Personal expenses paid from your business account: how to record them.

Every business owner does it eventually. The business debit card is the one on top in your wallet, and suddenly your groceries are in the books. Personal expenses paid from the business account aren't a crisis, and CRA doesn't expect perfection. What matters is that you record them correctly, so they don't end up as deductions you weren't entitled to.

This guide shows the right entry for sole proprietors and corporations, works through a mixed-use example with GST, and covers how to handle it in QuickBooks Online. It applies whether you run a studio in Mill Woods or a contracting company in Leduc.

1Why it matters

A business can only deduct expenses incurred to earn business income. Personal spending doesn't qualify. If it's left in an expense account:

• Your profit is understated, so you under-report income on your T2125 or T2.
• Input tax credits get over-claimed if GST was coded on the purchase.
• For a corporation, personal costs deducted as business expenses can be treated by CRA as a taxable benefit to the shareholder, with the expense denied at the corporate level too.
• In an audit, a few personal items in expenses make the auditor look harder at everything else.

None of this means you're in trouble for tapping the wrong card. The money left the business, and the books just need to say so honestly. Recorded as a draw or a shareholder loan item, a personal purchase is a non-event. Hidden in "supplies", it's a small problem that grows every month it's left there.

2Where personal expenses paid from the business account go

For a corporation, those shareholder loan entries add up. If you end the year owing the company money, the one-year repayment rule applies. Our guide to the shareholder loan account explains it. For sole proprietors, see owner draws for a sole proprietor.

3A worked example with a mixed-use cost

Say you run an incorporated mobile esthetics business, GST-registered. One month, two charges hit the business account. The numbers are hypothetical.

• A $380 grocery run. Entirely personal.
• Your cell phone bill, $120 including GST. You use the phone about 60% for the business, based on a review of a typical month of calls and data.

Work out the phone split first:

• Business share: 60% of $120 = $72.00, which includes GST of $72 × 5/105 = $3.43. The expense is $68.57.
• Personal share: 40% of $120 = $48.00. No GST is claimed on it.

The entry for the month:

Only $68.57 reaches the P&L, only $3.43 goes on the GST return, and $428 is added to what you owe the company. If you were a sole proprietor, the two shareholder loan lines would go to owner's draws instead, and the rest would be identical.

4Home office, vehicle and other mixed costs

The phone is the easy one. The bigger mixed-use costs follow the same idea but need more support.

• Vehicle. The business share is generally based on business kilometres over total kilometres for the year, from a logbook. Fuel, insurance, repairs and lease or interest costs are all split by that percentage. A corporate-owned vehicle used personally raises separate taxable benefit questions for your accountant.
• Home office. For a sole proprietor, the business share of home costs is usually worked out by area and claimed at year-end, provided the space qualifies. Our guide to the home office deduction in Canada covers the tests. Home utilities paid from a personal account don't need to touch the business books until year-end.
• Internet. Split like the phone, based on a reasonable estimate of business use.
• Meals. A business meal with a client is an expense (50% deductible for tax, recorded in full in your books). A family dinner on the business card is a draw or shareholder loan item, not a meal expense.

The common thread: decide the business share using something you can show, apply it consistently, and only claim GST on that share.

5The reverse: business costs on your personal card

This one costs owners money in the other direction. You buy a $210 printer on your personal Visa and forget about it. The business loses a deduction and an input tax credit.

Record it in the business books with the receipt: debit office equipment or supplies and GST input tax credits, then credit owner's contributions (sole proprietor) or the shareholder loan (corporation). The business gets the expense, and for a corporation the balance it owes you can be repaid tax-free later.

6Common mistakes

• Coding personal items to vague expense accounts. "Supplies", "meals" and "miscellaneous" are where personal spending hides. Review them monthly.
• Claiming GST on the full amount of a mixed cost. Input tax credits follow the business share.
• Deleting the transaction because it's personal. The money left the business account, so the books must show where it went, or the bank won't reconcile.
• Treating personal income tax as an expense. Personal tax and CPP paid from the business account are draws or shareholder loan items, not expenses.
• Family costs as wages. Paying family members is fine when they genuinely work in the business at a reasonable rate, through payroll. Paying their personal bills isn't wages.
• Forgetting the business-on-personal-card side and leaving deductions on the table.

What it looks like in an audit

When CRA reviews a small business, auditors often scan the expense accounts for items that look personal: grocery stores, clothing retailers, streaming services, family travel. Each one they find is disallowed, and any input tax credit claimed on it is reversed. A few honest mistakes recorded correctly as draws or shareholder loan items won't raise eyebrows. A pattern of personal spending sitting in expenses will. Cleaning it up monthly costs you minutes; cleaning it up during an audit costs far more.

7Recording it in QuickBooks Online

• In the banking feed, categorize the personal purchase to Owner's draws or Shareholder loan. Leave the sales tax field blank or use the out-of-scope option, so no input tax credit is created.
• For mixed costs, use Split on the transaction. One line goes to the expense with GST, the other to draws or the shareholder loan with no GST.
• Use a bank rule for regular mixed costs like a phone bill, so the split happens automatically each month. Check it every so often in case the amount changes.
• For personal-card business costs, a monthly journal entry or expense entry crediting the shareholder loan or owner's contributions works well. Attach the receipts.

8How to stop it happening

A clean separation also makes your profit and loss statement trustworthy, which is the whole point of doing the books.

If your business accounts have a year of personal spending mixed in, Plum can sort it out as part of a catch-up, then keep it clean every month. We work with owners in Edmonton, Leduc, Beaumont and St. Albert. Book a call and we'll take a look.

9Questions people ask

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.