Canadian Money Forum banner

1 - 3 of 3 Posts

·
Banned
Joined
·
1 Posts
Discussion Starter #1
I am the only shareholder of a Corporation. I put money into the corporation so it could pay off corporate tax and g.s.t owed to Revenue Canadafrom past years.
My accountant lowered my personal income the amount that I put in this corporation for that year. I did not receive nor will I ever receive any more money from that corporation. Was this done right.
 

·
Registered
Joined
·
343 Posts
Just a point for clarification here, did you loan the funds to the corporation, or did you inject capital/equity? Is this corporation a going business, or being wound up (as the second last sentence seems to indicate)?

Honestly, I don't know what the proper tax treatment is in this situation. But maybe with some more details, someone else on this board will be able to comment.
 

·
Banned
Joined
·
104 Posts
Sorry I missed this thread. I know a bit about this since a large chunk of our net worth is tied up in shareholder's loan, but I'm certainly not an expert. FWIW, here's what I understand:

Influxes of cash from an owner can be characterized in (at least) 2 different ways: as a shareholder's loan or as an capital contribution. Capital contribution is sometimes also called an injection of capital. Basically, the question of whether or not you have a shareholder's loan will be answered differently depending on the person you ask (i.e., regular accountant, tax accountant, corporate lawyer, or bankruptcy attorney). If you ask an accountant, they might only focus on the way that the influx of cash was characterized in the accounting books at the time. An attorney might only look at it through a framework that is flawed in 2 ways: first, the framework changes as more judgments are published, and second, they generally focus on worst-case scenarios, because that is when a client (or their bankruptcy trustee) might sue them if their reasoning or recommendation is flawed and creates losses. (So they won't care if your company isn't in a position to grow faster and quicker -- they want to minimize your losses if disaster happens, because disasters are what matter to them. Disasters also happen to provoke clients to sue their lawyers and make complaints).

Both of these two types of payments can start in identical ways --s/h putting cash into the business without getting a piece of paper (for example, a share or a bond) in return. But they each lead to very different outcomes, depending on the circumstances at the time of the influx and how the company performs afterwards.

S/H loans: In theory, a shareholder's loan that doesn't specify time of repayment is interpreted by the courts to be repayable on demand... but in practice, the ability to be repaid is limited - i.e., certain laws prevent a shareholder/director from acting in a way that forces the company into insolvency, including a demand for repayment of their own loan. In theory, a s/h loan is also better in the event the company is liquidated because the s/h gets paid out after the secured creditors get paid out, but before the shareholders get paid out -- unless you took steps to affect that order of priority. But again, in practice, the banks take steps to counter or prevent that.

Capital injection: A capital injection theoretically increases the intangible value of the company... but really, it just sort of "dissolves" into the part of the company that lawyers call "goodwill" and the rest of the world calls brand power, or market mindshare, intangible assets, and other vague, airy-fairy terms.

Because you are a sole s/h, this is a moot analysis. If the company does well, you reap all the profit regardless of the nature of the cash contribution you made. And at the same time, if the company fails and goes under, you are in no better or worse shape if it is a s/h loan -- as the holder of a s/h loan you'd be paid out before the shareholder (you). And of course, if the company saw hockey-stick level growth and is sold for big bucks...well, you would get your s/h loan "repaid", I guess, but it really doesn't matter if you have a s/h loan or a capital contribution, because you are getting the entire purchase price anyways. If anything, the accountants have more flexibility to shift things around for tax efficiency if there's no formal agreement in writing. But there's probably no way of getting around the basic fact that as a sole shareholder, you bear the entire risk of loss and the entirety of the opportunity to gain.

The only way you could have improved your position would be to have taken steps (at the time) to get a piece of paper that "secured" your s/h loans to assets owned by the company. But... that likely would not have gone over well with future creditors, as they'll insist on making their debts "top dog" if things go sideways down the road. In that case, characterizing it as a s/h loan would hamper your company's ability to grow by limiting its access to leverage. Plus, if your company had existing creditors, it may well have been meaningless for you to secure your interest (your interest is the $ amount of the s/h loan), because it's quite likely that your bank had you sign a personal guarantee (so they can sue you) or already had a secured interest in place that puts them ahead of your security interest.

So this is likely why your accountant either doesn't know, or does know but doesn't want to bother explaining it to you and risk provoking questions or worries -- hence the unspoken message of "fuhgeddaboudit".

Here's a Q&A from an accounting website that shows things from the accountant's perspective: https://www.clarityaccounting.com/help/index.php/tag/shareholder-loan/. This is for a proprietorship, not a corporation, but you can see the different mindset. They are pushing numbers into different columns so that you know the ins & outs -- they are focused on doing day-to-day business.

Here's an article that reflects the lawyer's point-of-view: http://www.legaltree.ca/node/504. Notice how the author is focussed on how things would appear to a judge -- this perspective is triggered by a problem of some kind, e.g., a shareholder's dispute that gets litigated, insolvency of the company, or a merger/acquisition that is being held up and has gone to lawyers for negotiation.

Finally, here is the best link: http://www.kpmg.ca/en/services/enterprise/protectinginvestments.html. Note how practical their advice is -- such as pointing out that retroactively characterizing the influx of cash as a s/h loan may not necessarily be possible (without boring you with the details of how different judges have looked at the transaction in lawsuits).

Hope this is helpful. Good luck to you and your business!
 
1 - 3 of 3 Posts
Top