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In short ...

Plenty of jurisprudence show examples of situations where gaps in record books (Minute Books of companies) or inexistence of the evidence that they should show are disastrous for taxpayers.

Untidy Minute Books : Horror stories

Liability of directors

Dipede v. The Queen, 2004 CCI 100
The taxpayer was sought by tax authorities because he was the director of a company that had not done source deductions and tax rebates in accordance with section 227.1 of the Income Tax Act and subsection 23(1) of the Excise Tax Act.

The taxpayer pretended he was not a director of the company anymore. Nevertheless, he was clearly mentioned as such in the Minute Book of the enterprise and his signature was seen in multiple places. Documentary evidence clearly contradicted his testimony. His responsibility was engaged.

Conclusion: When an enterprise experiences financial difficulties, a great risk is borne by directors as to payments required by tax authorities. Precautions must be taken and the Minute Book must show, for instance, resignation of a director. Such a rigor may be more than beneficial in case of a prosecution against directors. See judgement

Moll v. The Queen, 2008 CCI 234
The taxpayer was trying to avoid personal responsibility as a director. He was sought by tax authorities in accordance to section 227.1 of the Income Tax Act. Justice V.A. Miller from the Tax Court of Canada said the following:

“I do not accept his evidence for the following reasons: a) The pages from the alleged Minute Book are photocopies and do not refer to any corporation. They raise a suspicion of their authenticity; […]”

Here again, the taxpayer is assessed a penalty because the judge was not convinced he had had due diligence. Therefore, he was forced to pay due amounts plus a penalty. See judgement

Tehrani v. The Queen, 2006 CCI 131
The taxpayer pretends that having resigned his functions as a director, he cannot be solidarily liable, with the enterprise, of the debts of this enterprise, according to subsection 227.1(4) of the Income Tax Act. In fact, the last contribution he had to do was established more than two years after he had ceased his functions.

Unfortunately, he was never able to prove the existence of any resignation letter in the Minute Book of the enterprise. Besides, at the bankruptcy of the company, both the tax authorities and the trustee asked for records and never got them. The court concludes that many of the documents must have been produced afterwards.

This decision was confirmed in appeal (Tehrani v. Canada, 2007 FCA 12). This case is a good example to show that negligence and documents produced late cannot replace updated information, considering consequences that happened. See judgement

9214-7040 Québec inc. c. Enterprise registrar,, 2013 QCTAQ 04387
Taxes are required from the director of a company. He pretends he is no more a director since he has resigned from his functions several months ago. However, he admits not having any document or whatsoever that supports his words.

This judgement says the following: “[TRANSLATION] It should be recalled that no resolution, Minute Book, share certificate or record that could have been assigned as a shareholder or a director was produced to neither the Enterprise registrar or the court in the present case.” Therefore, the judge cannot accede to the demand. The request is dismissed and the enterprise must pay its taxes. See judgement (French)

Benefit according to subsection 15(1) of the Income Tax Act (I.T.A.)

Gravil v. The Queen, 2008 CCI 505
The tax authorities assessed the taxpayer by adding to his income several hundreds of thousands dollars as taxable benefits according to subsection 15(1) of the Income Tax Act. Inter alia, the taxpayer pretended that an enterprise had ratified a transaction, which explained the payments. But firstly, he could not produce the Minute Book of the enterprise, and secondly, some accounting entries were incompatible with his version. The taxpayer was also forced to pay a penalty according to subsection 163(2) of the I.T.A. Alas, most of the time, clients care little about tax consequences when they make transactions. A suitable planning can save lots of money. See judgement

Allowable business investment loss (ABIL)

Abrametz v. The Queen, 2007 CCI 316
The taxpayer had claimed an allowable business investment loss (ABIL). The tax authorities were refusing the ABIL and the Tax Court rejected the appeal mainly because share transfers of an enterprise were not supported by the documentation, namely the Minute Book.

This case goes with the main idea of The Queen v. Friedberg, 92 DTC 6031, that says the following: “In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterizations of a transaction for tax purposes. […] If a taxpayer fails to take the correct formal steps, however, tax may have to be paid.”

This decision from the Tax Court was reversed in appeal in Federal Court of Appeal (Abrametz v. Canada, 2009 FCA 111). The Court of Appeal acknowledges gaps in documentary evidence, but allows the appeal based on other factors. Still, the taxpayer undergoes important losses due to untidy documentary evidence. See judgement

Fry v. The Queen, 2001 CCI 44
The taxpayer is denied an ABIL of $ 25,000 mainly because of gaps in documentary evidence. Inter alia, a share certificate had a typographical error (wrong company number) and a replacement was never produced. See judgement