In a May 31, 2013 Tax Court of Canada case, at issue was whether shareholder withdrawals of $28,791, $32,173 and $23,351 for the 2004, 2005 and 2006 taxation years, respectively, could be added as personal income.
CRA generally has three years from the date of their initial assessment to revise its assessment of an individual or Canadian-controlled private corporation’s income tax return. At the time of reassessment, the 2004 and 2005 years were past this deadline. Any misrepresentation that is attributable to neglect, carelessness or willful default is subject to reassessment, even if the usual deadline has passed.
The Judge noted that, meaningful books do not exist for the Company or the Appellant, and if they do, they were not produced at the Hearing nor were any source documents regarding actual receipts, vouchers or invoices relevant to specific business expenses. As the reconciliation of the shareholder’s loan account was rendered impossible by the absence of an ascertainable flow of funds, the Court did not allow for a reduction in personal benefits received other than for a minor amount.
The Judge found that the CRA discharged its onus of proof thereby allowing the reassessment of these years past the usual deadline on the basis that the returns were signed with such imprecise expenses, shareholder advances and benefits that a misrepresentation was presented due to carelessness.
The Court, however, did not find that the errors were the result of dishonesty or deceit and, therefore, did not fall within the threshold for the imposition of gross negligence penalties of 50% of the underlying taxes.
Action Item: While the taxpayer lost his case, removal of the penalties reduced his tax cost by a third of what CRA had assessed – it can be worthwhile challenging CRA’s assessments.