CRA Shareholder Benefit Audit: Personal Expenses in a Corporation

What is a shareholder benefit, and how does the CRA assess it?

A shareholder benefit is value a corporation gives a shareholder because of the shares, outside a good-faith business deal and outside employment. Subsection 15(1) of the Income Tax Act adds its value to the shareholder's income for the tax year in which the benefit was conferred. The corporation cannot deduct it as a business expense, and it withholds no payroll deductions (CRA: shareholder benefits).

A benefit given to a family member, or to another individual who does not deal at arm's length with the shareholder or is affiliated with them, counts as a benefit to the shareholder, unless it is already included in someone's income (subsection 15(1.4)). The proposal letter is the CRA's position, not a final decision: whether an item was personal depends on its purpose and the records behind it.

A case is not simple when:

• The reply date, 30 days from the proposal letter, is close or has passed.
• The items span more than one year. Each year is reassessed separately, on both returns.
• The amounts sit in the shareholder loan account. A real loan follows its own rules (see shareholder loans), while a benefit is taxed in the year it was conferred.
• Both the corporation's T2 and your personal return will be reassessed.
• GST/HST credits were also claimed on the items.
• The letter proposes a penalty.
• The shareholder is not a Canadian resident. The Act treats the benefit as a dividend for Part XIII non-resident tax (subsection 214(3)); the payer must withhold it and is liable for what it fails to withhold (subsection 215(1); subsection 215(6)). A director when the amount was due can be jointly liable too (subsection 227.1(1)), unless the director took the care a reasonably prudent person would, and the CRA has two years after the person last ceased to be a director to start (subsections 227.1(3) and (4)).
• The corporation has tax it has not paid. The shareholder can be liable for part of it (see below).
• The corporation is in Quebec or Alberta.

Gather the audit letters and the list of disallowed items, the general ledger, the shareholder loan account, bank and card statements, and every invoice or note that shows a business purpose.

Why is a shareholder benefit not salary or a dividend?

Salary is pay for work, run through payroll with deductions withheld. A dividend is a distribution the directors declare and record as one. A shareholder benefit is neither: it is value the shareholder received because of owning shares.

The CRA says that once the corporation has filed the T4A that reports a shareholder benefit, the nature of the benefit cannot be changed, only a reporting error corrected, and that recasting it afterwards may be treated as retroactive tax planning (CRA: shareholder benefits). See paying yourself a salary after the fact.

What happens to me and to the corporation: is the benefit taxed twice?

The CRA reassesses two taxpayers: the shareholder, whose income goes up, and the corporation, whose deduction is denied. The two are separate notices with separate dates.

The same dollars can be taxed in both places. The corporation gets no deduction (Income Tax Act, paragraph 18(1)(a)), and the shareholder pays tax on the benefit. A credit claimed under the GST/HST rules is allowed only to the extent the purchase was for the corporation's commercial activities (Excise Tax Act, section 169), so a GST/HST reassessment can follow on its own notice. If the corporation itself supplies the benefit, such as the use of its own property or a service, section 173 can deem GST/HST collected on the amount included in income under subsection 15(1), subject to exclusions.

Paying the owner's costs can also create liability for the owner. If a corporation transfers property to a person it does not deal with at arm's length for less than fair market value, that person is jointly liable for the corporation's unpaid amounts under the Act for that year and earlier years, up to the value transferred less what the corporation received (subsection 160(1)). The CRA can assess it at any time (subsection 160(2)). Whether a given benefit is a transfer of property is a question for your accountant.

Which items does the CRA treat as shareholder benefits, and how are they valued?

The CRA lists personal expenses the corporation pays, personal use of corporate property, below-market or above-market sales between the corporation and the shareholder, and more. It values a benefit at either the fair market value of what the shareholder received, or the cost to the corporation or the amount the corporation did not earn (CRA: shareholder benefits). The CRA defines fair market value as the highest price that can be obtained in an open market between an informed, willing buyer and an informed, willing seller who deal at arm's length.

A corporate vehicle has its own rule. Where a corporation makes an automobile available to a shareholder or a related person, subsection 15(5) values the benefit with the employer-car rules, reading the corporation as the employer. Those rules combine a standby charge and an operating-cost benefit (CRA: automobile provided by the employer):

• Standby charge: a monthly charge for having the vehicle available, usually 2% of the cost for each 30 days on an owned vehicle, or two thirds of the monthly lease cost on a leased one. It is reduced only when the vehicle was required for the person's duties, business use is more than 50% and personal driving stays within the CRA's limits.
• Operating-cost benefit: a charge for the running costs the corporation paid; the general rate is $0.34 per personal kilometre (Department of Finance Canada).

Not every truck is an automobile. The Act excludes some vans and pick-ups, depending on their seating and on how they are used to earn income in the year they were acquired or leased (Income Tax Act, subsection 248(1)). A vehicle outside the definition is not valued with these formulas. Business use is shown with a logbook; see rebuilding a vehicle logbook for a CRA review. A home the corporation owns is covered in a home owned by your corporation.

