Tax Tip[] Shareholder Benefits

Shareholder Benefits – Bookkeeping Errors

“Bookkeeping errors to the benefit of a shareholder are not always shareholder benefits.”

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 benefitfrom 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 knowledgeor 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.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Single Purpose Corporations – New Proposals

“CRA has issued a new administrative policy on single purpose corporations that own US property..”

In the Tax Tip (04-17) dated July 9, 2004, we discussed the CRA’s proposals with regard to Single Purpose Corporations. This Tax Tip was based on the Income Tax Technical News Number 31 dated June 23, 2004. The CRA then withdrew that announcement and stated that they would come up with additional comments. On November 24, 2004, CRA discussed this issue in Income Tax Technical News No. 31R.

The CRA’s premise is similar to the previous announcement wherein they stated that there is no longer a need for a Single Purpose Corporation because of previous changes to the Canada-U.S. Tax Treaty. It was CRA’s previous position that there would be no shareholder benefit to shareholders of Single Purpose Corporations even though a corporation was holding a personal asset. The CRA is now stating that there will be a shareholder benefit where a property is acquired after January 1, 2005 by a Single Purpose Corporation or where a person acquires shares of the Single Purpose Corporation unless that acquisition is a result of the death of the individual’s spouse or common-law partner. In other words, Single Purpose Corporations are no longer acceptable in new situations commencing January 1, 2005.

However, the old administrative policy will continue to apply to those arrangements that are currently in place until the earlier of:

the disposition of the U.S. property owned by the Single Purpose Corporation; or

the disposition of the shares of the Single Purpose Corporation other than the transfer of the shares to the shareholder’s spouse or common-law partner as a result of the death of the shareholder.

The CRA has stated that the administrative policy will continue to apply to any renovation or addition to a dwelling which was acquired before January 1, 2005 and to a dwelling which was “under construction” on December 31, 2004. In order to clarify the situation, the CRA has stated that a dwelling is considered to be “under construction” where the foundation or other support has been put in place. There is no transitional relief where vacant land has been acquired but the foundation or other support has not been put in place. The CRA also states that transitional relief will not be provided where land, with an existing building, has been acquired before January 1, 2005 but it is the intention of the taxpayer to demolish that building and construct a new dwelling on the land.

For those individuals who were considering doing construction on vacant land, it might be a good idea to commence that construction before December 31, 2004 if the land is owned in a Single Purpose Corporation. From January 1, 2005, there is no longer a strong reason to use a Single Purpose Corporation as there will be negative Canadian income tax implications and there may not be U.S. estate tax protection. In the future, consideration should be given to using a trust to own U.S. property.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Personal Health Service Plans and Shareholder Benefits

“There could be shareholder benefits and non-deductible payments for PHSP’s..”

In a recent case (Spicy Sports Inc.), the Tax Court dealt with private health services plans (“PHSP’s”). There are a number of conditions in order to make a PHSP acceptable to CRA. These conditions are not based on the tax law. Instead, it is an administrative policy of the CRA. The main benefit of a PHSP is the ability of a corporation to make a tax-deductible payment into the PHSP which would then reimburse employees for any medical or health expenses. The corporate tax savings on payments to the PHSP are at a rate of 37% in Ontario versus personal tax savings of 25%.

In the case at hand, the issue was whether those payments into the PHSP were a shareholder benefit. The majority shareholder of Spicy Sports Inc. paid in over $38,000 to cover the cost of a knee operation performed in the United States. The corporation had purchased a “cost plus” insurance policy. This is very similar to the policies that are being offered now.

The only person who had used it was the shareholder. The judge stated that the issue was whether the benefit was conferred to the shareholder in his capacity as a shareholder or an employee and whether the payment to the PHSP was a business transaction made by the corporation for the purposes of earning income. The judge determined that the payments into the PHSP were only available to the shareholders and not to all of the employees in the company. He therefore determined that there was a benefit to the shareholder pursuant to subsection 15(1). The judge also went on to state that the payment into the health plan was not deductible as it was not incurred to earn business income.

This case shows an important distinction between those situations where a PHSP has been set up for all employees and those situations where it has been set up for the shareholders. In those cases where the only employees are shareholders, there is a strong possibility that there would always be a shareholder benefit for any payment made into a PHSP. As well, the payment would be non-deductible to the company.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.