In a corporate tax dispute involving a yacht, Judge Jamie Golombek essentially tells the CRA that it has no business trying to second-guess the company’s marketing plan.
Assume you have established your firm or are a professional who has incorporated and uses a professional corporation to manage their practice. Having your corporation cover all of your expenses in such a situation would be tempting.
But what happens if these expenses aren’t correctly incurred to generate income? In this situation, they could not be deductible to the company. The Canada Revenue Agency (CRA) might charge you a shareholder benefit for utilizing company funds for personal expenses rather than withdrawing them on a taxable basis as a salary, bonus, or dividend.
In this situation, they could not be deductible to the company. The Canada Revenue Agency (CRA) might charge you a shareholder benefit for utilizing company funds for personal expenses rather than withdrawing them on a taxable basis as a salary, bonus, or dividend.
Similarly, if you use a business asset for personal use, you could be charged a taxable shareholder benefit. In a recent tax case involving a Vancouver Island couple, their business, and the use of a boat, that is precisely what transpired.
Valuation of the personal shareholder benefit for the personal use of a boat owned by their company in 2013 and 2014 was the only issue in the case. The company used the ship primarily to market its marina, fuel, and supplies to nearby boaters.
A “successful, sizeable” marina enterprise was established on the island by the two individuals over fifty years, offering a wide range of goods and services to a vast but remote collection of remote little towns on the islands north of Vancouver Island, primarily along the water’s edge.
A “successful, sizeable” marina enterprise was established on the island by the two individuals over fifty years, offering a wide range of goods and services to a huge but remote collection of remote little towns on the islands north of Vancouver Island, primarily along the water’s edge.
The judge stated, “It’s not hard to imagine their region, community, and commercial activities appearing in a Canadian TV documentary on a documentary channel, or providing the background for a Canadian reality TV show on History channel, or providing the setting for a sequel to Corner Gas, or a remake of The Beachcombers.
“It’s not difficult to imagine their region, community, and commercial activities appearing in a Canadian TV documentary on a documentary channel, or providing the context for a Canadian reality TV show on History channel, or providing the setting for a sequel to Corner Gas or a remake of The Beachcombers,” the judge said.
Together, they managed their business. The couple’s wife was a bookkeeper who handled vendor payments and account reconciliations while the husband piloted the boat. The children of the marriage and their families now run the business to a large extent.
The CRA had expressed doubts about the couple’s “marketing” initiatives, hinting that an individual component to the marketing needed to be considered when determining the personal shareholder benefit.
The CRA had expressed doubts about the couple’s “marketing” initiatives, hinting that an individual component of the marketing needed to be considered when determining the personal shareholder benefit.
Contrary to the judge, “the courts have not enabled the CRA to just second-guess a business’s marketing strategy or operations.” Citing existing case law, “The tax authorities have no business telling a company owner how to conduct his or her corporation… A business may decide to promote a cause that its founders are passionate about or find personally fulfilling.
There is no justification for the (CRA) to prohibit the spending of a certain kind of advertising that is only motivated by the owner’s interest or enjoyment.
There is no justification for the (CRA) to prohibit the spending of a particular kind of advertising based only on the owner’s interest or pleasure.
The judge ruled that the expenses associated with the couple’s marketing activities on the boat were reasonable and that they were “true and primarily conducted for commercial reasons.” The only issue was whether or not the couple’s personal expenses had been adequately taken into consideration.
The judge decided that the $18,000 they paid to the company for personal use of the boat was permissible and that no shareholder gain should be assessed because their personal use of the vessel was in the 5% range.
