A judge puts the CRA in its place in a corporate tax case involving a boat

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If you are a business owner who has incorporated your business or an incorporated professional who operates your practice through a professional corporation, it can be very tempting to have your corporation pay for all kinds of personal expenses.

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But if these expenses are not legitimately incurred for the purpose of earning income, they may not be deductible to the corporation and the Canada Revenue Agency (CRA) may personally assess a shareholder benefit for the allocation of company funds for personal use, rather than extracting them first on a taxable basis as salary, bonus or dividend.

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Similarly, you may also be assessed a taxable shareholder benefit for the personal use of a company-owned asset. This is exactly what happened in a recent tax case involving a Vancouver Island couple, their company and the use of a boat.

The only issue in this case was the value of the shareholder’s personal benefit, in the 2013 and 2014 tax years, for his personal use of a boat owned by his company. The boat was primarily used by the company to market its marina, fuel and provisions to area boaters.

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Over five decades the couple, through their company, developed a ‘successful and substantial’ marina business on the island which provided a diverse range of goods and services to a large but remote group of small communities, mostly near water. board, on the islands north of Vancouver Island.

“It may not be difficult to imagine their region, community and business activities appearing in a Canadian TV documentary on a documentary channel, providing the context for a Canadian reality show on the History channel, or providing a venue for a sequel to Corner Gas or a remake of The Beachcombers,” Judge said.

The couple ran their business together. The husband did all the piloting of the boat and his wife acted as accountant, paying suppliers and balancing bank statements. Today, the business is mainly run by the couple’s children and their families.

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Tax authorities don’t have to tell a businessman how to run his business

Tax Court Judge

The boat at the center of the tax dispute is a 36-foot pleasure craft. Its main commercial use was to market the marina directly to boaters visiting, residing or working in the area. This was done by taking the boat out to meet boaters in all the other small marinas in the area or in the bays where they were moored.

It was also used to engage with other local marinas, their owners and operators, and their customers. It was typical direct personal marketing. Many of these other boaters were already users of their marina given its size and location, and those who were not were genuine potential customers.

The boat was also used to travel to, attend and entertain at boat shows in British Columbia and Washington, which the couple considered key to their business and where they rented booths for their marina.

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The couple did not own a boat before buying the marina, never took the boat for excursions, « not even short ones », because they could not leave their daily work responsibilities during the sailing season. When they made their marketing trips in the boat to other marinas and anchorages, they did so mainly in the evening, after their normal working day responsibilities.

Their marketing trips have proven to be very successful as the marina’s mooring and fuel revenues have increased every year. Their marketing has been described as « creating opportunities to socialize with customers and potential customers, dining with them at other marinas, entertaining them on the…(boat) and generally chatting about boating in the area , their marina and facilities ».

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The boat was also used in other aspects of the business for incidental transportation, such as delivering parts to business entities in the area. Personal use of the boat was « very occasional, less than half a dozen times ». For example, they would sometimes take friends or family out for whale watching in the harbor right across from the marina.

In each of the two tax years under review, the couple recorded and paid $18,000 to their corporation for their personal use of the boat. This was done in consultation with their accountant, and the couple thought the amount was « a moderately high amount under the circumstances ».

The court concluded that the personal use of the boat was minimal and in the order of 5%. In other words, almost all of her use as a boat was for genuine commercial purposes. Although a benefit was derived from the couple’s limited personal use of the boat, it was accounted for and this amount was within the range of a reasonable fair market value.

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The CRA had questioned the couple’s « marketing » activities, suggesting there was a personal element to marketing that needed to be considered when assessing the shareholder’s personal benefit.

The judge disagreed, saying « the CRA has not been permitted by the courts to simply question a company’s marketing strategy or efforts. » Citing previous case law, “The tax administration does not have to tell a businessman how to run his business…A business may choose to advertise a business in which its owner…has a keen interest or a some degree of personal satisfaction. There is no reason why expenses for a particular form of advertising should be disallowed by the (CRA) solely because of owner interest and satisfaction. »

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The judge said the couple’s marketing activities on the boat were « in good faith and primarily undertaken for a business purpose » and that the expenses were reasonable. The only thing left to decide was whether the couple’s personal use was properly accounted for. The judge concluded that since their personal use of the boat was approximately 5%, the $18,000 they paid annually to the company for their personal use was reasonable and that no shareholder benefit should be assessed.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is Managing Director, Tax and Estate Planning at CIBC Private Wealth Management in Toronto. Jamie.Golombek@cibc.com

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