When an incorporated IT contractor pays a business expense out of pocket and the corporation pays it back, that is a reimbursement. The expense belongs to the corporation; the reimbursement is not income to the contractor. When the corporation pays a personal expense for the owner, that is a shareholder benefit. The benefit belongs to the owner as taxable income, and the corporation generally cannot deduct it. The direction of the payment, and what it was for, determines which treatment applies. Both situations are common in incorporated contractor files, and both create entries that need to be handled correctly.
Why Direction Matters
The corporation and its owner are separate legal entities. Business expenses paid by the corporation reduce corporate income. Business expenses paid personally by the contractor need to be recorded and reimbursed, or credited to the shareholder loan account, before they are treated as corporate expenses. Personal expenses paid by the corporation are not deductible and produce a taxable benefit or shareholder loan exposure for the owner.
Three scenarios cover most of what comes up in practice:
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Contractor pays a business expense personally, corporation reimburses. The reimbursement route. The expense ends up in the corporate books. The contractor is made whole. No income arises.
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Corporation pays a business expense directly. Straightforward. The expense flows through the corporate books. A corporate credit card or direct payment works here.
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Corporation pays a personal expense for the owner. Shareholder benefit territory. Section 15(1) of the Income Tax Act applies. The amount is personal income to the shareholder, and the corporation cannot deduct it.
Getting scenarios 1 and 2 right produces the correct deduction and the correct input tax credit. Getting scenario 3 wrong produces a shareholder benefit that surfaces at filing time, often after accumulating quietly through the year.
The Reimbursement Route
When a contractor pays a business expense using a personal card or cash and then seeks repayment from the corporation, the process is a reimbursement. The expense must genuinely be a business expense of the corporation, and it must be supported by documentation.
What qualifies for reimbursement
The expense must have been incurred for the purpose of earning the corporation’s business income, under section 18(1)(a) of the Income Tax Act. Eligible reimbursable expenses for IT contractors typically include:
- office supplies or equipment purchased for client work
- software licenses paid personally that the corporation uses
- internet or phone charges to the extent they are business-use
- travel expenses incurred for client meetings or project work
- professional association dues or certifications paid personally
Expenses that are partly personal and partly business require a documented split before the business portion is submitted for reimbursement. The contractor should determine the business-use percentage and submit only that portion. Reimbursing the full amount of a mixed-use expense without adjustment is not correct.
The documentation requirement
A reimbursement claim should be supported by:
- the original supplier receipt or invoice, not a card statement alone
- the date of the purchase and the vendor name
- a brief description of the business purpose
- for GST/HST ITCs, the information required by CRA’s current total-sale bands: basic supplier/date/amount details for all purchases, supplier GST/HST registration number and tax indication at $100 or more, and buyer name, payment terms, and brief description at $500 or more
A card statement shows a payment occurred and confirms the amount, date, and merchant, but it does not show what was purchased, whether it was a business purchase, or the information CRA requires for larger ITC claims. CRA’s current ITC information table requires the underlying invoice, receipt, contract, or other supporting business paper, not the monthly bank or card statement alone.
An informal expense summary noting what was purchased, when, for what business purpose, and how much is useful in addition to receipts, particularly for smaller amounts or when receipts lack description. For an incorporated contractor submitting monthly or quarterly reimbursements, a simple spreadsheet with one row per expense and attached receipts provides a clean record and makes bookkeeping straightforward.
Processing the reimbursement
The reimbursement flows through the shareholder loan account. When the corporation owes the contractor money for expenses paid personally, that amount is a liability of the corporation, recorded as a shareholder loan — money owed to the shareholder. When the corporation pays the reimbursement, the liability is cleared.
The timing of the reimbursement does not need to match the date of the expense exactly, but it should not be left unprocessed for extended periods. A growing balance on the shareholder loan account representing unpaid reimbursements is technically a corporate liability — the corporation owes the contractor — but it is cleaner to settle these amounts regularly rather than letting them accumulate through the year.
