Citation: 2007TCC458
Date: 20070808
Docket: 2005-123(IT)G
2005-124(IT)G
BETWEEN:
ED DYCK and LORI DYCK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie
J.
[1] The appeals of these two appellants from assessments
under the Income Tax Act (the Act) proceeded together on common
evidence. In each case, the Minister of National Revenue reassessed the
appellant for income tax in 1997 to include in income a shareholder benefit
under subsection 15(1) of the Act in the amount of $48,107, and in 1998
to include a taxable capital gain in the amount of $67,496 in respect of the
disposition of a gasoline service station owned jointly by the appellants. The
appellants took the view that the proper computation of that taxable capital
gain was $38,906. At the trial, counsel advised me that the parties now agree
that the amount of the taxable capital gain to be attributed to each of the
taxpayers is $37,504.18. The appeals for the taxation year 1998 will be
allowed, and the reassessments remitted to the Minister to reassess on that
basis.
[2] There remains
the issue between the parties as to the assessment of a shareholder benefit to
each appellant. The appellants are husband and wife. Ed Dyck has worked
for most of his life in the retail oil industry, first as an employee, and
later as an owner and operator of gasoline stations. By the early 1970s he had
built up a very successful business, and he decided that it was time to
incorporate it, which he did under the name Ed Dyck Ltd. (ED). He and Lori Dyck
each owned 50% of the shares. The business continued to prosper, and in 1991 a
major oil company bought the assets of the business from ED and Ed Dyck
retired. His retirement proved to be short-lived, and he was soon back running
another service station.
[3] The issue in
these appeals relates to the assets of ED after the time of the sale of its
service station. The appellants for some time had had three investment accounts
with the brokerage firm Nesbitt Burns. Each of the appellants had an RRSP
account, and they also had a joint account, No. 805-17361, in their two names.
Following the sale of the business in 1991, the Dycks closed out the bank account
of ED and transferred all the funds to an investment account, No. 845‑01468,
with Nesbitt Burns.
[4] Early in the
year 1997, Mr. Dyck’s then accountant advised him that it would be in their
best interests to consolidate their personal joint account and the account of
ED into one investment account which could produce better returns on the
combined funds. Mr. Dyck asked his broker, Mr. Young, to do this. Mr. Young
recognized the tax implications of such a move and cautioned against it, but in
the end Mr. Dyck, for reasons that were never made clear to me, preferred the
accountant’s advice and insisted that Mr. Young transfer the balance in account
No 845-01468 to account No. 805-17361, which he reluctantly did on
February 19, 1997. The amount of that balance was $96,245.02. Mr. Dyck
gave Mr. Young no special instructions as to the investment of these funds,
other than that they were to be added to the balance in the joint account.
[5] In the early
months of 2000, the accountant, perhaps having understood the consequences of
his earlier advice, advised Mr. Dyck that it would be wise to reverse the
consolidation of the accounts. Mr. Dyck so instructed Mr. Young, who was
pleased to comply with this instruction by opening a new account in the name of
ED. Unfortunately, the copy of the document pertaining to this account that was
entered as an exhibit is totally illegible, but it is not in dispute that this
new account was opened on March 29, 2000, and funds were transferred to it from
account No. 805-17361 in an amount that was intended to restore the status
quo ante. The appellants did not withdraw any funds from the joint
investment account between the dates of the initial transfer to it and the
later transfer back of the balance formerly in the ED account. Mr. Dyck had an
income adequate for their needs from his latest venture, and the funds in the
investment accounts were simply being accumulated to provide for their
retirement.
[6] By the
reassessments under appeal, the Minister treated the transfer of the funds in
the account of ED to the joint account of the two appellants as a transfer of
funds to them falling within subsection 15(1) of the Act. That subsection
reads:
15(1) Where
at any time in a taxation year a benefit is conferred on a shareholder, or
on a person in contemplation of the person becoming a shareholder, by a
corporation otherwise than by
(a) the reduction of the paid-up
capital, the redemption, cancellation or acquisition by the corporation of
shares of its capital stock or on the winding-up, discontinuance or
reorganization of its business, or otherwise by way of a transaction to which
section 88 applies,
(b)
the payment of a dividend or a stock dividend,
(c) conferring, on all owners of
common shares of the capital stock of the corporation at that time, a right in
respect of each common share, that is identical to every other right conferred
at that time in respect of each other such share, to acquire additional shares
of the capital stock of the corporation, and, for the purpose of this
paragraph,
(i)
where
(A) the voting rights attached to a
particular class of common shares of the capital stock of a corporation differ
from the voting rights attached to another class of common shares of the
capital stock of the corporation, and
(B) there are no other differences between
the terms and conditions of the classes of shares that could cause the fair
market value of a share of the particular class to differ materially from the
fair market value of a share of the other class,
the
shares of the particular class shall be deemed to be property that is identical
to the shares of the other class, and
(ii) rights are not considered identical
if the cost of acquiring the rights differs, or
(d) an action described in
paragraph 84(1)(c.1), 84(1)(c.2) or 84(1)(c.3),
the
amount or value thereof shall,
except to the extent that it is deemed by section 84 to be a dividend, be
included in computing the income of the shareholder for the year.
