Teitelbaum,
J.:—This
is
an
appeal,
by
means
of
a
direct
action,
of
a
decision
rendered
by
the
Chairman
of
the
then
Tax
Review
Board,
L-J.
L.
Cardin,
Q.C.
The
decision
was
rendered
on
June
20,
1983
dismissing
Mansell
Nellis’
appeal
from
assessments
of
income
with
respect
to
the
1974,
1975,
1976
and
1977
taxation
years.
The
plaintiff,
in
his
amended
statement
of
claim,
alleges
that
on
May
29,
1979,
he
was
reassessed
for
income
taxes
for
the
years
1974
to
1977
inclusively.
Plaintiff
claims
that
for
the
1974
taxation
year,
the
Minister
of
National
Revenue
included
into
plaintiff’s
income
$30,000
and
$25,000
for
a
total
of
$55,000,
for
the
1975
taxation
year,
$20,000,
$16,476.68
and
$225
for
a
total
of
$36,701.68,
for
the
1976
taxation
year,
$60,544.13,
$3,923.18,
$8,000
and
$225
for
a
total
of
$72,692.31
and
for
the
1977
taxation
year
$1,816.32
and
$225
for
a
total
of
$2,041.32.
The
defendant,
in
its
defence,
admitted
the
fact
of
the
reassessment
and
the
amounts
as
stated
in
the
amended
statement
of
defence.
Plaintiff
alleges
in
the
statement
of
claim,
paragraph
6,
that
he,
at
all
material
times,
was
a
50
per
cent
shareholder
in
a
company
known
as
Corners
Sandstone
Quarries
(1966)
Limited
(Corners)
and
almost
100
per
cent
shareholder
in
a
company
known
as
Nellis
Construction
Limited
(Nel-
lis).
The
evidence
at
trial
showed
that
the
plaintiff
was
a
25
per
cent
shareholder
of
Corners,
his
wife
owned
25
per
cent
and
Mr.
and
Mrs.
Kenneth
Lloyd
Galbraith
each
owned
25
per
cent
of
the
issued
shares
of
Corners.
The
plaintiff,
who
is
now
retired,
owned
and
operated
Nellis
Construction
Limited
for
the
past
30
years,
it
is
now
a
family
business
and
although
the
plaintiff
is
retired,
he
still
remains
a
majority
shareholder
with
the
title
of
president.
Nellis
is
what
is
called
“an
earth
moving
company”.
Corners
Sandstone
(1966)
Ltd.
is
a
company
that,
according
to
plaintiff,
no
longer
exists.
It
was
operated
as
a
quarry
for
sandstone.
Corners
had
been
operated,
up
to
1966,
by
Austin
Corners
but
in
the
spring
of
1966
Mr.
Austin
Corners
died,
his
widow
attempted
to
continue
to
operate
the
company,
could
not,
and
thus
plaintiff
and
Kenneth
Galbraith
took
over
the
operation
of
Corners.
Western
University
was
Corner’s
main
purchaser
of
the
sandstone.
For
a
period
of
approximately
two
years
all
went
well.
To
the
dismay
of
plaintiff,
the
University,
after
the
two-year
period,
began
to
“cut-back”
on
its
construction
and
thus
Corners
was
left
without
a
market.
Plaintiff
states
he
believed
the
“cut
back”
to
have
been
a
temporary
measure,
thus
it
was
decided
to
continue
to
mine
the
sandstone
to
build
up
inventory
and
to
attempt
to
sell
the
sandstone
to
the
“local
market”.
As
it
turned
out,
Corners
was
unable
to
market
the
sandstone
on
the
local
market,
Western
University
was
not
purchasing
any
more
sandstone
and
thus,
beginning
in
1968,
the
Company
was
beginning
to
have
financial
difficulties.
These
financial
difficulties,
we
are
told
by
the
plaintiff,
forced
him
to
lend
to
Corners,
over
a
period
of
several
months
or
several
years,
he
is
not
quite
sure
which,
a
sum
of
$50,000.
Tab
8
of
Exhibit
P-1
shows
that
the
sum
of
$50,000
was
loaned
by
plaintiff
from
July
1968
to
December
31,
1969
by
sums
of
$10,000,
$5,000,
$10,000,
$5,000,
$10,000,
$3,000,
$5,000
and
$2,000.
The
said
document
also
shows
that
the
sum
of
$50,000
was
allegedly
repaid
to
plaintiff
on
July
31,
1974,
I
believe.
It
is
extremely
difficult
to
read
the
photocopy
furnished
to
the
Court.
In
that
Corners
was
unable
to
continue
to
operate
profitably,
plaintiff
and
his
associate
decided,
in
early
1970,
to
sell
the
property
owned
by
Corners.
The
property
consisted
of
the
quarry,
10
acres
of
quarry
and
the
“overburden”
five
acres.
Corners,
after
attempting
to
sell
this
land
as
a
building
site,
could
not
and
thus
it
was
decided
that
plaintiff
and
Galbraith
would
each
build
a
home
on
the
two
properties.
Construction
permits
were
allegedly
obtained
(not
produced),
and
a
contract
to
construct
the
two
homes
was
given
to
Rosset
Bros.
Construction
Co.
Ltd.
for
$150,000.
Plaintiff,
in
his
testimony
to
me,
stated
that
the
funds
to
build
the
two
homes
were
to
come
from
the
Bank
of
Montreal
who
had
given
a
verbal
commitment
to
supply
the
funds
by
way
of
a
mortgage.
