[bgau]

My client has a yr end of July 31/08 (Ltd. company) . There is a debit balance in S/H account of approx. $30,000 for misc. personal expenses paid by the company during the year. He made a deposit into the company of approx. $50,000 in Sep/08 which I assumed would wipe out the S/H receivable. However after reading some of the other posts on this website I'm not sure if this is the proper way to record this transaction. Is this OK or does the yr end S/H receivable need to be reclassed as wages and put on his 2008 T4???

[taxdetective]

bgau, on Oct 12 2008, 02:37 PM, said:

My client has a yr end of July 31/08 (Ltd. company) . There is a debit balance in S/H account of approx. $30,000 for misc. personal expenses paid by the company during the year. He made a deposit into the company of approx. $50,000 in Sep/08 which I assumed would wipe out the S/H receivable. However after reading some of the other posts on this website I'm not sure if this is the proper way to record this transaction. Is this OK or does the yr end S/H receivable need to be reclassed as wages and put on his 2008 T4???

You need to get out your income tax act to read S 15 and 80 and the CRA website search engine to find the IT's plus review the article I wrote for www.ProConnection.ca about shareholders. Specifically I wrote about shareholder benefits in November 2006 - sign up for free and review archives for all kinds of useful articles that are still relevant.

Under S.15(2) of the Income Tax Act where a corporation has advanced funds to a person or partnership that was a shareholder the amount of the loan must be included in the income of the person or partnerhsip to whom the loan was made for the taxation year during which it was made. There is an exceptionon under S. 15(2.6) if repayment in the year following the taxation year in which the loan is made or the indebtedness incurred. EG
During the year corporation made a loan. Shareholder must repay loan by the end of the next taxation year.

HOWEVER - in order for this exception to apply, the repayment must not be part of a series of loans and repayments. If the company lent the money back to the shareholder again, the loan is not considered repaid.

When the year end balance of the current year is repaid by dividends or wages credited to the loan account, CRA agrees these payments are not considered part of a series of loans and repayments. See IT119R4 on the CRA website for an illustration of how S. 15(2) applies when there are loans and repayments. Also review S. 80.4(2) and S. 15(2) interaction for interest calculations and how they work with T4A benefits for inputed interest on debit balances. See S.80.5 for deduction on interest benefit reduction and IT421.

Note there are other exceptions for purchasing a dwelling for personal use, shares of a coop housing corp. when someone is an employee-shareholder and special rules and documentation meet the criteria for an extended loan. Best not to mix the two up and always repay the amounts within the year. Best practice, never have debit balances for shareholders.

Also if someone repays in whole or in part, a loan included in their income because of 15(2) they may under 20(1)(j) deduct the repayment in the year the repayment is made.

and if you aren't sure, get a professional accountant involved to ensure that you and your client stay out of trouble.