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GST and Shareholder Benefits:
Case Comment on Touchette v HMK,
2025 CCI 1951
Many income tax disputes concern whether a corporate expense is incurred for the personal benefit of a shareholder rather than bona fide business purposes. In such cases, the Canada Revenue Agency ("CRA") generally disallows the deduction of an expense by the corporation under paragraph 18(1)(a) and/or (h) of the Income Tax Act ("ITA"))2 and includes the amount of the expense in the shareholder's income under subsection 15(1). However, if a corporation paid sales taxes (i.e., GST/HST and provincial sales taxes) in respect of the disallowed expenses, and recovered those sales taxes as "input tax credits" (or "input tax refunds" in the case of Quebec's sales tax) (collectively "ITCs"), the question arises as to whether those ITC amounts entail any further adjustments to either the corporation or the shareholder.
In Touchette, the CRA elaborated a theory according to which ITCs in respect of disallowed expenses had to be included in the corporation's income pursuant to subsection 248(16) and paragraph 12(1)(x).3 Subsection 248(16) (with its parallel subsection 248(16.1) applicable to Quebec's QST) deems ITCs to be assistance from a government which, pursuant to paragraph 12(1)(x), must be included in income if certain conditions are met. The CRA also took the position that the amounts of those ITCs need to be added to the shareholder's income pursuant to subsection 15(1.3), which provides that when the cost of purchasing a property or service is taken into account when calculating a shareholder benefit under subsection 15(1), that cost shall include sales taxes payable in respect of that property or service.
In a very welcome decision for taxpayers—and potentially an important precedent—the Court rejected the CRA's theories and vacated all adjustments made under subsections 15(1.3) and 248(16)/12(1)(x), holding that any adjustment that the CRA might seek to make with respect to the ITCs received in respect of disallowed expenses needed to be pursued under the applicable sales tax legislation—in particular the federal Excise Tax Act (the "ETA").4
The Court reached these conclusions for the taxpayers in Touchette on the basis that the corporate taxpayer did not deduct any of the sales taxes as expenses, but instead recorded the sales taxes it paid and ITCs it received as off-income-statement disbursements and receipts. Taxpayers have some degree of flexibility in deciding whether to include or exclude sales taxes paid and ITCs received in the calculation of their income (provided, of course, that the same approach is applied to both). While the choice should not, in principle, affect the bottom line, Touchette suggests that the decision can have material implications with respect to the valuation of any shareholder benefits that the CRA may one day ascertain.
The Facts
Daniel Touchette was a surveyor by training and the sole shareholder of the corporation 9134-3822 Québec inc. ("9134").5 With a partner (Michel Leclerc, who also operated through a corporation), Mr. Touchette became involved in a major land development project in Granby, Québec.6 Two of the lots presented challenges that required them to be severed from the project and developed separately.7 In 2009 or 2010 (the precise date being a point in dispute), the corporations sold these two lots to Mr. Touchette and Mr. Leclerc, who thereafter attended to their development personally.8
Following an audit, the CRA concluded that Mr. Touchette had not paid fair market value ("FMV") for his interest in the lots.9 Accordingly, the CRA imputed the difference between that FMV and the amount Mr. Touchette paid—which the CRA calculated at around $108,000—both to Mr. Touchette as a shareholder benefit under subsection 15(1), and to 9134 as deemed income under subparagraph 69(1)(b)(i).10
The CRA likewise concluded that some $125,000 of expenses incurred by 9134 pertaining to infrastructure and mechanical equipment served to improve the lots being developed personally by Mr. Touchette and Mr. Leblanc.11 Accordingly, the CRA disallowed the deduction of those expenses to 9134, apparently under paragraph 18(1)(a), and included them in Mr. Touchette's income as a shareholder benefit.
