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If you own an incorporated business, your financial statements may contain something called a shareholder loan account. During a divorce or separation, that account deserves careful attention. A shareholder loan can mean one of two very different things:
The corporation owes you money, usually because you put personal money into the business.
Or:
You owe the corporation money, usually because you withdrew corporate funds personally without treating the withdrawal as salary or a dividend.
That distinction can affect your property calculation, your business valuation and, in some cases, the income used to calculate support.
What is a shareholder loan?
A shareholder loan account tracks money moving between a shareholder and their corporation.
Suppose you personally contribute $150,000 to your company to help fund an expansion. Instead of issuing additional shares, the corporation records the money as a loan from you.
The corporation now owes you $150,000.
The reverse can also happen.
Suppose you withdraw $100,000 from your corporation personally and the withdrawal is recorded as a shareholder loan rather than salary or dividends.
You now owe $100,000 to the corporation.
Although both transactions may appear under the general heading of “shareholder loan,” their financial consequences are very different.
What happens if my corporation owes me money?
If you have loaned money to your corporation, the amount owed to you can represent a personal asset.
That can become relevant when calculating your Net Family Property under Ontario’s equalization regime.
For example, assume your corporation owes you $200,000 on the date of separation.
The shares of your corporation may have their own value, but the $200,000 shareholder loan may also need to be identified and valued separately.
This is important because overlooking the loan can produce an inaccurate picture of the business owner’s assets.
What if I owe money to my corporation?
The analysis changes if the shareholder loan runs in the opposite direction.
Perhaps the corporation paid personal expenses for you or advanced money that was never treated as salary or dividends.
The company’s records may therefore show that you owe money back to the corporation.
That balance may represent a liability, but the surrounding circumstances matter.
Questions may include:
- Was the money genuinely intended to be repaid?
- Has the shareholder historically repaid similar advances?
- Was the money used for personal or family expenses?
Can shareholder loans affect support income?
Potentially.
For business owners, child support income is not always limited to salary or dividends appearing on a personal tax return.
Section 18 of the Federal Child Support Guidelines permits a court to consider corporate pre-tax income where a shareholder, director or officer’s reported income does not fairly reflect the money available for child support.
Shareholder loans can therefore become part of the larger financial picture.
Imagine a business owner reports $120,000 of personal income but regularly withdraws another $150,000 from the corporation through a shareholder loan account.
Those withdrawals may raise questions about whether the owner’s reported income accurately reflects their actual financial circumstances.
That does not mean every shareholder loan is automatically income.
It means the transaction may need to be understood before support income can be properly determined.
Why do shareholder loans create problems during divorce?
The biggest problem is often misunderstanding what the account actually represents.
A financial statement may simply show: Shareholder loan: $250,000
That number alone does not tell you:
- who owes whom
- when the money was advanced
- why it was advanced
- whether repayment is expected
- whether the amount has tax consequences
- whether it affects the value of the shares
- whether it represents money already used personally
Those questions can materially change the family law analysis.
Frequently Asked Questions
Is a shareholder loan considered an asset in an Ontario divorce?
If the corporation owes money to the shareholder, the receivable may be an asset that needs to be considered in the shareholder’s Net Family Property.
What if I owe money to my corporation?
The amount may represent a liability, but the circumstances of the advances, repayment history, etc. should be reviewed.
Is a shareholder loan automatically considered income for support?
No. However, significant or recurring withdrawals from a corporation may be relevant when determining whether the shareholder’s reported income accurately reflects the money available for support.
Can a shareholder loan affect the value of my business?
Yes. The relationship between shareholder loans, corporate assets and liabilities needs to be considered carefully so that amounts are treated appropriately in the valuation.
What if the shareholder loan existed before marriage?
The timing and history of the loan may become important in the Net Family Property calculation. Proper documentation is especially important where a spouse claims a date-of-marriage value or an exclusion. Ontario courts have rejected claims where the necessary tracing evidence was insufficient.
Putting It All Together
Shareholder loans are common in privately held businesses, but they can create unexpected issues during separation.
A number sitting on a corporate balance sheet does not tell the whole story. You need to know where the money came from, where it went, who owes it and how the transaction affects the broader financial picture.
AP Lawyers assists business owners, professionals and spouses dealing with privately held corporations, business valuation, support and property issues during separation and divorce.