For expenses incurred in the corporate fiscal year, the reimbursement should generally be reflected in the corporate books for that year. A business expense paid in October but not submitted for reimbursement until the following March may require an adjustment to record the expense in the correct fiscal year.
GST/HST input tax credits on reimbursed expenses
When a contractor pays a GST/HST-taxable expense personally and is reimbursed by the corporation, the corporation may be entitled to claim the input tax credit. Section 175 of the Excise Tax Act applies to reimbursements paid to employees or officers, partners, and certain volunteers. In an incorporated contractor file, the shareholder should fit the employee or officer role, or the corporation should be able to support that the contractor acted as the corporation’s agent when making the purchase.
Under CRA’s GST/HST Memorandum 9-4, Reimbursements, the reimbursement route generally requires that:
- the person paid the GST/HST on the original acquisition
- the acquisition was for use in the commercial activity of the registrant
- the registrant pays an amount to the person as reimbursement for all or part of the expense
- the registrant holds supporting documentation
The ITC calculation depends on the method used. Under the exact method, the corporation uses the actual GST/HST paid by the employee or officer, multiplied by the lesser of the reimbursed percentage of the cost and the percentage used in the corporation’s commercial activity. If the full cost of a fully business expense is reimbursed, the ITC is generally the actual GST/HST paid. CRA also permits a factor method in qualifying cases where 90% or more of the reimbursed expenses were taxable: for example, 4/104 for GST-only reimbursements and 12/112 for Ontario HST reimbursements.
The corporation’s bookkeeper or accountant needs enough support to satisfy the ITC documentation rules for the method used. Under the exact method, that usually means the original supplier receipt or invoice with the required CRA fields. An expense report submitted without the underlying supplier receipts is not sufficient support for most ITC claims. Where receipts are lost or unavailable, the ITC for those amounts generally should not be claimed unless other acceptable supporting documents are available.
Corporate Credit Cards
A corporate credit card is usually a card issued on an account for which the corporation is liable, with the contractor as an authorized cardholder. Some cards used in a small corporation are legally payable by the cardholder alone, or jointly by the cardholder and the corporation. That liability detail matters for GST/HST: if only the corporation is liable, the corporation is generally the person paying the expense directly; if the cardholder is solely or jointly liable and the corporation pays the issuer, CRA may treat the payment as a reimbursement to the cardholder.
How a corporate card works
When a business expense is charged to a corporate card, the expense is recorded as a corporate expense when the charge appears on the statement, or on the date of the transaction. The corporation pays the card balance, and the bookkeeper records the underlying expenses by category from the individual receipts, not from the statement alone.
Where the corporation is solely liable on the card account, the corporate card simplifies the process: there is no reimbursement step, no need to track what the contractor paid personally, and the cash flow stays inside the corporate account. Where the owner-cardholder is also liable on the card account, the same business expense may still be deductible, but the section 175 reimbursement rules can matter for the GST/HST ITC.
Personal charges on a corporate card
A personal expense charged to a corporate card is not a corporate expense. The corporate card has been used to pay a personal cost, which means the corporation has made a payment on behalf of the shareholder. That payment creates a shareholder advance: the shareholder owes the corporation for the amount.
The accounting entry removes the personal charge from business expenses and places it in the shareholder loan account as a balance owed by the shareholder to the corporation. If the shareholder loan account is not monitored, personal charges on the corporate card accumulate as advances against which the corporation has no deduction.
This is the same accounting position as the corporation paying a personal expense from its bank account directly. The mechanism differs — card versus bank transfer — but the tax result is the same. A shareholder loan balance owed by the shareholder to the corporation must be cleared within the applicable window under section 15(2) of the Income Tax Act, or the balance is included in the shareholder’s personal income. The shareholder loan article covers those timing rules in detail.
