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Expensing shareholder drawings in Canada

By John R Mott |

Peter asked:

Under which account do I expense shareholders drawings in the company's records and show it as earnings on the shareholders T4A?

John R Mott answered:

A general ledger account called Due from Shareholder would normally be set up in the Current Assets section of the chart of accounts. Personal withdrawals by the shareholder would be charged to this account. Personal expenses of the shareholder that are paid by the corporation would also be charged to this account.

Amounts charged to this account effectively create an indebtedness by the shareholder to the corporation. Since there are tax rules governing how long shareholder loans may remain outstanding, it is necessary to extinguish this indebtedness on a regular basis.

If the indebtedness cannot be repaid by the shareholder, then it would normally be cleared by declaring a bonus or dividend payable to the shareholder. These are essentially the only options available. A bonus (i.e. employment income) represents remuneration for services provided to the corporation. A dividend represents a distribution on shares of the corporation owned by the shareholder. If the shareholder is an officer and/or director of the corporation, then he or she is an employee by definition. This means that an active shareholder of a private corporation can rarely be an independent contractor with respect to the corporation.

Salary and bonuses are subject to source deductions and are reported annually on a T4 tax slip. Dividends are not subject to source deductions and are reported annually on a T5 tax slip.

The Due from Shareholder account can be bypassed altogether if regular salary and/or dividends are paid to the shareholder sufficient to cover his or her requirements for funds.

A shareholder who borrows funds from his or her corporation is deemed to enjoy a taxable benefit if interest is not paid on the indebtedness. The amount of this benefit is computed as the Canada Revenue Agency prescribed interest rate on the amount of debt outstanding from time to time.

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