How to Structure Shareholder Loans: Interest, Security and Tax Considerations

Key Terms of a Shareholder Loan

A properly structured shareholder loan should include:

• Interest rate: Set at or above the CRA/IRS prescribed rate to avoid a taxable benefit. In Canada, the prescribed rate is 5% (2026)
• Term: A specific maturity date (e.g., 1-5 years) or demand loan
• Security: Whether the loan is secured (backed by company assets) or unsecured
• Repayment schedule: How and when the loan will be repaid
• Promissory note: Written evidence of the debt obligation

Example Journal Entries

Loan advanced by shareholder ($50,000):

Dr Cash $50,000
Cr Shareholder Loan Payable $50,000

Monthly interest accrual (5% annual on $50,000 = $2,083/year, $174/month):

Dr Interest Expense $174
Cr Interest Payable $174

Repayment of $25,000 principal:

Dr Shareholder Loan Payable $25,000
Cr Cash $25,000

Tax Treatment

In Canada:

• Interest paid by the corporation to the shareholder is taxable income
• The corporation can deduct interest expense if the loan is used for business purposes
• If the prescribed rate benefit rules apply, the shareholder may be taxed on a deemed interest benefit
• A shareholder loan that remains outstanding for more than 2 years may be recharacterized as a dividend by the CRA

Prescribed rate loans: If a corporation lends to a shareholder at 0% or below-market rates, the shareholder is deemed to receive a taxable benefit equal to the forgone interest at the prescribed rate.

Best Practices

• Always document loans with a formal promissory note
• Charge at least the prescribed rate to avoid deemed benefit rules
• Ensure board resolutions authorize the loan
• Track repayments carefully and document in writing
• Avoid loans that remain outstanding for more than 2 years without repayment to avoid dividend recharacterization

Internal links (related)

• Capitalization of Shareholder Loans to Equity
• PUC vs Stated Capital
• Tax Planning Strategies