9134 had paid $16,590 of sales taxes (GST and QST) on the disallowed expenses and reclaimed those amounts as ITCs.12 Because 9134 had never deducted these sales taxes as an expense when calculating its own income,13 the CRA could not disallow them. Not satisfied, however, that it had received adequate redress, the CRA included a further $16,590 in both Mr. Touchette's and 9134's income, supposedly in reliance on subsection 15(1.3) for Mr. Touchette and subsection 248(16) together with 12(1)(x) for 9134.
The CRA also assessed gross negligence penalties under subsection 163(2) of both Mr. Touchette and 9134 in respect of all the aforementioned adjustments.14
Prior to the trial, the CRA made a number of concessions,15 including with respect to the FMV of the lots and some of the expenses. The CRA also agreed to cancel the gross negligence penalties with respect to the FMV-related adjustments, although not with respect to the expense-related adjustments.16
The Judgment
On essentially evidentiary grounds, the Court upheld the Crown's position in its entirely with respect to the FMV of the lots17 and as well with respect to most of the disputed expenses.18
With respect to the sales tax adjustments, however, the Court agreed with the taxpayers and reversed the adjustments. With respect to the corporate adjustments, the Court agreed that the ITCs claimed by 9134 fell in the scope of subsection 248(16) and were thus deemed "assistance from a government".19 However, the Court noted that subsection 248(16) was not a charging provision and thus did not, in and of itself, mandate any adjustments to a taxpayer's income.20 Rather, any adjustment to income took place via paragraph 12(1)(x), the relevant portions of which read as follows:
12 (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable
[...]
(x) any particular amount [...] received by the taxpayer in the year, in the course of earning income from a business or property, from
[...]
(ii) a government, municipality or other public authority,
where the particular amount can reasonably be considered to have been received
[...]
(iv) as a refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of
(A) [...]
(B) an outlay or expense,
to the extent that the particular amount
[...]
(vi) [...] does not reduce, for the purpose of an assessment made or that may be made under this Act, the cost or capital cost of the property or the amount of the outlay or expense, as the case may be [...]
[Emphasis added]
The Court accepted that the ITCs received by 9134 were described by subparagraphs (ii) and (iv). However, because the ITCs served, in their entirety, to reduce 9134's GST/QST expense, there was no amount to include in income under subparagraph 12(1)(x)(vi).21 In other words, because 9134 never claimed a deduction for its GST/QST expense, the application of 12(1)(x)(vi) was precluded;22 conversely, had 9134 deducted the GST/QST it paid as an expense, the ITCs would not have reduced its GST/QST expense thus would have been includable in income in their entirety.23
The Court noted that there did not seem to be any basis in the ITA to apply subparagraph 248(16) and 12(1)(x) only to the ITCs in respect of the disallowed expenses,24 and that the CRA's position seemed to rely on a conclusion that 9134 could not claim ITCs in respect of underlying expenses that were of a personal nature.25 However, the Court noted that the validity of 9134's ITC claims fell outside of the scope of the CRA's income tax audit, 26 and the ETA sets out its own procedures—with its own safeguards and protections for taxpayers—for the CRA to recover ITCs that it considers to have been improperly issued.27
Accordingly, the Court reversed all of the CRA's adjustments with respect to the ITCs—both for 9134 (under subsection 248(16) and paragraph 12(1)(x)) as well as for Mr. Touchette personally (under subsection 15(1.3)).28 The Court's analysis did not include any particular discussion of subsection 15(1.3); the Court apparently relied on a submission from the Crown that the inclusions to Mr. Touchette under subsection 15(1.3) were consequential to the inclusions to 9134 under paragraph 12(1)(x)).29
The Court also vacated all of the gross negligence penalties in respect of the disallowed expenses, noting that the CRA failed to meet its onus to prove that the taxpayer had made misrepresentations either knowingly or under circumstances demonstrating gross negligence.30 The Court noted that penalties do not result automatically simply because expenses are disallowed—however large the quantum may be,31 and penalties do not result automatically simply because a taxpayer demonstrates "laxity" or even simple negligence in attending to their own filings.32 The Court noted that the CRA's penalty reports, in their sections about whether a taxpayer demonstrated gross negligence, "are addressed in a perfunctory manner and offer little insight into the taxpayer's behaviour".33
