Shareholder benefit

What counts as a benefit

The classic case is a corporation paying a shareholder’s personal expenses with no agreement to be repaid. Personal use of corporate property such as a house, car or yacht without paying fair market value, or buying company property for less than it is worth, can also be benefits. The CRA’s Income Tax Folio on shareholder loans gives paying personal expenses as an example.

The rule applies to a person in the capacity of shareholder. A benefit given to someone as an employee, customer or vendor is generally analyzed under other rules, and a genuine business transaction between the corporation and the shareholder is not a benefit. Where a person is both shareholder and employee, the facts decide which rule applies.

How it differs from a shareholder loan

A shareholder loan is a genuine obligation to repay, ideally supported by a written agreement and evidence of repayment. If no loan exists and the shareholder simply receives money or property, section 15(2) does not apply, though subsection 15(1) may. The CRA looks at what actually happened, so a bookkeeping entry in the shareholder loan account does not decide the question.

Forgiving a shareholder loan can also create an inclusion under subsection 15(1). The CRA says the benefit must be known to the shareholder or intended by the corporation, but the test depends on the facts, including the size of the benefit compared with the corporation’s revenues, expenses or loan account.

A simple illustration

Suppose a corporation pays $6,000 for a family vacation for its owner and records it as travel. The expense is personal, no repayment was agreed, and the owner knew about it, so the $6,000 would generally be included in the owner’s income as a shareholder benefit. The corporation would also lose the deduction. This example is illustrative only, and the proper treatment depends on the facts.

What to discuss with your accountant

Ask how to separate personal and business costs so they are recorded correctly when they happen. Bring receipts, logbooks, loan agreements and a list of anything the company paid that had a personal element.

Your accountant can compare repaying the corporation, treating the amount as salary or a dividend, or another approach. Benefits can also arise in family contexts, which is where tax on split income may apply to the same amounts.