Corporation Paid Personal Expenses: Shareholder Benefit or Loan

What happens if my corporation pays my personal expenses in Canada?

Unless a real debt to repay exists, the CRA generally treats a personal expense the corporation pays as a shareholder benefit. The value is added to the owner's income for the year, the corporation cannot deduct it, and, for a resident owner, the corporation does not withhold tax on it (Income Tax Act, subsection 15(1); CRA: shareholder benefits). The CRA also counts a benefit given to a person related or affiliated to the shareholder, such as a spouse or common-law partner. Typical items are family travel, groceries and home costs; the CRA also lists personal use of the corporation's property, such as a house or car, as a benefit. It values a benefit at fair market value, or the cost to the corporation or the amount it did not earn; valuing items is in a shareholder benefit found in an audit.

This page assumes the owner is resident in Canada. For a non-resident shareholder, a section 15 amount is instead deemed a dividend for Part XIII tax (subsection 214(3)): the corporation must withhold 25% before any treaty reduction and is liable for what it fails to withhold (subsections 215(1) and (6)).

For a resident owner, the corporation reports the benefit on a T4A slip, which the CRA says must be issued when the year's total is more than $500 or tax was deducted; the benefit is income either way. The shareholder pays the income tax on their own return. The CRA's shareholder page also mentions CPP contributions, but the Canada Pension Plan reaches only pensionable employment and business income (section 12; section 14), so ask the accountant whether any apply (CRA: shareholder benefits).

If the owner and the corporation had a real arrangement to repay when the money went out, the amount is a loan instead and sits in the shareholder account. The CRA says the substance of what happened decides, not the accounting entries (CRA folio S3-F1-C1, paras 1.13 and 1.14).

A case is not simple when:

• Personal items are already booked as business costs, or claimed on a GST/HST return.
• The charges repeat across more than one fiscal year, or the balance keeps growing.
• Nothing was written down when the money went out.
• The owner also works for the corporation as an employee.
• Someone other than the owner (a spouse, co-owner or staff member) made the charges: the CRA's test includes whether the shareholder knew, or reasonably should have known, of the benefit (CRA: shareholder benefits).
• The owner is not resident in Canada.
• The corporation has unpaid tax: the owner can be liable for part of it (see below).
• The corporation is in Quebec, where Revenu Québec may add its own rules.

If personal items are already booked as costs or claimed on a GST/HST return, or the charges span more than one year, the fix may reach returns already filed. That is a decision for an accountant, not a bookkeeping entry; the last section shows where to go.

Gather the corporate card and bank statements, the receipts, the general ledger and shareholder account, any loan agreement or directors' resolution, and the T2, GST/HST and T4A filings already made.

Is it a benefit, a loan, salary or a dividend, and who decides?

The facts decide, and the records made at the time prove them. A label, a journal entry or a later wish does not change what the payment was.

The corporation records it first, because it files the T2 and the slips, but the facts decide and the CRA can disagree on review. Once a T4A slip is filed, the CRA says the nature of the income or benefit on it cannot be changed (it may treat a change as retroactive tax planning), though a reporting error can be corrected, so settle the treatment before the slip goes out.

A withdrawal becomes salary or a dividend only through payroll or a declared dividend. See paying yourself a salary after the fact and declaring and paying a dividend.

Can the corporation deduct a personal expense or claim GST/HST on it?

No. Income tax allows a deduction only for an outlay made to earn income from a business or property (Income Tax Act, paragraph 18(1)(a)), and the CRA says a corporation cannot claim a shareholder benefit as a business expense. A personal item booked as a cost may have been deducted in error. If a T2 was filed, check whether Schedule 1 already added it back (CRA T2 guide, Schedule 1), and correct any deduction actually claimed. A mixed item is split: only the part made to earn income is deductible. For what does qualify, see business expenses the CRA accepts.

The same dollars can be taxed twice: the corporation gets no deduction, and the owner pays tax on the benefit. A documented loan repaid in time avoids the income inclusion for the owner, but still gives the corporation no deduction.

A GST/HST registrant can claim an input tax credit only for the part of a purchase it acquired for use in its commercial activities (Excise Tax Act, section 169; CRA: eligibility percentage). A personal item for the owner's household is not acquired for the corporation's commercial activities, so a credit claimed on it was generally overclaimed. Check each GST/HST return for the periods in which a personal charge was booked as a cost.

A separate rule in section 173 of the Excise Tax Act covers GST/HST on some benefits a registrant itself supplies to an individual, when the amount is included in income under subsection 15(1). Where it applies, the credit on that item can stay allowed while GST/HST is owed on the benefit amount, within the limits of section 170. Whether it applies depends on what the corporation supplied, for example the use of its own property, so raise it with the accountant before reversing a credit. For returns already filed, see reviews, audits and voluntary disclosure. Tax that a correction adds can carry interest from the original due date (Income Tax Act, subsection 161(1); Excise Tax Act, subsection 280(1)).

