Can a business loan be used for personal expenses?
Your loan agreement sets what the money is for. Under the federal Canada Small Business Financing Program, personal-use vehicles are an ineligible expenditure and a line of credit may only pay working capital costs. If a corporation confers a benefit on a shareholder, the Income Tax Act may include it in that shareholder’s income.
Can business loans be used for personal use? The loan agreement and the lender’s conditions decide what the money may be spent on, and the tax rules can treat personal spending by an owner as a separate problem. This page uses the federal Canada Small Business Financing Program as an example of how restrictions are written, and looks at one tax rule. Your own loan documents are what matter for your loan.
What the federal program restricts
The program’s guidelines list “vehicles for personal use” among ineligible expenditures. For a line of credit, the guidelines ask whether the borrower confirmed, by signing the acknowledgement on the registration form, that the line will only be used to finance working capital costs. The regulations require the borrower’s attestation that the line of credit will only be used to pay for working capital costs. They also say a term loan for real property, leasehold improvements, equipment, or intangible assets and working capital costs may not be used to finance the payment of any refundable taxes.
The tax side for a corporation’s owners
Section 15(1) of the Income Tax Act says that if a benefit is conferred by a corporation on a shareholder, the amount or value of the benefit is to be included in computing the shareholder’s income, subject to the exceptions set out in that subsection, such as an amount deemed by section 84 to be a dividend. Whether a particular payment or use of funds is such a benefit is a question for your accountant. Do not assume that money you can reach is money you can take.
Questions to put to the lender and your accountant
- What are the permitted uses written in the loan agreement?
- Does the lender have to approve changes in how the funds are used?
- How should an owner be paid: salary, dividend or shareholder loan?
- What records show where borrowed funds went?
If a personal guarantee is also involved, our page on what a personal guarantee is explains how it can tie your personal finances to the loan.
Related reading
4 pages on the same subject, grouped by topic.
Financing
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Innovation, Science and Economic Development CanadaGovernmentCanada Small Business Financing Program — Guidelines
- 02Government of Canada (Department of Justice)GovernmentCanada Small Business Financing Regulations (SOR/99-141)
- 03Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
Deavo is an advertising and listings platform, not a brokerage, law firm or valuation firm. This page is general information, not legal, tax, accounting or valuation advice, and rules differ by province. Confirm anything you rely on with a qualified professional before you act on it.