Malamute – Tax Court of Canada accepts that cheques to the shareholders labelled as (and treated rather like) “payroll” in fact were shareholder advances

A small contracting company made regular bi-weekly payments to its two shareholders (Mr. and Mrs. Lynch) in amounts equal to an even gross salary number (e.g., $6,000) minus amounts equal to income tax and CPP withholdings that would be applicable to such salary amounts. Mrs. Lynch, as an interim bookkeeper, notated the cheques as being “payroll” and for the first two months of 2018, but not thereafter, remitted source deduction amounts to CRA.

Cook J accepted the principle that “it is the intention of the parties (payer and payee) at the time of the payment that characterizes the nature of the payment” as salary or shareholder advance, but accepted the testimony before him that (consistent with the financial statements) the intention all along was that the payments were shareholder loan advances and not salary; and that the above bookkeeping reflected mistakes by an inexperienced and unsophisticated bookkeeper. He concluded:

This is the type of situation … wherein a shareholder receives draws on the shareholder loan account throughout the year and then a dividend determination is made at some point for the year.

Neal Armstrong. Summary of Malamute Contracting Inc. v. The King, 2025 TCC 47 under s. 5(1).