Keeping Tabs: Using Separate Personal And Business Accountants Can Be Trouble
If you're a small business owner, especially one with other shareholder partners, it's possible the accountant who prepares your corporation's books, records and tax returns may not be the one who handles your personal tax matters. If you're not careful, this can lead to potential problems as a recent Tax Court case demonstrates.
The case involved Andrew Tacilauskas, an electrical contractor in business with partners in Whistler, B.C. The businesses were operated by two corporations, West Systems Inc. and Alpine Electric Ltd. When Tacilauskas failed to report dividend income received from his corporations in two successive years, he was assessed federal and provincial penalties in the amount of $13,050 each. The issue before the Tax Court was whether the federal penalty could be cancelled.
On his 2008 tax return, Tacilauskas reported income of nearly $270,000, which included almost $170,000 of taxable dividends from Alpine Electric but not $31,000 of dividends from West Systems. The following year on his 2009 return, he reported employment income of $185,000, but failed to include taxable dividends of $130,500 received from Alpine Electric. Under the Income Tax Act, the penalty for failure to accurately report income in any two tax returns within a four-year period is 10% of the amount of the second omission or $13,050. For the court to cancel the penalty, Tacilauskas would have to prove that he "took all reasonable measures to prevent these omissions."
According to Tacilauskas' testimony, the root of the problem was that his personal tax returns were prepared by a different accountant than the one who acted for the two corporations. For 2008, Tacilauskas simply assumed his accountant had included all the dividends that were received. For 2009, Tacilauskas argued the accountant for Alpine Electric hadn't done the necessary paperwork for the dividend by the time his personal tax return was filed. He "mistakenly thought that the accountant would take care of whatever filings were necessary."
Unfortunately, the judge, in upholding the federal penalty, concluded Tacilauskas "did not take sufficient care in either the 2008 or 2009 tax returns to prevent the omissions from income. The dividends were large amounts, and Mr. Tacilauskas had a responsibility to take appropriate steps to ensure that they were reported. It was not enough to assume that an accountant would take care of it."