Introduction
Business owners are often tempted to dip into the corporation's pockets to pay for personal expenses. A temptation which seems like a relatively insignificant transgression but in reality, is a decision that can create dire tax consequences. A corporation paying amounts for a purpose other than earning income is generally incurring a non-deductible expense for the corporation. Additionally, the Canada Revenue Agency ("CRA") may personally assess the business owner with a shareholder benefit received for appropriating corporate funds for personal use.
If a business owner wishes to extract funds from a corporation for personal use, the proper method is through paying a salary, bonus, or dividend. Each of these methods is a taxable event for the recipient of the funds. Although a loan can be taken from the corporation to extract funds there are strict requirements for repaying it without incurring adverse tax consequences. Business owners must be cognizant of the tax consequences whenever accessing funds within a corporation, as the tax consequences will vary, depending on the way which the funds are received.
Laliberté v Canada: An Extra-Terrestrial Example
The most notorious example of the application of a benefit to a business owner took place in Laliberté v Canada, 2020 FCA 97 ("Laliberté"). Where the Federal Court of Appeal affirmed that the $41.8 million dollars incurred by Cirque du Soleil did not serve a business purpose and was instead a personal trip Mr. Laliberté took on the corporate dime.
In Laliberté, a corporation in Cirque du Soleil's corporate group paid $41.8 million for Mr. Laliberté's 12-day excursion to the International Space Station. Mr. Laliberté was the group's controlling shareholder, and the Tax Court of Canada found that Mr. Laliberté committed to taking the trip before seeking approval from anyone in the Cirque du Soleil group, and structured the transactions such that external shareholders interests were unaffected by the costs associated with the trip.
Despite Mr. Laliberté's claim that the trip was a foray into a new form of marketing. The Tax Court and Federal Court of Appeal held that the transaction was a personal venture, rather than a bona fide business transaction. Mr. Laliberté was ruled to have received a shareholder benefit equal to $37.6 million of the cost of the trip, with the remaining $4 million allocated to business activities of the corporate group.
Although most taxpayers will not be faced with the question of whether or not the space expedition taken should qualify as a business expense, Laliberté serves as a clear reminder that business funds and assets are not to be utilized by the owner for personal use and instead must be used for the pursuit of profit by the business.
Jackman v The Queen: Marketing Still Considered A Business Purpose
In Jackman v The Queen, 2022 TCC 73 ("Jackman"), a Vancouver Island couple was assessed for a shareholder benefit by the CRA for personal use of a boat owned by a corporation under the couple's control. The primary use of the boat in the business was to market directly to boaters in the marina where the business operated. This marketing was accomplished by taking the boat out to meet boaters in smaller marinas or bays within the surrounding area. The boat was also used to travel to and entertain at boat shows in both British Columbia and Washington, hoping to attract more traffic to the business. The boat was also used in incidental business activities and personal use was very occasional.
The CRA reassessed the couple, questioning the "marketing" activities and suggesting that there was a personal element that needed to be taken account when evaluating the shareholder benefit. Justice Boyle saw the marketing in a different light than the CRA, describing the use of the watercraft as "typical direct personal marketing" which "proved very successful" as mooring and fuel revenues increased each year. Justice Boyle went on to find that the boat was primarily acquired and used for business purposes – only being utilized for personal use 5 percent of the time.
Critically, Justice Boyle highlighted that the courts do not permit the CRA to simply second-guess a business's marketing strategy or efforts, even if unsuccessful in generating revenue. If a business engages in bona fide marketing activities which are primarily undertaken for a business purpose, the CRA cannot second-guess the purpose due to the poor execution of the marketing activities by the owner, or the owner's resulting enjoyment.
Justice Boyle held that the $18,000 the couple paid to the corporation for personal use of the boat was sufficient to cover the value of the personal use, allowing the couple's appeal of the reassessments.
Pro Tax Tips – Business Purpose Is Key
Justice Boyle took the same approach in both Laliberté and Jackman but came to different conclusions on whether there was a shareholder benefit. The key distinction between the result of the two is the business purpose regarding the relevant expense. In both cases the business owner was paying an amount towards the expense, the distinction being that Laliberté primarily incurred the expense to fulfill a personal desire and use. Whereas in Jackman, the couple very occasionally utilized an asset which was primarily acquired for a clear business purpose. Although there were ancillary marketing benefits to the trip taken in Laliberté, those benefits were not the primary goal.
If you are facing CRA tax audit or reassessment regarding a potential shareholder benefit from personal use of a corporate asset, you should engage with one of our expert Canadian tax lawyers. Further, if you are considering making personal use of corporate assets you should consult with our top Canadian tax lawyers to ensure that your use of the corporate asset will not result in and out of pocket tax expense for you. Our expert Canadian tax lawyers can provide legal advice and assist you with fighting unreasonable CRA decisions.
FAQ
What Does "Primarily For Business Purposes" Mean?
"Primarily" when used in the Income Tax Act is ordinarily interpreted as meaning over 50 percent. Meaning that the use is for business over half the time. However, just because the asset was acquired for a business purpose does not avoid a shareholder benefit. If the corporation acquires 100 percent of the asset and the asset is utilized by a shareholder for personal use – there will be a shareholder benefit equal to the amount of use. In Jackman, the couple used the asset 5 percent of the time but the corporation had acquired 100 percent of the boat – so the couple paid $18,000 per year for the personal use of the corporate asset.
What Types of Expenses Give Rise To A Shareholder Benefit?
Any time that a shareholder uses the assets or capital within the corporation in a personal capacity, there is a benefit conferred upon the shareholder. If a shareholder wishes to use or extract property from the corporation, there will be a shareholder benefit if there is no proper distribution (dividend, bonus, salary, or in the case of an asset – a fair market value purchase).
What If I Purchased a Vehicle For My Business But Now No Longer Need It And Want To Have It For My Own Use?
When there is a change in use of an asset from business to personal, the business is considered to have sold the property at fair market value (even if you did not actually sell it). There are potential tax implications based on the amount of depreciation claimed on the asset in the years it was used by the business, with the difference between the fair market value and the adjusted cost base resulting in a recapture or terminal loss. If the asset is received for no consideration, the value of the asset will be included in the income of the recipient as a shareholder benefit. There is a wide array of tax issues arising from the change of use of a business asset, if you are planning to expropriate an asset for personal use, you should consult with one of expert Canadian tax lawyers to have a greater understanding of the tax consequences that may arise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.