February 8, 2018
All Tax Articles

Bookkeeping error meant no shareholder benefit

In the recent Chaplin case, the taxpayer was a 50% shareholder in a corporation (Triventa). Ms. Chaplin brought a legal action against the other 50% shareholder. She incurred significant legal fees in the dispute, including legal fees to document some of the corporate history that was necessary to determine the ownership of the corporation. 

Four years after the lawsuit was started, the corporation Triventa recorded the legal fees as if it had actually paid them, and added a corresponding amount to Ms. Chaplin shareholder loan account. Based largely on those corporate records, the CRA assessed the taxpayer, adding a shareholder benefit in her income.

Ms. Chaplin appealed to the Tax Court of Canada. One of her main arguments was that she paid the legal fees personally and that the corporation Triventa did not. Basically, she argued that the corporation’s alleged payment of those fees, and therefore the credit to her shareholder loan account, were erroneously recorded.

The Tax Court agreed. Although the facts were quite complex, the Tax Court judge found no evidence that Triventa paid the fees. To the contrary, all of the relevant evidence showed that the taxpayer paid the fees. The judge concluded: “Based on all of the foregoing, I find that there was no loan made by Ms. Chaplin to Triventa to pay the Legal Expenses. The bookkeeping entry by which the purported loan was created was a complete fiction.” Ms. Chaplin won the appeal.

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Sandy J. Lee

Hello my name is Sandy Lee, I am a partner at Lee & Sharpe.

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