Francesca Giroux, CPA
For the Lakeside Leader
Business owners, are you sure you are reporting all your income for the year?
In a recent Tax Court of Canada case (Thompson vs. H.M.Q., 2015-262(IT)G) the issue to be decided was whether or not tax years would be statue-barred where shareholders draws were not correctly reconciled by the accountant, and insufficient personal income was included on the tax returns in question. As presented below the Canada Revenue Agency (CRA) appears to be setting a precedent with this case that not only must the shareholder draws throughout the year (regardless of fiscal year end date) be included on the shareholders personal income tax return, but that it is the taxpayer’s responsibility to review their tax returns and question discrepancies.
To summarize, the taxpayer in this scenario had noticed that the income reported on his personal income tax return was lower than his personal draws during the year from his corporation. His accountant had indicated that a bonus had been declared at year-end and was considered “paid” within 180 days. This bonus would then become taxable to the shareholder in the year it was “paid” as opposed to when the actual draws were made. The taxpayer accepted this explanation as a timing difference for income inclusion on his personal tax return and did not question the amount of income included on his T4 for the following two fiscal tax years.
Finding some other errors in his returns the taxpayer switched accountants. At that point the new accountant did a reconciliation of management wages and discovered that there was unreported personal income of at least $65,000. It was proposed by the new accountant that the shareholder make up this difference in his personal income in the current year. The CRA disagreed with this method and requested that the correction be made to the appropriate years, which would result in significant interest charges stemming from the personal income tax amounts owing.
In order for the CRA to reassess a statue-barred year the Minister must demonstrate that there was a misrepresentation due to carelessness, neglect, or willful default. In this case the Minister deemed that although some reliance may be delegated to the accountant, the taxpayer still had the responsibility to question it. Since the taxpayer did not review the years in question (and could have requested a reconciliation of the corporation’s management expenses and the personal income reported) the Court found that the taxpayer was careless or neglectful, and the reassessment of the years in question were not statute-barred.
What does this mean for business owners? If your year end is July 31, 2017, you must report the management wages declared at the year end from January-July, as well report your draws from August-December. Since your year that would normally include August-December 2017 wouldn’t be completed until 2018 it is important that you keep your bookkeeping current and provide your accountant with your personal draws up to the end of December 31.
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Information provided is of a general nature. As each individual or company’s situation is unique, you may wish to consult with your CPA for information specific to your own needs.