The
Bank
of
Montreal,
after
having
given
its
verbal
commitment,
reversed
itself,
as
banks
may
tend
to
do,
if
it
serves
their
best
interest
and
notwithstanding
their
commitment,
thus
forcing
plaintiff
to
find
the
necessary
funds
elsewhere.
Plaintiff
personally
owned
some
property
and
he
was
able
to
raise
$110,000
by
giving
a
mortgage
on
his
personal
property
(Exhibit
P-2).
The
mortgage
is
dated
June
27,
1974,
is
for
a
sum
of
$110,000,
for
a
period
of
one
year,
to
July
2,
1975,
bearing
interest
at
the
rate
of
13
per
cent
per
annum,
payable
half-yearly
on
the
2nd
day
of
July
and
January
in
each
year
(Exhibit
P-2,
page
2).
After
plaintiff
borrowed
the
sum
of
$110,000,
he,
in
turn,
loaned
this
sum
to
Corners
to
enable
Corners
to
pay
for
the
cost
of
construction
of
the
two
homes
to
be
built
on
the
property
of
Corners.
It
must
be
remembered
that
plaintiff
stated
the
cost
of
construction
was
to
be
$150,000
and
thus
Corners
would
still
be
short
$40,000.
When
plaintiff
loaned
Corners
the
sum
of
$110,000
he
received,
as
security
for
this
loan
and
other
sums
previously
advanced
by
him,
a
mortgage,
dated
July
2,
1974,
on
property
of
Corners
but
for
a
sum
of
$230,000.
(Exhibit
P-3).
Plaintiff
explains
the
sum
of
$230,000
being
composed
in
the
following
manner:
(a)
$110,000
money
loaned
by
plaintiff
to
Corners
(see
Exhibit
P-2);
(b)
plaintiff
committed
Nellis
to
advance
$40,000
in
the
fall
of
1974,
at
such
time
as
Corners
would
need
the
money
to
pay
to
finish
the
construction
of
the
homes;
(c)
$50,000
owing
to
plaintiff
by
Corners
for
previous
advances
(see
Exhibit
P-1,
Tab
8);
(d)
$30,000
representing
interest
owing
plaintiff
by
Corners
on
the
$50,000
advanced.
Plaintiff
admits
receiving
security
for
the
$30,000
of
interest
that
was
owing
to
him
for
the
previous
advances
of
$50,000.
Therefore,
plaintiff
received
interest
income
in
1974
of
$30,000,
as
a
new
debt
was
created
for
this
sum
in
the
mortgage
(Exhibit
P-3).
In
examining
Exhibit
P-3,
it
must
be
noted,
under
“Recitals”
the
following:
1.
The
Mortgagor
is
indebted
to
the
Mortgagee
in
his
personal
capacity
in
the
amount
of
$190,000
in
respect
of
past
transactions
and
in
respect
of
a
loan
presently
being
made.
2.
The
Mortgagor
is
indebted
to
Nellis
Construction
Ltd.
in
the
amount
of
$40,000
and
has
agreed
to
give
this
mortgage
to
the
said
Mortgagee
as
Trustee
for
the
said
Nellis
Construction
Ltd.
to
secure
the
said
indebtedness.
It
thus
can
be
noted
that
this
document,
Exhibit
P-3,
a
certified
registered
mortgage,
states,
in
paragraph
2
under
"Recitals"
that
Corners
is
indebted
to
Nellis
for
the
loan
of
$40,000,
not
that
it
shall
become
indebted
to
Nellis
upon
Corners
receiving
the
$40,000
loan
from
Nellis.
This,
of
course,
is
a
serious
contradiction
with
plaintiff's
testimony
when
he
stated
that
he
committed
Nellis
to
giving
Corners
a
loan
of
$40,000
in
the
fall
of
1974,
at
such
time
as
Corners
would
need
the
money.
I
believe
plaintiff
when
he
states
that
on
July
2,
1974,
Corners
had
not
yet
received
the
$40,000
from
Nellis
and
from
the
proof
made
before
me
I
also
believe
that
Corners
never
received
the
$40,000
from
Nellis
but
received
this
sum
from
plaintiff.
Plaintiff
submitted
to
me,
as
Exhibit
P-4,
a
resolution
of
Corners
which
plaintiff
and
his
attorney
contend
corroborates
the
fact
that
moneys
will
be
advanced
by
Nellis
to
Corners,
the
sum
of
$40,000
mentioned
in
Exhibit
P-3.
I
do
not
agree.
The
resolution,
Exhibit
P-4,
states
that
Corners
will
borrow
from
plaintiff
$110,000
in
addition
to
other
moneys
already
owed
to
him
or
to
Nellis
Construction
Ltd.
and
will
give
a
mortgage
as
security
for
a
value
of
$230,000.
