Judge puts CRA back in its place in corporate tax case involving boat

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Should you’re a enterprise proprietor who has integrated what you are promoting or an integrated skilled who operates their follow by knowledgeable company, it may be fairly tempting to have your company pay for all types of non-public bills.

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But when these bills aren’t legitimately incurred for the aim of incomes revenue, they could possibly be non-deductible to the company and you might get personally assessed a shareholder profit by the Canada Income Company (CRA) for appropriating company funds for private use, fairly than extracting them first on a taxable foundation as both a wage, bonus or dividend.

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Equally, you may also be assessed a taxable shareholder profit for the private use of a corporate-owned asset. That’s precisely what occurred in a current tax case involving a Vancouver Island couple, their company and the usage of a ship.

The only real subject within the case was the worth of the private shareholder profit, within the 2013 and 2014 taxation years, for his or her private use of a ship owned by their company. The boat was primarily utilized by the corporate to market its marina, gasoline and provisions to boaters within the area.

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Over the course of 5 a long time, the couple, by their company, developed a “profitable, substantial” marina enterprise on the island that supplied a diversified vary of products and companies to a big, however distant group of small communities, largely close to the water’s edge, on the islands north of Vancouver Island.

“It won’t be laborious to image their area, group and business actions showing in a Canadian TV documentary on a documentary channel, offering the context for a Canadian actuality TV present on Historical past channel, or offering a locale for a sequel to Nook Fuel or a remake of The Beachcombers,” the decide mentioned.

The couple operated their enterprise collectively. The husband did all of the steering of the boat, and his spouse acted as a bookkeeper, paying suppliers and balancing financial institution statements. As we speak, the enterprise is usually run by the couple’s youngsters and their households.

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The tax authority has no enterprise telling a businessperson learn how to run that particular person’s enterprise

Tax Courtroom Choose

The boat on the centre of the tax dispute is a 36-foot pleasure craft. Its main enterprise use was to market the marina on to boaters visiting, residing or working within the area. This was accomplished by taking the boat out to satisfy boaters in any respect the opposite smaller marinas within the area, or within the bays the place they have been moored.

It was additionally used to interact with different native marinas, and their house owners and operators, in addition to their purchasers. This was typical direct private advertising and marketing. Many of those different boaters have been already customers of their marina given its dimension and placement, and those that weren’t have been bona fide potential purchasers.

The boat was additionally used to journey to, attend and entertain at boat exhibits in British Columbia and Washington, which the couple thought of key to their enterprise and at which they rented cubicles for his or her marina.

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The couple didn’t personal a ship earlier than they purchased the marina, have by no means taken the boat on any excursions, “not even brief ones,” as they might not go away their day by day enterprise duties in the course of the boating season. After they did their advertising and marketing travels within the boat to different marinas and moorings, they did so largely within the evenings, after their regular workday duties.

Their advertising and marketing journeys proved very profitable because the marina’s mooring and gasoline revenues elevated annually. Their advertising and marketing was described as “creating alternatives to socialize with purchasers and potential purchasers, eating at different marinas with them, entertaining them on the … (boat), and usually chatting up boating within the area and their marina and services.”

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The boat was additionally utilized in different facets of the enterprise for incidental transportation, similar to delivering elements to business entities within the area. Private use of the boat was “very occasional, lower than a half-dozen occasions.” For instance, they often took pals or household out for whale watching within the harbour instantly in entrance of the marina.

In every of the 2 tax years beneath assessment, the couple recorded and paid $18,000 to their company for his or her private use of the boat. This was accomplished in session with their accountant, and the couple thought that this quantity was “a conservatively excessive quantity within the circumstances.”

The court docket discovered that the private use of the boat was minimal and within the vary of 5 per cent. In different phrases, considerably all of its use as a ship was for bona fide enterprise functions. Although a profit was loved by the couple’s restricted private use of the boat, it was accounted for and this quantity was inside vary of an inexpensive honest market worth.

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The CRA had questioned the “advertising and marketing” actions of the couple, suggesting there was a private ingredient to the advertising and marketing that wanted to be taken under consideration when valuing the private shareholder profit.

The decide disagreed, saying the “CRA has not been allowed by the courts to easily second-guess a enterprise’s advertising and marketing technique or efforts.” Citing prior jurisprudence, “The tax authority has no enterprise telling a businessperson learn how to run that particular person’s enterprise … A enterprise might choose to promote an exercise by which its proprietor … has a eager curiosity or a level of non-public satisfaction. There is no such thing as a cause why the expense of a selected type of promoting must be disallowed by the (CRA) solely due to the proprietor’s curiosity, satisfaction.”

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The decide mentioned the couple’s advertising and marketing actions on the boat have been “bona fide and primarily undertaken for enterprise functions,” and that the bills have been affordable. The one factor left to determine was whether or not the couple’s private use was correctly accounted for. The decide concluded that given their private use of the boat was within the five-per-cent vary, the $18,000 they yearly paid to the company for private use was affordable and no shareholder profit must be assessed.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected]

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