Separating Business and Personal Expenses – A Complete Guide by a Montreal CPA Firm Near You

Separating business and personal expenses in Canada is one of the most crucial

components of tax compliance for entrepreneurs, incorporated businesses, sole

proprietors, and family-run corporations. When business owners mix corporate and

personal spending—even unintentionally—they expose themselves to CRA audits,

denied deductions, payroll reassessments, GST/HST penalties, and shareholder

benefit assessments under some of the harshest provisions of the Income Tax Act.

Many business owners do not realize that every personal expense paid through the

corporation is at risk of being treated as income, and every improperly claimed

business expense may be disallowed. Understanding how to properly separate

business and personal expenses in Canada protects your corporation, reduces audit

risk, and ensures accurate bookkeeping. This guide explains CRA rules, common

mistakes, legal cases, and best practices for maintaining flawless separation.

Legal and Regulatory Framework

CRA’s rules on business and personal expenses are grounded in several sections of the

Income Tax Act:

• Section 18(1)(a) – expenses must be incurred to earn income to be deductible.

• Section 67 – expenses must be reasonable in amount.

• Section 18(1)(h) – personal or living expenses are NOT deductible.

• Section 15(1) – personal expenses paid by a corporation for a shareholder are treated

as a taxable shareholder benefit.

• Section 6(1)(b) – personal benefits provided to employees may be treated as taxable

employment income.

• GST/HST Rules – ITCs are allowed only on business expenses with supporting

invoices.

CRA expects corporations and sole proprietors to maintain accurate, documented, and

clearly separated records. Mixed-use expenses—such as vehicles, cell phones, home

offices, meals, and travel—require careful allocation. These rules form the foundation

for separating business and personal expenses in Canada.

Key Court Decisions

Canadian courts have repeatedly upheld CRA’s strict enforcement of expense rules:

In Black v. Canada, the court ruled that personal expenses incorrectly categorized as

business expenses were nondeductible and resulted in significant penalties.

In Symes v. Canada, the Supreme Court ruled that personal living expenses—such as

childcare—cannot be claimed as business deductions even if they indirectly support

business operations.

In Youngman v. Canada, the court upheld shareholder benefit assessments for personal

use of corporate assets, reinforcing that corporations cannot pay personal expenses

without tax consequences.

In Sowrey v. Canada, CRA denied undocumented expenses; the court confirmed that

taxpayers must produce proper receipts and explanations.

These cases show the importance of maintaining clear and defensible separation of

business and personal expenditures.

Why CRA Targets This Issue

CRA audits business and personal expense mixing more aggressively than almost any

other area because it frequently leads to:

• overstated deductions

• unreported taxable benefits

• personal lifestyle expenses hidden inside corporations

• undocumented cash withdrawals

• misuse of shareholder loan accounts

• GST/HST input tax credit abuse

• improper write-offs of vehicles, meals, and travel

CRA compares bank statements, credit card statements, payroll, GST filings, and T2/T1

filings to detect inconsistencies. Corporations with frequent personal transactions,

negative shareholder loan balances, or excessive “miscellaneous expenses” are high-

risk audit targets. Understanding CRA’s scrutiny is essential to avoid penalties.

Mackisen Strategy

At Mackisen CPA Montreal, we implement a disciplined and audit-proof system to

separate business and personal expenses clearly and correctly. Our strategy includes:

• creating separate business bank accounts and credit cards for all business

transactions

• setting up proper reimbursement procedures for legitimate business expenses paid

personally

• reviewing shareholder loan accounts to ensure no negative balances

• implementing corporate policies for vehicles, travel, meals, and mixed-use assets

• categorizing allowable vs non-allowable expenses with precision

• documenting all expenses with CRA-compliant invoices

• reconciling GST/HST ITCs with eligible business expenses

• conducting periodic internal reviews to detect and correct personal charges

• preparing audit-ready books and defending clients during CRA reviews

With this proactive approach, we eliminate CRA risk and ensure proper separation

between business and personal finances.

Real Client Experience

A corporation owner paid for family vacations through the corporate credit card and

attempted to categorize them as “business development.” CRA reassessed the

corporation, denied all expenses, and issued a shareholder benefit assessment. We

corrected the filings, negotiated reduced penalties, and implemented strict separation

policies going forward.

Another client operated a consulting business but used the corporation to pay personal

grocery, clothing, and entertainment expenses. CRA performed a review and requested

receipts. We reconstructed records, reclassified expenses properly, and prevented the

case from escalating into a full audit.

A third client incorrectly claimed 100% of vehicle and cellphone expenses. CRA denied

the majority due to lack of logs. We created proper allocation systems and saved

thousands in future deductions.

These examples show why proper separation of business and personal expenses is

essential in Canada.

Common Questions

Business owners often ask whether they can pay personal expenses through the

corporation and “fix it later.” No—this creates shareholder benefits unless reimbursed

immediately.

Others ask whether they can claim partial personal-use items. Yes, but only the

business-use portion and only with proper documentation.

Some ask whether using one credit card for both types of expenses is acceptable. It is

possible, but extremely risky—separate cards are strongly recommended.

Another common question: Can CRA deny expenses even with receipts? Yes—if the

expense is personal, unreasonable, or unrelated to business operations.

These questions highlight why separating business and personal expenses in Canada

is critical for compliance.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

entrepreneurs avoid costly CRA penalties by ensuring clear and defensible separation

of business and personal expenses. Whether you operate a corporation or a sole

proprietorship, our expert team ensures precision, transparency, and protection from

audit risk.