Observations
Subsection 248(16) and Paragraph 12(1)(x)
The Court's analysis with respect to subsection 248(16) and paragraph 12(1)(x) is consistent with previous Informal Procedure case law applying the provisions, which has held that taxpayers, when calculating their income, can choose to exclude GST they pay and ITCs they receive, or else they can deduct GST paid and include any ITCs received as income.34 Subsection 248(16) and subparagraph 12(1)(x)(vi) ensure that if a taxpayer deducts GST as an expense, any offsetting ITCs received will be included in income. Conversely, if a taxpayer does not claim any deduction in respect of GST paid, the offsetting ITCs are not includable. Subsection 248(16) also specifies the timing of the offsetting ITC's inclusion to limit the possibility of deferring or avoiding tax by claiming GST expenses in the year the GST is paid and delaying the claiming of the ITCs until a subsequent period.35
The CRA's theory that the disallowance of a corporate expense as a shareholder benefit necessarily results in the "inclusion" of any ITC received in respect of that expense under subsection 248(16) and paragraph 12(1)(x) was not articulated fully. Indeed, the Court itself lamented that the Crown's submissions were "succinct" and consisted of little more than asserting that under "the law" (without specifying which one), a corporation cannot claim ITCs in respect of amounts spent as shareholder benefits, such that 9134 had to repay the ITCs, at which point it could claim a deduction under paragraph 20(1)(hh).36 Apparently, neither the CRA nor the Crown felt it necessary to square this reasoning with the wording of subsection 246(16) or paragraph 12(1)(x), which—as the Court noted in a footnote—applies to all ITCs, including those received in respect of properly-deductible business expenses.37
Reading between the lines, the CRA's position seems to have been predicated on the theory that the deduction of sales taxes paid on expenses incurred to earn income is not optional, but rather an essential aspect of the calculation of "profit" under subsection 9(1). Consequently, even if the sales taxes are not reported as an "expense" on the corporation's financial statements and tax returns, they still constitute an implicit expense for tax purposes, such that any offsetting ITCs implicitly constitutes a form of income under subsection 248(16) and paragraph 12(1)(x). Consequently, if the CRA disallows an expense on the grounds that it was not incurred for the purpose of earning income, the amount disallowed includes any sales tax paid in respect of that expense whether or not that amount is recorded as an "expense" on the corporation's financial statements. The offsetting ITC inclusion in respect of that sales tax—however—remains included income until and unless it is repaid, at which point a deduction might be claimed under paragraph 20(1)(hh).
Such an understanding, however—in addition to essentially reading subparagraph 12(1)(x)(vi) out of the ITA—runs counter to the principle set out by the Supreme Court of Canada in Canderel, which has held that in ascertaining "profit", the taxpayer is free to adopt any method that is not inconsistent with the provisions of the ITA, established case law principles and "well-accepted business principles".38 No provision of the ITA requires a taxpayer to deduct from its "profit" the sales taxes that it pays and recovers as ITCs, and it is a "well-established business principle" to exclude sales taxes from the calculation of "profit" to the extent that it is completely offset by ITCs. Essentially, the CRA's position was premised on reading a rule into the ITA that Parliament did not see fit to enact.
Moreover, the applicable tax treatment under the ETA is, in fact, considerably more nuanced than the CRA seemed to have assumed. Section 170 of the ETA—subject to certain exceptions— disallows ITCs in respect of supplies in respect of recreational club memberships, home office expenses, or expenses "exclusively for the personal consumption, use or enjoyment" of an officer and employee. Shareholder benefits outside the scope of section 170 of the ETA fall within subsection 173(1), which provides that—as a general rule—when a corporation confers benefits upon a shareholder, the corporation is deemed to make a supply of goods or services to its shareholder. Consequently, the corporation is obligated collect and remit GST in respect of those shareholder benefits, but can claim back those amounts as ITCs.