If the corporation also owes tax it has not paid, the owner can be liable for part of it. A transfer of property, which includes money, to a person the transferor does not deal with at arm's length, for less than fair value, makes the transferee jointly liable for the transferor's unpaid amounts for that year and earlier years, up to the value transferred less what was given (Income Tax Act, subsection 160(1); Excise Tax Act, subsection 325(1) for GST/HST). The CRA can assess the transferee at any time (subsections 160(2) and 325(2)). The accountant decides whether a payment is such a transfer.

How do I fix the books when the corporation paid a personal item?

Take each personal item out of the expense accounts, review the GST/HST credit on it, then record it by what it was. The shareholder account is the right place only when a real debt exists.

1. List every personal charge from the card, bank and cash statements: date, payee, amount and who it was for.
2. Move each out of the expense accounts, including cost of goods sold, so no deduction remains.
3. Review any GST/HST input tax credit claimed on it, reverse what the item did not qualify for, and note the return period. Section 173 can change this when the corporation itself supplied the item (see above).
4. Check whether the corporation already owed the owner money (a "due to shareholder" balance from the owner's own advances). A bill paid as a genuine repayment of that debt, as the records show, reduces it and creates no new loan; classify only the excess. A credit balance does not automatically cancel a benefit (CRA folio S3-F1-C1, para 1.82; CRA audit manual, 24.10.4).
5. Record each item by its facts. A documented loan goes to the shareholder account as an amount the owner owes ("due from shareholder"). An amount with no debt is a shareholder benefit: record it in its own non-deductible account, not the loan account, and report it on a T4A. A benefit received because of employment goes through payroll.
6. Date every item. A loan's repayment window runs from the corporation's fiscal year-end, and the year-end checklist places this step.
7. Clear any loan balance by repaying it in time (see the repayment section below), and reconcile the account to the statements.

Posting an item to the shareholder account does not prove it is a loan. The CRA lists payments the corporation makes to third parties for a shareholder among the items a loan account can hold, but with no agreement to reimburse, subsection 15(1) may apply instead (CRA folio S3-F1-C1, paras 1.11 and 1.13). Direction and entries are in the shareholder loan account. If the year is closed or the T2 is filed, the fix may mean amending a return, which is for the accountant.

When is it a loan, and what shows it is one?

It is a loan when the owner owed the money back from the day it was spent, and both sides acted that way. The CRA says a loan can be shown by a written agreement or other convincing evidence, such as a corporate resolution reflected in the financial statements (CRA folio S3-F1-C1, para 1.13).

Evidence worth having, made when the money left:

• A directors' resolution or written agreement that the corporation paid the item for the owner and the owner will repay.
• The repayment terms, so the end date can be told.
• Repayments the owner actually made from their own money.
• The item shown as owed by the owner in the year-end financial statements.

The one-year rule is in shareholder loans, and the interest benefit is in shareholder loan interest.

Can I just repay it, and how fast?

Repaying clears a genuine loan. It does not turn a benefit into a loan after the fact. A genuine loan avoids the income inclusion if it is repaid 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 (Income Tax Act, subsection 15(2.6)).

Repay from the owner's own money, and keep the bank record. Repayment by salary, bonus or dividend, and the rule on repaying and borrowing again, are in shareholder loans.

For an amount with no debt when it was spent, the CRA's shareholder-benefit page says nothing about reducing the benefit for amounts the owner repays later, so do not assume a late repayment cancels it. The CRA's audit manual, guidance for its staff and not law, allows reimbursement in a few listed cases, one being a voluntary disclosure, with prompt repayment and a written agreement (audit manual, 24.10.4). Have the accountant decide first; see reviews, audits and voluntary disclosure.

What if the corporate credit card has personal charges, or I pay the card from the corporation?

Paying the corporate card bill from the corporation's bank account is ordinary. The personal charges inside that bill are still the owner's personal expenses paid by the corporation, and they are treated like any other personal expense the corporation pays: a loan if a debt is documented when the money leaves, otherwise a shareholder benefit.

Book the payment by statement line, not as one expense:

• Pay the whole bill, then move the personal lines out of the expense accounts to the shareholder account or to a benefit record.
• Mark personal lines on each statement as the month closes, while the owner can still say who a charge was for.
• Where a debt is documented, the owner repaying the personal part from their own account in the same month clears it before the books close.
• If a business cost went on a personal card instead, that is the reverse case: see business expenses paid personally.

A bookkeeper is asked to record personal items as business costs: what is the risk?

Recording personal items as business costs puts a deduction and a GST/HST credit on returns that the law does not allow, and it can bring the bookkeeper under the penalty rules too. They turn on knowledge, gross negligence or culpable conduct (the Act includes indifference to whether it is complied with), not on honest error. Rows 1 and 2 are worked out from the tax or net tax of the person liable, the corporation when it files the return; row 3 is written for a person who helps with someone else's statement.

The Act says an advisor who relies in good faith on information the client gave, and so does not check it, is not for that reason alone treated as culpable (Income Tax Act, subsection 163.2(6)). The row 3 rule still turns on what the person knew or would reasonably be expected to know, so good-faith reliance gives no cover for a statement the bookkeeper knows is false. The Act's carve-out for clerical and secretarial help does not extend to bookkeeping services (subsection 163.2(9)).

