THE REVENUE AGENCY HAS ITS EYE ON YOU!

DIVIDENDS

THE REVENUE AGENCY HAS ITS EYE ON YOU!

You are being asked for several thousand dollars because you, or a person with a dependent relationship, received a dividend or benefit while the company had a claim against the Agency. Is this attempt to claim payment from you legitimate?

First of all, it should be noted that shareholders and even directors usually cannot be held personally liable for corporate taxes and do not expose their personal assets when they invest, in exchange for shares, in a corporation. By definition, a corporation is a separate entity with a distinct property from its shareholders. Only a special provision allows for an exception.

However, “there is a growing number of claims from the Canada Revenue Agency based on transfers of property or money by corporations or general tax debtors,” explains Me Dani Ann Robichaud. “Such a transfer exposes both the transferee and the transferor to joint liability up to the amount or value of the property received.”

Typical Case

This possibility has been analyzed by the courts when a tax debtor transferred assets to their spouse (e.g., transferred their half-interest in the family residence without consideration, contributed to their spouse’s RRSP without consideration) and subsequently did not pay their tax debt. Moreover, the intention to evade the tax debt is not relevant.

The transferee of the transfer can, however, be released from liability to the extent that consideration equal to the fair market value of the transferred property has been given. This consideration may sometimes result from their family responsibilities under the Civil Code of Quebec following a marriage breakdown.

Shareholders

As the main shareholder, you received a dividend on the company’s income rather than a salary. At the time of receiving the money, the financial situation of the company was good. However, for reasons that did not exist at the time of the payment, losses occur (a disruption in the supply chain or health measures force you to close doors or significantly reduce activities). Revenues being absent, the year ends with a debt to the CRA.

Against all expectations, the CRA tries to claim the amount received as a dividend to apply it to the corporate debt. “The Agency suggests that in the case of a tax debt owed by the corporation, it should not have paid dividends to its shareholder(s) because the result is to deprive it, in whole or in part, of the equivalent in cash required to settle its debts to the state. It is rather unusual to go after shareholders in such circumstances,” says Me Robichaud for the following reasons.

Already Seen

Readers will recall that we have previously addressed the question of the liability of directors, which can be incurred under certain circumstances under civil laws (for claims for unpaid GST/QST or source deductions). However, none explicitly provides for the possibility of invoking that of shareholders.

“The case law is still evolving, and the analysis gives a mixed result,” she notes. “Moreover, in Quebec, the argument that the payment of dividends (when replacing a salary) can serve as the basis for a claim by the tax authorities seems to be rejected.”

Individuals with a dependent relationship

Transfer of money or property to a person with a dependent relationship without a direct contribution to the corporation can lead to a different outcome. As a shareholder, you made a contribution to your spouse’s RRSP, or you provide your child with a vehicle paid for by the corporation without them actively contributing to its business activities. In both cases, the Agency has considered that these transfers or benefits give rise to joint liability for the value received in order to reduce the corporation’s tax debt due to the lack of consideration. In the event of a claim against the shareholder or a person with a dependent relationship, know that a specialist in tax litigation can help you contest it and avoid repaying thousands of dollars.

WARNING: The information contained in this article, while of a legal nature, does not constitute legal advice. It is recommended to consult with a professional for advice that will address your specific situation.