How Shareholder Benefits Impact your Income Tax
Dean Blachford, Tax Litigation Lawyer
Karen Cheung, Law Student
A shareholder who receives a benefit from his or her corporation is required to report the value of the benefit as income. If that benefit is not reported, the Canada Revenue Agency (“CRA”) can reassess the shareholder for the value of that benefit under section 15(1) of the Income Tax Act.
What is a shareholder benefit?
A shareholder benefit occurs when a corporation provides something of value to its shareholders. While most shareholders know that they have to report dividends and wages as income, many don’t appreciate that they must also report less-obvious transfers of wealth from their corporation.
The law has given shareholder benefits a very broad meaning. For example, a shareholder benefit could include using a corporate vehicle for personal-use or renting a corporation-owned property at a discounted rate. In these two examples, a shareholder may not have thought that there was any income to report because they did not receive actual monetary value or because they partially paid for the benefit. Regardless of whether the benefit looks like income or not, this value has to be reported.
CRA can assess both shareholders and prospective shareholders under section 15(1).
How do you calculate the value of a shareholder benefit?
The value of a shareholder benefit is determined by what two unrelated parties would have paid for the benefit (i.e. the “fair market value”). For example, if renting the corporate condo would cost $3,000/month, and a shareholder only pays $1,000/month to cover the expenses, then the benefit conferred would have a value of $2,000/month. The shareholder would then be expected to report an additional $24,000 of income over the year in his or her tax return.
How does a shareholder benefit affect the corporation’s taxes?
An additional consequence of a shareholder benefit is that the corporation cannot deduct benefits that it confers to a shareholder. In other words, the benefit is taxed twice – once in the hands of the corporation, and once again when it reaches the hands of the shareholder.
There are exceptions to the rule and CRA often assess shareholder benefits inaccurately or when they are not warranted at all. If you think you have received a shareholder benefit or have been reassessed for a shareholder benefit, contact Dean Blachford to discuss your options.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today. 613-747-2459 ext.310, [email protected]