Cash Deposits Cause CRA To Believe Owner Of A Company Is Paying Himself Unreported Income

June 1, 2022
Stack of coins

written on behalf of Feigenbaum Law

While the world is becoming more and more reliant on the electronic transfer of money, it’s strange to think of a world ever operating completely cashless. For business owners, it’s important to ensure that cash transactions are properly managed to help reduce the risk of unwanted tax issues related to either personal tax or corporate tax compliance. Today we’re looking at a recent decision by the Tax Court of Canada in which the Canada Revenue Agency (the “CRA”) alleged the appellant company had deposited cash from unreported sales into its sole shareholder’s (“AV”) personal bank account. AV tried to tell the court that the cash deposits made to his account reflected personal transactions between friends as opposed to income from his company.

Owner of company takes shares to provide personal loan to a friend

The blurring of business and personal finances can often lead to misunderstandings or in the worst cases, legal trouble with the CRA. In this case, AV, who was the sole shareholder and director of the appellant company, was waiting for a house to be built for him and his partner to move into. In the meantime, he had saved money for a down payment that he didn’t need right away. He decided to use some of that money to provide loans through a friend who was a mortgage broker. The repayment of these loans and the interest they generated led to bank deposits ranging from $20,000-$30,000.

In addition, AV had a friend (“GB”) who owned some businesses and was also looking to purchase a large plot of land. He decided to provide his friend with a series of six loans valued at $115,000 each. Instead of giving GB money from his personal bank account, he provided cheques from the appellant company. He told the CRA that these reflected shareholder equity, and that was not a cause for concern to the CRA. Instead, the CRA was curious about a series of cash deposits made by AV that it thought may have come from unreported sales from the appellant company.

Shareholder often deals with cash for personal matters

In addition to his role running the appellant company, AV had what could be described as an active financial life. In addition to the loans described earlier, he also took out loans from friends, family and private sources. AV told the court that two significant loans he took from a friend totalling $150,000 were deposited in his account during the same period of time that GB’s loans were being paid back. These loans were provided in the form of cash. He told the court that all the loans to GB were paid back in full, but he could not prove that since GB insisted on paying them back in cash, though he did provide what he said was a note from GB stating that his loans were no longer outstanding. AV said he always ensured that individual cash deposits to his bank account were less than $10,000 so as not to raise any flags and avoid filling out declaration forms.

Attempts were made to reach GB, but they were unsuccessful. AV said their relationship soured when the two purchased a cottage together. AV told the court GB was supposed to take care of property tax on the cottage but failed to do so. The cottage ended up going into receivership and that was the last time the two spoke. This meant that AV was unable to provide any proof outside of his own testimony as to whether some of the cash deposits made into his account were loan repayments. However, AV’s friend did provide testimony to the court that backed up AV’s claim that he had borrowed $150,000 from him and that it was provided in cash.

CRA fails to provide evidence

The court then turned to the CRA’s side of the story, noting that the Crown called no witnesses and provided no documentary evidence. This left the court to ask whether a total of $265,000 deposited into AV’s bank account were on the balance of probabilities related to personal loans and as such did not constitute taxable income from the appellant corporation. The court found that the witnesses called by the appellant, including AV himself, provided credible testimonies as well as details about their finances. The court was satisfied that the loans described by AV were real, noting that the CRA had failed to provide any evidence at all that would lead the court to believe otherwise. The court wrote that the CRA could have provided evidence of work done by the appellant company that was not reflected in its financial records but failed to do so. This led the court to conclude that on a balance of probabilities, AV had conducted a significant amount of cash transactions in his personal bank account but that those transactions consisted of loans he received and payback of loans he made with friends and associates.

Work with the experienced lawyers at Feigenbaum Consulting in Toronto if you are involved in Tax Litigation

The tax law team at Feigenbaum Consulting, led by Mark Feigenbaum, has extensive experience working with businesses to reduce their tax burden while shielding clients from liabilities and tax pitfalls. We are uniquely positioned to help clients in both the United States and Canada, particularly those who do business on both sides of the border. Please reach us online or call us at 1-877-275-4792 to see how we can help you today.

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