One of the most important relationships you`ll ever have is with your business partners, so it`s very important that you agree with them and document it. Section 15 of the Income Tax Act provides that shareholder benefits received from a capital corporation must be included in the shareholder`s personal income when generated for the benefit of a shareholder who is an individual. Shareholder utility rules are designed to prevent companies from financing shareholders` personal expenses from pre-tax corporate funds. The inclusion of a benefit in the shareholder`s personal income is a denial of deduction to the corporation. result. For the IRS. Legal fees to defend a business are deductible. The payment of expenses for others is generally not the case. However, if a payment is to be encouraged by a reporting company, the fees are deductible. There is a two-part test that allows CPAs to determine whether these payments are deductible. First, the payment must have been made primarily for the benefit of payment transactions.
Second, spending must be normal and necessary. Such planning usually involves significant accounting, legal and evaluation expenses. Are these charges deductible from the corporation or do they constitute a tax benefit to the shareholders themselves who, if paid by the corporation? This question was asked directly in the tax court of Truck Base Corporation v. The Queen in 2006. It was recognized before the Court that the legal fees of 1500 $US paid for the creation of the family trust were personal and constituted the benefits of the shareholders. However, the company submitted that the restructuring of the business, including the redesign and modification of the company`s share capital and the freezing of the estate, were necessary business costs for the business and not expenses related to the personal benefit of the owner/manager. While not covered in this case, legal and accounting expenses resulting from a sale of shares by the owner or manager will also be taxable benefits when paid by the company, but transactions involving the sale of shares will also result in significant social work in the transaction. In the case of a fair distribution of these royalties between the company and the shareholder, the amounts allocated to the company should be deducted from the company without benefiting from taxable benefits to shareholders. Also, remember that if you are a small business unit (revenues less than $10 million), all expenses generated by professional advice on shareholder or partnership agreements from your accountant or solicitor are tax deductible. If you create a new partnership, it can be established by a standard agreement in accordance with the Partnership Act. This agreement requires equal actions and equal rights, but it may not be fair to everyone. Therefore, when creating a partnership, you should consider creating a partnership agreement that will create a new regulatory framework for your partnership.
This type of agreement will be largely tailor-made, as it is important that it covers topics that are important to you and details such as: A solicitor will arrange such an agreement for you. The case of taxpayers was significantly weakened because it helped the co-accused conceal income and assets from the IRS, measures that would not benefit the company. Moreover, the fact that tribute payments also concern other companies denied the conclusion that the fee-paying company`s expenses were normal and necessary.