Malamute Contracting Inc v The King – Tax Court Considers Characterization of Shareholder Payments
In Malamute Contracting Inc v The King, 2025 TCC 47 [“Decision”], the Tax Court of Canada (“Tax Court”) was tasked with deciding whether Mr. David Lynch and Mrs. Danielle Lynch received salary from employment or shareholder advances from Malamute Contracting Inc. (the “Company” or “Appellant”) for income-tax and Canada-Pension-Plan (“CPP”) withholding and remittance purposes. The Tax Court granted the appeal and found that the cheques, despite being annotated by Mrs. Lynch as “payroll,” were in fact shareholder advances.
Minister’s Assessing Position
The appeals at issue involved, inter alia, “uneven-amount” (e.g., $1,889.12) cheques paid by the Company to Mr. and Mrs. Lynch (the “Cheques”) between January 2018 and February 2019. The amounts appeared to reflect the monetary value an individual would receive after deducting income-tax and CPP withholding from an even gross salary (e.g., $6,000). Additionally, the Company made payroll remittances for the Cheques paid out in the months of January and February 2018, and the Cheques were notated as “payroll” on the re: line. Similar Cheques continued in subsequent periods, but remittances were not made to the Canada Revenue Agency.
The Minister assessed the Company for failure to withhold and remit income-tax and CPP deductions on the similar Cheques paid out after February 2018. The Minister argues that the evidence––i.e., notation on the Cheques, the method of determination of the amounts, and number and frequency of payments––indicate that the Cheques were always on the account of salary from employment for both Mr. and Mrs. Lynch.
Appellant’s Position
The Appellant appealed on the grounds that the Cheques were not salary payments. The Company and the couple intended these payments to be issued to the payee in their capacity as shareholders. The Company had no corresponding obligation to withhold and remit income-tax and CPP deductions.
Analysis and Ruling
The Tax Court granted the appeal in favour of the Appellant.
Justice Cook recognized that the applicable law is not at issue. The tax treatment of a payment is governed by its character at the time the payment is made: Adam v MNR, [1985] 2 C.T.C. 2383; Irmen v The Queen, 2006 TCC 475; Park Avenue Furniture (MFG) Corporation v MNR, 2019 TCC 94. The question to be determined was the intended character of the payments at the time they were made.
Justice Cook found that Mrs. Lynch lacked the experience and training of a diligent bookkeeper. This deficit led her to make errors in judgement while processing these Cheques. Mrs. Lynch’s testimony explained away the Minister’s reasons for assessment:
- the “payroll” notation was to distinguish the Cheques from other payments by cheque from the Company to the Lynches; and
- the January and February 2018 remittances were a mistake led by her enthusiasm to comply with tax obligations.
Furthermore, the testimony of the Company’s accountant, the relevant financial statements of the Company, and the income-tax returns of the parties were consistent with Mr. and Mrs. Lynch not having received employment remuneration.
Key Insights
The Canada Revenue Agency can nitpick certain administrative oversights to form the basis of a reassessment, despite the overall record of evidence indicating otherwise. Small business owners should be careful in how they characterize payments––including casual notations––to avoid the Minister from developing an unwelcome assessing position.
Ummat Tax Law PC
5500 North Service Road, Suite 302
Burlington, ON L7L 6W6
(905) 336-8924
www.ummat.ca
