Public Practice - What You Do Know May Hurt You

When preparing John Acanfura’s 1996 tax return, Sara Chan notices that his income has dropped from the year before. She also notices that he sold some stocks during the year and cashed some Canada Savings Bonds. It appears that John converted about $120,000 of assets into cash and shows no income from that cash. Sara wants to be thorough in preparing John’s tax return, so she asks him about the decrease. John explains that he lent $120,000 to his daughter, Jenny, so that she could buy a house. He further reveals that Jenny is paying an amount equivalent to 6% interest on the loan. But he adds, "We are calling the interest a gift to repay me for all expenses I incurred in raising her." In John’s opinion, this interest should not be considered taxable income, because Jenny is not allowed to deduct the amount as an expense. Jenny is not required to reveal that she has paid the amount to her father. In short, there is no record of the amount being paid to him.

John insists that Sara prepare the tax return without the amount in income. Assume it is unlikely that Revenue Canada will discover that John has received this amount. What should Sara do?

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