Top five common Corporate Income Tax issues faced by clients: shareholder debit balances.

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Grant  GilmourA debit balance on your shareholder loan account indicates that you have taken more money out of the corporation than you have injected into it. Canada Revenue Agency (CRA) does not like corporations loaning money to the shareholders, as they view it as the shareholders taking money out without paying taxes.

 Discussion:

For many entrepreneurs and owner managers the corporation’s bank account is often an extension of their own personal bank account. This is because their lives are so entwined with their business. At the end of the day, as they own the corporation, they reason that any money in the corporation’s bank account ultimately belongs to them.  This type of reasoning can get the shareholder into trouble very easily. Although it is most likely that the money will end up in the hands of the shareholder, it has to go through the proper tax treatment. When a corporation earns income it is taxed at a rate of either 13.5% or 26%. This is generally lower than the tax rate an individual pays, which is around 45%. Consequently if you take money out of the company and do not pay tax you could be avoiding as much as 32% in taxes, something CRA frowns upon and will add to your misery by assessing penalties on top of any taxes owing.

 

To avoid such headaches we recommend you follow a few simple rules that will allow you to control the shareholder loan account:

• Always, always, always pay for personal items such as groceries, trips and  consumables personally.

• Keep a personal credit card as well as a corporate credit card. Do not use corporate  cheques or credit cards to pay for personal items.

•Ensure your accounting records are maintained regularly so that you can see how  much money is going through your shareholder loan account. Keep an eye on what  is recorded to shareholder draws.

Pay yourself either a salary or a dividend that is sufficient to cover

•           your living  expenses.

•           If you need additional money either pay yourself a dividend or salary and

record it  as such, do not just write a cheque for a random amount to yourself.

•           Organize your corporate and personal affairs so that the company owns and

pays  for items that are used to generate business income such as motor

vehicles.

•           Read our FAQ #12 Shareholder Loan Debit Balances.

  

Recommendation:

If you are concerned about your shareholder loan account, you should contact Gilmour Knotts Chartered Accountants for assistance.

Next week part three of our six part series will focus on missing payroll remittances.