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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 585
Experience:  10 years experience
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I want to close my incorporated company, owned by me and my

Customer Question

I want to close my incorporated company, owned by me and my wife. At closing there will be a $150,000.00 shareholders loan. I am looking for a legal loop hole not to pay income tax when I write off this loan. I also show $120,000.00 retained earnings. One accountant told me I can write off the loan against the retained earnings and would have to pay only income tax over the balance of $30,000.00. Is that correct, or, if not, is there an other way to prevent a large tax bill.
Submitted: 10 months ago.
Category: Tax
Expert:  Brian Pusateri replied 10 months ago.

Loan is something that is due from the Corporation to the shareholder if that is how it was originally set-up. It is a liability on the books of the Corporation. If it was an asset of the corporation that then corporation loaned you money and it created a receivable on the books of the corporation. If that is set-up of the corporation than the forgiveness would be a taxable item. It also depends on the type of Corporation. If it an S-Corp or LLC, then the retained earnings have already been taxed at the shareholder level and if the loan was given to you then you would be able to deduct the balance and only pay tax on the balance. If the corporation was a C-Corp 1120, then the retained earnings would be considered dividend income to the shareholders and would be taxable when that is distributed. So I need a couple of items to be able to let you know what you can do.

Customer: replied 10 months ago.
Personal expenses on my credit card bill paid by the company were filed by my book keeper under Loan to the shareholder. This has accumulated over several years to the amount mentioned. I checked my incorporation papers and I am not able to find if it is an S-Corp, LLC or C-Corp 1120. Where or how can I find this?
Expert:  Brian Pusateri replied 10 months ago.

It would be on the tax return filed by the corporation. This would identify the type of corporation it is.

Customer: replied 10 months ago.
All I can find on line 040 is the "Type of corporation at the end of the wax year" The item ticked is CCPC (Canadian-controlled private corporation.
Customer: replied 10 months ago.
I am just learning that your previous answers do not apply to a Canadian Corporation. It looks like I may have paid $75 for nothing?
Expert:  Brian Pusateri replied 10 months ago.

I have not done Canadian controlled private corporation here in the United States, but what I did find is there is a 400,000 lifetime capital gains deduction when the individual disposes of their shares. If you dispose of those shares that loan would become a capital gain to the shareholder and based upon the literature I read you should qualify for this

Expert:  Brian Pusateri replied 10 months ago.

Did the information I provided about the 400,000 lifetime capital gains deduction help

Customer: replied 10 months ago.
When I checked the Canada Tax guide on this they warn that this is very complicated and should be carefully planned well in advance by a professional tax expert. The problem in Canada is when you make 3 inquiries you get 3 different answers. The accountant I am using says I will have to pay income tax over the $150,000.00 or leave the company dormant until I die and let the estate take care of it. Either option sounds horrible. Anyway, I have forwarded your suggestion to her and I am waiting for her input.