In a September 27, 2017 Tax Court of Canada case (Chaplin vs. H.M.Q., 2014-3670(IT)G), at issue was whether the taxpayer was subject to a shareholder benefit. The taxpayer paid $163,898 of legal expenses related to a shareholder dispute. While the taxpayer fully paid the legal fees personally, the corporation recorded the fees as a legal expense and credited the shareholder loan account of the taxpayer.

Taxpayer loses – legal bills personal
The Court opined that the legal fees did not benefit the corporation, were not paid by the corporation, and were simply a benefit to the taxpayer and her personal expense. As such the payment by the taxpayer did not constitute a loan to the corporation. The bookkeeping entry which indicated something else had occurred was false, and the entry did not match the reality.

Taxpayer wins – no shareholder benefit from journal entry alone
The Court, however, was not convinced that simply making a false bookkeeping entry, even knowingly, confers a benefit on a shareholder. The Court noted that a benefit is transferred when something of value is conferred on a shareholder. The Court contrasted this case from others (Chopp vs. H.M.Q., A-87-95, and Franklin vs. H.M.Q., A-635-00) where there was a transfer of property from the corporation, but the transfer was not charged against the shareholder loan account.

timing of the shareholder benefit

At most, the Court noted that a false bookkeeping entry lays the groundwork for disguising a future appropriation or hiding an outstanding debt owed to a company by a shareholder. It is not, in itself, a benefit. As such, the recording of a false bookkeeping entry did not confer a benefit on the taxpayer.

Editors’ Comment
The decision suggests that a benefit would arise when the funds are transferred from the corporation to the shareholder. Also, presumably the corporation’s legal expense would be denied as it related to a shareholder’s personal expense.

*Updated: Summary point updated March 15, 2023.