The
important
words
of
this
resolution,
Exhibit
P-4,
are:
RESOLVED
that
Corner’s
Sandstone
Quarries
(1966)
Limited
borrow
from
William
Mansell
Nellis
the
sum
of
$110,000
in
addition
to
other
moneys
already
owed
to
him
or
to
Nellis
Construction
Ltd.
on
the
security
of
a
5.272
acre
parcel
comprising
part
of
the
East
and
West
Halves
of
Lot
27
in
Concession
10
in
the
Town
of
Halton
Hills
in
the
Regional
Municipality
of
Halton
and
a
10.001
acre
parcel
being
part
of
the
West
Half
of
Lot
27
in
Concession
10
in
the
same
municipality,
and
that
the
mortgage
from
the
Corporation
be
for
a
total
amount
of
$230,000
with
interest
at
13%
per
annum
from
2
July
1974
The
proof
before
me
was
that
no
money
was
advanced
to
Corners
by
Nellis
up
to
December
1974
and
thus
this
resolution
as
well
as
the
second
paragraph
under
"Recitals"
in
Exhibit
P-3
are
inaccurate.
Plaintiff’s
attorney
states
this
is
bad
draftsmanship
on
the
part
of
the
persons
preparing
these
documents.
I
think
not.
I
believe
it
was
drafted
in
this
manner
in
order
to
avoid
income
tax
that
may
eventually
become
owing.
In
fact,
a
sum
of
$40,000
was
loaned
to
Corners.
Plaintiff
produced
two
cheques,
Exhibits
P-5
and
6,
each
in
the
sum
of
$40,000,
to
attempt
to
show
me
the
manner
in
which
the
$40,000
was
loaned
to
Corners
and
that,
as
far
as
plaintiff
was
concerned,
the
$40,000
was
loaned
by
Nellis
to
Corners
but
through
plaintiff
as
a
conduit.
The
objective
facts
presented
to
me
contradict
any
verbal
proof
made
to
me
that
it
was
Nellis
Construction
Ltd.
that
loaned
the
sum
of
$40,000
to
Corners.
The
cheque,
a
current
account
cheque,
filed
as
Exhibit
P-5,
is
one
drawn
on
the
Bank
of
Montreal,
Acton,
Ont.,
is
dated
December
16,
1974,
is
payable
to
Mansell
Nellis,
the
plaintiff,
for
a
sum
of
$40,000
and
is
issued
from
the
account
of
Nellis
Construction
Ltd.
On
the
face
of
the
cheque,
the
following
is
written
“Loan
from
Nellis
Const.
Ltd.
to
Mansell
Nellis".
I
find
that
this
cheque
clearly
indicates
that
the
loan
is
made
to
the
plaintiff.
A
second
cheque,
Exhibit
P-6,
was
also
filed
by
plaintiff
in
order
to
show
circumstances
surrounding
the
transaction
to
indicate
that
the
loan
really
was
never
made
to
plaintiff
personally.
This
cheque,
Exhibit
P-6,
is
also
drawn
on
the
Bank
of
Montreal,
Acton,
Ont.,
is
dated
December
19,
1974,
three
days
after
Exhibit
P-5,
is
payable
to
Corners
Sandstone
Quarries
(1966)
Ltd.
for
a
sum
of
$40,000
and
is
from
the
true
chequing
account
of
plaintiff.
On
the
face
of
this
cheque,
the
following
is
written
“Loan
to
Corners
covered
by
Mortgage”.
This
cheque
clearly
indicates
to
me
that
the
sum
of
$40,000
was
loaned
by
plaintiff
to
Corners
and
that
this
loan
was
secured
by
the
mortgage
given
by
Corners
to
plaintiff
on
July
2,
1974
(Exhibit
P-3).
The
$40,000
mentioned
under
“Recitals”
on
Exhibit
P-3
may
have
been,
at
that
time,
foreseen
to
be
coming
from
Nellis
Const.
but
the
facts
proven
show
clearly
that
the
sum
of
$40,000
came
from
plaintiff
and
that
plaintiff
borrowed
the
money
from
Nellis
Construction
Ltd.
The
plaintiff,
during
his
testimony,
attempted
to
explain
away
the
objective
evidence
of
the
cheques
and
the
writings
contained
on
their
face
by
stating
that
this
method
was
used
as
a
result
of
advice
by
his
then
accountant,
Ralph
Davies.
The
plaintiff
stated
that
Mr.
Davies
informed
him
that
one
limited
company
could
not
write
a
cheque
to
another
limited
company
and
therefore,
I
presume,
Nellis
Construction
could
not
write
a
cheque
directly
to
Corners
Sandstone.
I
cannot
believe
that
an
accountant
would
make
such
a
statement
but,
of
course,
he
may
have
done
so.
Unfortunately,
Mr.
Ralph
Davies
is
deceased.
Mr.
Kenneth
Galbraith,
an
associate
of
the
plaintiff
testified
that
during
the
summer
of
1974
he
heard
Mr.
Davies
make
a
statement
to
the
effect
that
a
“closely
held”
company
cannot
make
a
loan
to
another
“closely
held”
company
but
must
do
this
through
a
third
person.
I
also
find
this
difficult
to
believe
particularly
when
both
companies
are
closely
related
because
of
plaintiff's
shareholdings
in
both
corporations
and
that
plaintiff
was
used
as
the
“third
person”.
If
Mr.
Davies
really
believed
what
he
allegedly
stated,
surely
he
would
not
have
used
plaintiff
as
the
“third
person”
to
make
the
loan.
In
any
event,
$40,000
was
loaned
to
Corners,
the
two
homes
were
completed
and
Rosset
Bros.
Construction
Co.
Ltd.
was
paid
the
balance
owing
to
it
(Exhibit
P-7).
The
plaintiff
states
that
Corners
attempted
to
sell
the
properties
but
could
not
do
so.
