Many business owners in Canada choose corporations as their business structure. Owner-managers of small firms must always remember that the company’s money is distinct from their own and shouldn’t be handled in the same manner. This can be tricky to understand and handle for most new businesses & companies.
It may result in tax issues if you use your corporate bank account for personal spending.
If it is determined that shareholders who do not properly separate their personal and business funds have received “shareholder benefits” or “shareholder loans,” they may be subject to double taxation under the Canadian Income Tax Act. If you want to know more about shareholders or taxes in general keep on reading and find your answers down below.
Rights and responsibilities of shareholders
Shareholders can vote at shareholder meetings after buying shares (if their shares have a right to vote). You can also receive a share of the corporation’s profits (dividends) and property upon dissolution. There is often a ton of meetings that one has to go through to understand all the responsibilities. In most cases, you have to understand the following:
Receive financial statements 21 days before each annual meeting
You have to approve large or fundamental changes (such as structure or business operations) on your own and within a certain time frame
Shareholders’ liability is limited to the amount they paid for their shares
A person stops being a shareholder when his or her shares are sold to a third party or the corporation is dissolved.
Shareholders can transfer shares and rights (also called “rights attached to the shares”).
Shareholders usually use special resolutions to make fundamental changes (such as changing the corporation’s name, the province of its registered office, share transfer restrictions, activity restrictions, and amalgamation, dissolution, and continuation) and to sell all or most of the corporation’s assets.
Foreign exchange gains and losses
Foreign exchange gains and losses incurred by a Canadian taxpayer as a result of conducting business activities (i.e. on an income account) are often fully deductible or includable in income, and this includes the functioning of a branch office.
Any method that corresponds with generally accepted accounting principles may be used to determine foreign exchange gains or losses on income transactions, so long as the treatment is consistent with prior years and the accrual method of accounting is followed.
Capital account gains and losses from currency exchange are subject to the same treatment as other types of capital gains and losses.
Accrual accounting cannot be used to reflect changes in capital accounts.
This is because, in the eyes of the CRA, a transaction must take place before a taxpayer may claim a capital gain or loss in a foreign currency.
Gains and losses on paper are consequently disregarded.
How a Canadian resident shareholder elects for eligible foreign spin-off shares
A shareholder who is a Canadian resident may elect to defer paying tax on the spin-off shares by including a letter with his or her income tax return in the year of the distribution.
You cannot file your T1 return using EFILE or NETFILE for the tax year covered by the election.
All required information for corporations filing online should be submitted in the “Notes to Financial Statements” section of CIF.
After filing electronically, you can send a letter to your tax center if you are unable to include all of the required information there.
Your letter should contain all of the following:
Written notification stating the shareholder’s decision to defer tax on the distribution of spin-off shares from a U.S. (or other foreign) corporation, along with the number of shares, cost amount otherwise determined, and fair market value of the shareholder’s original shares as of the distribution date and the election date.
Number of shares spun off and their current market value
Include your election with any Form T5 or Form 1099-DIV you receive in relation to this income.
For information on how to make a late election, go to the “Extension” part of the “Taxpayer Relief” portion of the code.
Common shareholder examples
Here are some real-life examples of shareholder loans.
Owner cash withdrawal is the simplest usage of a shareholder loan.
If money is withdrawn but not specified as pay or dividend, it’s a loan from the corporation to the shareholder. On the company’s balance sheet, it’s a “debit” asset.
If a shareholder buys a personal item with corporate funds, that’s another “due from shareholder” debt.
Non-business purchases can be anything.
If the shareholder doesn’t repay the money, they will have to include it on the income tax return.
Sometimes a stakeholder will invest his personal money into the business to offset expenses. However, you should know that the corporation must repay the shareholder’s debt. This is a shareholder-due transaction.
When a firm is fresh, new, and young, the owner often funds it until it can pay its bills, resulting in “due to shareholder” balances.
On the company’s balance sheet, it’s a “credit” liability.
If a shareholder pays business expenses using personal cash, it will be recorded as a “due to shareholder” activity in his shareholder loan account. A business owner or executive might take a prospect out to dinner and drinks.
PS: Make sure that all of your moves are smart, planned out & tactical. In case you don’t repay a shareholder loan before the end of the next fiscal year, it may result in that amount being included in your personal income for the year the loan was made.
Want to know more?
And there you have it! This a helpful guide on how you can make smart business moves and minimal mistakes. Due to shareholder frequently asked questions, you should check out wtcca.com and find your answers with them. They have an in-depth guide on how loans work, along with great tax services, bookkeeping services, accounting, etc. They will help with any big or small questions as well as any individual or company.