July 9, 2019
Shareholder Loan or Owner’s Draw. What’s the Difference?
If you are a business owner in Canada with a Shareholder Loan Account, you may be confused about what a Shareholder Loan account is. We hope to de-mystify this strange accounting concept, and hopefully leave you better-equipped to understand your business’ finances by the end of this post!
What’s in a name?
One reason that this account is confusing is that it goes by many names. Shareholder Loan. Owner’s Draw. Owner’s Contributions/Withdrawals. Owner’s Equity. These are all different names used in practice for the same account. Why do we have so many names for this? Hmm, would you believe that accountants like to spice things up??
Well, we certainly aren’t known for our Mexican cooking, but we do know how to track numbers!
What is a Shareholder Loan Account for?
The Shareholder Loan account tracks the owner’s personal money in and out of the business. For example:
- Transfers made to/from the Owner (from business bank account topersonal bank account or vice versa)
- Business expenses paid on a personal card
- Personal expenses that were accidentally paid on a business card
The Shareholder Loan account is meant to function like aloanand that is where the name comes from. If the account is in a negative balance, it is currently a loan FROM the Company TO the Owner. If the account is in a positive balance, it is currently a loan FROM the Owner TO the Company.
How does a Shareholder Loan account work?
As the Owner takes money from the business bank account during the year, those payments show up as negative amounts in the Shareholder Loan/Owners Draw account. Personal expenses paid with a business card also show up as negative amounts. Business expenses paid with a personal card will show up as positive amounts. You will see this if you review the General Ledger report for yourShareholder Loan / Owners Draw account.
It is important to note that legally, this account cannot stay at a negative balance at year end, meaning that you have drawn more money out of the company than what you have declared as income. The income must be declared as either Dividends (T5 Slip) or Salary (T4 Slip) or a combination of both. When the Dividend is declared as a year end adjustment, the amount gets posted to the Owners Draw account to reverse the previous negative charges and bring the balance back into the positive. A positive balance means that you have contributed more personal funds into the business than what you have pulled out, and this is what CRA wants to see.
The rule is that you can’t have 2 overdrawn year ends in a row so you can let the first year be negative, but it will have to be “paid off” in the following year. The way to “pay it off” is to declare that income on a T4 (Salary) or T5 (Dividend) Slip, which will push the balance back into a positive balance.
A Real Life Example of a Shareholder Loan Account Balance
Let’s pretend a brand new company starts up with a zero balance in their Shareholder Loan account. The business starts making some money in the first few months, and so the owner transfers $3,000 from the business bank account to their personal bank account. The owner uses their Business Visa to pay for their monthly Netflix subscription (a personal expense). The owner buys some office supplies with Cash they had in their wallet. Next, the owner transfers $4,000 from the business bank account to their personal bank account. Now, it is the end of the year and the Shareholder Loan account is negative, meaning that the Shareholder (Owner) has borrowed $6,984 from the business. The business has “loaned” this money to the owner, since it has not yet been officially declared as personal income to the owner. Personal Income is either Salary paid on a T4 Slip or Dividends paid on a T5 Slip. The owner chooses to pay out a dividend of $10,000 to declare this as personal income and also “re-pay” the Shareholder Loan account.
| DATE | NAME | AMOUNT | BALANCE |
| 01/01/2018 | Opening Balance | 0.00 | 0.00 |
| 03/31/2018 | Transfer to personal bank | (3,000) | (3,000) |
| 04/05/2018 | Netflix paid on Business Visa | (9.99) | (3,009.99) |
| 05/16/2018 | Bought office supplies with personal Cash | 25.99 | (2,984) |
| 06/30/2018 | Transfer to personal bank | (4,000) | (6,984) |
| 12/31/2018 | Dividend Declared of $10K | 10,000 | 3,016 |
In this example, the Company has recorded a dividend (T5 Slip) of $10,000 in order to “re-pay” the outstanding Shareholder Loan negative balance of $6,984. The account balance is now a positive $3,016, which means that the business owner can withdraw $3,016 in cash before the Shareholder Loan will go negative and need to be repaid again in the following year.
We hope you found this post about Shareholder Loan and Owner’s Draw accounts informative and enjoyable to read! Let us know your thoughts in the comments.
About the Author:
Alicia Loewen, Owner of Deximal Accounting Inc., has been helping small businesses across Canada to go paperless since 2016. She is a Certified QuickBooks Online ProAdvisor and a seasoned tax professional. Alicia is passionate about de-mystifying accounting concepts through straight forward communication and helping small businesses to grow their profits by making decisions based on accurate and real-time data. Get in touch with Alicia.
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