In
February
1976,
the
plaintiff
and
his
associate
Mr.
Galbraith,
decided
that
since
they
could
not
sell
the
homes
each
of
them
would
purchase
a
home
at
a
value
of
$160,000.
This
transaction
was
completed
in
the
manner
mentioned
in
a
resolution
of
Corners
dated
February
13,
1974
and
filed
as
Exhibit
P-8.
On
February
13,
1976,
the
same
day
when
plaintiff
purchased
one
of
the
homes
built
for
Corners,
plaintiff
personally
granted
Corners
a
complete
discharge
for
the
loan
of
$230,000
for
which
plaintiff
had
been
given
a
mortgage
on
July
2,
1974
(Exhibit
P-3).
The
discharge,
filed
as
Exhibit
P-9,
does
not
speak
of
any
money
that
may
have
been
owing
to
Nellis
Construction.
It
furthermore
states,
on
page
2:
And
that
I
am
the
person
entitled
by
law
to
receive
the
money,
And
that
such
mortgage
is
therefore
discharged.
There
can
be
no
doubt
that
Nellis
Construction
was
not
a
party
to
a
loan
of
$40,000
made
to
Corners
Sandstone.
Proof
was
made
before
me
through
the
testimony
of
the
plaintiff
himself
that
notwithstanding
that
he
granted
Corners
a
discharge,
Exhibit
P-9,
he
did
not
receive
all
the
money
owing
him
by
Corners
and,
as
at
August
19,
1976,
there
was
still
owing
to
him
$60,544.13.
To
confirm
that
this
sum
was
still
owing,
Corners
passed
a
Resolution
dated
August
19,
1976,
filed
as
Exhibit
P-10.
I
believe
it
important
to
recite
this
resolution
in
full
as
it
clearly
sets
out
the
reason
why
the
discharge,
Exhibit
P-9,
was
given
notwithstanding
that
not
all
that
was
then
owing
was
paid
and
clearly
sets
out
what
is
still
to
be
paid:
WHEREAS
1.
by
a
document
dated
2nd
July
1974
the
Corporation
gave
to
William
Mansell
Nellis
a
mortgage
on
the
real
estate
of
the
Corporation,
such
mortgage
being
in
the
amount
of
$230,000.00.
2.
the
terms
of
payment
under
the
said
mortgage
were
amended
by
a
document
dated
3rd
July
1975
and
under
the
terms
thereof
the
moneys
secured
by
the
said
mortgage
with
interest
thereon
became
due
on
2nd
July
1976.
3.
the
Corporation,
being
desirous
of
conveying
the
lands
free
of
encumbrance
obtained
a
discharge
of
the
said
mortgage
although
a
portion
of
the
interest
accrued
thereon
could
not
be
paid.
4.
the
portion
of
interest
remaining
unpaid
as
of
August
15,
1976
was
$60,544.13
which
the
said
William
Mansell
Nellis
has
agreed
to
waive
till
the
Corporation
is
in
a
better
financial
position
to
pay
the
same.
BE
IT
RESOLVED
that
the
Corporation
acknowledges
the
said
amount
of
$60,544.13
as
owing
and
agrees
to
pay
simple
interest
thereon
at
the
rate
of
12%
per
annum,
payable
monthly
on
the
15th
of
each
month,
the
first
of
such
payments
of
interest
to
become
due
on
15th
September
1976
and
calculated
from
15th
August
1976
on
the
amount
of
$60,544.13,
and
thereafter
on
the
amount
from
time
to
time
outstanding,
till
the
said
sum
and
interest
thereon
are
fully
paid.
It
therefore
can
be
seen
that
the
portion
of
interest
owing
plaintiff,
$60,544.13,
was
not
paid.
The
plaintiff
testified
he
never
received
any
part
of
this
money
from
Corners.
No
proof
was
made
that
he
did
receive
the
money.
I
believe
he
never
received
the
payment
either
in
cash
or
in
any
other
manner
that
can
legally
be
considered
payment
or
partial
payment.
Exhibit
P-10
is
simply
a
document
emanating
from
the
corporate
books
of
Corners
whereby
Corners
has
a
record
that
it
is
still
indebted
to
plaintiff
for
a
sum
of
$60,544.13
as
interest
on
a
past
due
loan
and
that
Corners
agrees
to
pay
interest
on
this
amount
at
12
per
cent
per
annum,
payable
monthly.
Furthermore,
no
date
is
mentioned
when,
if
ever,
the
sum
of
$60,544.13
is
to
be
repaid
to
the
plaintiff
other
than
“‘till
the
Corporation
(Corners)
is
in
a
better
financial
position
to
pay
the
same”.
This
document
cannot
be
considered
as
anything
other
than
a
statement
by
Corners
that
it
still
owes
the
money
to
plaintiff.
In
cross-examination,
the
plaintiff
admitted
that
when
he
obtained
the
mortgage
(Exhibit
P-3),
Corners
was
indebted
to
plaintiff
for
the
$30,000
back
interest
and
that
it
formed
part
of
the
new
debt
of
$230,000
for
which
the
mortgage
was
given.
The
amount
of
interest
owing
was
really
a
sum
in
excess
of
$33,000
but
that
the
balance,
over
$30,000,
was
forgiven.
According
to
plaintiff's
witness,
Frederick
Bott,
it
is
fairly
normal
for
a
creditor
to
forgive
a
minor
sum
owing
to
it
for
interest,
as
in
this
case.
