Hello all,

A belated Happy New Year to everyone reading. I hope you were all able to take some time off to rest and spend with family. Reality has risen its head and it is now time to go back to work. For my first blog of the year, I’m going to examine the area of shareholder benefits and its impact on business owners.

A shareholder benefit is deemed to have accrued to a shareholder when the shareholder benefits from the use of a corporate asset. The test is whether there is an economic benefit to the shareholder and impoverishment to the corporation.

The owner(s) of a company may draw benefits, either intentionally or unintentionally, from their position as owner. When this occurs, the individual is deemed to have received a shareholder benefit, which can lead to significant tax consequences. In the situation where a shareholder is not claiming a benefit from his corporation, he will be faced with potential double taxation. The individual must claim the benefit as income, but there will be no offsetting deductions granted to the corporation. 

Things such as meals, entertainment, and travel when paid for by the company and are not directly attached to the operation of the business can and should be claimed as a shareholder benefit. These benefits will then be attached to the shareholder’s income for the year and the appropriate level of tax should be paid. 

The use of a company vehicle can be complex as some of the use of the vehicle is a valid business expense and therefore not a shareholder benefit. On the other hand, when the vehicle is used for personal use, such as traveling from home to the office, it is not a legitimate business expense and will therefore create a shareholder benefit.

Another area where a shareholder benefit may arise is when the individual borrows money from the corporation. A “loan to shareholder” is not automatically considered a shareholder benefit. If the loan is repaid within one year after the end of the taxation year of the corporation in which the loan is made, no taxable shareholder benefit occurs. Otherwise, if the loan is not made at the prescribed rate from CRA and repaid in the allotted time, subsection 15(2) of the ITA applies and the loan would be considered income to the shareholder. 

In short, the use of a business asset for personal purposes should be considered a taxable benefit. The value of a shareholder benefit is equal to the value that the shareholder would have had to pay for the use of the asset if the individual were not a shareholder. 

I want to turn now to a few very specific examples closely related to our daily business activities where a shareholder benefit may be incurred. 

1. Policy transfer – Under certain circumstances, and certain valuations, the transfer of an insurance policy from a shareholder to the Corporation, or from the Corporation to an individual shareholder, a shareholder benefit may arise. The key criteria are whether or not the policy is transferred by the transferor and is paid for by the transferee at Fair Market Value (FMV). Change of ownership transactions may create tax issues if the transfer is not done at FMV. There is one exception, which will not cause a taxable event, and that is if a corporation transfers a policy as a “dividend in kind”.
2. Another area whereby a shareholder benefit may arise is in the use of a corporate life policy being pledged as collateral for a personal loan. This area seems to be quite contentious. It is not universally accepted that a corporately held life policy may be used for a personally held loan, or if such a setup exists is a guarantor’s fee appropriate, and if so, how large. A guarantor’s fee is simply a fee paid by an individual shareholder taking a personal loan using a corporately held policy as collateral. If the borrower chooses to pay a guarantor’s fee, the current size of the fee should be somewhere between 1% and 4%. There are many aspects to the guarantor’s fee which I will delve into at a later date.
3. A third area where a shareholder benefit is often seen is in the Corporate paid-for personally owned life insurance policy. In this case, the Corporation pays the premium on a policy that is owned by the shareholder, who is also the insured. In this situation, the corporation deducts the full amount of the premium as a salary expense, and the insured shareholder must claim the full amount of the premium as taxable income. If those steps are not taken, CRA would view the premium as a taxable shareholder benefit, but in addition, it would disallow the deduction as a salary expense to the corporation.

I have walked you through some of, but certainly not all, areas where shareholder benefits may exist. The one area we have not touched on is the penalty to a shareholder who is enjoying a corporate benefit. I won’t spend much time here but, in a nutshell, when a shareholder benefit is discovered by CRA, the penalty is generally somewhere between $100 and 50% of the understated tax or overstated credits. So, it will not take long for the penalty resulting from a shareholder’s benefit to become a significant expense.

When researching this topic, I came across a shareholder benefit situation that is going to be extremely expensive to the shareholder, but of great humorous value to us regular people. The case involves the owner of Cirque du Soleil and the CRA in Laliberte v Canada. In the case Laliberte took a trip to the International Space Station in 2009 as a “space tourist”. One of the corporations in the Cirque du Soleil group of companies paid the $41.8-million cost for the 12-day trip. Recently, the Minister of National Revenue and Court of Appeals assessed Laliberte with a shareholder benefit equal to 90% of the cost of the trip as a shareholder benefit. 

That equates to $37.6-million of income inclusion, with taxes now owing.

Keep well.