Am I able to borrow from my corporation?

Quite often we are asked, “Is my corporation able to lend me money to invest in a rental property or help me buy a house?” This is a great question, as typically there are cash reserves growing in the corporation and you are looking to use and invest the money wisely.

The challenge arises when we lend the money to ourselves or other family members. The Income Tax Act (ITA) has very clear rules on funds transferred under these circumstances, under section 15(2). We learn that any funds borrowed from a corporation must be returned or declared as income before the end of the next fiscal year-end. For instance, if the year-end is December 31^st and I borrow money from my corporation, in March. I have until December 31^st of the following year to pay back these funds, i.e., 21 months. As such, longer term plans for financing will require other funding sources then investing personally.

In our experience, we have heard of people trying to get around this rule, whereby they pay back the loan close to the deadline as imposed in section 15(2) of the ITA and then re-borrow early in the next year and continue this for several years. The CRA is wise to this strategy, referring to this as a “series of loans and repayments” which will result in the loan amount being assessed as income back to the first year along with penalties and interest.

Alternatively, let’s say that I have a second corporation which invests in properties or other investments, and want my active corporation to fund it through the surplus cash. In this case I am able to lend the money over to this other corporation, without the same restrictions as the first scenario described above. There is no term under which I am committed to have the funds repaid, and no interest is required for the borrowing corporation to pay the lender. There are other benefits and costs to having this second corporation, which will require further discussions and planning.

If you wish to discuss this further or other related issues, please reach out at your convenience and we will be happy to answer any questions.