CCPC Loans to Shareholders
by L. Kenway BComm (Retired CPB)
Highlights Of This Post
As cautioned in part 1 of this article, please use the information on this page more for talking points with your accountant ... so you have a better feel for what kind of information you are seeking.
Here are my notes on:
- Employee Loans / Loans to Shareholders ... not to be confused with Shareholder Loans to the Corporation
- Spousal Loans
- Management Fees and Salaries - includes owner manager remuneration and documentation requirements including overview of new rules introduced in 2018
- Owner Managers Do Not Take Draws
- Shareholder Benefit and The Company Vehicle ... SubSection 15(1)
- Shareholder Benefit and Disability Insurance Income Premiums
- Prescribed Rates for Vehicles - Tax exempt allowances and Vehicle deduction limits
INDEX for My Notes on CCPCs
Is Incorporation Right For You And Your Business? |
Part 1
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Part 2
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Part 3
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The Bookkeeper's Notes on CCPC
Part 2
If your company is a Canadian Controlled Private Corporation (CCPC) and has loans to shareholders, be aware of the very specific rules that apply when a corporation loans money to its shareholders who own more than 10% of the shares and their family members.
If you have a negative shareholder loan balance (it is in a debit balance), these rules now apply to you.
You may also want to make sure you meet CRA criteria BEFORE you take any management fees or bonuses ... to ensure there are no negative tax consequences.
Unlike a sole proprietor, an owner / manager does NOT have free access to the company's funds and/or assets. Why? The corporation has its own legal identity that is separate from the owner / manager's identity.
What does this mean to YOU? All titles to assets MUST be held in the corporation's name, not the owner / manager's name. If an asset is registered in the owner's name, it is a personal asset regardless if the funds to purchase were removed from the corporation.
Bookkeepers Be Aware of These Rules
Changes to Rules for Private Corporations
January 1, 2019 Update
Here is a brief summary of what came into effect in either 2018 or 2019 based on the proposals discussed below. Please check in with your accountant and do not rely on my notes for these new rules.
TOSI - see BDO's article on Income Splitting - Avoiding Tax on Income Split discusses business owners over 65 years old, gains on death and inherited property. Another BDO article to look at is Income Splitting - How the New Rules will Impact You and Your Family. It covers how the new rules work including the 3 exclusions from TOSI for (1) excluded businesses, (2) excluded shares, and (3) reasonable returns.
Passive Investment Inside a Corporation - Read about the new passive investment income rules that came into effect January 1, 2019 here.
Refundable Dividend Tax on Hand (RDTOH) - CRA website says, "For tax years that begin after 2018, the dividend refund rule will be changed so that a private corporation will get a refund of its refundable dividend tax on hand (RDTOH) only where it pays non-eligible dividends, or eligible dividends that are derived from portfolio dividends it received from non-connected corporations. A transitional rule will preserve the refundability of a corporation's pre existing RDTOH."
December 13, 2017 Update
The government's proposed income sprinkling restrictions, revised after consultations with the public, go into effect January 1, 2018. See BDO's tax alert on the changes introduced. The article details:
- Exclusions from TOSI
- Taxpayers over age 24
- Taxpayers between 18-24
- Adults over 65
- Others changes - some family members are automatically excluded
- Capital gains
- Reasonable return
July 2017
Here are my notes of the January 1, 2018 proposed tax changes for Private Corporations. This is a very, very simplified overview therefore if the rules affect you, you really do need to visit your accountant as soon as possible for advice as the changes are substantial. The new rules affect ALL private corporations not just professionals and high income individuals. The new rules seriously change how families with private corporations will remunerate themselves.
1. Income splitting
The same rules that apply for labour contributions and capital contributions will also be applied to dividend payments. "Kiddie" (under 18) tax rules will also apply to adult children, spouses and other family members. "reasonable" payments will be permitted.
Current Labour Contribution Rules - "Reasonable" is defined as follows: Related individuals between the ages of 18-24 must be actively engaged on a regular, continuous and substantial basis in the activities of the business. Related individuals over 24 years of age may be compensated provided they are active in the business and their compensation would be the same as you would pay a third party (they are at fair market value).
The labour contribution rules will now apply to payments of dividends as well.
Current capital contributions for related individuals between the ages of 18 and 24 says the dividend paid cannot exceed the prescribed rate in effect which is currently 1%. So if a $100,000 contribution was made to the business, dividend payments could not exceed $1,000.
