Shareholder Loan Repayments and Taxable Benefits
It is common for shareholders of private corporations to advance their own money to their corporations. Where the corporation later repays that money, the repayment will generally not be taxable to the shareholder.
Problems can arise where money is transferred to the shareholder, or the corporation pays the shareholder’s personal expenses, without properly recording the payments as repayments of the shareholder loan.
The Tax Court of Canada recently considered this issue in Kumar v. The King, 2024 TCC 105.
The Shareholder Loans in Kumar
Mr. Kumar had advanced substantial amounts of money to his corporation, RDR Tire & Autocentre Ltd. He had mortgaged his home to help finance the corporation and advanced more than $600,000 through two mortgage-financed loans, together with additional amounts from time to time.
There was no dispute that genuine shareholder loans existed. The corporation’s balance sheets showed shareholder loans payable of approximately $279,000 in 2013 and $278,000 in 2014. The corporation also made payments to or on behalf of Mr. Kumar, including payments of his personal expenses. Mr. Kumar argued that these payments were simply repayments of money the corporation already owed him. CRA assessed the payments as taxable shareholder benefits.
The Problem With the Corporate Records
The problem for Mr. Kumar was that the payments had not been recorded as repayments of the shareholder loan. There were no corresponding entries reducing the amount the corporation owed him.
The Tax Court concluded that the existence of a genuine shareholder loan was not enough. If corporate payments are intended to repay a shareholder loan, they should ordinarily be recorded that way in the corporation’s books. A taxpayer cannot simply rely on an intention expressed after the fact to change the character of the payments.
As a result, the Court upheld CRA’s assessment of the payments as taxable shareholder benefits.
What About a Bookkeeping Error?
The Court contrasted Mr. Kumar’s situation with the earlier decision in Canada v. Chopp.
In Chopp, a corporation advanced money that was used toward the shareholder’s purchase of a home. The amount should have been recorded against the shareholder loan account but was mistakenly recorded as a corporate expense. The Tax Court found that this was a genuine bookkeeping error, and the Federal Court of Appeal upheld the decision.
Kumar confirms that there is an important difference between correcting a genuine bookkeeping error and attempting to characterize payments as shareholder loan repayments after CRA discovers them. The Court accepted that a one-off accidental error may be corrected, but found that this was not what had occurred in Mr. Kumar’s case.
Why Kumar Matters
Kumar demonstrates that even where a corporation genuinely owes substantial amounts to a shareholder, CRA may assess payments as taxable shareholder benefits if the corporate records do not support the taxpayer’s position.
Whether a payment is a shareholder loan repayment or a taxable shareholder benefit can depend on the underlying transactions, the corporation’s accounting records and how the payments were treated when they occurred. Once CRA has commenced an audit, correcting or recharacterizing those payments can be difficult.
Gross Negligence Penalties
Mr. Kumar did succeed on one issue. Although the Court upheld the shareholder benefit assessments, it removed the gross negligence penalties imposed by CRA.
The Court accepted that Mr. Kumar believed the corporation was repaying amounts he had previously advanced. His failure to properly maintain the shareholder loan records was not enough, in the circumstances, to establish gross negligence.
Kirshen Tax Law Can Help
CRA frequently reviews payments between private corporations and their shareholders during tax audits. Disputes can arise over shareholder loan accounts, personal expenses paid by corporations and whether corporate payments should be treated as taxable shareholder benefits.
If you are dealing with a CRA audit, reassessment or dispute involving shareholder benefits or a shareholder loan repayment, a Toronto tax lawyer at Kirshen Tax Law can help. Contact us today to schedule a free consultation.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
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