Business expenses paid personally, including a home office

I paid on my personal card. How do I record the cost and repayment?

Record the purchase as the business's cost, then record who paid it. Repayment settles what the business owes the payer; it is not a second expense. Keep the invoice and an expense report showing the business purpose, since a card statement alone does not establish what was bought (CRA: business records; CRA: credit card evidence).

Split mixed purchases before posting them. Personal items do not become business expenses because the business reimburses them. An equipment purchase may instead be a capital item; see capital cost allowance (CRA: Form T2125 expenses).

Can my corporation repay me without taxable pay or a shareholder benefit?

Yes, when the corporation repays a reasonable, documented cost you incurred for its business. CRA describes a reimbursement as repayment of an employee's documented employment costs, and says a reasonable business travel reimbursement is generally excluded from the employee's income (CRA: taxable benefits guide).

The receipt, business purpose and amount matter more than the card used. A personal bill, an unsupported flat payment, or a purchase made for your own benefit may instead be taxable pay or a shareholder benefit. CRA says a corporation cannot deduct a benefit it confers on a shareholder in that capacity; a bookkeeping credit alone does not prove a genuine debt to the shareholder (CRA: shareholder benefit audit guidance).

If a corporation with a relevant tax debt transfers property to a related owner for less than fair value, the owner can owe its income tax under Income Tax Act section 160 or GST/HST under Excise Tax Act section 325, generally up to the value received without equivalent consideration and the tax debt. The CRA may assess either liability at any time. Document the repayment debt and value exchanged.

An owner who is also a director can separately owe unremitted GST/HST under Excise Tax Act section 323 or withholding on taxable pay under Income Tax Act section 227.1. Both provisions allow a due-diligence defence and have a two-year limit after the person ceases to be a director for a GST/HST assessment or withholding recovery action.

If the corporation already owes you money, keep that supported balance separate from amounts you owe it. Questions about drawings from a shareholder account belong in shareholder loans.

Can my corporation or partnership claim GST/HST on what I paid?

A GST/HST registrant may claim an input tax credit when it reimburses an employee or, for a partnership, a partner for a qualifying purchase used in its commercial activities. The person must have held that role when they made the purchase and paid the GST/HST. The reimbursement must be supported, and the credit cannot exceed what the business could have claimed had it bought the item itself (CRA: GST/HST Memorandum 9-4).

Check the GST/HST accounting method. The Quick Method generally bars credits for ordinary reimbursed purchases, though certain capital purchases qualify. A registrant elects online or on Form GST74: annual filers by the first day of the second fiscal quarter; monthly or quarterly filers, and new registrants with a short first period, by the return due date for the first period using it (CRA: Quick Method). Most registrants must claim an ITC by the due date of the return for their last reporting period ending within four years after the period when the credit first arose; some have two years (Excise Tax Act section 225(4); CRA: ITC time limits).

In Quebec, elect the Quick Method for GST and QST on Form FP-2074-V instead, with the same annual or monthly and quarterly filing deadlines (Revenu Québec: Quick Method election).

Without repayment, the business cannot use the reimbursement rule. An employee who deducts a qualifying expense may instead claim a GST/HST rebate on Form GST370 if the employer is a registrant other than a listed financial institution. An individual partner may do so if the partnership is registered and the partner deducts a personally paid cost outside the partnership's account; Form T2125, Part 6 reports such costs. A reimbursed or reimbursable cost cannot also qualify (CRA: rebate eligibility). Normally submit GST370 with the income tax return and claim its rebate on line 45700; a later application can be sent separately within four years after the end of the calendar year in which the cost arose. Generally report a rebate received for deducted expenses as income in the year received (CRA: rebate filing deadline; CRA: line 45700).

For a shareholder's purchase, confirm whether the person was acting as an employee or as the corporation's agent. CRA says the special reimbursement rule does not apply to an agent purchase; the corporation instead follows the ordinary input tax credit rules as the recipient. A shareholder's status alone does not establish employee status for this rule. A taxable personal benefit also does not qualify as a reimbursement under it (CRA: GST/HST Memorandum 9-4).

