Discretionary expenses
Discretionary expenses are costs the owner chooses to run through the business, such as personal items or perks, that a new owner may not need. The CRA says that in most cases personal and living expenses cannot be deducted, and that a corporation paying its shareholder’s personal expenses is a shareholder benefit.
Measuring what a business earns can mean asking which costs were the current owner’s choice rather than a requirement of running it. The tax rules show why those costs deserve scrutiny: the CRA says that in most cases you cannot deduct personal and living expenses.
How the CRA treats them
The CRA says a corporation’s payment of its shareholder’s personal expenses is an example of a shareholder benefit, and that the corporation cannot claim a shareholder benefit as a business expense. For a sole proprietor, the CRA says to enter only the business part of expenses on Form T2125.
What to ask the seller
- List every cost that is personal or optional, with receipts
- Show how each was recorded in the books and on the tax filings
- Say which costs would stop after the sale and which a new owner would still need
See which add-backs are legitimate when adjusting EBITDA and owner’s compensation.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentTypes of operating expenses
- 02Canada Revenue AgencyGovernmentShareholder benefits
- 03Canada Revenue AgencyGovernmentExpenses section of form T2125
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