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