Shareholder Loans in Canada: The One-Year Rule, Interest and How to Clean Up
Shareholder loans in Canada: how s.15(2) and the one-year repayment rule work, the 3% prescribed rate for 2026, the series-of-loans trap and clean-up options.
In this article
- What is a shareholder loan?
- What does section 15(2) of the Income Tax Act say?
- How does the one-year repayment rule work?
- What is the series-of-loans rule?
- How is imputed interest calculated on a shareholder loan?
- Are there exceptions for employee loans?
- How do you clean up a shareholder loan?
- Why do shareholder loans attract CRA attention?
- How MNJ CPA can help
Key takeaways
- Under s.15(2) of the Income Tax Act, a loan from your corporation is included in your personal income unless it is repaid within one year after the end of the corporation's tax year in which it was made.
- A loan taken during a corporation's tax year ending December 31, 2026 must be repaid by December 31, 2027 to avoid an income inclusion.
- Repaying just before the deadline and then re-borrowing can be treated as a series of loans and repayments, which denies the one-year exception.
- While a loan is outstanding, you have a taxable interest benefit at the CRA prescribed rate, which is 3% for all of 2026, less any interest you actually pay by January 30 of the following year.
- If a loan is included in your income and later repaid, you can deduct the repayment under s.20(1)(j) in the year you repay it.
A shareholder loan is money you take out of your corporation that isn’t salary, a bonus or a dividend. It’s tax-free only if you repay it within one year after the end of the corporation’s tax year in which you borrowed it, and the repayment isn’t part of a series of loans and repayments. If you miss that deadline, the full amount is added to your personal income for the year you received it. While the loan is outstanding, you also have a small taxable interest benefit at the CRA’s prescribed rate, which is 3% for all of 2026.
Shareholder loans are one of the most common issues we see in owner-managed corporations, often by accident. Here’s how the rules work and how to fix a balance before it becomes a tax bill.
What is a shareholder loan?
Most small corporations track amounts between the business and its owner in a shareholder loan account (sometimes called a “due to/from shareholder” account). When the corporation owes you money, the account has a credit balance. When you owe the corporation, it has a debit balance, and that’s a shareholder loan.
Debit balances build up in ordinary ways:
- Paying personal expenses with the corporate credit card or bank account
- Transferring money to yourself “for now” without declaring salary or dividends
- Paying for a family member’s expenses through the business
- Drawing more than the salary or dividends you later declare at year-end
None of this is illegal. The tax issue is what happens if the balance stays unpaid for too long.
What does section 15(2) of the Income Tax Act say?
Subsection 15(2) of the Income Tax Act says that when a person who is a shareholder, or who is connected with a shareholder, receives a loan from the corporation or becomes indebted to it, the amount is included in that person’s income for the year. “Connected” generally means not dealing at arm’s length, so loans to your spouse, children or other related people are caught too.
The rule doesn’t apply when the borrower is a corporation resident in Canada. A loan from your operating company to your holding company, for example, isn’t caught by s.15(2), though other rules may apply.
The idea behind the rule is simple. Without it, owners could take corporate profits out as “loans” indefinitely and never pay personal tax on them.
How does the one-year repayment rule work?
Subsection 15(2.6) provides the main exception. The loan isn’t included in your income if it’s repaid within one year after the end of the corporation’s tax year in which the loan was made, and the repayment isn’t part of a series of loans or other transactions and repayments.
Because the clock runs from the corporation’s year-end, not the date of the loan, the actual time you have varies:
| Loan date | Corporation’s year-end | Repayment deadline | Time available |
|---|---|---|---|
| January 15, 2026 | December 31, 2026 | December 31, 2027 | About 23 months |
| June 30, 2026 | December 31, 2026 | December 31, 2027 | 18 months |
| December 15, 2026 | December 31, 2026 | December 31, 2027 | About 12.5 months |
| August 1, 2026 | March 31, 2027 | March 31, 2028 | About 20 months |
If the loan isn’t repaid in time, it’s included in your income in the year you received it, not the year the deadline passed. That usually means the CRA reassesses an earlier return, with interest on the extra tax.
What is the series-of-loans rule?
The one-year exception doesn’t apply if the repayment is part of a “series of loans or other transactions and repayments.” This targets the classic workaround: repay the loan just before the deadline, then borrow the same money back a few days later.
Situations that can be treated as a series include:
- Repaying with funds that are re-borrowed from the corporation shortly after
- Circular transactions where the corporation lends you money to repay itself
- Journal entries that “repay” the balance without real money or a genuine taxable payment behind them
Genuine repayments funded by a salary, bonus or dividend that you report and pay tax on are generally not a series. The point is whether the debt was actually settled, not just shuffled.
