Shareholder benefits

• Steps
• References

Steps

1. Determine if the benefit was received from the corporation as an employee or a shareholder

   To determine if the benefit is a shareholder benefit, you must determine if the benefit was received from the corporation in the shareholder’s capacity as:

   • A shareholder
   • An employee (including an officer)

   A shareholder  may also be employed by the corporation and receive taxable benefits related to their employment. However, if the shareholder receives benefits specifically because they own shares, those are treated as shareholder benefits, not employee benefits.

   This is a question of fact, and each benefit your shareholder received must be reviewed independently of any other benefit that they received. Your shareholder must have known or reasonably should have known that they were receiving the benefit.

   Why is it important to determine if your corporation is providing a benefit to a worker in their capacity as a shareholder

   It is important to determine if your corporation is providing a benefit to an individual in their capacity as a shareholder because of the following tax obligations which affect both your corporation and your shareholder:

   • Your corporation's obligations

     • You do not withhold payroll deductions from shareholder benefits
     • You have to report the shareholder benefit on a T4A slip
     • You cannot claim the shareholder benefit as a business expense (unlike an employee benefit)

   • Your shareholder's obligations

     • Your shareholder is responsible for remitting income tax and CPP contributions when filing their income tax and benefit return
     • Your shareholder must include the full amount of the shareholder benefit included on the T4A slip using line 13000 – Other income or lines 13499 to 14300 – Self-employment income on their income tax and benefit return

   ---

   •  If the benefit was received by the individual in their capacity as an employee, do not continue to the next step.

     You must review the tax treatment of the benefit as a taxable benefit for an employee.

     Learn more: Determine if a benefit is taxable

   • If the benefit was received by the individual in their capacity as a shareholder, continue to: Step 2 - Determine if the benefit provided is considered a shareholder benefit.

2. Determine if the benefit provided is considered a shareholder benefit

   If the benefit to your shareholder is provided in one of the following situations, it is not considered a shareholder benefit:

   • Dividends

     You pay dividends to your shareholder, which are a return on the shareholder’s investment in the company and are not considered as payment for services provided for the corporation.

   • Deemed dividends

     You make one of the following transactions which are deemed to be a dividend paid to your shareholders under the Income Tax Act:

     • Paid-up capital (the amount paid or contributed by your shareholders for their existing shares) of the corporation increases other than by means of a stock dividend without a corresponding increase in net assets or decrease in net liabilities
     • Property is distributed to shareholders when a corporation's business is wound-up, discontinued, or reorganized
     • Any of the company's own shares are redeemed, acquired, or cancelled, other than by an ordinary purchase in the open market
     • Paid-up capital for any class of shares of capital stock is reduced

     A deemed dividend could arise when you (the corporation) buy back shares held by your shareholder for more than they had originally paid to the corporation to acquire the shares.

   • Other exceptions

     • A return of invested capital
     • Right to acquire additional capital stock
     • Provided as part of a good faith business transaction

   ---

   •  If the benefit provided to your shareholder is a dividend, a deemed dividend or other exceptions apply, do not continue to the next step.

     Learn more on how to report dividends or deemed dividends: T5 slip

   • If the benefit provided to your shareholder is not a dividend, a deemed dividend or other exception, continue to: Step 3 - Determine if different considerations apply to the calculation of a shareholder benefit.

3. Determine if different considerations apply to the calculation of a shareholder benefit

   If you provide the following shareholder benefit, use the links to calculate the value of the benefit where the shareholder benefit relates to:

   • Loans
   • Automobile benefits
   • Motor vehicle benefits
   • Aircraft benefits

   ---

   •  If the benefit provided to your shareholder is one of the above, review how to calculate the benefit using the link. Continue to: Step 5 - Determine if you need to withhold payroll deductions.

   • If the benefit provided to your shareholder is not one of the above, continue to: Step 4 - Calculate the value of the shareholder benefit.

4. Calculate the value of the shareholder benefit

   If you provide a shareholder benefit to an individual (or the family member of the individual) in their capacity as a shareholder not included in step 3, the value of the benefit is based on one of the following:

   • The FMV  of the property or benefit being conferred by the corporation on the shareholder
   • The cost or the amount the corporation did not earn in conferring the benefit on the shareholder
   What is the FMV

   FMV is the highest price that can be obtained in an open market between an informed and willing buyer and an informed and willing seller who are dealing at arm's length.

   Generally, the FMV of a benefit is the price that could be reasonably charged for the use of that benefit in an open market (that is, the market price for a similar benefit in the surrounding area).

   This determination must be done based on a review of the facts in each specific situation.

5. Determine if you need to withhold payroll deductions

   You do not withhold the following from a shareholder benefit:

   • Income tax - Do not withhold
   • EI premiums - Do not withhold
   • CPP contributions - Do not withhold

   A shareholder is responsible for remitting income tax and CPP contributions on their shareholder benefits when filing their income tax and benefit return.

6. Report the shareholder benefit on a T4A slip

   You must report the shareholder benefit on a T4A slip depending on the type of benefit:

   • Code 028 – Other income
   • Code 117 – Loan benefits

   Under the CRA administrative policy, a slip must be issued if the total of all payments in the calendar year were more than $500 or if you deducted tax from the payment.

    

   After your T4A slip has been filed, you cannot change the nature of the income paid or benefit received. Depending on your situation, this is considered retroactive tax planning and is inaccurately changing the reporting of the income. You can only correct a reporting error.

    Learn how to report the payment: T4A slip - Information for payers

References

Related

• Benefits Conferred on Shareholders
• Income Tax Folio S3-F1-C1, Shareholder Loans and Debts

Legislation