Sometimes owner/managers may inadvertently treat the company as just another pocket to reach into for funds. However, when it's time to meet with their accountant to prepare their corporate and personal tax returns, the problems arising from not segregating their corporate and personal financial transactions soon blossom into time-consuming tasks and sometimes-unwelcome tax surprises.
A look at some of the common transactions that can create difficulties for owner/managers and their tax advisors may help you better plan for the current tax year. Keep in mind that these are also the areas that pique the CRA's interest when performing a tax audit.
The owner/manager takes funds from the company without declaring the funds as income. While the funds may be considered an advance on account of salaries and dividends, sometimes they will be viewed as a loan. Unless the funds are borrowed for one of the purposes that are allowed under the Income Tax Act, the full amount of the loan is included in income and as such is taxable to the owner/manager. There is an exception to the income inclusion if the loan is repaid within one year from the end of the corporation's fiscal year. Note that the company must have adequate documentation to substantiate that the loan meets the allowed purpose under the Act. If the owner/manager receives a loan or advance from the company for some period in the year, interest has not been charged and the loan has not been included in income, the CRA will consider the interest to be a taxable benefit and calculate it at the CRA's prescribed interest rate.
The owner/manager charges business meals and entertainment to the company. However, for these expenses to be deductible, they must be supported with proper receipts. It is advisable to indicate on each receipt, the names of the clients and the business purpose of the expense. For items such as season tickets to sporting events, extra care should be exercised to ensure that the client's name and business purpose are documented.
The owner/manager will often have access to a company vehicle. Whether the company owns or leases the vehicle, it is important to keep proper records so that your chartered accountant can maximize the allowable deductions for the business use of the vehicle. It is advisable to keep records in an automobile log of the kilometres driven for business and personal purposes. The personal use of the vehicle is a taxable benefit that must be reported. The GST must also be remitted on the amount of the benefit. Where the company owns the vehicle, there are also restrictions on the maximum capital cost allowance that the company may claim. Where the automobile is leased, there are restrictions on the amount of the lease payments that the company can deduct. Similarly, there are restrictions on the amount of the GST input tax credits that the company may claim on the vehicle, whether owned or leased by the company.
Where the owner/manager uses other company assets for personal purposes, a taxable benefit must also be reported. An example would be the personal use of a company-owned residence.
The owner/manager is often a director of the company and as such needs to be aware of the personal liability for withholdings. If the company fails to remit GST and provincial sales taxes or employee source deductions such as income tax, Employment Insurance or Canada Pension Plan on a timely basis, the company will incur interest charges and penalties. However, if the company is in financial difficulty and unable to make these payments, the director can be held personally liable for the amounts outstanding.
The company makes loans to third parties or purchases investments. Make sure you have the appropriate documentation for the loans and investments, such as the loan agreement, share certificates, and cancelled cheques. If these investments decline in value and the investments were not made for an income-producing purpose, any loss will be denied.
The owner/manager sometimes draws money to pay a spouse for services performed for the company. As these funds may be attributed to the owner/manager and thereby increase your personal taxable income, you should ensure that the salary is paid directly to your spouse. Consider also that since your spouse may be in a lower tax bracket, the tax liability will be less. Any salary paid to a spouse should be reasonable for the work performed for the company.
Often the company will pay the owner/manager's credit card bills. If you do not have the appropriate documentation to show which expenses are corporate and which are personal, this will not only create difficulties when your financial statements and tax returns are prepared but also cause additional problems if there is a tax audit.
The owner/manager sometimes declares a bonus without regard for when it must be paid. In order for the bonus to be deductible to the company, it must be paid within 179 days after the company's year-end. If it is paid after that time, the company may not claim the deduction in the year the amounts were accrued, a situation that will result in a greater corporate income tax liability in that year. While the company can claim the deduction at the time the bonus is subsequently paid, this deduction is only allowed in the later year.
Get Professional Advice
Finding the appropriate tax planning strategies that will help minimize corporate and personal taxes can be challenging in today's complex taxation environment. Meet with your Collins Barrow advisor throughout the year to discuss your personal and company financial strategies to ensure that the personal and corporate transactions you carry out do not result in unanticipated tax consequences. Your accountant can help you review your financial structuring and advise on the timing and other requirements that can ensure a favourable tax treatment.