Rebuilding Two Companies' Books to Defend a Cost Split

The situation

The reassessment CRA sent Pratheep's two companies totalled a little over $90,000 once HST, interest and penalties were added together — a number that landed on a retirement he had spent thirty years as an HVAC technician building toward. Pratheep had incorporated his service business decades earlier, and along the way he had set up a second company to hold the trucks, diagnostic equipment and tools the service company used every day, mostly for liability reasons a lawyer had recommended at the time. The two companies shared a small office, one bookkeeper, and a rough understanding that the equipment company would cover a portion of the overhead — rent, insurance, the bookkeeper's wages — and the service company would reimburse it roughly in proportion to how much each business used. Nobody had ever written that understanding down.

By the time Pratheep retired and handed day-to-day running of the service company to his son Gordon, the informal split had been running for years, invoiced back and forth between the two companies with no HST charged on either side, on the assumption that moving money between two companies under common ownership was not the kind of transaction the HST system was built to catch. CRA's auditor disagreed. The audit treated each reimbursement as a supply — the equipment company was, in CRA's reading, effectively charging the service company for shared costs, and any charge for a service between two companies is taxable unless a specific relieving provision applies and the arrangement is structured to meet it.

Because nothing had been documented as that kind of arrangement, and because the amounts moving between the companies over several years were not small, the assessed HST plus interest and penalties came to roughly $90,000, sitting equally over both companies' books. Pratheep, technically still a director of both even after retiring, found himself facing a number that threatened to unwind savings he thought he had already put behind him, over an arrangement he had genuinely believed was just bookkeeping between two branches of the same family business. He had stepped back from daily involvement specifically so that this kind of problem would be someone else's to manage, and instead found his own name still attached to every liability the two companies had accumulated.

The legal question

The question at the centre of the file was narrower than it first looked: when two related companies split shared overhead, is one company supplying something to the other in a way the HST system taxes, or is it simply reimbursing a cost that was never really its own supply to begin with?

HST applies to supplies — goods or services provided for consideration. Ordinary cost-sharing between related entities can, in the right circumstances, avoid being treated as a supply at all, because the party fronting the cost is not providing a service to the other; it is simply collecting its share of an expense both parties genuinely incurred together, like two roommates splitting a hydro bill. But the exception is narrow and technical. Proportionality, clear documentation and consistent application year over year all help, but none of them settles the question on its own. What matters most is whether the party fronting the cost genuinely acquired the underlying expense as agent for the other, and simply passed it through untouched — no markup, no added staff time, no coordination fee folded in — with the arrangement structured as an agency relationship from the outset. Add anything of the fronting company's own to the charge, or set the arrangement up any other way, and it is treated as payment for a supply, taxable like any other. Closely related corporations may also have a separate election available that lets certain supplies between them be treated as made for no consideration, though that is a distinct route from genuine cost-sharing. An arrangement that looks, on paper, like one company invoicing another for admin support or equipment access will usually be treated as a taxable supply, however the parties privately understood it.

That was the difficulty here. The two companies had never documented what they were doing as a cost-sharing arrangement in the technical sense. The invoices that did exist, prepared informally by the bookkeeper over the years, described the equipment company as billing the service company for 'shared costs' in round numbers that did not obviously track any defined allocation method — not hours of equipment use, not square footage of office space, not a fixed percentage tied to anything verifiable. CRA's auditor treated that as decisive: without a documented method connecting the charge to an actual shared expense in defensible proportion, the arrangement read as one company supplying administrative and equipment access to the other for a fee, which is squarely taxable.

The legal question we had to answer, then, was not whether cost-sharing between related companies can ever sit outside the HST system — it can — but whether this particular arrangement, as actually run for the years under audit, could be shown to fit that narrow description after the fact, using records that had never been built with this question in mind. That meant the outcome depended less on legal argument in the abstract and more on whether the underlying numbers, once reconstructed properly, actually supported a genuine cost-sharing allocation rather than a disguised service fee.

