Are you a shareholder of a corporation? You need to remember that even though corporate funds are not personal funds and if you treat your business like it’s a personal bank you may get yourself into trouble with the taxation department. According to the Income Tax Act (ITA) shareholders who are keeping funds but are failing to make a separation between corporate and personal funds can be thought to have been receiving shareholder benefits or shareholder loans both of these funds are taxable.
What are shareholder benefit and subsection 15(1)
According to Income Tax Act subsection15 (1), it is stated that shareholder benefit is when a corporation provides a benefit to a shareholder or someone who is affiliated with the shareholder like his wife or kids and provides them with a fund that is not a dividend or any other form of taxable income such as a salary. According to the CRA, a benefit is any form of payment, property, or advantage that is given to a shareholder by the corporation. When the shareholder is given property or anything valuable by the corporation the value of it is included in the income of that shareholder and is therefore taxable.
Company cars, if used by the wife/husband of the shareholder will also be enlisted as an expense and will be included in the shareholder’s taxable.
How is the value calculated?
The value is calculated by keeping in mind what Two unrelated parties may pay for the benefit this is the fair market value. So if a house rental is worth $3000 per month but the shareholder is paying $1000 per month only then $2000 would be the benefit and this would need to be reported on personal income tax.
Explain subsection 15(2)
According to subsection 15(2) of the same statuary law if a corporation provides a shareholder with a loan, or to anyone connected to the shareholder such as, as mentioned above spouse or children the full amount of the loan should be recorded in the name of the shareholder, clearly in documents. In the year that the loan is repaid only then the shareholder can deduct this amount from their income tax. The only time this provision will not be upheld is in situations where the shareholder is a Canadian resident of the corporation, the loan was made in an ordinary course of lending business or there is a policy of loans for employees. The other benefit is that the shareholder has a longer time duration to pay back the loan which is corporate lenders year which starts from July 31st, so whenever the loan is paid during the year it is paid back after July 31st year 2.
Bookkeeping services and accounting firms often use both the above-mentioned subsections as common tools, it is important that if you have received or you think you may have received such funding you must consult an expert because such loans are double taxable, bookkeeping service and accounting firms must be consulted in such situations to offer protection.