A corporation pays a personal expense, makes property available to a shareholder or transfers value without adequate commercial consideration. Even though no dividend was declared, the benefit may be included in the shareholder’s income under subsection 15(1) of the Income Tax Act.
The risk often arises from ordinary-looking bookkeeping entries: corporate credit cards, shareholder accounts, vehicles, housing, travel, family expenses or a sale of property at a preferred price. Contemporaneous records are far more persuasive than an explanation reconstructed during an audit.
Identify a benefit conferred on a shareholder
The question is whether value was received because of the person’s position as a shareholder. A cost may have been paid by the corporation and still be mainly personal. Conversely, a properly supported reimbursement of a genuine business expense is not necessarily a shareholder benefit.
The value of the benefit depends on the facts. Use of property, debt forgiveness, a payment to a relative or a transfer below fair market value may all be reviewed. The absence of a declared dividend does not prevent an assessment.
Distinguish a benefit from a loan or compensation
A shareholder debit balance may fall under the shareholder-loan rules rather than subsection 15(1). Salary, bonuses and properly declared dividends follow different rules again. The true nature of the transaction should be identified before selecting the accounting treatment.
A retroactive reclassification is not always available. Resolutions, agreements, expense policies, repayments and general-ledger entries should support the treatment adopted. Where the shareholder is also an employee, the file should explain whether the benefit was received as an employee or as a shareholder.
Introduce controls before year-end
The shareholder account should be reconciled regularly, not only when the T2 return is prepared. Personal costs charged to a corporate card should be repaid or treated correctly. Property used for both business and personal purposes requires usage records.
- Expense policy explaining what the corporation reimburses.
- Supporting documents and the business purpose of unusual expenses.
- Shareholder-account reconciliation before closing and after year-end entries.
- Fair market value support for transfers of property or services.
Respond to an audit or a discovered error
An assessment can increase the shareholder’s personal income without necessarily providing a matching deduction to the corporation. Interest and penalties may also apply. The response should therefore include documents, a timeline and the tax basis for each disputed transaction.
If an error is found before an authority intervenes, an adjustment or disclosure may be considered. If the CRA or Revenu Québec has already begun its review, see our tax audit and compliance and tax representation services.
Use the shareholder account as a control tool
The shareholder account should not be a holding category for transactions that are difficult to explain. It should show at all times what the corporation owes the shareholder, what the shareholder owes the corporation and why.
Impôts Ici can review the entries, distinguish benefits, loans and compensation, and recommend appropriate corrections. To have your corporate file reviewed, contact our team.