The
plaintiff
was
carefully
cross-examined
by
the
attorney
of
defendant
but,
unfortunately,
plaintiff
had
a
great
deal
of
trouble
remembering
anything
with
regard
to
his
tax
returns
filed
under
Tab
13
of
Exhibit
P-1.
These
are
plaintiff's
tax
returns
for
1974
to
1977
inclusively.
He
referred
all
questions
as
to
investment
or
interest
income
to
his
accountant,
Frederick
Bott.
The
plaintiff
called
Mr.
Kenneth
Lloyd
Galbraith
to
testify
on
his
behalf.
He
added
very
little
to
the
evidence
other
than
to
corroborate
plaintiff's
testimony
on
a
number
of
points
mentioned
in
plaintiff's
examination-in-
chief.
Mr.
Galbraith
confirmed,
and
as
I
have
stated
I
believe
it
to
be
true,
that
other
than
the
resolution,
Exhibit
P-10,
there
was
no
other
document
ever
prepared
or
given
to
plaintiff
concerning
the
debt
of
$60,544.13
by
Corners.
That
no
money
owing
on
this
sum
was
ever
paid
by
Corners
and
will
never
be
paid
as
Corners
is
no
longer
in
business.
The
plaintiff
testified
that
Corners
was
no
longer
in
business
but
had
not
yet
surrendered
its
Charter.
It
therefore
legally
exists
but
with
no
assets.
I
am
satisfied
that
plaintiff
will
never
receive
any
of
the
$60,544.13
owing
to
him,
let
alone
any
more
interest
on
this
amount,
the
plaintiff
having
received
some
interest
payments.
Plaintiff
had
a
Mr.
Frederick
Bott
testify
on
his
behalf.
Mr.
Bott
informed
me
that
he
is
a
chartered
accountant
since
1968
and
that
he
was
acting
for
Mr.
Mansell
Nellis
personally
as
well
as
for
his
corporation
Nellis
Construction
since
1975.
He
stated
that
he
prepared
plaintiff's
personal
income
tax
returns
since
1975
as
well
as
the
corporate
tax
returns
since
1975.
He
therefore
should
be
in
a
position
to
answer,
clearly
and
without
any
ambiguity,
all
questions
of
a
financial
nature
concerning
plaintiff
or
Nellis
Construction
from
the
time
he
took
over
the
accounting
work.
I
feel
that
it
is
necessary
for
me
to
briefly
state
in
this
judgment
some
remarks
I
made
in
open
Court
concerning
my
impression
of
the
testimony
of
Mr.
Bott.
I
stated
that
I
was
not
impressed
with
his
testimony.
I
further
stated
that
I
got
the
feeling
throughout
his
testimony
that
he
always
was
attempting
to
avoid
replying
to
questions
in
a
clear
and
concise
manner
and
would
only
answer
after
being
"boxed"
in.
Although
I
have
given
full
consideration
to
Mr.
Bott's
testimony,
I
seriously
doubt
his
credibility
as
being
an
objective
witness.
In
cross-examination,
the
witness
was
shown
Exhibit
D-1,
the
financial
statement
for
Nellis
Construction
for
1975.
The
witness
admitted
he
prepared
this
financial
statement.
I
would
now
mention
that
Mr.
Bott
was
shown
Exhibit
D-1
after
he
had
testified
in
his
examination-in-chief
that
the
shareholder’s
loan,
the
$40,000
loaned
to
plaintiff
by
Nellis
Const.
on
December
16,
1974
(Exhibit
P-5),
was
not
an
accurate
reassessment
by
the
defendant
because
the
$40,000
was
added
to
Mr.
Mansell
Nellis’
shareholder
loan
account
by
a
bookkeeper
and
by
the
previous
accountant
which,
he
states,
should
not
have
been.
In
cross-examination,
after
being
shown
Exhibit
D-1,
he
admits
that
he
continued
to
show
the
$40,000.
as
an
advance
to
a
shareholder.
In
Exhibit
D-1,
Financial
Statements
of
Nellis
Construction
Ltd.,
for
year
ended
May
31,
1975,
last
page,
Mr.
Bott
lists
on
Supplementary
Information
T2
S
11
ADVANCED
$40,000.
to
a
Shareholder
After
this
was
shown
to
him,
Mr.
Bott
replied
that
he
did
this
on
the
information
that
was
there
(in
the
books)
and
he
believed
it
to
be
correct.
He
stated
he
took
it
for
granted
and
although
he
did
not
know
if
it
was
true,
he
had
only
taken
over
the
books
for
approximately
three
months,
he
nevertheless
asked
Mr.
Nellis
to
sign
a
tax
return
that
this
statement
was
true
and
correct.
The
excuse
for
the
1975
statement
was
that
he
just
took
over
the
books
of
Nellis
Construction.
When
confronted
with
Exhibit
D-2,
Financial
Statements
of
Nellis
Construction
Ltd.
for
year
ended
May
31,
1976
wherein
it
states,
on
page
5,
under
Current
Assets:
Due
from
Shareholder
$41,476.68.
the
witness
finally
admitted,
after
much
prodding,
that
this
sum
of
$40,000
is
included
in
the
sum
of
$41,476.68
but
because
Mr.
Nellis
personally
has
a
claim
against
Corners
Sandstone
for
the
money,
it
was
not
really
a
loan
to
Mr.
