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.
On August 31, 2010, CRA had advised the taxpayer that his income tax return for the 2007 year was under review and that he was required to provide information and documents concerning a rental property sold in 2007.
The taxpayer had disposed of the rental property for $285,000. CRA included this amount on the 2007 Personal Tax Return but reduced the Adjusted Cost Base (ACB) claimed by the taxpayer by the estimated $52,810 of renovation expenses which the taxpayer had added.
The dispute was settled in a July 3, 2013 Tax Court of Canada case. The taxpayer could not provide any corroborating evidence of the renovation costs, therefore, the Court did not accept this as part of the ACB.
The taxpayer referred to the expiration of six years as being the time for which he had to keep receipts.
CRA successfully argued that this six years commences after the year to which the costs relate. Therefore, costs which become part of the ACB of the property must be maintained for six years after the property is disposed, not six years after the costs are incurred.
Related to the above, in a June 14, 2013 Technical Interpretation, CRA noted that permanent documents must be kept for a period ending two years following the dissolution of the corporation and the general documents must be kept for a period ending six years following the last year for which they relate, unless the corporation is dissolved, in which case the period ends two years following the dissolution of the corporation.
It should be noted that, at the Tax Court, the onus is on the taxpayer to prove the CRA is wrong, not the other way around. “Innocent until proven guilty” is a principal of criminal law, and most tax disputes are not criminal in nature.
Action Item: Don’t throw out the receipts for improvements to property! Keep them separate from regular expense receipts.
Dropbox.com is a popular service which enables users to synchronize, share and back-up files via computer, tablet or iphone.
The service is fairly easy to use thanks to its smooth integration with Windows and other platforms. Once installed, Dropbox appears as a folder in My Documents and similarly functions like any other regular folder.
Users are able to share documents in the folder, whether or not they use Dropbox, making it a great medium to collaborate with friends and co-workers.
Dropbox.com offers 2GB of free storage, however, paid upgrades are available if users require more space.
Prior to employing this service, it is important to consult with your IT Representative to ensure it complies with your organization’s IT policy.
Action Item: Data security is a common issue in the electronic age. Consider obtaining permission from the other party when transferring information via services like Dropbox.com.