Shareholder Loans | Edmonton Bookkeeping
Hi, thanks for tuning in again for another episode of ask squirrels. CPA. Did he ever talking about Sheryl alone? I’m here with uh, with me. May I think you might’ve seen some, some shareholders who are disciplined in their shareholder loan draws and some who are maybe a little undisciplined in the shareholder draws and taking a little more live. They live beyond their means. Yeah. So, uh, the court that we have here, uh, you know, for you concerning shareholder loans, Jim Calls, author of six business books including good degree, which one of my favorite is a culture of discipline is not a principle of business. It’s a principle of greatness. So the statistic that we have that ties in the shareholder loans is the average Canadian pays 43% of their income in taxes, tax, CPP, e I g, s t fuel tax, and it never ends. And then by comparison, on average, the average community is paying only 37% of their eight come for basic necessities, food, shelter, clothing.
Um, so Kenny gives you an idea how significant taxes in terms of our, our life, and we don’t often consider it. Sometimes because we think that bought a house for $500,000. That’s the biggest expensable. Uh, what about, you know, 40,000 a year every year until you die, it’s going to be bigger. Um Edmonton Bookkeeping is what you need for your business, so, and most people, you know, they don’t grasp that, but it usually ends up being the biggest expense of their entire life since going to dwarf the cost of your house and your car several times over. So the story, we have their business owners and they’re not sure how their shareholder loan account works or they don’t think it’s a really significant, uh, for tax and they end up triggering significant tax Bavis because of what’s in there still the loan. So me, and what do you think, you know, the business owners should be asking in terms of understanding the shown the loan account?
Well, the first question is what happens when you draw money out of the company or get a personal benefit? So
will you draw money out of the company? It normally adds to your shareholder loan account. So business owners should get beyond the, the, the fact that they should be running all of their payments. I it as a regular employee, they should be using a struggle on account to exercise some efficient tax strategies. So when they draw money out initially, it should add to this show alone accounts. So you’d take out $5,000 to live on in February. That means you now older company, $5,000 the same thing as the company pays your personal mortgage for 1500 bucks. Well now you owe the company, say you took $5,000 to live off, he took the company, paid your $1,500 personal mortgage payment. Now you are, the company has $6,500 so whenever money comes out or you receive a personal benefit of the company pays for, you know, what’s a running total of what you know over the company,
what have you contribute personal funds or pay corporate expenses personally?
Yeah. So let’s go back to that. That, that same example where that business owner had taken out $5,000 to live on and the the business paid their $1,500 a personal mortgage payment and the old the business, $6,500. But what if in the month before that the business owner put in $10,000 for that business to start? So really when that you get a credit in the share on the loan account, so let’s say they started by putting $10,000 into the business account. So then when they took $5,000 to live on, they know the business only 5,000. So it’s a running balance. Every time you get money out, it’s a debit and adds the amount that to you over the company. And every time you put money in, it’s a credit and it basically, it’s going to reduce the amounts of that, uh, uh, you know, that you owe the company or could create a scenario where the company owes you money. Okay? Okay.
How a shareholder loans owing to the corporation normally cleared?
So normally they’re going to be cleared via salary dividends. So that business owner taking $5,000 a month to live on the $60,000 they were taking it out because they need to live on it. They don’t have another source of income other than their business. So they’re not going to pay it back that that’s not what’s going to happen is we’re going to declare salary or dividends to clear that amount. So normally what happens in order to clear that shareholder loan balance is we’re going to declare personal salary or personal dividends and that wouldn’t declare it. So if we have a $60,000 in draws for that individual, we can declared a dividend for $60,000 and bring that share a little long balance. Zero. And we started from, from from scratch, from square one all over again.
What happens to your personal taxes when you declare salary or dividends?
Yeah, so you declare dividends, um, and you clicked salary or dividends and that’s going to create a personal tax amount because those salary given is there going to be included on your personal tax return. So they cleared the shareholder loan balance. Dividends can be complex which is why our Edmonton Bookkeeping can help you. Now we all personal tax on those salary or dividends. Yeah.
Why is it difficult to review historical shareholder hold our loan business.
The the of the loan balances? Yeah, they, they’re really what the, the Cheryl, the loan balances. You gotta remember it’s a running total from the beginning of the business, so you get a new business owner and you’re walking through year one, it’s not so bad. Let’s say you get a client and they come to you and the last account never met with them. Then just email them reports and they weren’t sure what’s going on. They asked me, can I get an accounting and my shareholder loan balance? Well, that would mean an accounting of your shareholder loan balance for the last decade. Since you’ve incorporated transaction by transaction line by line this, the shareholder probably doesn’t, even the owner of the business probably doesn’t even have the General Ledger or the receipts that deal with ledger. Nevermind. I don’t remember any of the transactions that happened seven or eight years ago to term if they’re reasonable. So, you know, it’s something you need to stay on top ball because the exercise of going back, it’s, it’s, it’s very difficult if not impossible, uh, to go back and, you know, because of the, the shareholders recollection on, on doing a reasonableness test. It’s not there. They just don’t remember what happened in that length of time period.
Does monitoring your shareholder loan prevent unnecessary personal debt?
