Shareholder Benefits Generally
When shareholders receive payments from a corporation in the form of dividends or wages these amounts are included in income. As a shareholder, you need to be aware of other income inclusions that are less obvious than a dividend or wages. These are commonly referred to as “shareholder benefits”. The general rule is that if a benefit is granted to a shareholder, that benefit is included in the shareholder’s income in the year the benefit was conferred.
A shareholder who receives a benefit from his or her corporation is required to report the value of the benefit as income. If that benefit is not reported, the Canada Revenue Agency (“CRA”) can reassess the shareholder for the value of that benefit under section 15(1) of the Income Tax Act.
The term “benefit” is not defined in legislation, but it is broad enough to include any type of payment or advantage to a shareholder that is not in the normal course of business. Benefits can include the use of company assets, such as equipment or vehicles.
Another issue is whether a company can loan funds to a shareholder for personal use, to purchase a cottage or cabin, for example. The issues become: (1) Is this a benefit, and (2) if it is a benefit, what are the tax implications. Invariably the answer to the first question would be yes, and for the second question, the result is an income inclusion for the shareholder. The income is equal to the value of the loan.
Some exceptions to the income inclusion are:
- If the corporation providing the loan is in the business of lending money
- If the loan is provided to the shareholder in their capacity as an employee, not a shareholder, and the employee is not a “specified employee”
- If the loan is provided to the shareholder in their capacity as an employee, not a shareholder, and the loaned funds are used to purchase a home, a vehicle to be used in their employment or shares of certain corporations. The loan must also have bona fide repayment terms.
- If the loan is repaid within one year after the end of the year in which the corporation made the loan and is not considered part of a series of loans or other transactions and repayments. This rule is in place to ensure there is not a cyclical nature to the lending of funds (i.e. borrowing funds and repaying it before the year-end and then borrowing the funds again right after the year-end).
If an exception applies, then there likely is no shareholder benefit. An additional consequence of a shareholder benefit is that the corporation cannot deduct benefits that it confers to a shareholder. In other words, the benefit is taxed twice – once in the hands of the corporation, and once again when it reaches the hands of the shareholder.
If you are a shareholder of a company, be aware of the potential income tax implications if you use corporate assets for personal use or a corporation provides you with a benefit in some other way.
CRA often assesses shareholder benefits inaccurately. If you believe you have been assessed or reassessed an unwarranted shareholder benefit, contact Ummat Tax Law to discuss your options.
Read more on CRA’s position on shareholder benefits