Nellis
by
Nellis
Construction
Ltd.
For
a
chartered
accountant
to
make
this
statement
is,
I
believe,
sufficient
reason
to
doubt
his
credibility.
Mr.
Bott
also
admitted
that
Nellis
Construction
never
received
any
interest
for
this
alleged
loan
of
$40,000
from
Corners
nor
from
Mr.
Nellis.
In
being
questioned
concerning
the
interest
income
shown
on
the
tax
returns
by
plaintiff,
the
witness
answered
what
he
thought
was
the
source
of
the
interest
income
but
could
not
produce
a
single
document
giving
a
breakdown
of
where
the
interest
came
from.
The
witness
was
referred
to
the
1976
tax
return
of
plaintiff
(Exhibit
P-1,
Tab
13)
where,
on
page
3
of
the
1976
return,
“Other
Investment
Income
Not
Eligible
for
Interest
and
Dividend
Income
Deduction
—
Interest
received
from
—
where
it
shows
“Corners
Sandstone
$14,834.65’’.
Mr.
Bott,
in
attempting
to
explain
this
amount
of
interest
income
stated
that
$3,200
of
the
$14,834.65
was
the
balance
of
interest
due
to
Mr.
Nellis
on
the
original
$30,000
of
interest
owing
Mr.
Nellis
on
the
$50,000.
Mr.
Nellis
had
loaned
Corners
between
July
1968
to
December
31,
1969,
the
$26,800
was
supposedly
included
in
the
1975
tax
return.
In
the
1975
tax
return,
the
amount
is
really
$27,499.45
(Exhibit
P-1,
Tab
13,
3rd
page
of
1975
return).
If
this
is
correct,
how
is
it
that
in
July
1974
this
sum
of
$30,000
was
included
in
the
mortgage
of
$230,000
and
that
this
mortgage
was
only
discharged
on
February
13,
1976
and
there
is
no
document
to
show
that
any
amount
received
or
allegedly
received
by
Mr.
Nellis
was
for
this
debt
of
interest.
Further
to
other
questioning,
the
witness
replied
that
the
full
$14,834.65
was
for
interest
received
from
Corners
Sandstone
and
was
in
relation
to
the
$230,000
mortgage.
This
was
completely
contradicted
in
a
letter
from
plaintiff’s
attorney
dated
October
23,
1985
to
the
attorney
representing
the
defendant
wherein
it
was
stated
that
the
sum
of
$14,834.65
had
nothing
to
do
with
the
mortgage
of
$230,000.
(Letter
not
filed.)
In
fact,
the
letter
of
October
23,
1985,
was
written
as
a
result
of
an
Examination
on
Discovery
of
Mr.
Bott,
where
Mr.
Bott,
at
page
31,
question
15,
was
aSked
for
a
Clarification
of
the
sum
of
$14,834.65.
I
simply
do
not
believe
the
testimony
of
Mr.
Bott
when
he
testified
as
to
the
loan
of
$40,000
nor
as
to
the
interest
of
$14,834.65
nor
as
to
his
explanation
with
regard
to
the
dividends
shown
as
declared
in
the
books
of
Nellis
Construction
to
Mr.
Nellis.
To
further
show
the
doubtful
credibility
of
this
witness,
he
insisted
that
the
recording
of
the
dividend
payment
was
not
in
accordance
with
the
facts,
and
after
being
shown
Tab
24,
Page
2
of
Exhibit
P-1,
Entries
of
Nellis
Construction
Ltd.
showing
a
dividend
payment
of
$15,000
(May
31,
1975)
and
then
being
shown
Tab
29
of
Exhibit
P-1,
Nellis
Loan
Account
clearly
showing
the
$15,000,
Mr.
Bott
admitted
that
the
defendant
was
correct
in
reassessing
the
plaintiff
$20,000
as
dividends.
The
defendant
did
not
have
any
witnesses.
Plaintiff’s
attorney,
in
his
argument
admitted
that
the
reassessment
of
$20,000
as
a
dividend
for
the
1975
year
is
correct.
He
also
agrees
that
the
$25
reassessment
was
correct
for
the
same
year.
He
also
agreed
with
the
$25
reassessment
for
1976
and
1977.
Plaintiff’s
main
and
only
argument
is
with
regard
to
the
defendant’s
assessment
of
$30,000
interest
in
1974
and
$25,000
as
a
result
of
the
$40,000
loan
which
was
not
repaid
within
a
year
of
receiving
same
as
per
the
Income
Tax
Act
and
with
defendant’s
reassessment
of
$60,544.13
(interest
received)
for
the
1976
taxation
year.
He
made
no
argument
with
regard
to
any
of
the
other
assessments
made
by
the
defendant.
The
sections
of
the
Income
Tax
Act
applicable
to
this
case
are
12(1)(c),
15(2)
and
76(1).
These
sections
state:
12.
(1)(c)
any
amount
received
by
the
taxpayer
in
the
year
or
receivable
by
him
in
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
profit)
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
interest.
15.