Is it different if I am also an employee or a director?

Yes. A benefit you receive as an employee is not a shareholder benefit (CRA: shareholder benefits). A benefit you receive because you own shares stays one, even if you also work for the corporation.

The label changes who pays what:

• Employment benefit: its value is employment income (Income Tax Act, paragraph 6(1)(a)), the corporation can deduct it, and payroll rules apply.
• Shareholder benefit: no deduction and no payroll deductions, as above.

A director holds an office, and the Act's definition of office includes the position of a corporation director (subsection 248(1)). A benefit received because of the directorship may therefore be treated under the employment rule instead. The CRA's page speaks only of employees and says each benefit is reviewed on its own facts, so the reason it was given, and the records made at the time, carry the weight.

What penalties and interest can come with a benefit assessment?

Interest follows any extra tax. A penalty needs its own basis, and the CRA must prove it if the penalty is appealed (Income Tax Act, subsection 163(3)).

Interest also runs on these penalties, from the day the return was due (subsection 161(11)). It generally keeps running on an amount in dispute (CRA: P148). A corporation that expects a reassessment can send an advance deposit with Form RC159 to reduce the interest (CRA: prepaying reassessments).

How do I answer the CRA's proposal letter, and how long do I have?

You have 30 days to agree or disagree with the proposal (CRA: business audits; CRA: RC4188). Neither page promises more time, so ask the auditor before the date passes if you need it.

1. List every item in the letter: year, date, payee, amount, who it was for, and the figure the CRA proposes to add to income and to deny the corporation.
2. Match each item to records made at the time: receipt, contract, resolution or a note of the business purpose.
3. Sort the items by what your records support: items the records show were personal, items the records may show were business, and items you cannot yet judge.
4. Reply in writing before the date. For each item you contest, give the facts and attach the documents. For each item you agree with, say so. Whether to agree is your decision; the letter is the CRA's proposal.
5. Check whether the proposal covers your personal return as well as the T2, and whether it proposes a penalty. The auditor can give an estimate of the amount before a notice is issued (CRA: RC4188).

Whether paying an item back to the corporation now changes how the CRA treats it is a question for your accountant; the CRA's shareholder-benefit page does not say.

If an issue stays open, the team leader's contact details are in the auditor's letters. After the final letter, a notice of reassessment follows where income or tax changes. Voluntary disclosure and the rest of the audit process are in reviews, audits and voluntary disclosure.

What if I disagree: how does an objection work for the corporation and for me personally?

You object to each notice of reassessment, not to the proposal letter. The corporation and the shareholder are separate taxpayers with separate notices, so each files its own objection by its own deadline.

For the T2 and personal income-tax notices, file through the CRA's online formal-dispute service, or send Form T400A or a signed letter to the Appeals Intake Centre. Explain why you disagree and include the facts and documents (CRA: P148). An appeals officer reviews the reassessment.

The CRA normally postpones collection of the disputed income-tax amount until 90 days after it sends its decision, but interest generally keeps running (CRA: P148). A large corporation has a different collection rule (Income Tax Act, subsection 225.1(7)). If you still disagree with the decision, you can appeal to the Tax Court of Canada within 90 days of it, or once 90 days pass with no decision. A late income-tax objection can be requested no later than one year after the deadline (CRA: P148).

A GST/HST notice follows different rules. Object online through My Account or on Form GST159 (CRA: GST/HST Memorandum 31). An objection does not stop collection, though the CRA may postpone it (Excise Tax Act, section 315). With no decision, you can appeal to the Tax Court after 180 days, not 90 (section 306).

How far back can the CRA go on a shareholder benefit?

The CRA can usually reassess a T2 within three years for a Canadian-controlled private corporation at year-end, or four years for any other corporation, and a personal return within three years, each counted from that return's original notice of assessment (CRA: when we reassess your T2). The corporation and the shareholder file separately, so their clocks end on different dates. A misrepresentation attributable to neglect, carelessness or wilful default, fraud, or a waiver lets the CRA reassess after that period, but only for matters related to it (subsection 152(4); subsection 152(4.01)). Subsection 152(4) lists a few other cases; the rules, waivers and unfiled years are in how far back the CRA can reassess.

How do I correct the books and prevent a repeat?

Restate each item by the CRA's final position, then change how personal spending is handled. The accountant should confirm each step.

1. Remove the deduction. For each item the CRA finally treats as a benefit, take the cost out of the expense and cost-of-goods accounts, and review any GST/HST credit claimed on it, reversing it to the extent the item was not for commercial activities, and any GST/HST that section 173 deems collected on a benefit the corporation supplied.
2. Record the benefit by itself. Keep it in its own non-deductible account, not in the shareholder loan account, unless a real debt to repay existed when the money went out. See the shareholder loan account and shareholder loans.
3. Record the reassessment. Tax, interest and penalties each need their own entry; see recording CRA reassessments and penalties.
4. Check the slips. The CRA says a shareholder benefit is reported on a T4A when the year's payments are more than $500 (or tax was deducted), under the code for the type of benefit (CRA: shareholder benefits). Ask whether the corporation must file or amend one for each year.
5. Check the years the audit did not cover. The same items may sit in them.

