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

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

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But if those expenses aren’t legitimately incurred for the purpose of earning income, they could be non-deductible to the corporation and you could get personally assessed a shareholder benefit by the Canada Revenue Agency (CRA) for appropriating corporate funds for personal use, rather than extracting them first on a taxable basis as either a salary, bonus or dividend.

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Similarly, you can also be assessed a taxable shareholder benefit for the personal use of a corporate-owned asset. That’s exactly what happened in a recent tax case involving a Vancouver Island couple, their corporation and the use of a boat.

The sole issue in the case was the value of the personal shareholder benefit, in the 2013 and 2014 taxation years, for their personal use of a boat owned by their corporation. The boat was primarily used by the company to market its marina, fuel and provisions to boaters in the region.

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Over the course of five decades, the couple, through their corporation, developed a “successful, substantial” marina business on the island that provided a diversified range of goods and services to a large, but remote group of small communities, mostly near the water’s edge, on the islands north of Vancouver Island.

“It might not be hard to picture their region, community and commercial activities appearing in a Canadian TV documentary on a documentary channel, providing the context for a Canadian reality TV show on History channel, or providing a locale for a sequel to Corner Gas or a remake of The Beachcombers,” the judge said.

The couple operated their business together. The husband did all the steering of the boat, and his wife acted as a bookkeeper, paying suppliers and balancing bank statements. Today, the business is mostly run by the couple’s children and their families.

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The tax authority has no business telling a businessperson how to run that person’s business

Tax Court Judge

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

It was also used to engage with other local marinas, and their owners and operators, as well as their clients. This was typical direct personal marketing. Many of these other boaters were already users of their marina given its size and location, and those who weren’t were bona fide potential clients.

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 at which they rented booths for their marina.

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The couple did not own a boat before they bought the marina, have never taken the boat on any excursions, “not even short ones,” as they could not leave their daily business responsibilities during the boating season. When they did their marketing travels in the boat to other marinas and moorings, they did so mostly in the evenings, after their normal workday responsibilities.

Their marketing trips proved very successful as the marina’s mooring and fuel revenues increased each year. Their marketing was described as “creating opportunities to socialize with clients and potential clients, dining at other marinas with them, entertaining them on the … (boat), and generally chatting up boating in the region and 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 commercial entities in the region. Personal use of the boat was “very occasional, less than a half-dozen times.” For example, they occasionally took friends or family out for whale watching in the harbour immediately in front of 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 that this amount was “a conservatively high amount in the circumstances.”

The court found that the personal use of the boat was minimal and in the range of five per cent. In other words, substantially all of its use as a boat was for bona fide business purposes. Even though a benefit was enjoyed by the couple’s limited personal use of the boat, it was accounted for and this amount was within range of a reasonable fair market value.

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The CRA had questioned the “marketing” activities of the couple, suggesting there was a personal element to the marketing that needed to be taken into account when valuing the personal shareholder benefit.

The judge disagreed, saying the “CRA has not been allowed by the courts to simply second-guess a business’s marketing strategy or efforts.” Citing prior jurisprudence, “The tax authority has no business telling a businessperson how to run that person’s business … A business may opt to advertise an activity in which its owner … has a keen interest or a degree of personal satisfaction. There is no reason why the expense of a particular form of advertising should be disallowed by the (CRA) solely because of the owner’s interest, satisfaction.”

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The judge said the couple’s marketing activities on the boat were “bona fide and primarily undertaken for business purposes,” 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 given their personal use of the boat was in the five-per-cent range, the $18,000 they annually paid to the corporation for personal use was reasonable and no shareholder benefit ought to be assessed.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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