How to avoid penalty and double taxation for shareholders take benefits from private corporation

Subsection 15(1) was introduced to prevent shareholders of a corporation from directly or indirectly appropriating corporate funds or property free of tax.

Some shareholders took some personal benefits from corporation and recorded expenses for corporation.Thus, it would result in double taxation for the benefits need to be included in shareholders’ income and corporation cannot be deducted the expenses as well as penalty may be charged to 50% of the income tax payable on the taxable benefits.

Some example are as the following:

  • shareholder sells property to the corporation for a consideration greater than the fair market value (FMV) of the property transferred.
  • the corporation pays personal expenses of the shareholder, or the shareholder personally receives the benefits of the corporation without recording the transaction in the books of the corporation as income and as an advance to the shareholder.
  • property owned by the corporation is used by a shareholder for personal use, free of charge.

Case 1:

One client is a sole shareholder of ABC Ltd. ABC Ltd. owned a condominium in downtown Toronto, nearby University of Toronto. The client’s daughter is a full time student in University of Toronto and occupied the condo for the entire year in 2013. The total operating costs of condo was $15,000, and recorded expenses in the books of corporation ( property tax, utilities, insurance, condo fees, etc). However, the benefits to shareholder did not included taxable income.

For tax consequences, the client must include benefits from personal use of the condo by his daughter in his income, and ABC Ltd. cannot deduct the costs related to the condo as expenses since the expenses were not incurred to gain income purpose for the corporation.

Since there are possibilities of double taxation and heavy penalties under the rules of subsection 15(1), shareholder should aware that personal expenses are not claimed by the corporation. If the corporation pays a shareholder’s personal expenses, the amount paid should be recorded as a shareholder advance or loan that may be subject to inclusion in income under subsection 15(2) if it is not repaid within the time period provided for in that subsection.

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