Card statements and receipts
A card statement shows the amount, date, and merchant for each charge, but it does not meet CRA’s documentation requirements for business expenses or GST/HST input tax credits on its own. For ITCs, the supplier’s invoice, receipt, contract, or other supporting business paper must show the required fields for the size of the purchase. For total sales of $100 or more, that includes the supplier’s GST/HST registration number; for total sales of $500 or more, it also includes the buyer’s name or trading name, payment terms, and a brief description of the property or services.
In practice, the workflow is: keep the original receipt for every corporate card charge, reconcile receipts to the monthly card statement, and code each charge by expense category. Receipts stored digitally and organized by month are sufficient; paper originals are not required as long as the digital image is legible and complete.
Shareholder Benefit Risk: Personal Expenses Through the Corporation
The shareholder benefit question arises when the corporation pays an expense that benefits the shareholder personally rather than the corporation’s business. Section 15(1) of the Income Tax Act requires that any benefit conferred on a shareholder of a corporation — in their capacity as a shareholder — be included in that shareholder’s income for the year.
The benefit does not need to be hidden or intentional. An incorporated contractor who bills a personal expense to the corporate account because they paid from the wrong card, or who has the corporation cover costs that are personal in nature, has conferred a benefit under section 15(1) regardless of intent.
Common examples
Expenses that CRA typically treats as shareholder benefits include:
- personal vehicle insurance paid from the corporate account, beyond the business-use portion
- personal phone plans not related to business use
- home renovation work, furniture, or household items paid by the corporation
- family meals or entertainment that do not meet the business entertainment threshold
- personal travel or vacation costs charged to the corporation
- personal subscriptions or memberships with no business connection
The test is whether the payment serves the corporation’s business or the owner’s personal benefit. Expenses that are partly business and partly personal should have only the business portion charged to the corporation, with the personal portion either excluded or repaid by the shareholder.
The shareholder-corporate leakage article covers this in more detail, including the distinction between planned compensation and inadvertent leakage, and what CRA looks for during reviews of incorporated contractor files.
How exposure accumulates in the shareholder loan account
Personal expenses paid by the corporation flow into the shareholder loan account as amounts owed by the shareholder to the corporation. If the account is not reviewed regularly, these amounts build up across the fiscal year. By year-end, the shareholder loan balance owed to the corporation may reflect a combination of intended advances, unintended personal charges, and mixed-use expenses that were not split.
At the time of the T2 filing, the balance must be addressed. If it represents personal expenses that should have been shareholder benefits, they need to be reclassified. If it represents advances that the shareholder intends to repay, the repayment window under section 15(2) applies. If it represents legitimate reimbursable expenses that have not yet been processed through a formal reimbursement, the documentation should be in place to reclassify them before the return is filed.
Leaving the shareholder loan account unmonitored until filing creates a cleanup problem. Regular review — monthly or at minimum quarterly — is more manageable than a year-end reconstruction.
Mixed-Use Expenses and the Business-Use Percentage
Some expenses are used for both business and personal purposes. The most common examples for IT contractors are a phone, a home office, and a vehicle. Only the business-use portion of a mixed-use expense is deductible as a business expense or eligible for a GST/HST input tax credit.
For a contractor using a personal phone for business, the corporation should reimburse only the business-use percentage of the monthly cost. If the phone is 60% used for business, the reimbursement covers 60% of the bill, and the ITC applies to 60% of the GST/HST paid. The personal portion stays personal.
The business-use percentage must be defensible if CRA asks. A reasonable, documented estimate based on the nature of the use is acceptable. An undocumented claim that 100% of a phone is for business when personal use is obvious is not. The documentation does not need to be elaborate: a brief description of how the percentage was determined, kept with the expense records, supports the position.
Reimbursing a shareholder for 100% of a mixed-use expense when part of it is personal does not make the personal portion a business expense. It makes the personal portion a shareholder benefit.