If only part of the bill is repaid or used commercially, the credit is limited accordingly. A credit card statement needs an invoice or other supporting document, and paying a personal card issuer directly may still be a reimbursement depending on who owes the card issuer (CRA: GST/HST Memorandum 9-4).

Home costs yield an input tax credit only where GST/HST was paid on that cost; mortgage interest, home insurance premiums and residential rent generally carry none (CRA: employee and partner rebate). A corporation reimbursing an owner for home costs must establish whose purchase and tax it is claiming. In Quebec, a QST registrant separately tests an input tax refund; an eligible employee or partner claims a personal QST rebate on Form VD-358-V, line 459 of the Quebec return (Revenu Québec: reimbursements; Revenu Québec: line 459). For mixed-use home costs, invoice rules, calculation methods and filing, see GST/HST returns and input tax credits.

Does a sole proprietor have to reimburse themselves?

No. A sole proprietor and the business are the same taxpayer for this purpose: record the business portion of a personally paid cost on Form T2125, then treat any cash taken from the business as an owner draw. CRA says drawings paid to yourself are not deductible business expenses, and personal use of business property must be removed from the claim (CRA: Form T2125 expenses).

Use the supplier invoice and a reasonable business-use calculation. If registered for GST/HST, test the business share for an input tax credit under the ordinary purchase rules, rather than the employee or partner reimbursement rule (CRA: GST/HST Memorandum 9-4).

For a Quebec income-tax return, report sole-proprietor and partner business expenses on Form TP-80-V or the required financial statements, as well as on the federal T2125 where applicable.

A sole proprietor personally owes the business's income tax and GST/HST. Under Excise Tax Act section 272.1(5), current and former partners, other than limited partners who are not general partners, are jointly liable for partnership GST/HST payable while they were members. Liability can also cover earlier debts to the extent of partnership property and money, and later debts if the partner was a member at dissolution. Provincial partnership liability rules may add obligations.

Can my corporation take over costs I paid before incorporation?

Sometimes, but incorporation does not automatically make an earlier personal purchase a corporate expense. Identify the purchase date, who entered the contract, who owned or used what was bought, and whether the new corporation actually adopted or acquired it.

For a corporation formed federally, section 14 of the Canada Business Corporations Act allows it to adopt, within a reasonable time, a written contract made in its name or on its behalf before it existed. Until adoption, the person who signed is personally bound unless the contract expressly says otherwise; a court can adjust liability. Keep the contract and evidence of adoption. If the corporation takes on a qualifying cost paid by its promoter, record the cost and amount owed, then clear that balance on repayment. The rule does not turn every earlier invoice into the corporation's cost. The employee reimbursement ITC rule cannot apply to a purchase made before the corporation existed. CRA's archived interpretation cautions against treating an existing sole proprietorship's or partnership's earlier transactions as the new corporation's. Moving an existing business or its assets is a separate transfer; see moving a business into a corporation. Provincial incorporation law may differ. Have the documents and proposed transfer reviewed before reimbursing or claiming input tax credits.

For that separate transfer, a sole proprietor and corporation may jointly elect an income-tax rollover on Form T2057; a partnership and corporation use Form T2058. File by the earliest electing party's return filing date. The seller and buyer may jointly elect on Form GST44 to avoid GST/HST on an eligible business transfer. If registered, the buyer files it by the due date of the first return on which tax otherwise would have been payable, or by a later date the CRA allows on application (Income Tax Act section 85(6); Excise Tax Act section 167(1.1)). In Quebec, file TP-518-V or TP-529-V for the income-tax transfer and use joint Form FP-2044-V for GST/QST instead of GST44. A registered buyer sends FP-2044-V by the due date of the return for the acquisition period.

I work from home. Should my corporation reimburse costs, pay rent, or issue a T2200?

Start with what the corporation is paying for. It may repay a documented business purchase or the supported work-use share of home internet; repaying personal use can create a taxable benefit (CRA: internet services). A blanket share of household bills needs separate review.

