Personally speaking

Shareholder Purchasing Asset: Input Tax Credit (ITC)

An August 20, 2024, Tax Court of Canada case reviewed whether a corporation could claim ITCs of $8,874 related to the purchase of two vehicles that were used by the corporation. One vehicle was purchased by the shareholder and the other was purchased by the shareholder and his spouse.

Taxpayer loses

To be eligible for an ITC, the corporation must meet all of the following conditions:

the corporation must have acquired the vehicles;
the GST/HST in respect of the vehicles must be payable or must have been paid by the corporation; and
the vehicles must have been acquired in the course of the corporation’s commercial activities.

The Court found no evidence that the corporation acquired either vehicle; the corporation’s name was not on the sales agreements, bill of sales, vehicle registrations or proof of insurance. In addition, there was no evidence of any trust, agency or assignment agreement. As such, criterion (a) was not met.

The Court also found that the corporation was not liable to pay consideration under the purchase agreement for either vehicle; therefore, GST/HST was not payable by the corporation. As such, criterion (b) was not met.

While the corporation argued that the vehicles were used or available for use by the corporation, the vehicles were not actually acquired in the course of the corporation’s commercial activities. As such, criterion (c) was not met.

While only failing one of the above criteria would be fatal to the claim, the corporation failed all three. The ITC was appropriately denied.

ACTION: Care should be afforded to acquire assets in the proper entity such that GST/HST can be recovered as an input tax credit, if appropriate.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.

If you have any questions, please get in touch with Chander Professional Corporation to discuss these matters in the context of your circumstances.

Shareholder Loan Account: Proper Bookkeeping

A July 31, 2024, Tax Court of Canada case reviewed whether payments made by a corporation in 2013 and 2014 of $24,249 and $41,680, respectively, were taxable as shareholder benefits on the basis that they were for the personal expenses of the shareholder. The Court also reviewed whether payments of $13,693 and $28,131 in 2013 and 2014 were taxable to the shareholder as indirect payments on the basis that they were made on behalf of the shareholder’s son for personal mortgage payments and day-to-day expenses. The taxpayer argued that all these payments constituted non-taxable shareholder loan repayments.

Starting in 2001 and continuing over several years, the taxpayer loaned a newly incorporated entity, of which the taxpayer and his spouse were shareholders, over $600,000. The loans enabled the corporation to acquire and operate a tire/auto detailing business managed by the taxpayer’s son. As the corporation could not afford a professional to prepare the corporation’s tax returns, the taxpayer compiled the returns, although he had no accounting training other than a personal tax preparation course he took 40 years prior. In 2018, the corporation ceased operations due to financial problems.

Taxpayer loses – shareholder benefit

The Court acknowledged that the taxpayer had made a bona fide loan to the corporation. However, the Court observed that payments the taxpayer received from the corporation were not properly recorded via a debit entry to the shareholder loan account as a repayment of the shareholder loan. The taxpayer argued that he did not know how to record payments for personal expenses in the shareholder loan account. The Court found that this was not a sufficient reason for not debiting the shareholder loan account for the repayments of the shareholder loan. The Court noted that the choice was to pay for professional assistance for the books and records or learn how to do it properly, neither of which the taxpayer selected. The shareholder benefit income inclusion was upheld.

Taxpayer loses – indirect payment

The Court noted that all of the following conditions were met in respect of payments to or for the benefit of the taxpayer’s son:

the payments were made to a person (the son) other than the reassessed taxpayer (the shareholder);
the allocations were at the direction or with the concurrence of the reassessed taxpayer (the shareholder);
the payments were made for the benefit of the reassessed taxpayer (the shareholder) or for the benefit of another person (the son) whom the reassessed taxpayer wished to benefit; and
the payments would have been included in the reassessed taxpayer’s income (the shareholder’s income) if they had been received by them.

The taxpayer was, therefore, required to pay tax on the indirect payments benefiting his son.

ACTION: Ensure that all loans to a corporation and associated repayments are properly recorded in the books and records of the corporation.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.

If you have any questions, please get in touch with Chander Professional Corporation to discuss these matters in the context of your circumstances.

Corporate Tax Return Filed Late: Ability to get a Tax Refund

A July 22, 2024, Federal Court case found that CRA’s refusal to accept and provide tax refunds for corporate tax returns filed more than three years after the relevant year-end was reasonable. While a specific provision allows CRA to accept requests (at their discretion) for refunds after the three-year deadline for individuals, there is no parallel provision for corporations.