Sole Proprietors: A Simpler Picture
For contractors operating as sole proprietors rather than through a corporation, the reimbursement concept does not apply. The business and the person are the same taxpayer. Business expenses are reported on Form T2125 and reduce net business income on the T1 directly.
A sole proprietor who pays a business expense on a personal card has paid a business expense. There is no separate legal entity to reimburse, no shareholder loan account to track, and no shareholder benefit risk. The expense goes on T2125 in the appropriate category with its supporting receipt.
The documentation requirements are otherwise the same: original receipts, business purpose, business-use percentage for mixed-use items, and the required supplier tax registration information for GST/HST ITC claims. A sole proprietor who is registered for GST/HST claims ITCs directly on their GST/HST return for eligible business expenses paid, regardless of whether they were charged to a personal or dedicated business account.
Quebec Note
For an incorporated contractor with a Quebec establishment, the QST input tax refund on reimbursed expenses broadly parallels the federal GST/HST ITC. Revenu Québec’s current IN-203-V guide describes reimbursements to employees, partners, and volunteers, not shareholders merely because they are shareholders. For an owner-managed corporation, the same practical caution applies: the owner should fit the employee or officer role, or the corporation should be able to support an agency/direct-purchase analysis.
The documentation requirements for QST ITRs are closely aligned with GST/HST ITCs, including the current $100 and $500 total-sale bands, but QST has its own required-information table. Original receipts should show the supplier’s QST registration number where required, the date, the amount, and the property or service supplied. A supplier registered for both GST/HST and QST will show both registration numbers on their invoices. A supplier registered only for one may not carry both.
For the corporate books and CO-17 filing, the same general structure applies: business expenses reduce corporate income, personal expenses paid by the corporation create shareholder benefits, and reimbursements need documentation. Revenu Québec administers QST and conducts its own reviews independently from CRA. A file in good standing for GST/HST purposes may still have QST issues if ITR claims have not been supported at the same level of documentation.
Records to Keep
For each reimbursed expense:
- original supplier receipt or invoice, not a card statement alone
- date of purchase, vendor name, description of the supply
- amount, including the GST/HST or QST paid
- supplier’s GST/HST or QST registration number where required, generally starting at total sales of $100 or more under the current CRA and Revenu Québec tables
- buyer name or trading name, payment terms, and other higher-threshold fields where the total sale is $500 or more
- brief note on the business purpose, particularly for travel, meals, and entertainment
For corporate credit card charges:
- same original receipt requirement as above
- monthly card statement for reconciliation purposes
- separation of any personal charges identified on the statement, reclassified to the shareholder loan account
For the shareholder loan account generally:
- a running record of amounts owed to the corporation by the shareholder (advances, personal expenses) and amounts owed by the corporation to the shareholder (reimbursements outstanding)
- year-end balance reviewed before the T2 is filed
- any amounts cleared by salary, dividend, or direct repayment should be documented with the mechanism used
Expense records should be retained for six years from the end of the taxation year to which they relate. CCA records should be kept for as long as the class has a balance, plus six years after the year the class is closed.
Related Articles
- Shareholder Loan Account for Incorporated IT Contractors covers how amounts owed by the shareholder to the corporation and by the corporation to the shareholder are tracked, and the section 15(2) timing rules for clearing balances.
- Shareholder Benefits and Corporate Leakage covers section 15(1) in more detail, including common examples, what CRA looks for in incorporated contractor files, and how to distinguish planned compensation from inadvertent leakage.
- Technology Equipment and CCA for IT Contractors covers capital expenditures on equipment, which follow different rules from current expenses and are not reimbursed in the same way as ordinary business costs.
- Professional Development Expenses for IT Contractors covers certifications, subscriptions, and courses, which are often paid personally and submitted for reimbursement.
Get in touch if you are reviewing how business expenses are being processed through your corporation and want to confirm the reimbursement structure and documentation are correct.