Corporate Income in Your Personal Bank Account: Fixing It

Is money clients paid into my personal account my income or my corporation's?

Money a client pays for work the corporation did is generally the corporation's income, whichever account it lands in. A corporation has the capacity of a natural person (Canada Business Corporations Act, s. 15), and the Income Tax Act treats it as a separate "person" that pays tax on its own taxable income (s. 2; s. 248(1)). Whose income it is depends on the facts, mainly who made the sale. The contract and the invoice are the first evidence; the account the client paid into does not decide it. Timing matters too: a federal corporation comes into existence on the date on its certificate of incorporation (CBCA s. 9). Work sold before then needs its own check, because the corporation may adopt a written contract made in its name or on its behalf before it existed (CBCA s. 14(2)).

The case is simple when the invoices are in the corporation's name and the money reaches the corporation soon. It is not simple when:

• the money sits in your account across the corporation's year-end;
• GST/HST was collected and not reported;
• more than one year is involved; or
• the contract is in your own name.

Why they matter: an amount still owing to the corporation past the one-year deadline below can be added to your personal income, and GST/HST on the deposits may be missing from every return. Gather the client contracts and invoices, your personal and the corporation's statements for the period, the GST/HST number, the corporation's year-end and any slips.

Can I use my personal bank account for my Canadian corporation?

The Canada Business Corporations Act requires "adequate accounting records" and does not mention a bank account (s. 20(2)). The CRA requires records that are reliable, complete and supported by documents (CRA: your responsibilities). Neither source makes a bank account a requirement in itself; the records have to show the corporation's money as the corporation's.

A personal account that mixes your money with the corporation's makes that harder to show. Each deposit has to be matched to an invoice, and each personal item taken out; the deposits that match an invoice in the corporation's name are the ones this page is about. A separate corporate account, with its details on new invoices, keeps new payments out of this problem. A corporation incorporated under a provincial Act should read that Act's records section; this page cites the federal one.

How do I record income received in my personal account in the corporation's books?

If the invoices are the corporation's, the usual entries are the revenue in the corporation and the money you hold shown as an amount you owe it. Follow the payments, step by step:

The table assumes an invoice for fees already earned and not yet in the books; if it is already in receivables, record only the last two rows. Revenue belongs in the period the services were rendered, not just the invoice date (Income Tax Act, s. 12(1)(b)); for billing ahead of the work see customer prepayments and unearned revenue, and for GST/HST timing GST/HST on deposits and unpaid invoices. Date the last two entries by the day the money moved, and keep the matching line of your personal statement with each. Business costs you paid from the same account are separate entries; see business expenses paid personally. Which way the balance should run is in the shareholder loan account guide.

An entry records the debt; it does not clear it. The CRA says whether a loan or debt exists is not based on accounting entries, and that the substance of the transaction is what counts (Folio S3-F1-C1, para 1.14).

What does the CRA do if the money stays in my personal account?

If the books show you owe the corporation the money, the shareholder loan rule, subsection 15(2), can add it to your income for the year you received it, unless you repay it within one year after the end of the corporation's tax year in which the loan was made and the repayment is not part of a series of loans or other transactions and repayments (for example, repaying and then borrowing from the corporation again) (Income Tax Act, ss. 15(2) and 15(2.6)). The same clock applies to a debt that arose in that year. It counts from the corporation's year-end, not from the deposit date or your calendar year.

Without a written agreement or other convincing evidence of a loan or debt, and with no debtor-creditor relationship, subsection 15(2) will not apply, but subsection 15(1) may (Folio S3-F1-C1, para 1.13). A benefit the corporation confers on a shareholder is included in the shareholder's income, and the corporation generally cannot deduct it as a business expense (s. 15(1); CRA: shareholder benefits).

Even when subsection 15(2) does not apply, a balance you owe the corporation without interest at the CRA's prescribed rate may add an interest benefit to your income for the time it was outstanding, even if it is repaid before year-end (Income Tax Act, s. 80.4(2); Folio S3-F1-C2, paras 2.33 and 2.36). It does not apply to a balance already added under subsection 15(2) (para 2.15). See shareholder loan interest. For when taken-out money is a taxable loan, see shareholder loans.

How do I clear it: move the money to the corporation, or pay it out as salary, a bonus or a dividend?

A balance can be cleared before the one-year deadline above by paying the money into the corporation, or by applying salary, a bonus or a dividend the corporation owes you. Applying means setting it against the balance: what the corporation owes you reduces what you owe it. The CRA says repayments can be made by applying dividend, salary or bonus payments against a loan, and that doing so is not part of a series (Folio S3-F1-C1, paras 1.82 and 1.86).

Which is cleanest depends on your other income, the corporation's profit and cash, and the dates. See salary or dividends.

Does the corporation report the GST/HST on those sales?

The GST/HST on a corporation's sales is the corporation's to collect and report, whichever account the payment reached. Every person who makes a taxable supply must collect the tax (Excise Tax Act, s. 221(1)), and the person who files the return remits any net tax (s. 228). The tax collected has to reach the corporation, because the corporation pays the CRA. Directors can also be personally liable for net tax the corporation fails to remit, with interest and penalties; conditions and a due-diligence defence apply, and no assessment can be made more than two years after the person last ceased to be a director (s. 323).

