The latest CCH Tax Topics contain summaries of two interesting recent cases, one (Truckbase Corporation v. The Queen, 2006 TCC 215) dealing with the deduction of fees paid to amend a shareholder agreement and the other (Canada (Minister of National Revenue) v. Ellingson, 2006 FCA 202) with the powers of the Minister to demand information “where a suspicion exists as to unreported income and illegal activity”.
In Truckbase, the Tax Court followed BJ Services Company Canada v. The Queen, 2003 TCC 900 and held that expenses incurred in amending a shareholder agreement were deductible by a corporation as a current expense and did not constitute a shareholder benefit. The Court found that the principles in BJ Services “should [not] only apply in situations involving hostile takeover bids or economically difficult circumstances” (¶16). Too often, corporations deduct expenses that were really incurred for the benefit of a shareholder, and the danger, of course, is that the expenses will be denied and a benefit will be included in the income of the shareholder under subsection 15(1) of the Income Tax Act (Canada) (the Act) with no offsetting dividend tax credit. Truckbase seems to provide some grounds for arguing against such an assessment, in the right circumstances.
In Ellingson, the taxpayer was charged with criminal offences in California and a bank in British Columbia reported him to the RCMP because
Client brought in $5000.00 in cash all in 20s to be applied to two car loans he has with HSBC. The CSR noticed that the money had the distinct odour of marijuanna [sic]. A further review of the loans revealed that client consistently makes payments to the loans by way of cash.
The CRA, after noting that the taxpayer had not filed tax returns between 1997 and 2003, issued a demand for information under paragraph 231.2(1)(a) of the Act. The taxpayer sought to have the demand quashed on the grounds that it had been issued in the course of a criminal investigation. The Federal Court agreed. The Federal Court of Appeal, however, after reviewing the Supreme Court of Canada’s decision in R v. Jarvis, [2002] 3 S.C.R. 757, 2002 SCC 73, concluded that the demand was not invalid and allowed the Crown’s appeal.
