Twice The Tax; The Personal Cost Of Using Corporate Cards

National Post

2013-04-02



It's tempting to use your corporate credit card for personal purchases, but doing so can come with a very steep cost. Under the Income Tax Act, if your corporation pays for any of your personal expenses as a shareholder, you could be hit with a shareholder benefit equal to the amount the corporation paid on your behalf. But it gets even worse. The amount your company paid for your personal expenses may also be denied as a tax deduction to the corporation, essentially leading to double taxation.

As an example, let's say you took a recent spring break vacation with your family. You put the $2,000 cost of those four airline tickets on your corporate credit card, which your corporation paid off, classifying the expense as "travel." From a tax perspective, you could be faced with a $2,000 shareholder benefit income inclusion for 2013 and the company could be denied a deduction for the $2,000 in inappropriate expenses. In addition, you could also be hit with gross negligence penalties.

A tax case decided a few years ago involved an individual who owned a private trucking company. The owner, his wife and daughter made extensive personal purchases totalling nearly $300,000 using nine credit cards. The credit-card statements were handed over to the company's bookkeeper for payment. The bookkeeper classified the expenses as either "repairs and maintenance" or "travel."

The CRA assessed the owner a shareholder benefit requiring him to include the personal expenses in his income as shareholder appropriations. While the owner never disputed this, he maintained his company "should be entitled to a deduction to avoid double taxation." The judge disagreed, finding "the avoidance of harsh tax consequences is not a sufficient justification for a deduction. If the expenditures are appropriations by (the owner) in his capacity as a shareholder, the legislation does not permit their deduction as they are not laid out for the purpose of earning income." The business owner was also hit with gross negligence penalties.

Rather than claim personal expenses though your corporation, your best bet is to have the corporation pay you not as shareholder appropriation but rather as compensation for services rendered. This compensation, assuming it's reasonable, could then be deducted as a legitimate business expense, although it will be taxed in your hands when received.

But remember, paying tax once is better than paying it twice.