A bookkeeper who cannot support an item as a business cost can post it to the owner's account and ask for the receipt and the business purpose. If the owner insists on booking it as a cost, put the question to the accountant before posting.

What if the person is also an employee?

A shareholder who also works for the corporation can receive the same payment as an employee or as a shareholder. The CRA treats which one it was as a question of fact, reviewed benefit by benefit (CRA: shareholder benefits).

A benefit received because of the employment is an employee benefit: the value of benefits received by reason of the office or employment is employment income (Income Tax Act, paragraph 6(1)(a)), and payroll rules apply. A benefit received because the person owns shares is a shareholder benefit. For payroll mechanics, see running payroll.

What records do I keep, and what should I gather before the accountant or the CRA asks?

Keep whatever shows what each item was, who it was for and how it was treated. Gather:

• Corporate card and bank statements for each fiscal year, with personal lines marked.
• Receipts or invoices for each item.
• The general ledger and the shareholder account, with last year's closing balance.
• Any loan agreement, directors' resolution or repayment note, and the bank record of each repayment.
• The T2, GST/HST returns and T4A slips already filed for those periods.

Keep records and supporting documents for six years from the end of the last tax year they relate to, or from the filing date for a late income tax return; an objection, appeal or CRA direction can require longer. The CRA says the share registry and other historical information are kept indefinitely, so keep the minute book and any loan resolution with them (CRA: keeping records).

The T2 guide says to complete Schedule 11 for transactions with shareholders, officers or employees outside the ordinary course of business, so expect the preparer to ask (CRA T2 guide). If statements are the only record, see rebuilding books from bank statements.

Example

These examples are illustrative; all amounts are Canadian dollars, the corporation's fiscal year ends December 31, the owner is a Canadian resident, and the corporation owed the owner nothing.

Family travel and groceries: loan or benefit

In Year 1 the corporation pays C$4,800 of the owner's family travel and groceries.

• A resolution written at the time says the owner will repay: it is a loan. The owner repays it from their own money by December 31 of Year 2. If the repayment is not part of a series, the loan amount itself is not added to the owner's income; interest on it is a separate question. If it is still unpaid after that date, subsection 15(2) adds C$4,800 to the owner's Year 1 income, and the Year 1 personal return is amended.
• Nothing was written down and nothing was repaid: it is generally treated as a shareholder benefit. The C$4,800 is added to the owner's Year 1 income and reported on a T4A, and the corporation gets no deduction. Posting it to the shareholder account later does not change that.

Personal purchases booked as cost of goods sold

The bookkeeper booked C$6,000 of the owner's personal purchases as cost of goods sold, and the corporation claimed the C$780 of HST it paid (13% in this illustration). Assume the owner bought the items for personal use and the corporation only paid the bills; it did not supply goods to the owner (if it did, section 173 can change the HST result). The deduction of C$6,000 is reversed, and so is the C$780 credit. The whole C$6,780 paid moves to the shareholder account, or is treated as a benefit if no debt is shown. If the benefit is measured by cost, subsection 15(1.3) includes the HST: C$6,780, not C$6,000; the accountant confirms the basis. The T2 (was the C$6,000 already added back on Schedule 1?) and the GST/HST return are then reviewed.

The card with personal charges

The corporation pays a card statement of C$3,400. Of that, C$2,500 is business and C$900 is the owner's personal spending. The corporation pays the whole bill. The C$2,500 stays as business costs. The C$900 goes to the shareholder account if a debt is documented, otherwise it is a benefit. If a debt was documented and the owner transfers C$900 from their own account that month, the shareholder account clears before the books close. If it was a benefit, the transfer does not by itself undo it.

Different for you?

• Personal charges have sat on the corporate card for a year or more, and some are already booked as business costs or claimed on a GST/HST return, so filed returns carry the deduction or the credit: the cost, the credit and the filed returns each need a decision. Bring the statements to bookkeeping help to settle how each item is treated. See also reviews, audits and voluntary disclosure and how far back the CRA can reassess.
• The owner lives outside Canada or changed tax residence: Part XIII withholding and an NR4 return may apply instead of a T4A. Gather the payment dates and residence history for cross-border tax help.
• The corporation owes tax it has not paid: the payments can make the owner liable for part of it. Bring the tax statements and payment records to bookkeeping help; see also a shareholder benefit found in an audit.
• A balance is older than one fiscal year, or keeps growing: the repayment window may have passed. See shareholder loans and bookkeeping help.
• The books are behind: see catching up on overdue books and bookkeeping help.
• The CRA has audited and reassessed a benefit: see a shareholder benefit found in an audit.
• Past withdrawals should become salary: see paying yourself a salary after the fact.
• The corporation owns a home or condo you live in: see a home owned by your corporation.
• Business income went into your personal account: see corporate income in a personal account.
• Two or more owners take different amounts: see shareholders taking different amounts.
• Your corporation is in Quebec: Revenu Québec rules are not covered here. Have them checked with the federal rules.