Truck financed personally by sole director of CCPC

T2
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*Technical question

Sole director of CCPC personally financed (in his name) pick up truck 5 passenger capacity (4 years - 48 months).
COST: $20,000
HST: $2,600
INTEREST: $2,500
*Payments are made montly

Used 70% for business in corp during year.
Corp will need to repay director for business use of his personally paid for truck.

My J/E looks like the following for the year:
DT Auto $3500 ($20K/48 MONTH LOAN X 12 MONTHS FOR THE YR X 70%)
DT HST (ITC) $455 ($2,600/48 MONTH LOAN X 12 MONTHS FOR THE YR X 70%)
DT Interest $437.50 ($2,500/48 MONTH LOAN X 12 MONTHS FOR THE YR X 70%)
CT SH LOAN $4,392.50

I came across GST/HST memorandum 9.4 - Reimbursements.

What I would like to know is do I simply book JE for reimbursement for the principal, interest, hst payments for the year?

Does anyone have references/legislation/etc noted for a situation like this?

Thanks Kindly

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The vehicle will attract standby charges if the company owns it - anything less than 90% business use. It might depend on the type of truck - i.e. one with service box that can’t be easily used for personal use. The definition of the vehicle gets complicated - if it setup to transport driver plus more than one passenger it might fall into same rules of passenger vehicle.

We find it less complicate to keep it in personal hands so if there is an audit they do not have to prove the 90% number. Of course monthly expense claim is needed with some documentation as to the mileage being claimed.

The mileage charge is prescribed and covers all of the costs - depreciation, insurance, repairs, interest and so on.

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The very first question you need to ask; Who’s name is on the legal ownership of the pick up truck?

If the vehicle is registered in the Shareholder’s name the corporation is not permitted to make an HST claim on that vehicle. Your route under that situation might be a T2200 and the GST370 for the HST rebate.

Regardless of ownership (shareholder’s name or corporation’s name), I can’t see any situation where the journal entry would look like what you have laid out.

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Probably better to have the corp reimburse the shareholder for business use of a personal vehicle. He will have to keep a mileage log, but then can be reimbursed at CRA’s standard rates, which depend on the province. Usually somewhere around 54¢ /km for the first 5,000 km and 48¢ /km thereafter.

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Ownership - Shareholder’s name

Entry for Corp - interest & principal portion
DT Auto XXX
DT Interest XXX
CT SH LOAN XXX

On personal income tax return of SH - HST rebate on GST 370

?

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The vehicle belongs to the shareholder, so the company has no asset to capitalize and no interest to deduct.

As Garth and Nelson have suggested, the best way in this situation would be for the corporation to give the employee a reasonable (0.55 / 0.52) allowance (based on km’s driven for business). In Ontario the HST Input Tax Credit the corporation could recover would be be calculated as 13/113 times the reasonable allowance paid to the shareholder.

Otherwise, if the allowance is not reasonable; meaning the calculation is something other than the CRA prescribed rates of 55 cents/km for the first 5,000 and 52 cents for anything over 5,000 km (for 2019) then the amount must be added to the income of the shareholder employee. The shareholder would then (with a duly completed and signed T2200) be free to deduct the loan interest, fuel, capital cost allowance, licence, insurance etc on his personal T1 using form T777. The corporation would not be able to claim any HST on the allowance payment, but the employee would claim HST on his T1 return using the form GST370. Since the vehicle is used for business between 50% and 90% the HST rebate as it relates to the cost of the vehicle would be based on the amount of CCA claimed on the T777.

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My thoughts from my initial post were from Memorandum 9.4 reimbursements and these specific points:

This memorandum explains the treatment of reimbursements paid to employees, members of a partnership or volunteers of a charity or public institution under the Excise Tax Act , and the subsequent eligibility rules for claiming input tax credits or public service body rebates for persons who pay these reimbursements.

  1. The term “employee” includes an officer.

Meaning of employer
ss 123(1)

Calculation of the tax deemed paid

Effect of section 175

  1. When the conditions under section 175 are met, an employer, partnership, charity or public institution that pays an amount as a reimbursement to the employee, partner or volunteer is deemed to have received a supply of the property or service that was acquired, imported or brought into a participating province and to have paid tax in respect of this supply.

para 175(1)(b)

  1. Any consumption or use of the property or service by the employee, partner or volunteer in relation to the activities of the employer, partnership, charity or public institution is deemed to be consumption or use by the employer, partnership, charity or public institution, and not by the employee, partner or volunteer.

