June 23, 2023
All Tax Articles

Personal expenses paid by company — double tax whammy

In 1048547 Ontario Inc. v. The King, 2023 TCC 24, a family-owned company operated a goat farm in eastern Ontario, manufacturing dairy products. The CRA audited the company for its 2015 year, and reassessed it to disallow a number of expenses, including over $350,000 in travel and meal expenses that the company paid for its shareholders that year.

The CRA also assessed the company’s shareholders for 2014 and 2015, adding $370,000 to the President’s income and $420,000 to the Treasurer’s income, as well as smaller amounts to the income of other family members. The company and the shareholders appealed to the Tax Court of Canada.

The Court did not believe the evidence of the shareholders or the company’s Controller, who testified that the expenses in question were business expenses. There was no documentary proof of these being legitimate expenses of the company. Rather, they were personal travel expenses. All the appeals were dismissed.

This case demonstrates a double-tax danger in having a company pay a shareholder’s personal expenses. Not only is the expense denied to the company, but the shareholder has to pay tax on the shareholder benefit (Income Tax Act subsection 15(1)). It is much better to pay the shareholder extra salary or bonus, so the company gets a deduction, and let the shareholder pay their own personal expenses. Alternatively, pay the shareholder a dividend, which is taxed at preferential rates that recognize that the company is paying the dividend out of after-tax income. The worst option is to do what the company did here, paying shareholders’ personal expenses and trying to deduct the cost as a business expense.

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Adam H. Sharpe

Hello, my name is Adam Sharpe, I am a partner at Lee & Sharpe.

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