Took Money Out of Your Corporation? Here’s What Happens Next
If you’re a small business owner, you may have transferred money from your corporation’s bank account to cover personal expenses. It happens more often than you might think.
The good news is that taking money out of your corporation is not necessarily a problem. The important thing is making sure it is recorded and reported correctly for tax purposes.
Can I Use My Corporation’s Money for Personal Expenses?
Yes, but the way the withdrawal is treated matters.
When you take money from your corporation for personal use, it is generally not considered a business expense. This means the corporation cannot claim a tax deduction for the amount withdrawn.
Instead, the withdrawal is usually recorded as a shareholder loan.
What Is a Shareholder Loan?
A shareholder loan occurs when a shareholder takes money from the corporation for personal use.
Think of it as the corporation lending money to you. The amount is recorded on the company’s books as money owed back to the corporation.
For example, if you withdraw $10,000 from the corporate bank account for personal expenses, the corporation may record a $10,000 shareholder loan receivable.
What Happens If I Don’t Repay the Loan?
The Canada Revenue Agency (CRA) has rules that may require unpaid shareholder loans to be included in your personal income if they are not repaid within the required time period.
This can result in unexpected taxes for the shareholder.
Because of these rules, it is important to review shareholder loan balances before filing your corporate tax return.
Is There Another Option?
Yes.
If the corporation has retained earnings, one common solution is to declare a dividend.
A dividend is a payment made from the corporation’s profits to its shareholders. Instead of paying cash, the dividend can be used to reduce or eliminate the shareholder loan balance.
For example:
- Shareholder loan balance: $10,000
- Dividend declared: $10,000
- Remaining shareholder loan balance: $0
This approach is often simpler than setting up payroll, especially for smaller amounts.
Why Do Many Business Owners Choose a Dividend?
Declaring a dividend may:
- Eliminate the shareholder loan balance
- Avoid payroll administration
- Avoid CPP contributions on salary
- Provide a straightforward tax reporting process
The corporation will generally need to prepare a T5 slip to report the dividend to the shareholder.
The Bottom Line
Taking money out of your corporation for personal use is common, but it should never be ignored at year-end.
Whether the withdrawal is treated as a shareholder loan, salary, or dividend can affect both your corporate and personal taxes. Reviewing these transactions before filing your T2 corporate tax return can help prevent costly mistakes and unexpected tax bills.
If you have been using your corporation’s funds for personal expenses and are unsure how to handle it, speak with your accountant before filing your return. A little planning now can save you time, money, and stress later.