Advances or loans including the forgiving of debts made by a private company to shareholders or associate of a shareholder are automatically deemed dividends unless they come within specific specified exclusions. For example, the deemed dividend can only apply to the present unpaid entitlement to which the private company is entitled.
If the advances are converted to a loan before the due date of the company’s income tax return, the advances will not be treated as a dividend. However, this loan must be written and have a maximum term and minimum interest rate.
There is also a requirement that the shareholder make minimum repayments on the loan. If the minimum repayments are not made, a deemed dividend will arise in relation to the shortfall.