Borrowing From Your Company: Why it’s Riskier Than You Think

UPDATE (June 2, 2025): This article has been updated to reflect changes in legislation, regulations, and accounting practices since the original date of publication (July 13, 2021).

Many business owners move money between their corporate and personal accounts without thinking twice. Whether you’re drawing funds for personal use or reimbursing expenses, shareholder loans are a common practice—but they come with big risks if you don’t plan carefully.

Here’s what you need to know about the tax consequences of borrowing from your own corporation—and how to avoid the most common traps.

The “one-year” rule: When a loan becomes personal income

Under subsection 15(2) of the Income Tax Act, and as outlined in the CRA’s folio S3-F1-C1 on shareholder loans, if you borrow money from your corporation and don’t repay it within one year of the end of the corporation’s tax year, the full amount is included in your personal income.

Example: If your corporation’s year-end is December 31, 2024, and you borrow $60,000 in January 2025, the loan must be fully repaid by December 31, 2025. If it isn’t, that $60,000 may be included in your 2025 personal income.

There are exceptions (such as loans made in the ordinary course of business), but they’re narrow and subject to strict CRA conditions.

Interest adds up: Deemed benefit under section 80.4

Even if the loan itself isn’t taxed under 15(2), you may still face a deemed benefit under section 80.4 if the interest you pay is below the CRA’s prescribed rate (currently 4% for Q2 2025). That benefit—calculated as the difference between the interest you pay and the prescribed rate—is taxable as employment or shareholder income.

This applies each year the loan remains outstanding and must be included in your personal return.

Repayment plans must be bona fide

To avoid unintended tax consequences, shareholder loans must be documented and repaid like any other formal loan. That means setting out the loan amount, interest rate, repayment terms, and repayment schedule in writing.

Repaying the loan through salary or dividends is permitted—but those amounts must actually be paid and recorded. Be careful about repaying a loan only to re-borrow a similar amount shortly after. The CRA may treat this as a continuing obligation and deny the deduction.

Not all loans are created equal

There are a few situations where shareholder loans may avoid tax under 15(2). These include:

• Loans to buy a home used as your principal residence
• Loans to buy a vehicle used in your employment
• Loans made in the ordinary course of business where lending is part of the company’s operations

Even in these cases, the loan must be properly documented and have bona fide repayment terms in place.

Borrowing from your corporation might seem like a simple short-term solution—but the long-term tax consequences can be significant. If you’re considering a shareholder loan—or already have one on the books—talk to your DMCL advisor. They can help you understand your obligations, avoid unexpected taxes, and make sure the loan works for you and your business.