Commingling of personal expenses in the business: The Cost Could Be Very High

09 Feb Commingling of personal expenses in the business: The Cost Could Be Very High

In a July 23, 2020 Tax Court of Canada case, at issue were a number of expenses claimed by the taxpayers (a corporationand its sole individual shareholder) in respect of the business of selling financial products and providing financial planning advice. CRA denied various expenses spanning 2007 and 2008 and assessed many of them as shareholder benefits.  That is, the amounts were taxable to the individual shareholder and not deductible to the corporation.

CRA also assessed beyond the normal reassessment period on the basis that the taxpayers made a misrepresentation attributable to neglect, carelessness, wilful default or fraud.  They also assessed gross negligence penalties which is computed as the greater of 50% of the understated tax or overstated credits related to the false statement or omission, and $100.

The following expenses were reviewed:

• bonuses paid to family members who were not employees of the taxpayer;
• payments to family members under an Employee Profit Sharing Plan (EPSP) where there was no evidence that the payments referred to profits;
• salaries paid to family members (including the shareholder’s daughter who received a salary of $5,000 in 2007 and $400 in 2008);
• salaries paid to the taxpayer’s children’s care providers;
• salaries to the taxpayer’s former spouse, which the taxpayer argued was the same as personally paying spousal support;
• travel costs for the taxpayer and his family to go on a cruise on which the taxpayer made business-related presentations (CRA conceded the taxpayer’s travel costs);
• significant interest expense with very little support; and
• many other costs such as clothing, toys, jewelry, personal items, lawncare, maid service, and pet care for the shareholder and family members.