Shareholder Benefits from Subsection 15(1) of the Income Tax Act (Canada)

Subsection 15(1) of the Income Tax Act (Canada) is designed to prevent shareholders from extracting assets from a corporation tax-free. A shareholder benefit may arise when a corporation provides a benefit to a shareholder (or a person related to them) that is not considered part of their employment income.

How Does Subsection 15(1) Work?

If a corporation provides a benefit to a shareholder, the Canada Revenue Agency (CRA) treats the value of that benefit as income to the shareholder. The shareholder must then report this amount on their personal tax return and pay tax on it.

Common Examples of Shareholder Benefits Under Subsection 15(1)

1. Personal Use of Corporate Assets

If a corporation owns a vehicle, cottage, boat, or condo and a shareholder uses it for personal purposes without paying fair market rent, the CRA considers this to be a shareholder benefit.

2. Loans to Shareholders

If a corporation lends money to a shareholder and the loan is not repaid within a reasonable time (or does not meet certain exceptions), it may be taxed as income under subsection 15(2).

3. Undervalued Transfers of Property

If a corporation sells an asset (e.g., real estate, equipment) to a shareholder for less than fair market value (FMV), the CRA considers the difference to be a taxable benefit.

4. Payments for Personal Expenses

If a corporation pays for a shareholder’s personal expenses (e.g., home renovations, vacations, groceries) and does not charge them back, that amount is a taxable benefit.

How Is the Benefit Calculated?

The taxable benefit is generally equal to the fair market value (FMV) of the benefit received. If the shareholder partially pays for the benefit, only the unpaid portion is taxable.

Why Does This Rule Exist?

This rule ensures that corporations do not distribute tax-free benefits to shareholders instead of paying taxable salaries or dividends.

Is a Subsection 15(1) Benefit Punitive?

Although a shareholder benefit under subsection 15(1) is considered a taxable income inclusion (not a penalty), its practical effect can be punitive because the corporation cannot deduct a subsection 15(1) benefit from its income.

Avoiding Subsection 15(1) Issues

To prevent unintended tax consequences:

• If using corporate assets personally, pay fair market rent to the company.
• If borrowing from the company, ensure the loan meets bona fide loan conditions under subsection 15(2).
• If the corporation sells an asset to a shareholder, ensure the sale is at fair market value.
• Avoid mixing personal and corporate expenses—keep clear records and reimburse personal costs.
• Carefully record and track shareholder loan balances.

Does the CRA Misuse Subsection 15(1)?

Subsection 15(1) reassessments are often incorrectly imposed. The CRA frequently assumes that any journal entry or transaction record showing a credit to a taxpayer should be categorized as a subsection 15(1) benefit. However, the CRA often fails to recognize that it must first demonstrate that the corporation actually transferred something of value to the shareholder. A journal entry alone is insufficient to substantiate such a claim.