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Shareholder Benefit - Do I Have One?

07/03/2013


Many of us are aware that when shareholders receive payments from a corporation in the form of dividends or wages these amounts are included in income. However, as a shareholder you need to be aware of other types of income inclusions that are not as obvious as, say, a dividend or a wage. These are commonly referred to as “shareholder benefits”. The general rule is that if a benefit is granted to a shareholder, that benefit is included in the shareholder’s income in the year the benefit was conferred.

The term “benefit” is not defined in legislation; however, it is broad enough to include any type of payment to a shareholder that is not in the normal course of business or any type of advantage given to a shareholder. One of the most common shareholder benefits is personal use of the corporation’s property, such as using a company vehicle for personal use. If the shareholder is using corporate assets for personal use, the amount to include in the shareholder’s income is an amount that would be agreed to between parties dealing at arm’s length.

Another question that often comes up is whether a company can loan funds to a shareholder for their personal use, for example, a loan to purchase a cottage or cabin. The issues are: (1) Is this a benefit, and (2) if it is a benefit, what are the tax implications. The answer to the first question is yes and the tax implication to the shareholder is generally an income inclusion equal to the amount of the loan.

Some exceptions to the income inclusion are:

  • If the corporation providing the loan is in the business of lending money (i.e. a bank or credit union).
  • If the loan is provided to the shareholder in their capacity as an employee, not a shareholder, and the employee is not a “specified employee” (generally meaning the employee cannot own 10% or more of any class of shares). The loan must also have bona fide repayment terms.
  • If the loan is provided to the shareholder in their capacity as an employee, not a shareholder, and the loaned funds are used to purchase a home, a vehicle to be used in their employment or shares of certain corporations. The loan must also have bona fide repayment terms.
  • If the loan is repaid within one year after the end of the year in which the corporation made the loan and is not considered part of a series of loans or other transactions and repayments. This rule is in place to ensure there is not a cyclical nature to the lending of funds (i.e. borrowing funds and repaying it before the year-end and then borrowing the funds again right after the year-end).

If none of the exceptions are met the amount of the loan is included in the shareholder’s income for the taxation year in which the funds were loaned. If one of the exceptions is met, the amount does not need to be included in the shareholder’s income. However, the shareholder will still have to include a benefit in their income based on the funds loaned. For example, if company A lends $100,000 to shareholder X and X falls into one of the exceptions, X will have an interest benefit added to their income each year the loan is outstanding. The interest inclusion is equal to the prescribed rate of interest (1% at the time of writing this article) less any interest paid by the shareholder.

In closing, if you are a shareholder in a company, you need to be aware of the potential income tax implications if you use corporate assets for personal use or a corporation provides you with a benefit in some other way.​