Shareholder Woes

The Canada Revenue Agency (“CRA”) is clamping down on shareholders of private Canadian companies.

It is common for a shareholder of a small Canadian company to take draws from their company when they need the funds for their lifestyle expenses. They may take $1,000 one month, $5,000 the next and so on.

If at the end of the year the records show a shareholder to have drawn $60,000 from their company, this amount must be included as income on the shareholders tax return, unless it is paid back by the shareholder no later than the last day of the corporation’s coming fiscal year.

The CRA’s primary problem with this is that they receive taxes and in some cases Canada Pension Plan payments at the end of the company’s fiscal year or in April of the following year.

Employee’s are taxed at source, which means they are taxed when they receive the employment income from their employer. The CRA views shareholders (who take regular draws) as ‘employees’ and is now enforcing the requirement for them to be on the company’s payroll and to have monthly withholding taxes remitted to the government.

The challenge in not following this rule is that the CRA can require a shareholder and a company to essentially ‘re-file’ corporate and personal taxes, T4 information slips and monthly payroll forms. This will cost in accounting fees and will result in late filing penalties and interest charges.

In summary, if you take regular draws from your company, you should be placed on the corporate payroll.

To learn more about Shareholder’s Payroll Woes, please give us a call.

NOTE: The Shannon & Company 'Tips' are NOT intended to cover all tax issues. You should talk to your Shannon & Company professional before making any decisions regarding the information found here.


site design and contents © Shannon & Company 2009