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How to Protect Shareholder Loan

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In this video, Jason Watt discusses the often misunderstood concept of shareholder loans, which he attributes to confusion in the accounting profession. He explains that from an accountant's perspective, this term refers to a balance sheet item indicating whether a corporation owes money to a shareholder (typically a positive situation) or if the shareholder owes money to the corporation (generally negative, with some exceptions). Watt emphasizes that the shareholder loan account is not well understood, primarily because the distinction between these two scenarios is not clearly communicated. He clarifies that this video serves purely as an educational resource and does not constitute tax advice.

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What is the advantage of shareholder loan?

By keeping a record of payments and an eye on interest, shareholder loans can be an effective tool to compensate shareholders, where the balance of the loan is declared as a dividend during the year.

Is shareholder loan interest tax deductible?

Debt repayment by the corporation is not an earnings distribution to the shareholder, and therefore it is tax-free. Dividend distributions are not deductible by the corporation, whereas interest payments are deductible by the corporation [Section 163].

What is the use of shareholder loan?

A shareholder loan is an amount that you, as a shareholder owe to your corporation. Typically, a shareholder is paid from the corporation through either salary or dividends. Dividends are paid from after-tax corporate profits and taxed at a personal level.

What is an example of a shareholder loan?

An owner withdrawing money from a corporation is the most basic example for how a shareholder loan is used. If the withdrawal is not designated as a dividend or a salary, it creates a loan from the corporation to the shareholder.

Can a shareholder loan be forgiven?

Shareholder Loans Before dissolving the corporation, these loans need to be recovered so that creditors can be paid and distributions made. If there are mitigating circumstances such as the shareholder with the loan filing for bankruptcy, the corporation will forgive the loan.

Do shareholder loans have to be repaid?

Updated October 6,2020: The shareholder can also put money into the corporation when it needs an infusion of cash, but the corporation has to be diligent in repaying the loan so as to avoid incurring taxes for that shareholder.

What qualifies as a shareholder loan?

Shareholder loan is a debt-like form of financing provided by shareholders. Usually, it is the most junior debt in the companys debt portfolio. On the other hand, if this loan belongs to shareholders it could be treated as equity. Maturity of shareholder loans is long with low or deferred interest payments.

What is the difference between a shareholder loan and a capital contribution?

A capital contribution (also called paid-in capital) increases the shareholders stock basis; a loan increases the shareholders debt basis. Basis is important because each shareholder can deduct pass-through losses up to the amount of their basis in the company.

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