(2)
Where
a
corporation
has
in
a
taxation
year
made
a
loan
to
a
shareholder,
the
amount
thereof
shall
be
included
in
computing
the
income
of
the
shareholder
for
the
year
unless
(a)
the
loan
was
made
(i)
in
the
ordinary
course
of
its
business
and
the
lending
of
money
was
part
of
its
ordinary
business,
(ii)
to
an
officer
or
servant
of
the
corporation
to
enable
or
assist
him
to
purchase
or
erect
a
dwelling
house
for
his
own
occupation,
(iii)
to
an
officer
or
servant
of
the
corporation
to
enable
or
assist
him
to
purchase
from
the
corporation
fully
paid
shares
of
the
corporation
to
be
held
by
him
for
his
own
benefit,
or
(iv)
to
an
officer
or
servant
of
the
corporation
to
enable
or
assist
him
to
purchase
an
automobile
to
be
used
by
him
in
the
performance
of
the
duties
of
his
office
or
employment,
bona
fide
arrangements
were
made
at
the
time
the
loan
was
made
for
repayment
thereof
within
a
reasonable
time,
or
(b)
the
loan
was
repaid
within
one
year
from
the
end
of
the
taxation
year
of
the
corporation
in
which
it
was
made
and
it
is
established,
by
subsequent
events
or
otherwise,
that
the
repayment
was
not
made
as
a
part
of
a
series
of
loans
and
repayments,
and,
where
the
shareholder
is
a
corporation,
the
amount
so
included
in
computing
its
income
for
the
year
shall
be
deemed
to
have
been
received
by
it
as
a
dividend.
76.
(1)
Where
a
person
has
received
a
security
or
other
right
or
a
certificate
of
indebtedness
or
other
evidence
of
indebtedness
wholly
or
partially
as,
in
lieu
of
payment
of,
or
in
satisfaction
of,
a
debt
that
was
then
payable,
the
amount
of
which
debt
would
be
included
in
computing
his
income
if
it
had
been
paid,
the
value
of
the
security,
right
or
indebtedness
or
the
applicable
portion
thereof
shall,
notwithstanding
the
form
or
legal
effect
of
the
transaction,
be
included
in
computing
his
income
for
the
taxation
year
in
which
it
was
received.
Issue
No.
1
—
The
$40,000
received
by
Plaintiff
from
Nellis
and
Advanced
to
Corners
Sandstone
As
I
have
stated,
only
a
portion
($25,000)
of
this
loan
was
assessed
as
income
for
plaintiff's
1974
taxation
year.
I
am
satisfied
from
the
proof
and
for
the
reasons
I
have
already
given,
plaintiff
borrowed
from
Nellis
Construction
$40,000
on
December
16,
1974
(Exhibit
P-5)
and
then
he
personally
loaned
a
similar
sum,
$40,000,
to
Corners
(Exhibit
P-6).
The
documentation
filed
makes
this
very
clear.
The
theory
advanced
by
Plaintiff's
attorney
that
Mr.
Nellis
was
only
a
"conduit"
for
the
money
simply
cannot
be
taken
seriously.
Not
only
the
cheques
(Exhibits
P-5
and
6)
contradict
this
theory
but
so
do
the
books
of
Nellis
Construction
as
prepared
by
Mr.
Bott.
I
agree
with
Mr.
Cardin
of
the
Tax
Review
Board
when
he
rendered
his
decision
involving
Mr.
Nellis
[1983]
C.T.C.
2480
at
2483;
83
D.T.C.
381
at
384:
In
the
absence
of
direct
evidence,
the
best
available
evidence
with
respect
to
the
$40,000
transaction
is
to
be
found
in
the
Nellis
shareholder’s
loan
account
and
the
cash
disbursement
book.
On
the
basis
of
the
evidence,
one
cannot
conclude
otherwise
than
that
the
appellant
personally
borrowed
$40,000
from
Nellis
Construction
Limited
and
loaned
the
funds
to
Corner’s
along
with
the
$110,000
already
advanced
by
him
to
Corner’s.
Whether
the
transaction
could
have
been
effected
differently
and
perhaps
more
advantageously
for
the
appellant,
is
not,
in
my
opinion,
pertinent
to
the
issue
before
me.
Judgment
must
be
rendered
on
the
best
available
evidence
as
to
what
actually
took
place.
In
my
opinion,
the
appellant
did
not
succeed
in
establishing
that
the
$40,000
received
by
the
appellant
from
Nellis
Construction
Limited
was
not
a
shareholder’s
loan
made
by
Nellis
Construction
Limited
to
the
appellant
which
had
not
been
repaid
within
a
year.
The
balance
of
the
unpaid
loans
was
properly
included
in
the
appellant’s
income
for
1974,
in
accordance
with
subsection
15(2)
of
the
Act.
The
appeal
on
that
point
must
fail.
The
purpose
of
section
15
of
the
Income
Tax
Act
is
to
prevent
a
corporation
from
distributing
its
profits
to
its
shareholders
under
the
guise
of
a
loan
(see
Zatzman
v.
M.N.R.,
23
Tax
A.B.C.
193
at
195;
59
D.T.C.
635
at
637).
The
assessments
made
by
a
Minister
are
presumed
valid
until
the
taxpayer,
and
the
onus
is
upon
him
to
do
so,
has
proven
that
they
are
not
(see
Johnston
v.
M.N.R.,
[1948]
C.T.C.
195;
3
D.T.C.
1182
(S.C.C.)
and
Trout
v.
M.N.R.,
7
Tax
A.B.C.
216;
52
D.T.C.
388).
