CRA, courts clamp down on siblings who spent company funds on personal travel

financialpost.com:

One of the benefits often cited by small-business owners is the ability to write off various expenses for tax purposes. The misconception about what can be legitimately written off brings to mind one of my favourite Seinfeld episodes, The Package, in which Kramer convinces Jerry to say his stereo was broken during shipping to collect a $400 insurance payment from the post office.

The problem with write-offs is that in order for a business expense to be properly deductible for tax purposes, it must be legitimately incurred for the purpose of earning income. Otherwise, the Canada Revenue Agency can deny the deduction as well as assess an employee or shareholder benefit, resulting in double taxation. Once, because the expense is disallowed as a deduction, and a second time when the value of the benefit becomes taxable to the shareholder or employee.

That’s exactly what happened in a Federal Court of Appeal case decided earlier this month.

The case involved four siblings in Ontario who operate a large dairy farm business that manufactures a variety of products, including cheese and yogurt, that are sold throughout North America. The business is incorporated, and each sibling is a shareholder and an employee of the business.

For the Dec. 31, 2015, taxation year, the CRA reassessed the corporation to disallow nearly $500,000 of business expenses. Of these expenses, nearly $355,000 of them related to travel expenses (including meals). In addition, the CRA reassessed each of the siblings to include various amounts relating to the non-deductible travel in their income that it deemed personal, saying each of them had received either a shareholder or employment benefit.

The amounts were significant. One sibling, the president,