Avoid Tax Issues And Keep Personal And Business Assets Apart
Mixing personal and business purchases as a small business owner may seem convenient, but it can land you in hot water with the Canada Revenue Agency (CRA). In fact, there are strict Canadian tax laws governing this. Many company owners/operators/managers and Kelowna accounts should be aware of these laws.
Two important acts, applicable to any Canadian business, are the Income Tax Act of Canada (ITA) and the Excise Tax Act of Canada. The former details the laws regarding the collection of income tax, both personal and corporate, whereas the latter governs the collection and remittance of GST/HST. If a court discovers someone failed to properly claim a business expense, the person is required to repay the personal income tax that should have been paid in addition to GST/HST they claimed.
Section 18 of the ITA imposes limits on company deductions, as outlined below:
18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of:
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
(h) personal or living expenses of the taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business;
And in Section 67:
In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.
What this means is that only if business owners incur these expenses for the “purpose of gaining or producing income”, business owners cannot deduct expenses. This is mainly laid out in sub-paragraph (h) where no deductions can be made for “personal or living expenses of the taxpayer”, and Section 67 which also states expenses must also be reasonable.
What’s the best way to comply with these tax regulations? Simple, don’t mix personal and business assets. As an owner, operator, or manager of your business, you should always stay abreast of any new tax laws and guidelines. If you are struggling to stay on top of this, Kindret Business Solutions can provide accounting services for Kelowna organizations or a virtual financial office for companies situated farther away. Contact us to learn more.