The various "shareholder benefits" at issue in Touchette were not for the personal use and benefit of Mr. Touchette—but rather represented costs attributable to his own commercial activity of developing a parallel plot of land. If Mr. Touchette was himself registered for GST (which he may well have been), 9134 would have had to collect GST from Mr. Touchette, who would have been able to claim that GST back as ITCs—thus resulting in a commonplace "wash transaction" in which the CRA typically provides various forms of interest and penalty relief.39
In any event, subsections 299(2) and (4) of the ETA provide that any assessment under the ETA is "deemed to be valid and binding" until and unless it is vacated on objection or appeal, or subsequently reassessed. Section 298 sets out the limitation periods during which the CRA can issue ETA reassessments (generally four years from the date of the filing of the relevant returns). There is no indication that the CRA conducted any kind of audit of 9134 under the ETA, much less issue any kind of assessment or reassessment under the ETA within the applicable time periods. Instead, the CRA attempted to make ETA-related adjustments through an ITA adjustment in a manner that was inconsistent with the letter and spirit of both statutes.
The CRA's apparent lack of understanding and regard for the two primary pieces of legislation that it is responsible for administrating is extremely troubling. One is also left to wonder why—over the course of the ITA audit—an ETA auditor was not brought in to allow the ITA and ETA issues to be addressed together.40
Subsection 15(1.3)
Subsection 15(1.3) provides that "[t]o the extent that the cost to a person of purchasing a property or service ... is taken into account in determining an amount [under section 15] ... that cost [...] shall include any tax that was payable by the person in respect of the property or service or that would have been so payable if the person were not exempt from the payment of that tax because of the nature of the person or the use to which the property or service is to be put".41
At first impression, subsection 15(1.3) could be read so as to support the CRA's position that when a corporate expense is disallowed as shareholder benefit, any sales tax that was payable in respect of that expense must be added to the calculation of the benefit to the shareholder, even if the corporation did not deduct that sales tax as an expense and/or even if that sales tax is completely offset by ITCs. However, the Court followed the CRA's view that subsection 15(1.3) operates in conjunction with subsection 248(16) and paragraph 12(1)(x), so as to produce symmetrical adjustments between a corporation and a shareholder.
While not stated expressly in the decision, in reaching this conclusion, the Court apparently understood the words "cost" in subsection 15(1.3) to refer specifically to the amounts deducted by a corporate taxpayer in the calculation of its income—as opposed what the corporation may have actually paid. Similarly, the Court apparently understood the word "include" as simply confirming that any GST included in that "cost" was not to be excluded. Such an interpretation is consistent with the legislative history of subsection 15(1.3), which was enacted in 1997 to reverse a prior rule that categorically excluded any GST paid by a corporation from the determination of shareholder benefits, and instead mandated a top-up of any shareholder benefit under subsection 15(1) that "essentially represents the amount (if any) of GST that the shareholder would have paid had the shareholder purchased in the marketplace a property or service which results in a subsection 15(1) benefit".42 The amendment seemed to evidence Parliament's intent that, when valuing a shareholder benefit that is conferred by a taxable corporation through a taxable transaction, it the actual tax cost to the corporation that is to be used to value the benefit, rather than the tax that the individual would have paid had it concluded the transaction itself.
Footnotes
1.Touchette v HMK, 2025 CCI 195 ("Touchette").
2.RSC 1985, c 1 (5th Supp). Unless otherwise stated, all statutory references in this Bulletin are to the ITA.
3.Touchette, ¶20-28.
4.RSC 1985, c E-15.
5.Touchette, ¶3.
6.Touchette, ¶3-4.
7.Touchette, ¶38.
8.Touchette, ¶7, 35-36.
9.Touchette, ¶9-11, 16-18.
