How do I repay shareholder loans when I sell and wind up my company?

A shareholder loan can run in either direction, and the rules differ. Either you lent money to your company, so it owes you, or you took money out that was booked as a loan from the company to you. Both balances need to be cleared, or deliberately dealt with, before the company is sold or closed. Our comparison of winding up and selling covers the choice between the two.

If you lent money to the company

Your loan is a liability of the company. Corporations Canada’s guide says a corporation can be dissolved only when its property has been distributed and its liabilities have been discharged, and the Canada Business Corporations Act requires a liquidator to pay or make adequate provision for all claims against the corporation. For a federal corporation, then, your loan is paid, or provided for, from the company’s property before the remainder goes to shareholders. A provincially incorporated company follows its own statute.

Check for a postponement first

If the company has a bank loan, its lender may have required your loan to be postponed. The CSBFP guidelines, for example, say a lender holding a personal guarantee can still obtain an assignment or postponement of shareholder loans. Where one exists, its terms govern when you may be repaid, so read the loan documents before moving any money.

If the company lent money to you

A shareholder who owes the company money faces a tax rule. Under section 15(2) of the Income Tax Act, a loan the corporation made to a shareholder, or to a person connected with one, is generally included in that person’s income for the year it was received. The Act says this does not apply to a loan repaid within one year after the end of the lender’s taxation year in which it was made, where it is established that the repayment was not part of a series of loans or other transactions and repayments. Other exceptions exist, so a balance still open at sale or wind-up needs an accountant’s attention.

Finishing with the CRA

The CRA says to send the application for dissolution to the body that governs the corporation and, once the corporation has been dissolved, to consult Form RC145 to see whether to complete it and send the CRA a copy of the articles of dissolution. Otherwise, the CRA says, it considers that the corporation still exists and it will have to file a return even if there is no tax payable.