Prepared by W. Morley Lemon
Gary Archibald is owner of two companies, Arch Limited and Bald Corp. In 1992, Arch transferred land located in Ontario with a value of $2 million to Bald, although there was no registration of the title transferring the property from Arch to Bald. The transfer was effected by journal entries in both companies. Lisa Li Chong, the general service partner of Stevens, Levins and Co., forgot to tell Gary Archibald about the need to pay a land transfer tax on the transfer of the property. Archibald had asked Lisa if there was any tax to be paid and the partner had said no.
Bill Robertson, a tax partner at Stevens, Levins and Co., reviews the file and realizes that a mistake has been made. He realizes that the land transfer tax should have been paid because the transfer was, in fact, effected by virtue of its having been transacted through the financial records of the two companies. He advises Lisa of the problem. In other words, the firm is aware of the problem although Gary Archibald is not.
The partners of Stevens, Levins and Co. realize that they will probably have to pay the tax plus damages if the failure to pay the tax is ever discovered either through disclosure by Archibald or the accounting firm, or by an audit. The omission was the accounting firms fault and not that of their client, Gary Archibald. In circumstances like this, it is usual for the accounting firm (when they believe they are responsible) to pay any costs incurred by the client. The accounting firm is further aware of the fact that the Ontario Ministry of Revenue is not likely to discover that the tax was not paid since the title transfer was not registered. They are further aware that if the problem does come to light, it is the client, Gary Archibald, and his two companies that will be criticized for not paying the tax, and not the accounting firm.
Should the accounting firm tell the client and, if so, what should they say?
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