If you’re a business owner whose tax situation is somewhat complex, chances are you hire an accountant to prepare your personal and corporate tax returns.

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Taxpayer blames $500,000 misstep on accountant, but the CRA doesn’t bite Back to video

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But beware that you are still ultimately responsible for making sure your taxes are done correctly and all your income is fully reported, and you won’t be able to put the blame on your accountant should the Canada Revenue Agency come knocking.

Take the recent Federal Court of Appeal case, decided in June 2024, involving a taxpayer who was appealing a 2023 decision of the Tax Court. The taxpayer operated several businesses, including a grocery store, through various corporations. One of these corporations had not filed any income tax returns for several tax years.

From 2005 through 2009, the corporation reported sales of between $2.2 million and $2.9 million, resulting in gross profits of between $200,000 and $400,000 annually. The CRA performed a bank deposit analysis of the corporation as well as the personal joint bank accounts of the taxpayer and his spouse.

The analysis showed a total of $512,211 of shareholder appropriations, being money taken from the business and transferred to personal name, that was not included in the taxpayer’s income for the years from 2006 through 2009.

Both the taxpayer and the CRA agreed that the agency had correctly calculated the amount of the taxpayer’s unreported income, but the dispute in tax court was whether the CRA was still able to assess the taxpayer for those years, which ordinarily would be considered to be “statute barred” and whether gross negligence penalties were applicable.

Under the Income Tax Act, the CRA is generally prohibited from reassessing an individual taxpayer more than three years after the original reassessment, unless it can be shown that the taxpayer made “a false statement attributable to misrepresentation arising from carelessness, neglect or wilful default.”

The taxpayer testified that his accountant at the time had advised him to open a “second” bank account and to make deposits of cash sales into his personal account and that of his spouse “to avoid ‘some’ charges.” Furthermore, the taxpayer acknowledged that monies from the corporation were directly deposited into his personal bank accounts.

The taxpayer said he used to take his business records, such as invoices, cash register slips and mail, to his accountant every two to three months, for an estimated total of 30 times over the course of the relevant taxation years. He said his accountant also filed his personal returns, but that “he never signed them.” He also claimed he “did not know where the numbers for the income reported came from.”

The taxpayer supported a family of six during the relevant taxation years, yet the total income reported by him and his wife on their returns was clearly insufficient to pay the family’s living expenses, including mortgage payments on the family home purchased in 2006.

The tax court judge said that while the taxpayer may not have had sophisticated knowledge of the tax system, he had been filing his income tax returns since his very first job in 1995, which was a full decade prior to the taxation years under review. He was also a shareholder of three corporations and a director of two, including the corporation that ran a “very successful grocery business.”

The taxpayer ultimately acknowledged that his income for the relevant taxation years was “significantly underreported” and that he had made no inquiries at any time to confirm the appropriateness of the amounts being reported. He also acknowledged that his accountant suggested he open another bank account to avoid “charges.”

The taxpayer testified that he knew “very little about taxes” and “simply relied on his accountant to prepare the returns based on the financial information he had provided.” He suggested that the misrepresentation in the returns was the fault of the accountant, not himself.

The tax court determined it was not sufficient to simply rely on the accountant without asking any questions. “(The taxpayer) cannot simply throw his hands up and say that he blindly relied on his accountant, without making any attempt at seeking a better understanding of his obligations and without making any effort to verify the accuracy of the income reported in his income tax returns,” the judge said.

After all, the taxpayer was a very successful business owner in Canada who had previously graduated from high school and studied physics for two years at university in his home country overseas. Furthermore, the tax court said the amount of income that was not reported far exceeded the income that was reported. In the four years under review, the total unreported income was more than $500,000, but the income actually reported on his tax returns during that period was less than $40,000.

The tax court dismissed the appeal and said the assessments were not statute barred because the taxpayer’s failure to include the shareholder appropriations in his income was “a misrepresentation due to carelessness or neglect,” adding that the taxpayer “did not exercise reasonable care to report the proper amount of income.”

The lower court also said the gross negligence penalties were justified because the taxpayer’s conduct “fell markedly below what would be expected of a reasonable person in his circumstances.”

The taxpayer appealed the lower court’s decision to the Federal Court of Appeal, which heard the case in Toronto on June 7. In a short four-page decision delivered orally from the bench, the three-judge appellate panel unanimously concluded that the tax court’s conclusion was well supported by the facts, and there was no reason for it to intervene. The court, therefore, dismissed the appeal and awarded the crown costs.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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