Applicability of Shareholder Loans to Incorporated Physicians

Incorporated physicians need to be well-versed with the regulations surrounding shareholder loans. According to the Income Tax Act, a corporation is an independent entity that files its income and expenses on a corporate tax return. This is distinct from the personal tax return of the owner-shareholder. 

The profits generated within a medical professional corporation can be either: 

• Reinvested, benefiting from lower corporate tax rates and tax deferral, or 
• Distributed to owner-shareholders in the form of salary, dividends, or loans/advances. 

While the salary or dividend amounts are reported as income on the personal tax return of the owner-shareholder, the taxation of amounts taken out as a shareholder loan is governed by Section 15 of the Income Tax Act. 

The primary objective of the shareholder loan rules is to prevent owner-shareholders from taking unlimited loans or advances from their corporation without incurring personal income tax. The shareholder loan account is a cumulative record, reflecting the movement of funds between the individual and their corporation. This account typically includes: 

Credits (increasing the amount the corporation owes to the shareholder): 

• Net salary/dividends 

• Payments made by the shareholder for the corporation using personal bank accounts or credit cards 
• Cash contributions 

Debits (reducing the amount the corporation owes to the shareholder): 

• Cash withdrawals 

• Amounts deposited in the personal bank account on behalf of the corporation 
• Personal expenses paid by the corporation for the shareholder using corporate bank or credit cards 

If the cumulative debits surpass the credits, it indicates that the shareholder has borrowed from the corporation. Any shareholder loan amount not repaid within a year from the corporation’s tax year-end is added to the shareholder’s income, leading to additional personal taxes. Hence, if a loan was taken in the previous tax year, it should be repaid before the end of the current tax year to avoid tax implications. 

There are specific exceptions where a shareholder loan or debt doesn’t count as income. For instance, if an employee receives a loan for housing, buying a car, or purchasing shares from the company. However, for majority-owned corporations like incorporated physicians, the CRA typically views a loan as employment-based only if it’s evident that other non-shareholder employees with similar roles in a comparable company received similar loans under the same conditions. Not adhering to this can lead to substantial tax implications and potential disputes with the CRA. 

A recent case in the French Court of Quebec (Moufarrege vs. QRA, 2021 QCCQ 5873) highlighted this. The court ruled that loans from the taxpayer’s corporations amounting to $1,221,997 over eight years (2006-2013) should be added to his income. The taxpayer owned two corporations: one for his medical practice (plastic surgery) and the other for managing vacation properties. The court observed that the loans not repaid within the stipulated timeframe should be considered as the shareholder’s income. The court also emphasized that the taxpayer should have heeded the advice of accountants to clear the overdrawn loans and should file an amended tax return to account for these loans.