How is imputed interest calculated on a shareholder loan?
While a loan is outstanding and hasn’t been included in your income, section 80.4 deems you to have received a benefit equal to interest at the CRA prescribed rate, minus any interest you actually pay to the corporation by January 30 of the following year.
The prescribed rate for this purpose was 3% in every quarter of 2026, as shown on the CRA’s Q1 2026 and Q4 2026 rate pages. Rates for 2027 hadn’t been announced when we wrote this, and the federal budget on November 5, 2026 could bring other changes.
Are there exceptions for employee loans?
Yes, but they rarely help an owner-manager. Subsection 15(2.4) exempts certain loans to employees, including:
- Loans to an employee who isn’t a specified employee (broadly, someone who isn’t a significant shareholder and who deals at arm’s length with the corporation)
- Loans to an employee to buy a home to live in
- Loans to an employee to buy newly issued shares of the corporation
- Loans to an employee to buy a vehicle used in their job
To qualify, the loan must be made because of the person’s employment and not because of anyone’s shareholdings, and bona fide arrangements for repayment within a reasonable time must be made when the loan is given. In a corporation where you’re the only shareholder, it’s hard to show you’d get the same loan as a regular employee. The CRA looks at whether non-shareholder employees are offered similar terms.
There’s also an exception for loans made in the ordinary course of a money-lending business, which won’t apply to most small businesses.
How do you clean up a shareholder loan?
If your shareholder account has a debit balance, you have several options. The right one depends on your income, the corporation’s profits and your timing.
| Strategy | How it works | Tax effect |
|---|---|---|
| Repay in cash | Transfer personal funds back to the corporation | No tax, but you need the cash |
| Declare a bonus | Corporation pays you a bonus and offsets it against the loan | Deductible to the corporation; taxed as salary; payroll withholding and a T4 required; creates RRSP room |
| Declare a dividend | Corporation declares a dividend and offsets it against the loan | Not deductible to the corporation; taxed at dividend rates; T5 required |
| Offset a credit balance | Apply amounts the corporation owes you (such as business expenses you paid personally) | No tax, if properly documented |
| Accept the inclusion | Leave the loan and report it in income | Usually the worst option, since the corporation gets no deduction |
Good records make all of this easier. If personal and business spending are mixed in the same accounts, the first step is getting the shareholder account reconciled so you know the true balance. That’s where regular bookkeeping pays for itself.
Why do shareholder loans attract CRA attention?
A large or growing debit balance on the balance sheet is easy to spot on a T2 return. In an audit, the CRA will often trace the shareholder account year by year, looking for loans past the one-year deadline, repayments followed by new borrowing, and personal expenses run through the business. If you’re facing a review, our guide on how to prepare for a CRA audit walks through what to expect.
How MNJ CPA can help
We review shareholder accounts as part of every corporate year-end, flag balances approaching the deadline and help you choose the most tax-efficient way to clear them. If you already have an old balance or a CRA inquiry, we can help with that too. See our corporate tax services or contact us to get started.
Frequently asked questions
Is it a problem if my shareholder account has a credit balance?
No. A credit balance means the corporation owes you money, for example because you lent it funds or paid business expenses personally. You can withdraw a credit balance tax-free, because you are simply being repaid.
Do the shareholder loan rules apply to loans to my spouse or children?
Yes. Section 15(2) also covers loans to people connected with a shareholder, which generally includes family members who do not deal at arm's length with you.
Does my corporation have to charge me interest on a shareholder loan?
It does not have to, but if it does not, you will have a taxable benefit calculated at the prescribed rate. Paying interest at that rate by January 30 of the following year eliminates the benefit.
What happens if the CRA finds an old shareholder loan during an audit?
The CRA can reassess the year the loan was made and include the outstanding amount in your income, with interest on the unpaid tax. Clearing the balance properly before an audit is far less costly.
Sources
Disclaimer: This article provides general information based on Canadian and Ontario tax rules in effect at the time of writing. It is not tax, legal or accounting advice for your specific situation. Rates and rules change, so please speak with a CPA before acting.
Written by
Manraj Chahal, CPA, LPA, MBA
Manraj Chahal is a Chartered Professional Accountant (CPA), Licensed Public Accountant (LPA) and MBA graduate with over a decade of experience in accounting, assurance and taxation. As Principal of MNJ CPA Professional Corporation, she provides audit, review and compilation engagements, financial reporting, and personalized tax planning and compliance services to businesses and individuals across a wide range of industries. Her expertise includes financial reporting under ASPE and IFRS, helping clients stay compliant while making informed financial decisions. Manraj takes a proactive, client-focused approach, emphasizing integrity, accuracy and practical solutions that support business growth, optimize tax outcomes and build long-term financial success.
