Tax Court Rules on Salary vs Shareholder Loans: Case Study Insights
April 16, 2025
Sector:
Tax Court of Canada decision highlights the importance of accurate financial record keeping…
Introduction
In a recent ruling, the Tax Court of Canada has provided some clarity on the tricky issue of whether payments in small businesses should be considered salary or shareholder loans. The case of Malamute Contracting v the Queen shows how important it is to get your financial records just right to avoid unexpected tax problems.
Case Background
Malamute Contracting, a small company that specializes in kitchen and bathroom renovations, found itself under the spotlight of the Canada Revenue Agency (CRA). The company is owned by David and Danielle Lynch, a dynamic duo who split their responsibilities between hands-on work and bookkeeping.
Payment Practices
From January 2018 to March 2019, Malamute issued biweekly cheques to the Lynches labeled “payroll.” These payments were generally consistent, though some variations did occur. Initially, Malamute made tax and CPP remittances for January and February 2018. However, after this period, the company stopped remitting and began treating the payments as shareholder advances.
CRA Position
The CRA decided that the payments made from March 2018 onward were actually salary, which meant that Malamute should have been withholding and remitting income tax and CPP contributions. This led to the CRA issuing assessments against Malamute, including penalties.
Rookie Bookkeeper
During the trial, it was revealed that Danielle Lynch’s inexperience in bookkeeping played a crucial role in the company’s predicament. Eager to do things by the book, she estimated taxes for each cheque using a government website. This resulted in cheques being issued in uneven amounts and incorrect remittances for January and February 2018.
Implications
This case is a gentle reminder of the importance of accurate and professional bookkeeping. Despite their best intentions, Malamute’s lack of experience and reliance on estimations led to unwanted CRA attention and penalties.
The decision underscores that the tax treatment of a payment is determined by its character at the time it is made. Small businesses need to keep precise financial records to avoid any unintended consequences.
Conclusion
The Malamute Contracting case is a cautionary tale for small businesses, highlighting the potential pitfalls of inexperience in financial management. It serves as a reminder that professional bookkeeping services can be invaluable in navigating the complex world of tax regulations and ensuring compliance with CRA requirements.
Is it Salary or Shareholder Loans? – Tax Court says it depends!
The tax treatment of a payment is determined by its character at the time it is made. The Canada Revenue Agency can use certain aspects of financial records to develop assessments against compliant taxpayers. This was confirmed by the Tax Court of Canada’s decision in Malamute Contracting v the Queen, which highlighted how unintended financial notations can lead to CRA assessments – not always fair but, that is life!
How Kreston GTA Can Help
At Kreston GTA, we understand the pressure financial reporting teams are under in this dynamic environment. Whether you need assistance with impairment testing, going concern evaluations, or clear disclosures tailored to your industry, our team of experienced bookkeeping, tax, audit and advisory professionals can help.
We offer:
- Cloud Bookkeeping and Payroll services
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Reach out to us now for more information! info@krestongta.com