The capital contribution rules will now apply to payments of dividends as well. Related individuals over the age of 24 will have more flexibility as it allows for consideration of risk.
2. Lifetime Capital Gains Exemption (LCGE)
LCGE allows owners of CCPSs to receive tax-free proceeds from the sale of shares subject to certain rules. The government is proposing the same handling as income splitting.
New rules say that any gains realized or accrued in the hands of an individual under the age of 18 are not eligible for LCGE (which means the gains are no longer shielded). In addition, any gains on shares of a CCPC that would be subject to the split income rules would NOT be eligible for the LCGE. This would exclude any "reasonable" gains determined using the same tests as income splitting.
Trusts will no longer eligible for LCGE. The main benefit for setting up trusts is to protect yourself from creditors.
There is some relief for 2018 in the form of an election. The election will NOT apply to individuals under the age of 18 ... NOR to trusts making allocations to beneficiaries under the age of 18.
3. Passive Investment Inside a Corporation
Prior to January 1, 2019 there was a mechanism in place that leveled the playing field (Part IV tax) when a passive investment portfolios are accumulated inside the private corporation.
As The Knowledge Bureau July 19, 2017 post stated "... these alternative tax calculations challenge the 1972 tax system which was comprised of two elements: first, the RDTOH (Refundable Dividend Tax on Hand), which denied the lower small business tax rate when income is earned in the corporation and then second, the refund of the high rate tax when income was distributed to shareholders, where it was taxed personally. ". The post points out the proposals are making changes to rules that are commonly used to prevent double and triple taxation of the same income.
The government now wants to eliminate the tax deferral. The government is now proposing to tax the investment income as if paid to a self employed individual who is a sole proprietor ... taxed as if the investment was taken out of the company. Evelyn Jacks points out that salaried employees benefit from graduated tax rates while passive income in a corporation does not.
4. Conversion of Income to Capital Gains
The proposals prevent income being converted into a capital gain which is taxed at a much lower rate. This probably has been abused and should be addressed but the government's solution could potentially create double taxation for shareholders on death.
You can obtain more information in Moodys Gartner Tax Law Blog - More proposed reforms to small business taxation announced July 18, 2017 and the Knowledge Bureau blog referenced earlier in the article.
Management Fees and Salaries for Incorporated Businesses
Owner Manager Remuneration
BEST BET in 2018
Given all the changes announced by the government over the past few years regarding private corporations, including the proposed changes to go into effect in 2018, your best bet is to not take any short cuts here and book an appointment with your accountant. Find out how the rules apply to your situation. Don't listen to what others are telling you. They are often wrong or inaccurate.
Owner Managers have other options besides loans to shareholders when they want to remove money and/or assets from the company. Let's discuss a few ... starting with management fees.
Management Fees
As a small owner managed corporation, before you book your management fees or bonuses this year end, check to make sure the circumstances meet CRA criteria.
In August 2009, Andrews & Company Chartered Accountants posted on their website (www.andrews.ca) an excellent tax tip on management fees and salaries. I summarize the article here ... but tax rules and therefore strategies are always changing so what was effective in 2009 may not be the best strategy for owner manager remuneration in 2011. To make my point ...
I found a BDO article from February 2011 titled Owner Manager Remuneration Strategies Integration Revisited.
The article explains how "the corporate tax system was substantially changed in 2006 with the introduction of the eligible dividend rules as an initial step to counter the stampede of corporate conversions to income trusts. At the same time, the federal government and some provincial governments started a gradual process of lowering general corporate tax rates." It discusses the advantage if the income remains and is taxed in the CCPC.
The BDO article pertaining to CCPCs is somewhat technical but worth reading. I'm not a tax expert by any stretch of the imagination. I didn't understand all the nuances but got the gist of what was being said. As I've noted before, use the article for talking points with your accountant.
BDO also released an article titled Owner-Manager Considerations on October 15, 2011 that is worth reading; as is Deloitte's January 2011Privately Speaking - Tax Insights article by senior tax manager Robert Leombruno titled Managing Your Management Fees.
BDO's article points out that "a complicating factor to this analysis (salary / dividend mix) is the fact that the personal tax rate on dividends will increase between 2011 and 2012, and then is projected to remain at the 2012 rate." It discusses the drawbacks of dividend income and advantages of having a portion of your income taken in salary.
Okay now that I've addressed the time sensitivities of various tax strategies, here are effective owner manager remuneration strategies that are not utilized as much since the 2006 changes mentioned above.