10. Touchette, ¶10, 16-18. Subparagraph 69(1)(b)(i) is not expressly referred to in the judgement, however, it is cited in the Crown's Réponse à l'avis d'appel dated April 29, 2019 in Mr. Touchette's personal appeal (TCC Docket #2019-108(IT)G) (obtained from the Court), ¶32, 35.
11.Touchette, ¶11.
12.The quantum of the adjustments as originally made by the CRA in respect of GST and QST are not all set out expressly in the judgement or the pleadings. However, they can be calculated using the data found at paragraphs 10-26. Essentially, the adjustments seem to equal 12.88% of disallowed expenses incurred in calendar 2010 (fiscal 2011 for 9134) and 13.93% of expenses incurred in 2011 (fiscal 2012 for 9134)—these amounts corresponding to the combined GST and QST rates in effect during those years. See also ¶159 and p 2 of decision signed December 22, 2025 in respect of 9134.
13.Touchette ¶180.
14.Touchette ¶10-11.
15.Touchette ¶20-28.
16.Touchette ¶19, 27-28.
17.Touchette ¶87. The issue of the FMV of the lots turned primarily on the date of the acquisition, with Mr. Touchette arguing that the corporations had transferred ownership of the lots over a year prior to the sale being documented before a notary. The Court's analysis included, among other things, a discussion of whether, because the taxpayers were challenging facts recorded in a notarised deed, the appellants needed to proceed through the "improbation" procedure pursuant to Art. 2821 of the Civil Code of Quebec (Touchette ¶43-47).
18.Touchette ¶90-153; 229-237. Mr. Touchette relied primarily on the fact that, prior to the transfer of the lots, 9134 signed an agreement with the City of Granby to construct various infrastructure on all of its lands under development—including the two plots subsequently transferred to Mr. Touchette and Mr. Leclerc. The Court accepted the principle that expenses incurred by 9134 to fulfil these obligations were deductible, although with respect to most of the expenses, it found the evidence of their purpose insufficient. Eventually, the Court allowed approximately 20% of the disputed expenses.
19.Touchette ¶171.
20.Ibid.
21.Touchette ¶182.
22.Ibid.
23.Touchette ¶181.
24.Touchette ¶189.
25.Touchette ¶188-190.
26.Touchette ¶190.
27.Touchette ¶190-191.
28.Touchette ¶192, 229-239.
29.Anne Poirer, Représentations to the Tax Court of Canada (Docket #2019-115(IT)G and #2019-108(IT)G) (June 16, 2023), ¶16 (obtained from the Court).
30.Touchette ¶226-227, 234-237.
31.Touchette ¶224-225.
32.Touchette ¶219, 224.
33.Touchette ¶224 (translation by author).
34.Mann v HMQ, 2003 TCC 63, Gauthier v HMQ, 2004 TCC 57 and Blais c SMR, 2010 CCI 195—all of which are discussed in Touchette ¶184-187.
35.For a discussion of the planning opportunities that were largely eliminated by amendments to paragraph 248(16) in 2003, see Barry Hull, "Government Proposed Change to ITA to Thwart Tax Planning" (2003) XVII(1) GST & Commodity Tax (Carswell) 6-8.
36.Touchette ¶159, 163. See also Poirer, supra note 27 ¶15.
37.Touchette ¶189 footnote 120.
38.Canderel v Canada, [1998. 1 SCR 147, ¶35.
39.See Canada Revenue Agency, "Reduction of Penalty and Interest in Wash Transaction Situations" – GST/HST Memorandum 16.3.1" (April 2010).
40.Alas, Canadians can only dream of a tax system in which the ITA and ETA are both sufficiently comprehensible that a single CRA auditor might be able to responsibly conduct an audit under both statutes.
41.SC 1997, c 10, s 269(1).
42.See Canada Revenue Agency, "Benefits Conferred on Shareholders"– Interpretation Bulletin IT-432R2 (February 10, 1995).
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