What we did

1. Rebuilt the accounting from source records. We started where the file was weakest: the accounting itself. The bookkeeper's invoices described round-number 'shared cost' charges with no method behind them, so we went back to source documents — the lease, the insurance policy, payroll records and equipment logs — to work out what the two companies actually spent, and roughly how much of it belonged to each business based on real usage rather than habit. Until that existed, there was nothing solid enough to argue with CRA's auditor about.
2. Built a defensible allocation method. From those source records we built an allocation method that could actually be defended: overhead like rent and insurance split by square footage each company used in the shared office, and equipment costs split by the hours each truck and tool set was logged out to service calls. That gave us a formula tied to something measurable, rather than the vague round numbers the old invoices had used, and it is the kind of method CRA's cost-sharing exception actually expects to see.
3. Recast the historical charges. We then recast several years of historical cross-charges using the new method, to see how closely the informal split the bookkeeper had used actually tracked genuine shared costs. The answer was mixed: the overhead allocation was reasonably close to defensible, but the equipment charges had drifted well past what actual usage supported, closer to what a market equipment rental would cost. That gap mattered, because it was the part of the arrangement CRA had the strongest case to tax.
4. Drafted a formal agreement going forward. We drafted a written cost-sharing agreement between the two companies that set out the allocation method explicitly, tied it to the usage records the companies would now keep routinely, and distinguished clearly between genuine shared-cost reimbursement and any component that functioned as a real service or lease, which would need to carry HST going forward regardless of how it was documented.
5. Led with the weaker part of the case. We brought the reconstructed numbers to CRA's auditor, James, arguing that the overhead portion of the historical arrangement functioned as genuine cost-sharing and should fall outside the assessment, while acknowledging candidly that the equipment portion looked more like an unregistered lease arrangement than a shared cost, and could reasonably attract HST. Leading with the weaker part of our own position, rather than waiting for the auditor to find it, made the stronger argument on the overhead side more credible.
6. Negotiated a workable settlement. After several rounds of exchange, we negotiated a settlement that split the difference in a way both companies could actually pay: the overhead portion was accepted as genuine cost-sharing and removed from the assessment, while the equipment portion was assessed as a taxable supply, with a reduced penalty in recognition that the underlying error was a documentation failure rather than a deliberate attempt to avoid HST.
7. Set up ongoing compliance. Finally, we advised Pratheep and Gordon on running the new agreement properly day to day — logging equipment hours, invoicing the equipment company's portion with HST going forward, and reviewing the allocation annually — and talked through what Pratheep's continuing role as a director of both companies meant for his exposure if the arrangement ever drifted again after he stepped back further from daily involvement.

The outcome

The final settlement brought the assessment down from roughly $90,000 to a little under $40,000, concentrated entirely in the equipment cross-charges that had genuinely outpaced actual usage. The overhead portion of the arrangement was accepted as legitimate cost-sharing and removed from the assessment in full, along with most of the penalty on the remaining amount, once CRA accepted that the error traced to sloppy invoicing rather than any attempt to dodge HST.

It was not the outcome anyone would call a win outright. The two companies still owed a real amount, split between them, and Pratheep had to accept that some of what he had treated for years as harmless bookkeeping between his own companies had, in substance, been an unregistered equipment lease that should have carried HST from early on. That is a hard thing to hear about an arrangement you built yourself, decades into running a business, but the alternative — contesting the full $90,000 with accounting that could not support the argument — carried real risk of losing on the whole amount rather than settling on the weaker half of it.

Gordon now runs both companies with a written cost-sharing agreement in place and a habit of logging equipment hours as they happen rather than reconstructing them after the fact. Pratheep stayed on as a director in name but stepped back from any involvement in the invoicing, on the view that the arrangement now runs on a method solid enough not to need him checking it. The bookkeeper who had run the informal system for years retired around the same time Pratheep did, and the companies now use an outside accountant to review the allocation annually. Pratheep says the audit was the first time in years he actually understood how the two companies fit together financially, rather than trusting that the arrangement his lawyer had set up decades earlier was still doing what it was meant to do.

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