Other
than
the
statement
of
plaintiff
that
he
was
acting
as
a
conduit
and
that
Exhibits
P-5
and
6
were
“‘cashed”’
at
the
same
time,
I
have
nothing
to
indicate
to
me
that
Nellis
Construction
did
not
intend
to
make
a
direct
loan
to
plaintiff
and
that
plaintiff
made
a
direct
loan
to
Corners.
I
am
satisfied
the
defendant
was
correct
in
assessing
plaintiff
the
sum
of
$25,000
in
1974.
Issue
No.
2
—
The
$30,000
Interest
Owing
on
the
$50,000
Advances
to
Corners
by
Plaintiff
Here,
again,
I
have
stated
that
the
evidence
had
clearly
shown
that
the
sum
of
$30,000
was
included
in
the
amount
of
$230,000
in
the
mortgage
given
to
plaintiff
by
Corners
(Exhibit
P-3).
Plaintiff
admitted
that
this
sum
of
$30,000
was
interest
due
to
him
by
Corners
and
was,
for
this
reason,
included
as
part
of
the
mortgage.
I
am
satisfied
that
the
mortgage
received
by
the
plaintiff
(Exhibit
P-3)
on
July
2,
1974
from
Corners
constituted
security
received
in
lieu
of
payment
of
the
debt
of
$30,000
and
thus
was
correctly
included
in
plaintiff’s
income
for
1974
by
virtue
of
subsection
76(1)
of
the
Income
Tax
Act.
Issue
No.
3
—
The
$60,544.13
—
Resolution
of
Corners
acknowledging
owing
of
said
amount
Here,
as
in
issues
1
and
2,
I
have
discussed
this
matter.
The
defendant
in
its
statement
of
defence
has
alleged,
paragraph
19,
that:
The
Deputy
Attorney
General
of
Canada
submits
that
as
the
Plaintiff
received
a
note
in
the
amount
of
$60,544.00,
paying
12%
per
annum,
in
the
1976
taxation
year
in
lieu
of
interest
upon
the
mortgage
of
$230,000.00
calculated
from
July
of
1974,
the
Minister
of
National
Revenue
correctly
included
such
amount
in
computing
the
Plaintiffs
income
for
the
1976
taxation
year
by
virtue
of
subsection
76(1)
of
the
Income
Tax
Act.
The
defendant
therefore
contends
that
plaintiff
received
a
note
in
lieu
of
interest
upon
the
mortgage
and
thus
the
value
of
the
note
was
properly
included
in
plaintiffs
1976
taxation
year
by
virtue
of
subsection
76(1)
of
the
Income
Tax
Act.
The
proof
before
me
clearly
shows
that
the
plaintiff
never
received
any
note
nor
any
other
document
that
would
indicate
that
a
new
debt
for
the
sum
of
$60,544.13
was
created.
The
only
document
in
existence
is
the
resolution
of
Corners
of
August
19,
1976
which
acknowledges
that,
although
a
discharge
was
granted
on
the
mortgage
of
$230,000,
in
fact
a
sum
of
$60,544.13
interest
was
still
owing
and
is
to
be
eventually
paid,
without
setting
a
date
for
payment.
The
proof
was
to
the
effect
that
Mr.
Nellis
never
received
any
payment
on
the
sum
of
$60,544.13.
The
resolution
of
Corners
of
August
19,
1976
is
not
a
document
given
in
satisfaction
of
the
payment
of
the
debt
and
creating
a
new
debt
as
was
the
mortgage
which
included
the
$30,000
interest
payment.
I
agree
with
plaintiffs
attorney
when
he
states
that
the
resolution
of
August
19,
1976
is
only
a
simple
"acknowledgment"
of
an
amount
still
owing
not
a
payment
of
a
debt
by
creating
a
new
debt.
I
believe
that
it
was
not
the
intention
of
Parliament
to
force
a
taxpayer
to
pay
income
tax
on
revenue
he
never
received.
This
is
not
the
intention
of
subsection
76(1)
of
the
Income
Tax
Act.
I
was
referred
to
the
case
of
Estate
of
Maxime
Raymond
v.
M.N.R.,
41
Tax
A.B.C.
263;
66
D.T.C.
450
(Tax
Appeal
Board)
by
the
attorney
of
plaintiff.
It
was
his
belief,
that
just
as
a
delay
for
payment
was
granted
in
the
Raymond
case,
so
did
Mr.
Nellis
grant
a
delay
for
the
payment
of
the
sum
of
$60,544.13.
I
agree.
Mr.
Nellis
did
not
create
a
new
debt,
the
debt
was
only
deferred
and
he
unfortunately
will
never
be
paid
for
same.
He
should
not
be
forced
to
pay
income
tax
on
this
sum
of
$60,544.13.
For
the
above
reasons,
I
hereby
dismiss
plaintiffs
action
for
the
reassessments
of
1974,
1975
and
1977,
and
with
regard
to
the
1976
taxation
year,
I
dismiss
plaintiffs
action
with
regard
to
the
assessments
for
the
sum
of
$3,923.18,
$8,000
and
$225
but
maintain
plaintiffs
claim
to
the
effect
that
he
should
not
have
been
reassessed
on
the
sum
of
$60,544.13.
I
hereby
order
the
return
of
plaintiff’s
income
tax
for
the
1976
taxation
year
to
the
Minister
of
National
Revenue
for
a
new
assessment
in
accordance
with
the
above
conclusion,
the
whole
without
costs.
Appeal
allowed
in
part.
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