Personal Expenses and Shareholder Benefits
If you own an incorporated business, it can be tempting to let the corporation cover a personal expense from time to time. But mixing personal and corporate spending can create unexpected tax consequences.
When a corporation provides a personal benefit to a shareholder or related person, the Canada Revenue Agency (CRA) may treat the amount as a taxable shareholder benefit.
What is a shareholder benefit?
A shareholder benefit can arise when a corporation provides value to a shareholder or related person outside an appropriate business arrangement.
Situations that may create concerns include:
- Personal expenses paid by the corporation.
- Personal use of corporate-owned property.
- Corporate assets transferred to a shareholder or family member for less than fair market value.
- Other transactions where a shareholder receives a personal benefit from the corporation.
The tax treatment depends on the circumstances, which makes identifying and documenting these transactions important.
A shareholder loan isn’t an automatic fix
Advancing money to your corporation doesn’t automatically offset personal expenses the corporation has paid on your behalf.
If a shareholder advance is intended to reimburse the corporation for specific personal expenses, the accounting records and supporting documentation should clearly reflect that treatment.
Trying to establish that connection years later can be much harder than documenting the transaction when it happens.
Fair market value matters
Additional issues can arise when corporate property is sold or transferred to a shareholder, family member, or other related party.
Related-party transactions should be supported by appropriate valuation and documentation. If an asset is transferred below fair market value, the transaction may create additional tax consequences.
Keep personal and corporate spending separate
Good records can help prevent uncertainty around shareholder transactions.
Business owners should consider:
- Keeping personal and corporate spending separate.
- Recording shareholder advances and repayments promptly.
- Reconciling shareholder loan accounts regularly.
- Documenting related-party transactions when they occur.
- Reviewing significant shareholder transactions before year-end.
The sooner an issue is identified, the easier it is to understand what happened and determine the appropriate treatment.
Address issues early
If your corporation has been paying personal expenses or you’re considering transferring corporate property to a family member, review the arrangement before assuming everything can be addressed later.
Davidson can help you review shareholder transactions, identify potential tax issues, and strengthen the documentation supporting your tax position.
This article is provided for general information only and should not be considered accounting, legal, or tax advice. Your individual circumstances may differ. Contact your trusted advisor for guidance specific to your tax needs.
