A small contracting company, whose shareholders were Mr. and Mrs. Lynch, made regular bi-weekly payments by cheque to Mr. and Mrs. Lynch in amounts that were equal to an even gross salary number minus amounts equal to income tax and CPP withholdings that would be applicable to such salary amounts. Mrs. Lynch, as an interim bookkeeper, notated the cheques as being “payroll” and for the first two months of 2018, but not thereafter, remitted source deduction amounts to CRA.
Cook J accepted (at para. 10) the statement in Park Avenue (2019 TCC 94, at para. 20) that “it is the intention of the parties (payer and payee) at the time of the payment that characterizes the nature of the payment” as salary or shareholder advance. He found that “Mr. and Mrs. Lynch, were not sophisticated in tax matters and it resulted in the unfortunate notation on the Cheques, misguided use of the website calculator and mistaken remittances for January and February 2018” (para. 26) and accepted the testimony of the company’s accountant and Mrs. Lynch that (consistent with the financial statements) “all draws were to be on the shareholder loan account and that no amounts were to be paid to Mr. and Mrs. Lynch by way of salary” (para. 17). He concluded (at para. 27):
This is the type of situation referred to by Chief Justice Rip in Adam [85 DTC 667] wherein a shareholder receives draws on the shareholder loan account throughout the year and then a dividend determination is made at some point for the year.