As a shareholder are you aware of the benefits you are receiving and their potential tax implications? Crowe MacKay advisors review common shareholder benefits you may encounter and the importance of identifying these.
What is a shareholder benefit?
Shareholders may be subject to tax on benefits that they receive (or are deemed to receive) from their companies. A shareholder benefit can arise in a number of ways, such as when a company pays for items or provides use of company owned assets for the benefit of the shareholder instead of the company.
Money that comes into a business is meant to be used for business purposes, meaning that it should be used to pay for expenses or costs directly related to operating the business. The business bank account or company credit card should not to be used to pay for personal expenses which may include personal meals and entertainment or any other personal items which are not directly related to the operation of the business.
Likewise, a company owned asset, such as a company vehicle, should be used for business purposes and a shareholder benefit may arise if it is used personally.
Common areas that shareholders should be cognizant of include, but are not limited to:
Gifts, meals and entertainment
The rules around expenses that may have an element of personal-use (i.e. gifts, meals, sporting events, golfing, other events, and parties) can be challenging. Some of these expenses are 100% deductible, some are only 50% deductible, and some are not deductible at all. The rules for these expenses are onerous, but it is important to document the reason for the expense to demonstrate that it is incurred for business purposes. If there is no benefit to the business from incurring the expense, then more likely than not, it may be considered a shareholder benefit and may not be deductible by the company.
Travel costs for business are generally deductible, including costs associated with business meetings, conventions, trade shows, etc. If a spouse or family member has accompanied the shareholder on a business trip, only the business portion of the expense may be deducted in the company. Again, it is important to document the reason for the trip expense to support its business purpose, as shareholders could be subject to an income inclusion if there is a personal element to the travel.
The use of a company owned vehicle for personal purposes is generally considered a benefit to the shareholder. Shareholders should keep track of business and personal kilometers (kms) driven using a log. Currently, there are a number of cell phone applications that could assist with such tracking. Travel from one work site to another is generally considered travel for business purposes. However, travel from home to the work site and back home again generally is considered travel for personal purposes.
Personal use of company owned assets
The use of a company asset by a shareholder for personal purposes is a taxable benefit. Generally, the benefit is equal to what the shareholder would have had to pay for the same benefit in the same circumstances if he or she had not been a shareholder of the company. Benefits from the use of a company owned asset could be in the form of the use of equipment or a rental property by the shareholder, or anyone related to the shareholder, for personal purposes.
Temporary loans from a corporation to an individual or non-resident shareholder may result in a deemed taxable benefit to the shareholder when the loan is not repaid within one year after the end of the taxation year of the corporation in which the loan is made. The loan amount is included in the income of the shareholder for the year in which the loan is made. The reason for this rule is if the amount was not included in income, shareholders could take loans out of a corporation rather than salary or dividends and would never have to pay tax on these loans.
Why is it important to identify shareholder benefits?
Any benefit conferred on a shareholder by a company must be reported on their personal tax return, unless the shareholder has reimbursed the company in a timely fashion or has credit in his or her shareholder loan before the benefit was received. Reimbursing the company can be done by way of issuing a dividend to the shareholder for value of the benefit (proper dividend documentation should be maintained) or simply repaying the amount of the benefit back to the company.
Failing to report the taxable benefit correctly could result in reassessment by the Canada Revenue Agency, which may result in including the value of the benefit in the shareholder’s income without allowing a corresponding deduction to the corporation, thus resulting in potential double taxation.
The rules surrounding shareholder benefits can be complex, and each situation may be unique to an individual shareholder. It is important to seek professional advice if there are questions surrounding transactions that may be considered beneficial to a shareholder.
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.