For a Quebec employment-expense claim, also use TP-64.3-V and TP-59-V or a detailed expense statement with the provincial return.

For an employee home-office claim, the law requires the space to be where they principally perform employment duties, or to be used only to earn employment income and regularly and continuously for meetings. CRA's current T2200 asks whether they worked from that space more than 50% of the time for at least four consecutive weeks under the first test (Income Tax Act, section 8(13); CRA: T2200). Salaried employees generally cannot claim mortgage interest or property taxes under the employment-expense rules. A shareholder-employee must also show that the costs arose from employment duties and that they were required to pay them in that capacity; CRA says merely having a written contract may not establish this (CRA: employment expenses).

Which home office costs can a self-employed person claim?

A self-employed person may claim the business share of eligible home costs if the space is their principal place of business, or is used only to earn business income and regularly to meet clients. The costs must be split reasonably between business and personal use (CRA: business-use-of-home expenses).

Eligible costs can include heat, electricity, home insurance, maintenance, property taxes and mortgage interest, or rent if you rent the home. Mortgage principal is not a current expense. Use floor area to allocate shared costs, then reduce the share of a room also used personally by its business-use time; adjust for part-year use. Claim home costs in Form T2125, Part 7, not again in another expense line. The deduction cannot create or increase a business loss, but unused eligible costs may carry forward while the conditions continue (CRA: business-use-of-home expenses).

Claiming capital cost allowance on your home can affect a later sale. See capital cost allowance before making that claim (CRA: business-use-of-home expenses).

I paid for a client meal. Does the business repay the whole bill?

If the corporation or partnership agrees to cover a supported business meal, it can repay the full reasonable bill. The income-tax deduction limit does not set the repayment amount: ordinarily, only 50% of the lesser of the actual cost and a reasonable cost is deductible (Income Tax Act, section 67.1). Some meals have different rules, so identify the purpose before applying that limit (CRA: business expenses).

For a registered business, the usual input tax credit on qualifying meals is also restricted to 50%. Reimbursing only the income-tax-deductible share can reduce the reimbursement-based credit further (CRA: input tax credit eligibility; CRA: reimbursement methods).

What records prove a genuine reimbursement?

Keep enough records to connect the purchase, payer, business use and repayment. CRA asks businesses to retain receipts or vouchers showing what was bought, and describes a reimbursement as an amount fully accounted for with supporting records (CRA: business records; CRA: GST/HST Memorandum 9-4).

• Keep the itemized supplier invoice or receipt, proof that you paid, and an expense report naming the business purpose and the person repaid. For meals, note who attended and the business reason.
• Record the purchase once, split personal use, and match the reimbursement to the amount owed. For GST/HST, retain the document supporting tax charged; the card statement by itself is insufficient (CRA: GST/HST Memorandum 9-4).
• For home use, keep household bills, floor-area and time calculations, and any employment or rental agreement. For older purchases, keep the incorporation date, original contract and transfer records.

Example

Illustrative amounts in Canadian dollars; GST/HST is omitted. A corporation's employee uses a personal card for C$120 of office supplies and a C$80 client meal. The receipts and expense report show both were for the corporation, which agrees to repay them. The corporation records C$120 of supplies, C$80 of meals and C$200 owed to the employee. It repays C$200, clearing that balance. Assuming the ordinary meal rule applies, the meal's income-tax deduction is C$40; repayment remains C$80. Any GST/HST credit requires a separate check against the invoices.

Different for you?

• You need to decide who owns or leases your car: see buying a car through your business.
• You need receipt rules or a GST/HST filing date: see GST/HST returns and input tax credits.
• You bought equipment or may claim capital cost allowance on your home: see capital cost allowance.
• The shareholder account includes advances or personal withdrawals: see shareholder loans.
• Your receipts mix personal and corporate use, or you are choosing a home-office arrangement: bring the invoices, repayment records, incorporation date and home-use calculation to bookkeeping.