How Important Is Getting and Keeping That Receipt?

Mr. Ling and Mr. Gibson are neighbours living in BC.  Since their personal taxable incomes are about $80,000, their marginal income tax rate is 30%.  They own and operate their own businesses and their corporate income tax rate is 11.0%.  (rates effective 2019)

Mr. Ling reimburses himself $1,000 for supplies which he purchased on behalf of his company.  He keeps the receipt.  The receipt indicates the $1,000 includes PST @ 7% and GST @ 5%.  How much cash, on an after-tax basis, did these supplies cost Mr. Ling?

Paid to supplier and reimbursed	$1,000
less: GST recovered @ 5%	(45)	5/112 x $1,000
	$955
less: corp income tax savings @ 11.0%	(105)	11.0% x $955
Ling’s net after-tax cost of supplies	$850

Mr. Gibson reimburses himself $1,000 for supplies which he purchased on behalf of his company.  He either does not request the receipt or he loses it.  Upon an audit and with no receipt, CRA will deny the deduction for purposes of GST and  corporate income taxes.  Furthermore, the $1,000 payment to Mr. Gibson will be deemed as salary on which he must pay personal income taxes.  Granted, the $1,000 salary will reduce corporate income taxes otherwise payable.  What is Mr. Gibson’s net after-tax cost for these supplies?

Paid to supplier and reimbursed	$1,000
add:  personal income taxes @ 30%	300	30% x $1,000 salary
less: corp income tax savings @ 11.0%	(110)	11.0% x $1,000 salary
Gibson’s net after-tax cost of supplies	$1,190

Conclusion #1:  After all taxes are taken into account, Mr. Gibson, without a receipt, paid $340 more cash ($1,190 – $850) than Mr. Ling.

Suppose Mr. Gibson negotiates a “cash only – no receipt” with the supplier.  How much should he offer to his supplier to be in the same net after-tax cash financial position as his neighbour, Mr. Ling?

Paid to supplier and reimbursed	$715
add: personal income taxes @ 30%	214	30% x $715 salary
less: corp income tax savings @ 11.0%	79	13.5% x $710 salary
Gibson’s net after-tax cost of supplies	$850

Conclusion #2:  Mr. Gibson should offer no more than $715 “cash only – no receipt” to be in the same net after-tax cash financial position as his neighbour, Mr. Ling.