I have a client who for years has held the Annual General Meeting for her corporation on Maui. She and her husband are the sole directors of the corporation (although I’m not sure her husband even knows where the office is, but that’s another matter).
Every year she asks me the same question……”Can I write off my trip to Hawaii”?
Every year I answer, “Sure…as long as it’s not personal in nature, you have a legitimate business purpose, and the cost is reasonable in the circumstances. And, you understand the consequences if CRA audits your expenses and disagrees with your interpretation of nature of the expense.”
I’m not a cop or a judge. I don’t work for the CRA. My job is to make sure my clients minimize their taxes legitimately and understand the consequences when they push the boundaries of what is acceptable.
So what are the consequences if a CRA auditor determines the annual trip does not have a legitimate business purpose or is not reasonable?
First, he will disallow the expense. At today’s corporate tax rates in BC, that will cost my client 13.5% of the expense.
Then, he will probably deem the expense to be personal and a taxable benefit. Since my client does quite well for herself, she is in the top tax bracket, meaning that the taxable benefit will cost her another 45.8% of the expense.
If he’s really feeling like my client was abusive, he might assess gross negligence penalties of up to 50% of the unpaid tax. And there will be interest payable on the unpaid tax and penalties from the original due date to now, which could be as much as 3 year of interest at 5%.
So a disallowed $5,000 trip to Hawaii might end up costing almost as much again in taxes, penalties and interest. Plus the professional fees involved in fighting with the auditor.
If the client had just taken the money out as a salary and paid for the trip from her net wages, the tax cost would have only been about $3,000.
Each client needs to decide which is the better result given their taste for risk.
Let us help you to understand the risks associated with your tax filings.
Written by: Doug Johnstone, CA/CPA