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Spencer Stable owns 50% of the outstanding shares of Stable Estates Ltd. His sister, Tracy,...

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Finance

Spencer Stable owns 50% of the outstanding shares of Stable Estates Ltd. His sister, Tracy, owns the other 50%. During the winter months, the company's construction activities are rather slow so Spencer uses this time to design new homes for the spring. At the beginning of January, to keep the company's largest subcontractor busy over the long winter months, he asked the subcontractor to build an addition to his cottage so that he can use it to entertain guests. The bookkeeper of Stable Estates Ltd. has expensed the $40,000 invoice from the subcontractor. Spencer had told the bookkeeper to treat the invoice as a business expense.

Required:

If the CRA were to discover this transaction during its audit, what would they do about this transaction?

Why, and what are the tax consequences?

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