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Edmonton Bookkeeper | Understanding Shareholder Loans

Many business owners do not understand how shareholder loans work in their corporation, believing that they can take any money out of their business that they want at any given time says Edmonton bookkeeper. Not only is this not correct, it can also be dangerous for business owners to believe because if they’re not properly declaring the money that they take of their account to Canada revenue agency, they can be hit with significant tax penalties. It can be fairly simple for business owners to understand some basics of shareholder loans, in order to help them take the money out that they need in order to live, all while avoiding tax penalties.

Business owners may not understand that personal tax can be automatically assessed to them if they don’t clear the shareholder loan. CRA can assess a business owner the outstanding balance at any time and without warning says Edmonton bookkeeper. It’s extremely important for business owners to understand that they cannot open your company for longer than two consecutive years. By knowing how long they have to clear their balance, can help business owner not only take the money out in order to avoid tax assessments, they can also help business owner plan how to take that money out in a way that will help them avoid paying significant taxes. Many business owners who do not understand how shareholders loans work, and up carrying the balance in their company for several years, and get hit with a huge tax bill when they least expect it.

One way that business owners can ensure that they are keeping their shareholders loans simple and accountable says Edmonton bookkeeper is to create a separate bank account that is just for shareholders loans. All of the money that they draw out of their company comes from that account, which limits the number of transactions that are coming from that account in order to avoid errors. Business owners should have one draw of money out of that account every month says Edmonton bookkeeper. Maybe they’ll have a second draw for their personal taxes, but then nothing else. This can help the business owner and the accountant review the accounts and see if additional monies coming out that they aren’t expecting, or help them account for every dollar that is taken out. The reason why this is important, is in order for the business owner and the accountant to be able to track each draw and be able to explain it. If a business owner takes money else, but it’s not for personal use, explaining that to CRA will help them avoid paying taxes on the amount that they didn’t take for personal reasons says Edmonton bookkeeper.

by understanding how shareholder loans works, and how to take money out of their corporation, entrepreneurs can take the money out that they need in order to live, all while paying the minimum amount of taxes and avoiding being assessed by the CRA.

Understanding how shareholder loans works in a corporation can help business owners avoid paying significant taxes on the money that they take it out of their corporation says Edmonton bookkeeper. Understanding how they work can also help them take money out in a way that helps them avoid paying higher taxes, as well as avoiding being assessed for higher personal taxes by the Canada revenue agency. Too often, business owners don’t understand how shareholders loans works, or they don’t think that it is important until it is too late and they’re paying higher taxes or being assessed by CRA an amount that they can’t pay.

The business owner should understand that every time they take money out of their business, that’s money that they owe back to their business. All the money that they take out is kept track in a running total called shareholder loan. Every time a business owner takes money out of the corporation, they are expected to pay back. However, if the business owner takes the money out because they need to draw a salary in order to live off of it, their intentions are not to pay it back. Therefore they need to declare to government that they took that money out as salary. This is extremely important to do, and is called the clearing shareholder loan. A business owner has two years to declare to CRA that they have taken the money out for personal use, and they will get assessed personal tax on that amount. All business owners who take dividends or salary from their corporation pay personal taxes on the amount. If the business owner does not clear there shareholder account, Edmonton bookkeeper says CRA will be able to assess that business owner for taxes on all the money that they took out. If a business owner has let this amount go longer than two years significantly, this can be a huge tax bill that is very difficult to pay. Therefore it’s extremely important says Edmonton bookkeeper that business owners clear their child over account regularly, and keep good records.

Business owners should also know that every time they pay money into the corporation, but it’s also kept as a running total in their shareholder loans, all the money that they take out and all of the money that they put in. If they put more money in then they take out, then the corporation owes them the money instead of the other way around says Edmonton bookkeeper.

In order to keep extremely good track of both of these totals, business owners should have a separate shareholder loan bank account. Edmonton bookkeeper says this will help business owners keep track of all the money that they have taken out of their business. If they take all of their dividends out of this account, it limits the number of transactions that are happening in that account, which makes it much easier for that business owner and their accountant to review all of the draws to understand clearly what is going on with it. This is extremely important, because if CRA asks why certain amounts were taken out, business owners should be able to prove each time they drew money out, and what reason it was for.