Yeah, 100%. You can have these amounts that are, that are put in your, um, share the loan account and remember the, what’s put in your show the loan account and usually it’s going to trigger salary or dividends, uh, to clear that show the whole account. So for monitoring that show, the loan account, we could catch something that maybe it’s, hey, we thought this is, it’s $1,500. I go back to that $1,500 mortgage payment. What did that $1,500 was a payment on a business loan at the accountant. Didn’t know about it. Our Edmonton Bookkeeping can help you avoid those. Okay. That now we’ve just avoid it. $1,500 in personal income, which is, you know, probably somewhere between 30 to 48% depending on how much this business owner is making. Um, so monitoring that show the loan account, like this is a, of all the accounts that are significant loss of times, you can look at totals and then the rest of the accounts, but your shareholder loan account, you should be looking line by line and it shouldn’t have that much stuff in it because we shouldn’t be running personal transactions through it. We should be taking one amount per month out every month and living off of that
does limiting the transaction in your shareholder okay.
Account prevent. Yeah, 100%. So you want to be limiting the amount of transactions in your shareholder loan account because this is so significant for tax. We don’t want to be making errors and the way to reduce errors and reduce the number of transactions. So the, you know, the, the goal normally is for that shoulder to take one draw every month out of that account to meet their personal, uh, obligations. So they take one single draw every month and maybe they have a plan, personal tax payment every month. But that’s it. So we look at that show loan account, we see the one draw that we planned for and we see the one personal tax payment that we’d planned for and we see nothing else. And that way if we do see something else, it’s one of three transactions now and then we can determine is this legitimate or is this, you know, uh, something that should be a business expense. But imagine if you have this Cheryl the loan account and you have a hundred or 200 transactions a month, you’re going to miss that. You’re just gonna miss stuff. So you know, you don’t want to be comingling those personal expenses and get them out, get them to another account and that’s going to reduce the air. Is it reduced the chance that you’re going to pay tax on something that you shouldn’t pay tax for?
How long do you have to clear bounces owing to the corporation?
So you have two years, so you can’t all your company, uh, for, you know, two consecutive years. You can’t own your company from one year. So it, because people often ask, I was like, well, the salary dividends, um, what happens, you know, I don’t, I don’t want salary give it is because I don’t want to pay any personal as well. Unfortunately, that’s not the case. Everyone would just borrow money from their company forever. You have two years, you have to clear the balance from your corporation in two years. Edmonton Bookkeepingis important for your company. Um, if not, you know, it, you know, it can be assessed personally. So, um, you have two years, declare that balance and it has to be cleared, unfortunately. Did that two year window to clear a shareholder loan, provide planning opportunities? It does. It provides a significant amount of planning opportunities in terms of smoothing out the income.
So, you know, uh, let’s say you’re a business owner and you’re purchasing house in year one, but in year two, you’re not going to purchase another house. So you gotta take a bunch of money out of your company to purchase this. How is purchasing or you’re going to get married and the weddings are expensive or whatever it is, but you have some sort of you know, one time event and and you you are maybe business slowed down later on. Um, and for whatever reason you’re taking more money out in one period. Then the next, well we don’t need to pay all of the tax on that in period one. We can spread it out into period. Two of the beauty of that is the more you take out at any period the higher rate of tax so you’re going to pay. So the more we can smooth out that income over time rather than declaring our high income one year in a low income next year, you know, really affect the tax money is normally we’re hitting that middle range.
We’re using the maximum amount of those marginal rates. We don’t want it. We’re always trying to avoid those amounts at the high end of the, the tax rates spectrum, you know, we can often reduce taxes. You know, pretty significantly in two years is a long time. We can look at, you know, corporate year end, this is, you know, often that personal tax is an even do on those amounts for more than two years because we had, we had to declare the year the, the salary or dividend by the end of year two, but then, you know, we have until April after that often to pay the personal taxes. So there’s a lot of things that we can do in spreading out those tax balances to either give you a longer time horizon to pay and even, you know, possibly reduce the amount that you have to pay all together. Edmonton Bookkeeping will help you lower your expenses and track them.
And Canon personnel tax be automatically assessed if you don’t clear the shareholder loan. Yeah. So if you want to roll the dice on the Cheryl alone and you don’t want to pay it off, uh, by the, by the second year, it can just be added to your personal return. Siri doesn’t need any permission to do it. Um, you know, they find out that the share of the loan balances those standing for more than one year. So on that second year again, they can add it and quite frankly, they can add it to whatever year, the day that they see fit, whether that’d be the opportunity or not. Um, so that’s kind of the, you know, the, the Russian roulette of taxes is, uh, you know, see if you want to push the VAT and the envelope on that declaring the, the shelter bounce over two years, you know, it’s not recommended because that, and that’s just going to get added to your, your, your personal tax return and not necessarily in the, in the form that you want to do the form of salary or dividends and not necessarily the period that you want it either.
So it’s better for you to declare it and then in the Mech, in the salary dividends or the period that makes sense to you rather than, you know, run the risk of cra imposing it for you. Don’t wait to get your Edmonton Bookkeeping under controll. So that’s what we have here today concerning a share the loans. Thanks so much for tuning in. As always, hit the light could subscribe button so we can continue you deliver your tips on how to beat the odds at business, and if you have any questions, leave them in the comments below and we’ll do our best to address them in future videos. Thanks very much.