Before reducing the corporation's tax burden by bringing this year's profits down to the $500,000 small business deduction limit through the use of management bonuses and fees, be aware that CRA can challenge the amounts if they are not reasonable as discussed in Deloitte's article mentioned above.
The Corporate Minute Book
It is important that details be documented. There should be a written contract and the decision to pay the fees / bonuses recorded in the corporate minute book.
The fees should be for active participation in and services provided to the corporation and in line with the effort it took to earn the fees. You must have the skills related to what you are being paid for and they should be in line with other similar companies.
CRA also looks at whether the profits being distributed in this manner are a regular corporate policy.
The Bookkeeper's Tip
A Good Bookkeeping Practice
Management Fee Documentation Requirements
BDO has an excellent article published in their newsletter Tax Factor (2010-02) titled Do You Have Documentation For Your Management Fees? Here is a quick summary of what BDO says CRA looks for:
- General shareholder information;
- A listing of the details of the management fees paid including recipient names, SINs or BNs, the relationship between the parties, the date and amount of payment, and how it was paid (cheque or journal entry*);
- Details of the services provided including description, time and frequency; and
- The actual contract of services between the two parties.
The article states that reasonable fees could be denied if there is insufficient documentation available to backup the fee(s) charged.Note* - Best practise is to always make a physical transaction of the money exchange between the corporation and the owner manager ... which means it is better to transfer money to the owner's bank account than make a journal entry to the shareholder loan account. Visit BDO's website to read the whole article located under Publications> BDO Publicaitons> Tax Publications> Tax Factors> 2010-02.
Other Owner Manager Remuneration Options
Speak with an accounting professional before doing anything to avoid negative tax consequences. Your accountant will
- advise you regarding the best way to personally compensate yourself and when the compensation should be paid.
- help you determine the amount and whether the compensation should be taken by salary, dividends or other benefits.
Here are some points to consider:
- Taking a salary is a deductible business expense and reduces the business's income. A salary also gives you RRSP contribution room and affects your claim for child care expenses.
- The salary required for the maximum contribution for 2022 is calculated as follows: $29,210 maximum contribution allowed / 18% of earned income = $162,278 earned income.
- The salary required for the maximum contribution for 2021 is calculated as follows: $27,830 maximum contribution allowed / 18% of earned income = $154,611 earned income.
- Accrued bonuses must be paid out within 180 days (not six months) of the fiscal year end ... and source deductions must have been remitted to CRA the month following when the bonus was received. If you don't pay out the bonus within the 180 days, it will have to be added back to income in the previous year.
- Dividends are paid out on after tax dollars. Rules changed in 2015. The dividend income for CCPC is grossed up for 2019 forward, it is 115% with an offsetting dividend tax credit on your personal tax return. Rate before 2015 was 125%. Between 2015 to 2018 it was as follows: 2015 = 118%, 2016 & 2017 = 117%, 2018 = 116%.
- Shareholder loans / employee loans can draw a taxable benefit. If your corporation loaned you or a family member money, repay the outstanding loan within one year. Interest on employee loans should also be paid.
I found an excellent CGA three part series of articles on owner/manager remuneration through google. Although the series is not dated, it is an older series as CRA is referred to as CCRA. This means it was written sometime between December 1999 and January 2004. So keeping in mind the 2006 changes mentioned earlier in this chat and subsequent changes if there years since ... although the principles will still be valid, some of the information may not be current. Check with your own accountant before doing anything. Here are the links:
- Part 1 on salaries, bonuses, and management fees
- Part 2 on dividends
- Part 3 on other methods of remuneration
See CRA's publication Technical News No. 22 for their position on CCPC shareholder / manager remuneration.
You can also check out RBC Wealth Management's article in 2016 on Salary vs Dividend.
As you can see, there are a number of ways to remove money from your company; loans to shareholder is just one of them.
The Bookkeeping Forum Q&A Related Links
The Bookkeeping Forum discussed ...
Shareholder loans and how an owner managers records a "draw". Just remember once this account is at zero, no more "draws" are available without tax consequences.
Recommended Reading - Deloitte's recommends the fourth edition of Taxation of Private Corporations and Their Shareholders available through the Canadian Tax Foundation. From their newsletter:
"The book is a valuable resource for entrepreneurs, owners and those who advise them. It provides an analysis of incorporation, capitalization, compensation, the acquisition and disposition of assets, the drafting of shareholder agreements, the purchase and sale of a business, and the structuring of a business in the most tax-effective manner."
It's been great chatting with you.
Your Tutor
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