While no tax refund can be provided where corporate tax returns are not filed within three years of the fiscal year-end, CRA has discretion to re-appropriate the refund to another account of the taxpayer (e.g. the taxpayer’s GST/HST, payroll or income tax account). However, this re-appropriation is fully at CRA’s discretion, based on factors such as CRA error or delay, natural or man-made disasters, death, accident, serious illness, or emotional or mental distress.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.
No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.
If you have any questions, please get in touch with Chander Professional Corporation to discuss these matters in the context of your circumstances.

Short-Term Rentals: Denial of Expenses

In late 2023, the Federal government announced its intention to deny income tax deductions for expenses by non-compliant operators of short-term rental properties (such as Airbnb or VRBO properties rented for periods of less than 90 days). These rules would apply to individuals, corporations and trusts with non-compliant short-term rentals. These rules are proposed to come into effect on January 1, 2024.

A short-term rental would be non-compliant if, at any time, either:

• the province or municipality does not permit the short-term rental operation at the location of the residential property; or

• the short-term rental operation is not compliant with all applicable registration, licensing and permit requirements.

Many municipalities require a business license or permit for short-term rental operations. Where short-term rental activities are carried on without such a permit, the operator would be subject to these proposals and taxable on gross rental revenues with no deductions in 2024 and later years.

Residential property would include a house, apartment, condominium unit, cottage, mobile home, trailer, houseboat and any other property legally permitted to be used for residential purposes.

No expenses incurred with respect to the non-compliant shortterm rental would be deductible. For example, consider a shortterm rental that incurred $100,000 in expenses to generate $20,000 in profit. If non-compliant, all expenses would be denied,

resulting in a profit for tax purposes of $120,000. Assuming the individual owner was in the top tax bracket (53.53% in Ontario), they would pay tax of $64,236. As the actual profit was only $20,000, the effective tax rate would be 321% ($64,236/$20,000). In absolute dollars, the individual would have to pay $53,530 in additional taxes due to the denied expenses.

Where the short-term rental was non-compliant for part of the year and compliant for another part of the year, the total expenses incurred for all short-term rental activity would be prorated over the period of that activity to determine the nondeductible portion.

For example, assume that a property was used for long-term rental from January 1 to June 30, then converted to short-term rental on July 1. However, the owner did not obtain a business permit as required until September 1 (62 days non-compliant). Expenses for July 1 to December 31 (the short-term rental period, 184 days) would be 62/184 non-deductible. Expenses related to the longterm rental period would not be part of the calculation of nondeductible expenses.

Transitional rule

For the 2024 taxation year, if the taxpayer is compliant with all applicable registration, licensing and permit requirements on December 31, 2024, they would be deemed compliant for the entire 2024 year and, as such, would be able to deduct all relevant expenses for 2024.

ACTION: Ensure you comply with all municipal and provincial rules by December 31, 2024, to retain all deductions applicable to your short-term rental for the year.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.

If you have any questions, please get in touch with Chander Professional Corporation to discuss these matters in the context of your circumstances.

Purchasing versus leasing a vehicle in a corporation

The decision to purchase or lease a vehicle in your corporation depends on various factors, including your business needs, financial situation, and tax considerations. Both options have their pros and cons, so it’s essential to evaluate your specific circumstances before making a choice. Here’s a breakdown of purchasing and leasing a vehicle in your corporation:

Purchasing a Vehicle:

Pros:

Ownership: When you purchase a vehicle, it becomes a corporate asset, and your business owns it outright. This can be advantageous if you plan to keep the vehicle for an extended period.
Depreciation Deductions: You can claim capital cost allowance (CCA) on the vehicle’s depreciation as a tax deduction over several years, which can reduce your taxable income.
No Mileage Restrictions: Unlike leasing, there are no mileage limits or excess mileage fees to worry about.

Cons:

Higher Initial Costs: Purchasing a vehicle typically requires a more substantial upfront cash outlay or a significant down payment if you’re financing it.
Maintenance Costs: You’re responsible for all maintenance and repair costs, which can be a financial burden.
Depreciation Risk: You may be exposed to the risk of the vehicle’s value depreciating significantly over time.

Leasing a Vehicle:

Pros:

Lower Initial Costs: Leasing usually requires a lower initial payment or down payment compared to purchasing.
Lower Monthly Payments: Lease payments are often lower than loan payments for the same vehicle.
Maintenance Included: Most lease agreements cover maintenance costs, which can save you money and provide peace of mind.
Potential Tax Deductions: Lease payments may be partially deductible as a business expense, subject to specific limits and conditions.

Cons:

No Ownership: With leasing, you don’t own the vehicle; you’re essentially renting it for a set period.
Mileage Restrictions: Lease agreements typically have mileage limits, and exceeding them can result in excess mileage fees.
No Capital Cost Allowance: You can’t claim depreciation deductions (CCA) on a leased vehicle.

