Tax Court Recently Confirmed That “Backdating” Is Allowed But Cannot Alter Reality

It is not uncommon, especially in privately-held corporations, for a payment or transfer to be made by a corporation on a particular date and the nature of the payment or transfer may be determined on a later date, at which time a director’s or shareholders’ resolution may be required.  The Canada Revenue Agency (CRA) and the Tax Court of Canada (TCC) recognize that a transaction may be “papered” after the fact, however, backdating is improper where it alters the characterization of a transaction or reality. Learn more about  Backdating vs. Effective Dating. 


A recently released decision of the TCC highlights when the Court will find backdating improper.


In Trower v The Queen,[1] Ms. Trower (the appellant) was assessed by the CRA for the 2016 taxation year and included in that assessment was a $50,000 taxable dividend.  Ms. Trower contended that she did not receive any dividends in 2016.


Throughout 2016, funds from Cove were transferred to a jointly held bank account owned by Mr. and Ms. Trower.  The funds were used to pay family expenses.  In early 2017, Cove’s accountants were preparing its income tax return and sought instructions from Mr. Trower with respect to how to treat the funds transferred to his joint account with Ms. Trower.  Cove’s accountant provided two scenarios to Mr. Trower: a first, where all the funds are considered his income and is taxed in his hands and a second, where the funds are considered to be income (or dividends) paid equally to Mr. and Ms. Cove.  In the second case, the family’s combined tax bill would be lower than if all the funds were taxed in Mr. Trower’s hands.  Mr. Trower instructed the accountants to split the income with Ms. Trower.


A T5 was generated and issued to Ms. Trower.  When she received her 2016 income tax assessment, she appealed it to the TCC.  The TCC found for Ms. Trower holding that she did not receive taxable dividends in 2016 in the amount of $50,000. The resolution approving the dividend was prepared and signed in early 2017 (long after Ms. Trower ceased being a director and shareholder


The TCC explained that best practice is that dividends are “declared on a particular day, to be paid on that day or a future day, to shareholders of record on a specified date, which may be the declaration date, payment date or some other date.”[2]  The Court allowed that “the nature of a payment made by a corporation on a particular day may be determined at a later date at which time, depending on the nature of the payment, a resolution of directors or shareholders might be required.”[3]  The Court further allowed that reality does not always conform to best practice, especially in the case of a closely-held corporation.[4]



[1] 2019 TCC 77.

[2] Ibid at paragraph 23.

[3] Ibid at note 5 in paragraph 23.

[4] Ibid at paragraph 38.