When the CRA audits a corporation, one of the first accounts reviewed is the shareholder loan account. In the case of Clifford Cook (2006 TCC 344), the taxpayer’s company bookkeeper incorrectly credited $25,000 to the shareholder loan account, instead of to the sales account. It was agreed by the CRA and the taxpayer that Clifford Cook had no involvement in, nor knowledge of, the incorrect entry.
When the CRA discovers a bookkeeping error that benefits a shareholder, they often claim that, if the CRA had not audited the corporation, the taxpayer could benefit from the error in the future. For that reason, they will often assess a benefit under subsection 15(1) of the Income Tax Act when they find accounting errors. In this case, even though both sides realized that it was an accounting error, the CRA’s policy was that it “does not correct bookkeeping errors.” The CRA earlier took the position in the Tax Court (Chopp 95 DTC 527) that “a bookkeeping error which benefits a shareholder to the disadvantage of his corporation is a benefit within subsection 15(1) even if the error was not intended and was not known to the shareholder.”
Fortunately for the taxpayer, in this case the Court disagreed, and agreed with the earlier decision (Chopp) that “the benefit must be conferred with the knowledge or the consent of the shareholder; or alternatively, in circumstances where it is reasonable to conclude that the shareholder ought to have known that the benefit was conferred.” The Court also referred to the cases of Simons (85 DTC 105) and Robinson (93 DTC 254) to support its position. Clifford never withdrew the $25,000 in a lump sum, but there were transactions in the shareholder account both before and after the bookkeeping error.
As well as assessing a shareholder benefit, gross negligence penalties were assessed pursuant to subsection 163(2). The CRA’s position was so weak that they did not win the initial assessing position in Court. One might query why penalties were assessed when it was not clear that there was a shareholder benefit, which was the result of an error, unknown to the taxpayer.
This case is welcome guidance in respect of the tax consequences of errors made by an internal bookkeeper. A taxpayer cannot be held responsible for errors when he or she is not intimately involved with the corporation’s bookkeeping. In this case, the fact that the taxpayer did not withdraw the funds from the corporation was relevant.
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