Does a business loan count as income?

The short version is that borrowing money is not earning money. The Income Tax Act taxes the profit of a business, and a loan has to be repaid, so it sits on a different part of the financial statements. Two details can change the picture, and both are worth a question to your accountant: what the money is for, and whether any part of it is forgiven or comes with conditions.

What the Act taxes

Section 9(1) of the Income Tax Act says that, subject to Part I, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year. The test is profit. Nothing in that section names loan proceeds as part of income.

Where a loan shows up in the books

BDC says an income statement shows what a company earns, what it spends and whether it makes a profit over a period. A balance sheet is where BDC places debts to lenders: it lists examples of long-term liabilities, including term and mortgage loans. A loan is a debt you have to repay, which is why BDC lists it with liabilities. Ask your accountant to show you where your loan sits in your own statements.

What a loan does change

Interest on the loan is a cost. The Act, in section 20(1)(c), lets a business deduct interest on borrowed money used for the purpose of earning income from a business or property, subject to conditions and limits. Ask your accountant how those conditions apply to your loan, including a loan used to buy a business. See also how to get a loan to buy a business.

Questions for your accountant

• Is any part of the funding forgivable, or does it come from a government program with its own tax treatment?
• Is the money a loan from a shareholder or owner, and how should it be recorded?
• If a lender or buyer asks about your "income", does it mean profit, revenue or something else?