Calculation of tax deemed paid
para 175(1)©

  1. Where the conditions of section 175 are met, the employer, partnership, charity or public institution is deemed to have paid, at the time the reimbursement is paid, tax in respect of the supply equal to the amount determined by the formula

A Ă— B

where

A is the tax paid by the employee, member or volunteer in respect of the acquisition, importation or bringing into a particular province of the property or service by the employee, member or volunteer, and

B is the lesser of

  1. the percentage of the cost to the employee, partner or volunteer of the property or service that is reimbursed, and
  2. the extent (expressed as a percentage) to which the property or service was acquired, imported or brought into the province by the employee, partner or volunteer for consumption or use in relation to activities of the employer, partnership, charity or public institution.

Example 4

A volunteer rented a car in Manitoba while attending three days of meetings as a representative of a charity. Since the volunteer was not returning home after the meetings but was taking a one-week vacation, the vehicle rental agreement was for a ten-day period. The volunteer paid $500, plus $25 GST, for the car rental. The charity reimbursed the volunteer for the car rental in respect of the meetings (including the GST). The percentage reimbursed was 30%, which was the three days use during the meetings of the ten-day car rental.

Pursuant to section 175, the charity is deemed to have received a supply of the car rental, and the use of the car by the volunteer for the three days is considered to be use by the charity.

The tax the charity is deemed to have paid in respect of the supply is equal to
A Ă— B
where
A is $25 (the tax paid by the volunteer),
B is 30% which is the lesser of

  • 30% (the percentage of the cost to the volunteer that was reimbursed), and
  • 30% (the extent expressed as a percentage to which the rental of the car was acquired for use in relation to activities of the charity).

Therefore, the tax deemed paid by the charity on the car rental is equal to $7.50 ($25 Ă— 30%).

## Calculation of the ITC and rebate

ITC eligibility
ss 169(1)

  1. As a result of the application of section 175, an employer, a partnership, a charity and a public institution may be eligible to claim an ITC or a rebate for the amount of tax deemed paid to the same extent as the person would have been able to claim the credit or rebate if the person had incurred the expense directly to the extent that the deemed consumption or use is consumption or use in the course of the person’s commercial activities. Charities are required to use the “net tax calculation for charities”. Consequently, they cannot claim ITCs for the GST/HST paid or payable on most of their purchases. However, if a charity meets certain conditions, it may elect not to use the net tax calculation for charities.

Example 6

An employer reimburses an employee for expenses incurred in respect of supplies of property or services purchased in Prince Edward Island and Nova Scotia.

The employer is eligible to calculate its ITCs based on the deemed tax paid on the reimbursed amount equal to the total of:

  • 4/104 of the amount reimbursed for supplies made in Prince Edward Island where 90% or more of the supplies are subject to the 5% GST; and
  • 14/114 of the amount reimbursed for supplies made in Nova Scotia where 90% or more of the supplies are subject to the 15% HST.
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@NiceGuy
I’ve never included GST when calculating a motor vehicle reimbursement, but looks like you found something that says you can. I might have to consider that from now on! :grinning:

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@NiceGuy
I think that has more to do with the reimbursement of current expenses and services paid by an employee on the employer’s behalf. I don’t think it applies to purchasing fixed assets or real property where ownership of the asset does not transfer to the employer.

Determine the ITC eligibility percentage for reimbursements or allowances to an employee, partner, or volunteer

You may be eligible to claim an ITC in respect of an amount reimbursed or an allowance paid to employees, partners, or volunteers for the acquisition of property or services for use related to your commercial activities.

Examples of reimbursements and allowances for which you may be eligible to claim an ITC

  • food, beverages, and entertainment
  • parking
  • supplies
  • union, professional, or similar dues
  • motor vehicle expenses (for example, fuel, maintenance and minor repairs, insurance, license, registration)
  • work space in home (for example, electricity, heat, water, maintenance)

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/gst-account/input-tax-credits/calculate-input-tax-credits-overview/calculate-input-tax-credits-eligibility-percentage.html#reimbursements

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In my experience, CRA GST auditors will throw out a claim for ITC on vehicle purchase, unless it is registered in the GST registrant’s name, and it is used substantially all in that business…

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@Nezzer

This might be of interest to you regarding ITC’s on auto reimbursements.

https://www.djb.com/2018/08/reasonable-automobile-allowances-gsthst-claim/

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*sorry for the late reply

After crunching #s - pro-rated % of actual auto exps vs allowance method - almost same ($100 difference).

