In Irmen v. The Queen, 2006 TCC 475, the taxpayer, a shareholder and key employee of a corporation, received amounts from the corporation throughout the taxation year. During the year, the corporation accounted for the amounts as salary, and CPP and tax was deducted and remitted. At the end of the year, however, the taxpayer and his accountant decided that he should really have taken amounts from the corporation as a draw on his shareholder loan. Adjusting entries were made accordingly, and the taxpayer reported only a small amount as employment income in the taxation year. The CRA, however, reassessed the taxpayer as if he had received salary and not a draw on his shareholder loan.
The Tax Court dismissed the taxpayer’s appeal. Justice Millar cited Adam v. M.N.R., 85 DTC 667 (T.C.C.), where Justice Rip wrote:
It was admitted that during the year, Mr. Adam received salary. Adamin treated the payments as compensation for regular work performed by Mr. Adam. When a taxpayer receives salary from his employer he is taxable in the year of receipt on the amount of salary since this constitutes income from employment (section 5 of the Act). The salary, once received, cannot for tax purposes become anything else. Mr. Adam cannot by any “ex post facto” act alter the destination of the monies, or the purpose for which they were paid to him and received by him. … An adjustment to the books of account of the taxpayer cannot render null that which has transpired. Past events cannot be ignored. That is not to say a taxpayer cannot make entries in his books of account to reflect adjustments to his accounts as and when they take place. For example, incorporations the size of Adamin, it is not unusual for a shareholder employee to draw money as loans from the corporation throughout the year and at the end of the year, the shareholder employee and the corporation decide as to the mix of dividends and salary the shareholder employee is to receive; the loan account would then be adjusted accordingly.
However, no taxpayer has the right to retroactively alter events when it best suits its purposes, although there is no question he may prospectively plan events for these purposes: this is sometimes called tax planning. While I may sympathize with Mr. Rabinovitch’s desire to minimize his client’s taxes and the uncertainty in tax law during 1982, I am of the view that the retroactive adjustments to accounts is not a valid tax planning scheme, I must therefore dismiss his appeal.
