Article

The Accountants' Fine

However, there are some expenditures that contain an element of a personal nature as well as a business nature. And it is for these expenses that the client relies on the accountant to assist him in determining just where the business portion ends and the personal nature takes over.

The accountant typically will exercise “professional judgement” in making determination. This is a combination of part common sense, part knowledge of the client and his way of conducting business, and part understanding of the consequences in both time and money of declaring unreasonable expenses on an income tax return.

Along the way, the accountant sometimes finds himself in a position of negotiating with the client on what the latter will ultimately put down on the income tax form. In some cases the client will opt for declaring less expenses than what the accountant may feel could reasonably be claimed, and in other cases, the accountant is put into the position of restraining his client from making a claim that he feel may only cause aggravation down the road.

But in the final analysis, the return being prepared is that of the client and it is he who must bear ultimate responsibility for its contents.

That has been the case up to now … but with the provisions of the 1999 Federal Budget, this may drastically change starting as early as next year.

Resolution #12 of last February’s budget as presented by Finance Minister Paul Martin, proposes to apply “civil penalties for misrepresentations of tax matters by third parties”. As such, the document proposes new provisions to fine accountants and other third parties (such as persons who plan, promote or sell “tax shelters”) an amount equal to the greater of $1,000 and 50% of the income tax sought to be avoided should they knowingly, or in circumstances of gross negligence, “make false statements or omissions in respect of another person’s tax affairs”.

Up until now, it has always been against the laws of our country to make a false statement on an income tax return. However, the onus of responsibility previously extended only to the taxpayer who signed the return prior to its submission to Revenue Canada. But, once the Resolution passes through Parliament and receives Royal Assent, should Revenue Canada prove that the tax return preparer knowingly made an entry that he knew to be false, the preparer can now be subject to the penalties, as well. In the other words, Revenue Canada will still collect its outstanding taxes from the taxpayer as they always have, but they will go after the income tax preparer for attempting to work in the best interests of his client on matters that may have been open to interpretation.

For example, say Mr. Taxpayer comes to his accountant with the usual receipts and cancelled cheques that typically accompany the “books and records” of his company. In the brief discussion that takes place before the year end work is commenced, the client indicates that all expenditures incurred were business related on behalf of his company. The accountant accepts him at his word (within reason) and prepares the financial statements and related income tax return(s) accordingly.

The return is filed and twenty-four months later is scrutinized by Revenue Canada auditors. Their inquiries lead to their contention that Mr. Taxpayer has been running personal expenses through the business and propose to “add them back” as business incomes.

A process of appeal and ultimate resolution of the issues involved then begins and in some cases at least, the accountant will becomes “on the hook” for certain expenditures that fall in the grey area between those that are business related and those that are personal in nature.

These proposals will pose problems for owners of small businesses whose financial statements are prepared on a “Notice to Reader” basis. Their accountant may not be aware, nor have the time to verify, that all expenditures incurred meet all the criteria of deductibility. Therefore, with each additional engagement, the risk of the accountant’s personal reassessment will grow.

The enacting of this resolution will cast aside the independence of the accountant from his client. It will sever a business relationship that must be recognized and respected. There is no place in the Income Tax Act for the professional practitioner to be placed in the middle of Revenue Canada’s overzealous attacks on small business and entrepreneurs, and the resolution as proposed should not become law.

It has always been important for the accountant to know his clientele and the ways they conduct their business. But he must not become a de facto auditor, effectively working for Revenue Canada. It will only lead to higher liability insurance rates for himself and higher professional charges to his client who must bear the additional cost for the performance of his duties.

Article ©1999 The Quarterly Dividend
Reprinted with permission