For some reason, the CRA seems to want to believe that an accounting entry by itself is a real transaction that can give rise to tax consequences. The Tax Court, in Cook v. The Queen, 2006 TCC 344 was called on to remind the CRA, again, that an accounting entry as such does not create a taxable reality.
In arriving at its decision, the Court cited a slew of cases on the subject, including Chopp v. The Queen, 95 D.T.C. 527, [1995] 2 C.T.C. 2946 (T.C.C.), where Justice Mogan wrote:
I cannot accept the Respondent’s argument so broadly stated 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. In my opinion, if the value of a benefit is to be included in computing a shareholder’s income under subsection 15(1), the benefit must be conferred with the knowledge or 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. I am supported in this view by the decisions of this Court in Simons v. M.N.R., [1985] 1 C.T.C. 2116, 85 D.T.C. 105 (T.C.C.) and Robinson v. M.N.R., [1993] 1 C.T.C. 2406, 93 D.T.C. 254.
The Court found no evidence that the taxpayer consented to or even knew about a posting that decreased his due-from-shareholder account. The Court, therefore, concluded that the corporation had not conferred any benefit on him.
The result will be different if a taxpayer knew, or ought to have known, about the erroneous entry and did nothing to correct it (see, for example, Cano v. The Queen, [1998] 2 C.T.C. 2344 (T.C.C.)) or if the taxpayer somehow used the entry for his own benefit (see O’Connor v. The Queen, [1997] 2 C.T.C. 2075 (T.C.C.)).
