If you own an incorporated business, the taxman wants a share on any distribution from your company. To prevent you or your family members from avoiding taxes by extracting funds as shareholder loan from your corporation, the subsection 15(2) of the tax law requires the amount of loan be included in the borrower's income in the year the loan was made if the loan is not repaid by the end of the corporation's following taxation year. However, if the amount is included in income and is repaid at a later date, it is deductible from income in the year of repayment. In fact, you can turn around and use this rule at your advantage to achieve income splitting among family members. Here is an example.
Lets say you r child is studying in the university. You can have your corporation make a loan to your child to pay tuition fees, books etc. The amo0unt of the loan will be included in your child's income. Your child will likely pay little or no tax on the loan if your child has no other income. After your child graduates and starts working full-time, he will repay the loan to your corporation and get a deduction for the repayment.
The benefits? Your child pays little or no tax when receiving the loan, and enjoys a nice deductino for repaying the loan when his income is much higher.
This strategy does not work if the child is a minor because the loan will be taxed at the highest marginal tax rate. For this reason, use this strategy only after your child has reached at least 18 years.
If you own an incorporated business, the taxman wants a share on any distribution from your company. To prevent you or your family members from avoiding taxes by extracting funds as shareholder loan from your corporation, the subsection 15(2) of the tax law requires the amount of loan be included in the borrower's income in the year the loan was made if the loan is not repaid by the end of the corporation's following taxation year.
However, if the amount is included in income and is repaid at a later date, it is deductible from income in the year of repayment. In fact, you can turn this around and use this rule at your advantage to achieve income splitting among family members.
Here is an example.
Lets say your child is studying in the university. You can have your corporation make a loan to your child to pay tuition fees, books etc. The amount of the loan will be included in your child's income. Your child will likely pay little or no tax on the loan if your child has no other income. After your child graduates and starts working full-time, he will repay the loan to your corporation and get a deduction for the repayment.
The benefits? Your child pays little or no tax when receiving the loan, and enjoys a nice deduction for repaying the loan when his income is much higher.
This strategy does not work if the child is a minor because the loan will be taxed at the highest marginal tax rate. For this reason, use this strategy only after your child has reached at least 18 years.