Perhaps an option is reverse auto expenses (vehicle owned by SH) the corp paid to SH loan & record an auto allowance for SH (for business use of a personal vehicle).

Should interest benefit be considered?

Similarly, if SH uses corp funds during the year (personal transactions) then SH loan account is cleared out to dividend @ year end should interest benefit be considered?

Thanks Kindly

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I have fired any client who didn’t stop when I said “stop that”, and tried to make that amateur hobby nonsense my problem.

In any case, technically a “shareholder” doesn’t get to raid/steal (or even “borrow”) the Corporations Treasury Box just because he feels like it.
If the Corporations President (and/or Director) grant a loan (to the Shareholder), it should be properly executed, in writing (including terms of repayment, and interest).

If it is the “Director” who is helping himself to those funds, then the essence of those transactions is an advance on his employment salary, and needs to be included on his T4 in the relevant year.

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@NiceGuy @joe.justjoe1
After working at large accounting firms before starting my own, I can say that it is common practice for a CCPC with a sole shareholder (or where shareholders are immediate family), to withdraw cash from the corporation whenever they want, or use corporate resources to pay for personal items. No problem, as long as the transactions are recorded as debits to the shareholder loan. Most accounting firms issue a dividend to clear out the shareholder loan at year end. CRA has an administrative policy (which I can’t find at the moment), stating this practice IS acceptable.

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Notwithstanding that you cannot find that particular reference at the moment,
I’ll bet that you would have extreme difficulty also finding that reference in an Accounting Text Book, and in the Minutes of Corporations, and in Legal references as to the ownership of funds so pilfered… :wink:

In addition, recall that CRA has in the past had much to say about “…series of (so-called) “loans”…”
Not to mention ITA S230…

Its common practice for kids to run out in front of oncoming traffic also, but that does not mean that the right thing for parents to do is to just shrug and say “oh well, kids will be kids”… :wink:
So, you are right, some “kids” do it… BUT, we ought to be the grown-ups in the room…
Also, the presence of such transactions not only leads to more bookkeeping effort, but also to more tax analysis, particularly looking for ITA S18(1((h)… both of which the client corporation will be paying for…

Add a quote from CRA:
“Where the business is carried on in a sole proprietorship, or in a corporation with a sole shareholder or that is closely held, there is potential co-mingling of business and personal funds. As such, when performing indirect tests, auditors will also request personal financial information of the spouse (or common law partner), the shareholder of a corporation and his or her spouse (or common law partner), and other contributing individuals living in the same household”

And law society comment regarding trust accounting:
“Deficient bookkeeping practices
… co-mingling of business and personal cash transactions”

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@joe.justjoe1
Perhaps others would like to comment?
I know it is common practice, and I know that CRA approves of it.

Re: “series of loans and repayments” - this addresses the situation where a shareholder withdraws funds from the corporation throughout the year, then deposits a large sum just before year end (so that the shareholder loan is in a credit balance), then withdraws all those funds the day after year-end. As such, there is no tax being paid on the corporate drawings. But, if a dividend is issued, the shareholder must pay tax on the dividend, so the ITA is satisfied. This was specifically addressed in one of my CGA tax classes.

Re: “co-mingling of business and personal funds” - this is where personal expenditures are recorded as expenses of the business - as such, the records are not being kept properly. If the expenditure is recorded as a debit to the shareholder loan, this is sufficient separation of business and personal, since the transaction is effectively transferred to the shareholder (does not reduce business income).

Hope that helps! :wink::blush:

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Now I know for sure that you are just pulling my leg… :wink:

"“series of loans and repayments”
You are probably thinking of S15(2.6) which provides that the Income inclusion of such amounts pursuant to S15(2) does not apply if repaid (within one year etc) - but which DOES apply if it is not proven that such repayment was not part of a “series of loans or other transactions or repayments”

“co-mingling of business and personal funds” - this is where personal expenditures are recorded as expenses of the business"
No, thats not quite it…

So I will leave this thread with:
Additional USA article:

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