Define business vs. personal expenses for tax purposes

If you’re a business owner and you regularly mix business and personal expenses when it’s tax time, you may want to pay attention to a recent case in which CRA assessed a taxable benefit for many personal expenses paid by a taxpayer’s corporation.

The case (Lucyk v The Queen, 2016 TCC 9) involved C.L., a carpet layer who was “so dedicated and hard-working that he chose to spend December 8, 2015 (the date of the Tax Court appearance) working on an installation job, rather than attending the hearing.” He was represented in court by his friend and life insurance agent.

C.L. is the sole shareholder and an employee of a numbered Saskatchewan company that carried on a carpet-installation business. In 2013, CRA reassessed C.L. to include a variety of taxable benefits in his income for 2009 and 2010. These benefits ($35,000 in 2009 and nearly $33,000 in 2010) related to alleged personal expenses of C.L. and his wife, R.L., that were paid by the corporation. CRA was of the view that the corporation’s payment of C.L.’s personal expenses gave rise to taxable benefits received by C.L., either in his capacity as an employee or as a shareholder of the corporation. Further, CRA viewed the corporation’s payment of his wife’s personal expenses as giving rise to indirect taxable benefits received by C.L.

Thanks to pretrial concessions, the only expenses that remained in issue at the trial were various meals and entertainment expenses, telephone bills and some costs associated with a motor vehicle.

Meals & entertainment

C.L. often worked with other carpet installers on split jobs in which he and another carpet installer would jointly bid on a job. If the bid was accepted, he and the other installer would jointly install the carpet. In these situations, C.L. would sometimes invite the other installer for a meal and his company would pay the cost. CRA agreed these meals were legitimate business expenses and did not assess C.L. a taxable benefit for their cost.

C.L. also indicated that the corporation also paid for meals for his helpers, but since his corporation had neither employees nor formal subcontractors, CRA considered those meals a taxable benefit.

At some meals, C.L. and R.L. were the only people eating. C.L. stated “he often takes his wife out because she is not paid for her work making bank deposits and paying bills.” Unfortunately, since these amounts were not included on a T4 for R.L. (i.e., the meal amount paid in lieu of wages), they were considered to be personal expenditures and thus a taxable benefit.

Telephones

During the two tax years under review, C.L. and R.L. had a home phone line, and they each had cell phones. CRA took the position that the home telephone and R.L.’s cell phone were not used for business purposes.

At the hearing, C.L.’s agent testified that the home telephone was used “from time to time for business purposes, such that a portion of the monthly home telephone bills should be deductible […] and should not be a taxable benefit.”

But without any specific evidence as to how much of the home phone was indeed business use versus personal, the judge was “not prepared to allocate any more than 10% to business usage” and assessed a taxable benefit for the other 90% paid by the corporation.

The judge accepted that C.L. likely used his cell phone entirely for business purposes and concluded that R.L. did not use her cell phone at all in respect of the business. Thus, half the cost of the couple’s joint cell phone bill paid by the company was deemed a taxable benefit.

Vehicle expenses

Finally, CRA included the motor vehicle allowances paid by the corporation to both C.L. and his wife in their incomes as a taxable benefit, while allowing C.L. to write off the costs of operating his vehicle.

Of particular concern to CRA was the allowance paid to R.L. She testified she “used her vehicle to do some of the banking for (the corporation);” however, she was paid an allowance of $0.60 per kilometer, for all of the kilometers driven by her each year (i.e., for both personal and business purposes). CRA concluded that since a significant portion of the kilometers driven by R.L. did not pertain to the company’s business, it was appropriate to assess C.L. an indirect taxable benefit for a large portion of this allowance. The judge agreed.

So, as you file your tax return this season, keep in mind that if you take some liberties when it comes to business and personal expenses, CRA may ultimately come after you.