Tax Considerations:

The tax implications of purchasing vs. leasing a vehicle for your corporation can be significant. Tax laws may change, and the impact can vary based on your specific situation, so it’s crucial to consult with a tax professional. They can help you determine the most tax-efficient option for your business.

Considerations:

If you need a vehicle for a long-term commitment and want to build equity, purchasing may be more suitable.
Leasing is a good option if you prefer lower monthly costs, want to drive a new vehicle every few years, and are comfortable with mileage restrictions.
Hybrid approaches, such as a lease-to-own agreement, can offer some of the benefits of both options.

In summary, the decision to purchase or lease a vehicle for your corporation should be based on your business needs, financial situation, and tax objectives.

This post has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only and is not a substitute for professional advice. Please contact Chander Professional Corporation to discuss these matters in the context of your circumstances.

Bookkeeping tips and tricks

Bookkeeping is a critical aspect of financial management for businesses and individuals. It involves accurately recording, organizing, and maintaining financial transactions and records. Here are some tips and tricks to help you manage your bookkeeping effectively:

Stay Organized:
- Keep all financial documents, such as receipts, invoices, and bank statements, organized and in one place. Consider using digital tools for document management.
Use Accounting Software:
- Invest in accounting software like QuickBooks, Xero, or FreshBooks to streamline bookkeeping processes. These tools can automate many tasks and reduce errors.
Regular Data Entry:
- Make it a habit to enter financial data into your accounting software regularly, whether it’s daily, weekly, or monthly. Consistency is key to accurate bookkeeping.
Separate Personal and Business Finances:
- Maintain separate bank accounts and credit cards for personal and business expenses. This simplifies record-keeping and tax reporting.
Categorize Transactions:
- Categorize expenses and income correctly. Use categories that make sense for your business or personal financial situation.
Reconcile Accounts:
- Regularly reconcile your bank and credit card accounts with your accounting software to ensure that all transactions are accurately recorded.
Track Invoices and Payments:
- Keep track of invoices sent, payments received, and outstanding payments. Send reminders for overdue invoices promptly.
Maintain Backup Copies:
- Create backup copies of your financial data and store them securely. Regularly back up your accounting software data.
Track Mileage and Expenses:
- If you have a business that involves travel, track mileage and related expenses for potential tax deductions.
Set Aside Taxes:
- Save a portion of your income or revenue for taxes. This prevents surprises when tax time comes around.
Stay Informed About Tax Deductions:
- Be aware of tax deductions and credits that apply to your situation. Keeping track of eligible deductions can reduce your tax liability.
Seek Professional Advice:
- Consider working with a Chartered Professional Accountant (CPA) , especially for complex financial situations. They can offer guidance and ensure compliance with tax laws.
Create a Financial Calendar:
- Develop a financial calendar that outlines important dates, such as tax filing deadlines, invoice due dates, and when to run financial reports.
Regularly Review Financial Statements:
- Review financial statements like income statements and balance sheets. These reports provide insights into your financial health.
Budgeting:
- Create a budget for your business or personal finances. Sticking to a budget helps control expenses and manage cash flow effectively.
Invest in Training:
- If you’re handling bookkeeping for a business, consider taking courses or attending workshops to enhance your bookkeeping skills and knowledge.

Effective bookkeeping is crucial for making informed financial decisions, meeting tax obligations, and ensuring the financial health of your business or personal finances. You can maintain accurate and well-organized financial records by following these tips and tricks.

Common business expenses

From time to time, I get calls from small business owners with the question; Harv what am I allowed to deduct for my business? A simple mantra I keep is that an expense that relates to your business generating revenue will generally be deductible.

Depending on the type of business you operate, typical expenses are:

Rent, repairs, and utilities paid where you operate your business. If you own the building, you can deduct mortgage interest paid if any;
Telephone – You can deduct costs related to business use of cell phones;
Membership dues;
Advertising paid to promote your business including google and social media ad campaigns;
Business Insurance for general liability and building;
Office supplies such as paper, toner, notepad, etc;
Automobile expenses – Business-related travel is deductible only. Going to and from your place of business and your primary residence is not considered business travel;
Meals and entertainment – Although you incur 100% of the expense, CRA only allows a 50% deduction on amounts that are reasonable. Note, these expenses should relate to business-related lunches and dinners;
Fees paid to accountants, lawyers, bookkeepers, or other professionals – Legal fees incurred when you purchase a capital property are not deductible;
Salaries and subcontractor fees paid;
Interest on money borrowed to fund business operations is also deductible, however, it is always prudent to keep a clear trail of where the funds came from and the amount of interest paid.