to Raymond's income for the year it was withdrawn. That produced additional personal tax of a few thousand dollars, along with arrears interest calculated back to the original filing deadline for that year — a real cost, not a symbolic one, landing at a time when the household budget had little room to absorb it.

The outcome was not the clean result Raymond had hoped for walking in, but it was a meaningfully better one than the reviewer's opening position. Nearly half the disputed balance was kept out of his income because the underlying repayments, while undocumented at the time, could still be proven after the fact through bank records. The other half could not be saved, because no amount of after-the-fact explanation substitutes for a repayment that never happened inside the window the law requires. Raymond paid the resulting tax and interest through the installment arrangement over the following months, and the corporation has run on properly documented loan terms and regular payroll ever since, with no further review activity on the account.

The lesson landed hardest in the gap between the two outcomes. The $17,000 survived only because real money had actually moved back into the corporation on a timeline that happened to work — not because Raymond had planned it that way. The $25,000 was lost not because Raymond had done anything dishonest with the money, but because nothing on paper, at the time, distinguished a shareholder quietly building up personal debt to his own company from a shareholder taking undeclared income out of it. The Income Tax Act does not ask a corporation to prove good intentions after the fact; it asks for a repayment record that shows them at the time.

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