Disallow practically $500,000 in write-offs put by way of household’s Ontario dairy enterprise
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One of many advantages typically cited by small-business house owners is the flexibility to jot down off varied bills for tax functions. The misunderstanding about what will be legitimately written off brings to thoughts considered one of my favorite Seinfeld episodes, The Bundle, by which Kramer convinces Jerry to say his stereo was damaged throughout delivery to gather a $400 insurance coverage fee from the put up workplace.
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Kramer: “Jerry, all these huge firms, they write off every part.”
Jerry: “You don’t even know what a write-off is.”
Kramer: “Do you?”
Jerry: “No, I don’t.”
Kramer: “However they do, and so they’re those writing it off.”
The issue with write-offs is that to ensure that a enterprise expense to be correctly deductible for tax functions, it have to be legitimately incurred for the aim of incomes earnings. In any other case, the Canada Income Company can deny the deduction in addition to assess an worker or shareholder profit, leading to double taxation. As soon as, as a result of the expense is disallowed as a deduction, and a second time when the worth of the profit turns into taxable to the shareholder or worker.
That’s precisely what occurred in a Federal Court docket of Attraction case determined earlier this month.
The case concerned 4 siblings in Ontario who function a big dairy farm enterprise that manufactures quite a lot of merchandise, together with cheese and yogurt, which might be offered all through North America. The enterprise is included, and every sibling is a shareholder and an worker of the enterprise.
For the Dec. 31, 2015, taxation yr, the CRA reassessed the company to disallow practically $500,000 of enterprise bills. Of those bills, practically $355,000 of them associated to journey bills (together with meals). As well as, the CRA reassessed every of the siblings to incorporate varied quantities regarding the non-deductible journey of their earnings that it deemed private, saying every of them had acquired both a shareholder or employment profit.
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The quantities have been vital. One sibling, the president, was reassessed to incorporate $211,621 in his earnings for 2014 and $156,696 for 2015 as shareholder advantages, which represented a part of the denied journey bills paid by the company for himself, his spouse and his mom. Equally, one other sibling, who acted as treasurer and director of human sources, needed to embrace $237,647 and $181,737, respectively, as shareholder advantages. The third sibling’s shareholder advantages totalled practically $27,000 over the 2 years below assessment, whereas the fourth’s have been virtually $50,000.
In tax courtroom, the taxpayers stated all journey bills paid by the corporate have been incurred for the aim of gaining or producing enterprise earnings, comparable to assembly suppliers worldwide or creating the corporate’s enterprise market. They stated the journey bills “weren’t of a private nature” and mustn’t have been included within the computation of their earnings. Additionally they argued that shareholder advantages shouldn’t apply to 2 of the 4 siblings since they solely owned most popular shares within the firm, not frequent shares.
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The CRA disagreed, saying that the disallowed journey bills weren’t incurred by the corporate for the aim of gaining or producing earnings from a enterprise.
Throughout the preliminary trial, the corporate’s monetary controller testified, however her testimony was “imprecise and inconsistent.” Because the decide stated: “Since she was assigned to cope with the audit, it’s not credible that, as (the company’s) monetary controller, she didn’t know which bills have been private and which bills have been business-related.”
The corporate president’s testimony was additionally discovered to not be credible. He acknowledged that every one disallowed journey bills paid by the corporate have been incurred for enterprise functions, however he was unable to offer any affordable rationalization nor any documentary proof to justify the deductibility of the journey bills by the company.
Among the many complete journey bills deducted by the corporate, the CRA auditor was ready to permit roughly $200,000 of journey bills with out every other supporting paperwork apart from credit-card statements for journeys to Dubai for an annual commerce present, and journeys to Chicago, New York, Vancouver, San Diego and Washington.
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Different journey bills for journeys to Paris, Aruba, Nassau and Mont-Tremblant weren’t allowed, nor have been bills paid to Sunwing Holidays, because the auditor concluded these have been private bills paid by the company for the advantage of the siblings and varied different relations.
Different disallowed journey bills included: credit-card costs incurred in Sint Maarten, together with varied restaurant meals; bills on the Fairmont Tremblant in Quebec, Ritz-Carlton in Aruba and Ritz-Carlton in Grand Cayman; and a few bills incurred by a sibling’s partner at Holt Renfrew in Montreal.
To justify any of the disallowed journey bills, the decide stated “it will have been affordable to count on that some supporting documentation — specifically emails, invites to conferences, agendas of conferences, and so on. — would have been adduced on the listening to indicating the needs of the assorted journey bills.”
With out such proof or documentation, the decide concluded the bills have been merely not deductible and the private bills have been included in every of the sibling’s incomes as both shareholder or worker advantages.
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The siblings and company appealed the decrease courtroom determination, and a brand new trial was held on the Federal Court docket of Attraction on June 17, 2024. In a brief, six-page determination delivered orally from the bench, the three-judge panel of the appellate courtroom unanimously upheld the decrease courtroom’s determination.
The panel stated the tax courtroom decide correctly weighed the proof earlier than her, noting the “complete absence of documentary proof” to again up the taxpayers’ claims that bills have been incurred for the aim of incomes enterprise earnings.
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The panel additionally addressed the argument of two siblings who held solely most popular shares and felt they might not be assessed as shareholders on this case. The panel famous, nonetheless, that the Tax Act “doesn’t make a distinction between frequent shareholders and most popular shareholders” when assessing shareholder advantages.
Consequently, “There’s … regardless of right here to intervene,” the panel stated.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.
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