Taking Money from your Corporation Part 2

The other side of the shareholder loan is when you borrow money from the corporation.  This may be a one time lump sum, or may be a series of draws monthly, regularly or sporadically.  You are allowed to have a shareholder loan owing to your corporation for up to one year after the Corporation’s year end date.  So, for example, if you borrowed money from your corporation in the year and then still owed the money on your corporation’s next year end, you would have 1 year from that corporate year end to either pay back the loan, or claim it as personal income.  Now that we understand that rule, does it not seem simple to just take monthly or semi-monthly draws from the company and then at the end of the year, determine if it is in fact shareholder loan, wages, or dividends?  A lot of times you may not know until the year end anyway!  This is a great alternative to trying to keep up with all the payroll administration, remitting and filing headaches!  We will discuss this further in this blog series.

Second, we will now discuss dividends as a way to take money from your corporation.  For more on dividends, please do search my blogs as there is a lot more in depth teaching on dividends.  Dividends are simply a payment of profit from the corporation to its shareholders.  The first rule of dividends from corporations is that dividends can only be paid if the end result, after the dividends are paid, is that the Retained Earnings of the corporation are positive (above zero).  The Retained Earnings of a corporation put simply are a sum of the profits and losses of the corporation, less dividends, since the corporation’s inception.  The second rule of dividends paid from corporations is that each shareholder that owns the same class of shares must receive the same amount of dividends per share.  This is an important topic that is discussed in great length in some of my other blogs, and is important in determining your share structure.  Simply put, if you plan on paying dividends to anyone but yourself (ie. Spouse) then ensure they have a different class of shares than you do, so you remain in control of the income splitting (who gets how much).  Dividends are claimed on the corporation’s T2 income tax return, and are given to you on a T5 reporting slip, which is filed as income on your T1 personal income tax return. 

We’ll cover the third way to take money from your corporation in the next blog.