To prevent a repeat:

• Keep personal spending off the corporate card and account.
• Mark each corporate-card line with its business purpose when it is paid, not at year-end.
• Decide in writing, at the time, whether any payment to or for the owner is a business cost, a loan, salary or a dividend.
• Keep receipts and purpose notes for six years from the end of the last tax year they relate to. If you file an objection or appeal, keep all necessary records until it is resolved, the time for any further appeal has passed and that period is over (CRA: keeping records).
• Complete Schedule 11 when the corporation had transactions with shareholders outside the ordinary course of business (CRA: T2 guide).

The year-end routine is in the year-end checklist.

I am in Quebec or Alberta: does the same audit apply?

The CRA audits the federal return wherever the corporation is, but it administers provincial corporation tax everywhere except Quebec and Alberta (CRA: provincial and territorial corporation tax). This page covers CRA audits. The provincial side is separate:

• Alberta: Tax and Revenue Administration administers the Alberta Corporate Tax Act, and a notice of objection to an Alberta assessment is due within 90 days of the date on the notice (Alberta: corporate income tax).
• Quebec: provincial corporation tax is outside the CRA's administration and has its own authority, Revenu Québec. Its audits, notices and deadlines are not covered here.

A federal reassessment and a provincial notice are separate documents with their own dates. Read each one.

Example

These examples are illustrative; all amounts are Canadian dollars.

Home renovation and family travel over two years

An Ontario corporation with a December 31 year-end pays C$8,000 for work on the owner's home in Year 1 and C$4,000 of family travel in Year 2. Both were booked as business costs. The proposal letter adds C$12,000 to the owner's income and denies the same amount to the corporation.

The owner finds a conference invoice and itinerary for C$1,500 of the travel. The reply accepts C$8,000 and C$2,500 as benefits and contests C$1,500 with the documents. If the CRA agrees, C$10,500 stays as shareholder benefits. Each year has a corporate notice and a personal notice, so four notices, four dates and four objection deadlines.

For illustration, assume 40% tax on the owner's extra income and 12% on the corporation's denied deduction; real rates vary. On C$10,500 that is about C$4,200 plus C$1,260, or C$5,460 before interest and any penalty.

A truck used only for family trips

A corporation leases a truck for C$500 a month (C$6,000 a year) and pays C$2,000 of fuel, all booked as business. Assume it is an automobile under the Act and the C$500 includes GST/HST and excludes insurance. The family drives it 8,000 personal kilometres and it has no business use.

• The leased standby charge is two thirds of C$6,000, which is C$4,000.
• The operating-cost benefit is 8,000 km at C$0.34, which is C$2,720.
• The owner's income rises by C$6,720.
• The corporation's deduction is denied for the whole C$8,000 it spent, because none of it earned income.

The two figures differ: one is what the corporation spent, the other is the formula value of the benefit. A logbook showing business trips could keep the business share deductible and reduce the personal kilometres counted in the benefit.

A Quebec corporation with two letters

A Quebec corporation receives a CRA proposal letter on its federal T2 and a letter from Revenu Québec about the Quebec return. The CRA's 30 days apply to the CRA letter only. The Revenu Québec letter has its own reply date and objection deadline, so one reply does not cover both.

Different for you?

• The letter lists personal items across more than one year, the amounts sit in your shareholder loan account, both your T2 and your personal return will be reassessed, or the corporation also owes tax it has not paid: the reply usually turns on an accept-or-contest call for each item, and the books then need restating to match the final position. Have the letter, ledger and statements reviewed before the reply date: corporate tax help for the reply and any objection, bookkeeping help for the restated books.
• A shareholder lives outside Canada: the corporation may owe Part XIII withholding it did not take off. Take the letter to corporate tax help before replying; with a US filing too, see cross-border tax help.
• The CRA has not contacted you and you are fixing personal costs now: see corporation paid personal expenses.
• The letter is a review, or you are weighing voluntary disclosure: see reviews, audits and voluntary disclosure.
• Some amounts may be genuine loans: see shareholder loans.
• Years beyond the normal period are involved: see how far back the CRA can reassess.
• The penalty or interest bill looks wrong: see penalties, interest and relief.
• You owe a balance you cannot pay at once: see a CRA payment arrangement for business debt.
• You want to know what triggered the audit: see what triggers a CRA audit.
• The corporation owns a home you live in: see a home owned by your corporation.
• You are in Quebec or Alberta: the provincial side runs on its own notice and dates; bring that letter to corporate tax help alongside the federal one.