If the corporation is registered, the tax on its invoices goes on its own GST/HST return, with input tax credits on its costs. If it is not registered, tax it charged is still held in trust for the Crown (s. 222(1); see charged GST/HST before registering), and its taxable sales count toward the $30,000 small supplier limit, with zero-rated sales and its associates' sales, but not financial services, capital property or goodwill. Passing the limit in a single calendar quarter means it must register and charge the tax from the sale that passed it; passing it over the last four consecutive calendar quarters ends small supplier status at the end of the month after that quarter (CRA: when to register). Deposits in your personal account do not reduce that count. See when to register, filing the return and recording GST/HST in your books.

Do I also report the income on my personal return, and what about a slip issued in my name?

Your own return picks up what the corporation pays you or is treated as giving you: salary, dividends, an amount added under subsection 15(2), or a benefit under subsection 15(1). The corporation's revenue goes on the corporation's return, which is due six months after the tax year ends (Income Tax Act, s. 150(1)). The corporation has slip duties too: the CRA says a shareholder benefit is reported on a T4A, and so is a deemed interest benefit (CRA: shareholder benefits; Folio S3-F1-C2, para 2.40).

If the contract is in your own name, or the work was sold before the corporation existed and it did not adopt the contract, the income may be yours rather than the corporation's. That depends on the contract and the facts, and is worth a professional's read before anything is booked. A slip a client issued in your name for the corporation's work has its own fix: see a fees slip issued to you, not your corporation.

What records do I need to keep, and for how long?

Keep reliable, complete records supported by documents for six years from the end of the last tax year they relate to (CRA: where to keep your records). The corporation's minutes, share records, general ledger and the agreements needed to understand its entries are kept until two years after it is dissolved (Income Tax Regulations, s. 5800(1)(a)). Late-filed returns and other changes are in how long to keep business records.

For this problem, keep the documents listed at the top, with the corporation's deposits marked on your personal statements, plus the bank record of each transfer into the corporation, the payroll or dividend records used to clear the balance, and the GST/HST returns.

What if this has gone on for years or the returns are not filed?

Each corporate year-end starts its own deadline for the amounts that arose in that year, so older amounts may already be past theirs. An amount past its deadline is included in your income for the year you received it, which can mean amending that earlier personal return (Folio S3-F1-C1, paras 1.16 and 1.73). A later repayment of an amount that was included can be deductible; see shareholder loans.

The corporation's side may be missing too: revenue that never reached its books is missing from its T2, and the GST/HST on it may be unreported. Rebuild the income first; see rebuilding books from bank statements and catching up on unfiled corporate returns. If a GST/HST return was already filed without it, see correcting a filed GST/HST return. If the CRA has already written, see reviews, audits and voluntary disclosure.

Example

These examples are illustrative; all amounts are Canadian dollars, and federal rules only.

Moved in before year-end

A consultant incorporated in Alberta in March but opened no corporate account until September. Clients paid C$18,000 into her personal chequing account, all on invoices in the corporation's name. The corporation's year-end is December 31. It books C$18,000 of revenue and a C$18,000 amount she owes it. In November she transfers C$18,000 into the corporate account, so nothing is owing at year-end. An interest benefit for the months it was outstanding may still apply.

Spent on her mortgage

Same facts, but she spends the C$18,000 on her mortgage. If it is still owing after December 31 of the following year, subsection 15(2) may add it to her income for the year she took it. Before that date, the corporation could clear the balance by declaring her a C$18,000 dividend, if its profit, cash and corporate-law tests allow it, and applying it against the balance; the CRA's folio does not treat that as a series. An interest benefit for the time it was outstanding may still apply, and the dividend is taxable to her under its own rules.

Sales with GST

Assume the corporation is registered and the consulting is a taxable supply made in Alberta. She bills C$10,000 plus 5% GST (C$500) on an invoice in the corporation's name, and the client pays C$10,500 into her personal account. The whole C$10,500 is then the corporation's: C$10,000 of revenue and C$500 of GST to report on its return. If only the C$10,000 reached the corporation, it would still owe the CRA the C$500, and she would still owe it the C$500.

Different for you?

• The money sat in your account across a corporate year-end, or more than one year is involved: each amount has its own deadline, and the choice between repaying, salary and a dividend turns on dates and numbers. Get bookkeeping help.
• GST/HST was collected and not reported, or there are years of deposits and no books: the missing returns and the books need fixing together. See catching up on unfiled returns and get bookkeeping help.
• Your account mixes personal and business deposits and you cannot match them to invoices: see rebuilding books from bank statements and get bookkeeping help.
• You were paid before the corporation existed, or changed from a sole proprietorship: see books after incorporating a sole proprietorship.
• A client paid you in US dollars, or into an account outside Canada: the currency side has its own steps; see a freelancer paid in USD: books and banking.
• The CRA has sent a letter: see reviews, audits and voluntary disclosure.
• A client's slip is in your name: see a fees slip issued to you, not your corporation.
• The corporation paid your personal expenses (the reverse): see personal costs the corporation paid.
• The corporation is new: see books for a new CCPC.
• Your corporation is in Quebec: Quebec's own rules are not covered here and may differ. Get bookkeeping help to check them alongside the federal rules.