A client purchased a property in 2021 that will be his principal residence (his only property and he will live there).
The zoning of the property permits commercial activity - the previous owner did not use it commercially.
A portion of the home will be exclusively used business (incorporated business).
A prorated portion of his home expenses such as utilities can be expensed and reimbursed back to him via the shareholder account (for example Home office space is 15% of the home and the utilities are $1000 then he can expense $150 among other things like mortgage interest, property taxes, etc.)
My question is he able to expense part of the legal fees paid to the lawyer?
I always enjoy specific references to the ITA as well as court precedent, however, all comments are appreciated!
What legal fees would be attributable to the business? Home office expense is basically “rent”, where the business is the tenant. A tenant is not responsible for the legal fees of the landlord - fees that simply establish the landlord’s title to the property being rented.
It is a stretch but I thought I would ask to be sure. To clarify, the home’s zoning does permit commercial activity and that enables the business to function out of the home, use signage, etc.
Also, the owner did partially pick the property because of the size of the office, location, zoning which are all things that benefit the business. Not sure if that changes anything but I thought it might be worth mentioning!
Legal fees when purchasing a property are added to the capital cost. You do not want to claim anything related to the capital cost or you lose the principal residence exemption.
“A prorated portion of his home expenses such as can be expensed and reimbursed back to him via the shareholder account (for example Home office space is 15% of the home and the utilities are $1000 then he can expense $150 among other things like mortgage interest, property taxes, etc.)”
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No, sorry, I cannot say that that is in any way correct.
(And the same goes for the inferences behind your question.)
The Professional Accountant in charge of this file may wish to liaise with the individual, the director, and the corporation’s lawyer so as to ensure proper (lease) legal contracts are drawn up between the separate contracting legal entities, whether or not they are acting at arms-length.
The individual would be very unwise to “fly by the seat of his pants” in legal-tax matters, since it may well cost him an unexpectedly larger amount of money down the road.
Sorry, one cannot prepare taxes in a proper manner (particularly regarding business income) by solely referencing websites, on the CRA website or anywhere else.
Dong so results in serious misunderstandings of law, such as your current misunderstanding
Your reference link is for personal taxes.
Knowledge of Income tax law and commercial law is required.
The topic is far too large and involved for casual forum comments.
I would suggest that you might consider referring this file to a CPA, perhaps quoting my earlier post.
Far too often we see people who do not have the full training or a designation, whether CPA or PBA, misapplying concepts. And it makes it a pain to clean these up and correct the files. I sometimes see it with files from big CPA firms, too. I suspect that these files are done by students and not fully reviewed, because they don’t warrant the full attention of more senior personnel.
Why would the person want to risk losing portion of the principal residence tax exemption on the capital gain otherwise applicable on the disposal of a property. In my opinion it is not worth it. Keep the principal residence fully exempt from any capital gain liability exposure. Instead you could record a “reasonable” home office expense provision in the corporation so as to account for some of the business work completed at home by the shareholder.
The other point to also consider is that even if NO home office expense is claimed in the corp, it just means more profit reported by the corp. Assuming the corp is a CCPC with taxable income below $500k, it will only pay tax of 12.5% (assuming in Ont).
In summary, if you have to pay tax, pay it at the corporate level, because it is the lowest rate and NOT expose the principal residence at all to any tax liability.
I agree with you 100%. I just got a call from an individual who is asking for my assistance with his 2021 T2 corporate tax return. The corp holds a rental property and completed extensive renovations in 2019-2020.
Another CPA completed the previous return(s) and claimed the renovations as repairs & main expense, creating a $15k and 22k, loss, in each year respectively. These should have been reclassified as a capital cost to the building and equipment accounts and depreciated accordingly.
The CPA’s incorrect filing resulted in a post assessment review by the CRA who disallowed the claim as expenses. The corp has been reassessed and now has tax payable, plus penalties and interest.
That does not exist as such in the ITA.
There is no such thing technically.
Presumably you are thinking of ITA S8 individual provisions regarding ITA S6 individual income.
Also, Shareholders qua Shareholders do not earn ITA S6 income.
The poster should definitely refer the file to a CPA, as postings on the internet will confuse, even mislead.
Both client’s best interests should be placed foremost.
I’m sorry that you are not understanding the issue here.
However, your interests should not be placed ahead of your clients.
Have both clients obtain an in-person real consultation from a CPA, and see if anything different from what I posted comes out.
The clients will thank you for it.
Yes there is nothing in the ITA to this effect, however it is a very common practise to record an expense for home office expense provided it is reasonable. We have done it for over 4 decades and in any CRA review it was not ever disallowed due to the reasonableness of the amount expensed.
@joe.justjoe1 I know for a fact if your clients found out there was a reasonable expense such as this one that you were not expensing for them you would likely not be their accountant for much longer.
Yes, designated accountants generally are stronger accountants than non-designated but not always. I have taken over many files in past years from both designated and non-designated accountants and found errors regardless. Not to mention the biggest mistake coming from a CPA. The key is experience and ongoing professional development.
" Instead you could record a “reasonable” home office expense provision in the corporation so as to account for some of the business work completed at home by the shareholder."
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Sorry Shun, I was referring to tax in Canada in this Universe.
Perhaps on other planets where some of your clients may be, Corporations might have principal homes, and walk and talk, and perhaps take a nap.
This thread is a striking example why clients, particularly business or corporate should ensure that their accountant is indeed qualified.
The ethical thing to do here clearly is to refer the clients for a consult.
Not quite sure what the issue is here. There is no problem in a properly constructed rental agreement between a property owner (who may also happen to be a shareholder, director and/or employee) and a corporation using some portion of the space. As long as the amounts deducted/reported are not in excess of a reasonable amount and are reported as income by the recipient (subject to appropriate expenses against)…where’s the issue? There is nothing either illegal or improper about same.
Your immature, unprofessional and sarcastic response to my input says a lot about your lack of experience in the real business world.
I am not in this forum to judge you on how you manage your clients, so I really don’t care for your opinion on how I manage mine.
What I know is that I have solid roster of clients both corporate and personal, here on this planet and universe who have been with us for over 40 years. We have taken clients from a start-up all the way up to a multi-million dollar enterprise all while ensuring their business grows in the most tax efficient manner. We further have a solid track record of experience and success with federal and provincial tax audits.
If you have have nothing constructive to contribute besides regurgitating sections of the ITA, then I suggest you mind your tone and please take a course is professional communication.
One issue with Tax is numbers.
Taxcycle handily helps mightily with that aspect.
The other issue with Tax (and for that matter, also business), is LAW.
Whilst you know what these matters are and if you were doing it, you would examine all the legal documentation and understand it.
So I know what you mean in your post (and agree).
However, it is clear that certain posters on this thread have considerably insufficient appreciation of the business and tax law issues, legal persona matters etc, making it fairly dangerous to attempt one-sentence solutions.
There are multiple taxpaying persona’s in the case presented, (and indeed, may also even involve the one individuals spouse or other matters not mentioned), so precise legal issues are important to specifically deal with (Hence my very first post).