The CRA’s One-Year Repayment Rule
When You Can Borrow Without Tax Consequences
What Happens if the Loan Is Forgiven
Best Practices Before You Borrow
When you run your own business, “borrowing from yourself” sounds harmless… until the CRA reminds you that your corporation isn’t your personal piggy bank.
When cash gets tight or opportunity knocks, dipping into your corporation’s funds can seem like the simplest fix. After all, it’s your business—the one you’ve built, funded, and nurtured—so why not borrow from it when you need a little breathing room?
But borrowing from your corporation isn’t as simple as moving money from one pocket to another. Done right, it’s a short-term loan. Done wrong, it’s unexpected taxable income and a potentially huge headache when year-end rolls around.
Let’s unpack what every small business owner should know before giving themselves a little “advance” from the company coffers.
What Is a Shareholder Loan?
A shareholder loan is when you, as a shareholder, take money out of your incorporated business for personal use. It might be to pay for a kitchen renovation, cover a gap in your personal cash flow, or make a down payment on a home. In the company books, this withdrawal shows up as a loan receivable, meaning the business is owed that money back.
It’s perfectly legal, but it’s not a free pass. The CRA keeps a close eye on these transactions to ensure business owners aren’t disguising personal income as “temporary” loans.
Which brings us to one of the most important rules of all: timing.
The CRA’s One-Year Repayment Rule
The CRA gives business owners one year after their company’s fiscal year-end to repay a shareholder loan. If you borrowed $10,000 on June 1, 2025, and your corporation’s year-end is September 30, you’ll need to repay that amount by September 30, 2026. Miss that deadline, and the entire loan could be treated as personal income—taxable in the year you took the money out.
That’s not a bill most business owners want to open.
In other words, borrowing from your corporation is fine as long as you treat it like any other loan. Set clear terms, track payments, and make sure it’s settled before the clock runs out.
Why the Interest Rate Matters
First of all, yes. The interest rate matters.
If you lend yourself money at a rate below what the CRA considers reasonable, the difference counts as a taxable benefit. This is based on the CRA’s prescribed interest rate, which changes quarterly. When the rate is low, the cost of borrowing from your business can be relatively minor. But when rates rise, undercharging yourself can trigger extra income tax.
It’s the CRA’s way of making sure you’re not giving yourself a sweetheart deal at the government’s expense.
The easiest way to stay compliant is to charge at least the current prescribed rate and make sure the loan terms look like something a bank would approve. You don’t need to hold board meetings over it, but a written agreement showing repayment terms and interest is worth its weight in peace of mind.
When You Can Borrow Without Tax Consequences
Not every shareholder loan leads to tax issues. If the loan is made for a specific purpose and follows a bona fide repayment plan, the CRA may allow an exception. These include loans made to:
- Purchase or improve your home
- Buy shares in the company
- Acquire a vehicle used primarily for employment
In those cases, the loan is considered to be made in your capacity as an employee rather than as a shareholder. That distinction matters—it can save you from having to report the loan as personal income.
Of course, the key phrase here is “reasonable repayment plan.” The CRA doesn’t expect perfection, but it does expect you to demonstrate that the loan is legitimate and not just a permanent withdrawal in disguise.
What Happens if the Loan Is Forgiven
If you never repay the loan and your corporation decides to write it off, that forgiven amount becomes taxable income in the year it’s forgiven. There’s no way around it. And since forgiven loans don’t magically disappear from your company’s balance sheet, they can also make your financial statements look weaker.
It’s a lose-lose situation: more personal tax and a less attractive corporate position if you ever need to apply for financing or attract investors.
Best Practices Before You Borrow
Borrowing from your business isn’t inherently bad (despite all of the warnings we’ve given thus far). The key is structure, documentation, and discipline.
Before you move any funds, consider these practical steps:
- Put it in writing. A written loan agreement makes the arrangement legitimate and clear to both you and the CRA. Include the amount, interest rate, repayment schedule, and purpose.
- Check the timing. If your corporation’s year-end is coming up, it might be smarter to wait until the next fiscal year to avoid tripping the one-year rule too soon.
- Track everything. Keep a simple record of repayments and interest charges. If you use accounting software or work with a bookkeeper, make sure the shareholder loan account is regularly reconciled.
- Stay proactive. If you know repayment will be difficult, talk to your accountant early. There may be ways to convert the loan into salary or dividends before it becomes a tax issue.
Good bookkeeping habits don’t just keep the CRA happy (though that’s a biggie). They keep you informed about where your money is really going, which.
Borrow the Right Way with AIS
Borrowing money from your corporation isn’t off-limits, but it requires a balance of convenience and compliance. Sure, the funds might be yours, but the tax rules around shareholder loans are strict for a reason. Treat the loan as real debt, document it carefully, repay it on time, and you can use it without issue.
Ignore those steps, and what started as a small cash flow fix could become an expensive tax surprise.
If you’ve already borrowed money from your business or are considering it, a quick conversation with your accountant can save you a long-term headache. AIS Solutions helps small business owners across Canada navigate shareholder loans, maintain proper records, and protect their Small Business Corporation status, so borrowing doesn’t come back to bite you at tax time.
Need help sorting it out? Our bookkeeping services can help you keep shareholder loan records clean, accurate, and fully compliant with CRA requirements. And if you just want straightforward advice from a team that’s fluent in small business, book a call and we’ll help you make sense of the numbers and keep more of what you earn.
Welcome to AIS Solutions. We’re a Canadian bookkeeping and cloud accounting firm with expertise in virtual bookkeeping, bookkeeping for ecommerce, SaaS companies, landscapers, and contractors.
We help business owners make good financial decisions by providing accurate real-time numbers.
You can learn more about our bookkeeping pricing here.
We also specialize in QuickBooks training.
- If you enjoyed this article, you might also like ‘How to Estimate Bookkeeping Costs for Your Business Size’
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