Last updated: January 22 2019
Most people seem to understand that you can’t treat your business’ money as your own . . . or do they? How many small business owners expense personal items from the company general account? This can get you into trouble on a tax audit and worse; significantly erode personal wealth.
Commingling business and personal assets and expenses is a bad approach overall, and here’s why – according to this excerpt from Phillipe Richer’s law blog.
The Income Tax Act of Canada (ITA) is the law that governs the collection of income tax, both personal and corporate. The Excise Tax Act of Canada governs the collection and remittance of GST/HST. Both of these acts apply to any business. If a court finds that someone inappropriately claimed a business expense, the person must repay the personal income tax that should have been paid. Additionally, the company will have to pay the GST/HST that it claimed.
Section 18 of the ITA imposes limits on company deductions, as outlined below:
18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of:
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
(h) personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business;
And in Section 67:
In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.
All of this means, essentially, that business owners cannot deduct expenses unless they incur the expenses for the “purpose of gaining or producing income.” Sub paragraph (h) clearly states that a business owner cannot deduct personal living expenses. In addition to these rules, Section 67 establishes that expenses must also be reasonable.
The simplest way to avoid issues that will get you in hot water with the CRA under these rules is to separate your business and personal assets. Secondly, ensure as an owner-manager you’re up to date on the latest tax guidelines that you’ll need to comply with this year. Enroll in the newly updated certificate course Tax Planning for Corporate Owner/Managers to learn about the impact of business tax rules on your personal assets, and how to minimize the total amount of income tax that needs to be paid by your family.
Philippe Richer is President of TLR Law Group. TLR has been located in the St. Boniface neighbourhood, in Winnipeg, since 1996. The office serves the middle class and small business within the province. With a focus on estates, wills, real estate and corporate law, he leads his team in providing accessible legal services. Philippe also authored the Business Law & Contracts course for the Knowledge Bureau and instructed the français juridique class at the Faculty of Law at the University of Manitoba.
Additional educational resources: Business owners, are you ready to focus on the special skills required to meet the responsible challenges of business life, while at the same time striving for balance and good health as an individual? Register to attend the Business Builder Retreat, taking place June 19-20, 2019, in Winnipeg, or November 9-10, 2019, in Puerto Vallarta, Mexico. This educational event is hosted by Knowledge Bureau’s leading instructors, like Philippe Richer, and is suitable for business leaders, owner-managers and executives in any industry. You’ll also want to read Defusing the Family Business Time Bomb, by Evelyn Jacks and Jenifer Bartman, which is available to order today!
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