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TAX
Shareholder and Taxable Benefits
With today’s high personal tax rates, shareholders must carefully monitor the amount of taxable benefits included in their personal income to ensure their tax liability is minimized.
Certain corporate transactions may be considered to create taxable benefits for the shareholders. For tax purposes, the dollar value of a benefit which a corporation confers on a shareholder must be included in the income of the recipient for the year in which it is received.
Shareholders’ Taxable Benefits CCRA views a benefit conferred on a shareholder as:
A bona fide transaction between a corporation and a shareholder occurs when the terms and conditions of the transaction are essentially the same as they would be if the transaction was entered into by arm’s length parties. Situations that could result in taxable benefits to shareholders include:
Personal Use of Corporate Property A shareholder’s personal use of property owned by the corporation is considered a taxable benefit, regardless of whether the shareholder has contributed to the cost of the property or paid related operating expenses. Normally, the calculation of the taxable benefit would be the fair market rent of the property minus the consideration paid by the shareholder for use of the property. If the corporation provides an automobile for the shareholder, the amount to be included in income is the same as would be calculated for an employee who has use of a company vehicle.
In certain cases, such as residences owned by a corporation, the Courts have held the appropriate taxable benefit to be equal to a reasonable return on the property. If the shareholder personally advanced some of the funds to purchase the property, the taxable benefit would be the reasonable return on the property after deduction the advances.
Additions or Improvement to Property Assume a corporation is renting a building from a shareholder. If the corporation constructs an addition or improves the property and the improvement is considered to enhance the shareholder’s position, then a benefit has been conferred to the shareholder. The benefit is calculated to be the present value of the amount, if any, by which the addition or improvement increases the value of the building to the shareholder at the time the building reverts to the shareholder. If there is no lease, the benefit would be calculated at the time of the addition.
Shareholders and corporations faced with this situation must carefully structure and document the transactions to understand the benefit impact to the shareholder. The benefit to be conferred in a particular taxation year is based upon the portion of the addition or improvement completed during the year. Thus, consideration must be given to the nature of the improvement or addition, the terms of the lease, (including extension considerations), and the rent charged.
Forgiveness of Debt If a loan or other obligation owing by the shareholder is forgiven, the corporation is deemed to have conferred a benefit to the shareholder. The value of the benefit is generally the amount by which the outstanding obligation at the time of settlement exceeds the amount paid by the shareholder upon settlement.
The impact of tax on benefits received, or deemed to have been received, by shareholders, can significantly affect your personal tax liability. Shareholders are often unaware of those non-arm’s length transactions that may impact their tax planning before making decisions that involve the corporation, the shareholders and their spouses, contact us to discuss the potential tax consequences.
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