Public Practice - Can You Keep a Secret?

Every year, Dalewood Inc., on the advice of Bakal Blazouske & Co., Dalewood’s accounting firm, files its tax return without claiming the small business deduction. And every year, the company is assessed by Revenue Canada with no adjustment to tax payable. One day in 1996, a Revenue Canada auditor appears and performs an audit for the past several years. According to her calculations, Dalewood owes some additional taxes. The Small Business Deduction is not mentioned.

Several months later, Revenue Canada sends Dalewood a notice of reassessment indicating the amount of the additional taxes. Much to the company’s surprise, however, Revenue Canada has allowed it to claim the Small Business Deduction for 1995, and has indicated that a large refund is appropriate. Later, a cheque for that very amount arrives from Revenue Canada.

Dalewood wonders whether it should tell Revenue Canada that a mistake was made in the reassessment. Management talks to its accounting firm, Bakal Blazouske, and learns that there is a low probability that the mistake will be discovered. It is unlikely that Revenue Canada will reaudit the years in question, since it seems satisfied that there were no problems.

The partners of Bakal Blazouske are pondering what the appropriate action might be in this case. What should they do?

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