Interest rates are reaching incredible highs in Canada, which is why many people are looking for ways to take out loans with low or no interest. One of the top options you have at your disposal is a shareholder loan. However, it is crucial to understand what the loan is and the risks and benefits that come with it.
So, if you want to understand more about shareholder loans, you are in the right place. Here is a complete guide to making an informed decision about whether this is the right choice for you.
Shareholder Loans Explained
The shareholder loan is the amount that you owe to your business as a shareholder. That is because you can use corporate funds for your personal use throughout the year outside of dividends and salary. The amount that you withdraw is considered a loan from the corporation.
Keep in mind that this amount is not subject to tax, which is why you need to repay it within a year. On the other hand, you can also loan money to your corporation, and this will be known as a shareholder loan as well.
When Is Shareholder Loans Beneficial?
You might wonder what the benefits of shareholder loans are. Here are the top considerations that you should to know about as a shareholder of a business:
When You Don’t Want Tax Liability
One of the greatest advantages with regards to taking out shareholder loans is that you can withdraw the money without triggering any tax liability. However, you have to pay the amount back within the time frame, which is usually a year. On the other hand, salaries and dividends require you to pay a certain tax amount to the CRA.
Anyone that wants to avoid this tax liability can opt for shareholder loans. Just make sure that you have enough cash flow to return this loan back on time.
When Purchasing A Motor Vehicle Or Place Of Residence
One instance where you can take out shareholder loans without the time limit of tax liability is when you want to purchase a motor vehicle for company use. You can also evade this liability if you plan on purchasing a place of residence for the shareholder. This includes a mobile home, condo, house, or cottage.
Keep in mind that there will still be certain conditions that will be applied here. For example, you will need to have a legitimate repayment plan in place within a set time period.
That was your complete guide to understanding when shareholder loans are beneficial in Canada. It is important to understand all the rules, regulations, benefits, and more before you decide to opt for this type of loan. It will enable you to make the right decision for yourself.
Once you learn more about shareholder loans, you will understand when a shareholder loan is beneficial. In addition, you would also be equipped with the required knowledge to help you make an informed decision that would ultimately help you make the most out of the loan and repay it in time.