The words in bold above are those that the Minister
relies on to support the assessments.
[7] In paragraphs 10 and 11 of their Notices of Appeal
the appellants plead:
10. It
was determined in 1997 that a maximum return would be achieved for all parties
if the funds in the Corporate Account were consolidated with the personal joint
account of the Appellant and his [her] spouse, account #805‑17361 (the
“Joint Account”).
11. The
Appellant and his spouse entered into an agreement with the Company whereby it
was agreed that $98,215 of the funds in the Corporate Account (the “Funds”) be
consolidated with the funds in the Joint Account and that the Appellant and his
[her] spouse would act as bare trustees with respect to those funds placed in
the Joint Account from the Corporate Account.
There is no evidence before me that could be said to
support the theory advanced in those paragraphs, and so I will say no more
about it.
[8] Counsel for the appellants argued that I should
not conclude that a benefit was conferred on the appellants by the February 19,
1997 transfer, because the appellants did not withdraw or otherwise use any
funds from the joint account and therefore did not obtain a benefit from the
increase in its balance. He finds support for this argument in the decisions in
Franklin v. The Queen,
Wagar v. The Queen, Poushinsky
v. The Queen, Chopp
v. The Queen, 9100‑2402 Québec
Inc. v. The Queen
and The Queen v. Robinson.
Chopp exemplifies a class of case that may be described as bookkeeping
error cases. In those cases, generally a bookkeeping entry is made by someone
who does not properly understand the transaction being recorded, with the
result that the books of account do not properly reflect the transaction. Typically,
the error results in an increase in the balance of a shareholder loan account,
because the bookkeeper wrongly assumes that that is what was intended. It is
clear that in such cases the shareholder is entitled to have a correcting
journal entry made, restoring the balance of the shareholder loan account to
what it would have been had the erroneous entry never been made. Wagar, 9100-2402
Québec Inc., Robinson, and of course Chopp itself, are all
cases of that sort. In argument, Mr. Christian made it clear that he did not
rely on the Chopp principle, because there is nothing in the evidence in
this case that would support such an argument.
[9] In Wagar, the Court found that erroneous
bookkeeping entries had had the effect of inflating the credit balance in the
loan account of one of the two shareholders, totally without any complicity by
the shareholder. The judge, as I understand it, applied the Chopp
principle to conclude that there had been no shareholder benefit conferred. In
the course of his Reasons, however, he appeared to rely not only on the
bookkeeping error, but also on the fact that the shareholder had never
withdrawn the funds involved. He said of the loan account balance:
It
has been a bookkeeping entry and he has never got any money from it to this
date.
…
They
were just book entries that didn’t mean anything to the Wagars.
[10] Two years later, in Franklin, this Court
held that no shareholder benefit arose where the taxpayer, again the person
that controlled the corporation’s affairs, sold an asset owned by the company
and took the proceeds for his own use. Because he did not tell the bookkeeper
about the transaction at all, the decrease in the company’s assets was not
recorded, nor was any reduction in the company’s debt to the shareholder recorded.
The decision of this Court, affirmed by a majority in the Court of Appeal,
seems to proceed on the basis that it is no benefit to a shareholder to
overstate the company’s debt to him, so long as the loan account remains in
credit balance. In affirming the decision, Rothstein J.A., writing for himself
and Sexton J.A., said:
The
asset and shareholder’s loan accounts of HVSL did not accurately reflect these
transactions. However, that does not justify ignoring the fact that no benefit
was conferred on the [shareholder] and assessing tax on the basis of financial
statements which have been found to be in error.
It was an agreed fact before the trial judge in that
case that the proper entries had been made to correct the company’s books of
account, but not until the facts had been brought to light during the
Minister’s audit of the company. The Chopp principle, therefore, seems
to have been extended to permit the erroneous overstatements of shareholders’
credit loan balances to be reversed without adverse tax consequence at any
time, so long as the account has remained in credit balance, even though the
shareholder was responsible for the failure to record the transaction
correctly. These cases were distinguished by Margeson J. in Poushinsky,
apparently on the basis that the taxpayer in that case actually made personal
use of the funds that had been diverted to him.
[11] On the basis of these cases Mr. Christian argues
that the transfer of the balance of the corporate account at Nesbitt Burns into
the joint account of the Appellants should be ignored for tax purposes, because
they withdrew nothing from the account during the period between February 19,
1997 and March 29, 2000, and therefore, he argues, they received no benefit. I
do not accept this characterization of the two transactions that took place
roughly three years apart. This is not a case in which events were either
incorrectly recorded, as in Chopp, or not recorded at all, as in Franklin, until some time later when
the books were adjusted to reflect the real transactions. In this case the
Dycks, acting on extraordinarily bad advice, entered into a transfer to
themselves of the assets of the corporation. That was a real transaction that
took place. The transaction in March 2000 was another real transaction. The
taxpayers did not do what they did in 2000 in order to properly reflect an
earlier transaction that had been wrongly recorded. Unfortunately taxpayers
cannot undo history, or create it ex post facto, when it turns out that
they have made a mistake, except in a very limited class of cases where the
applicable legislation specifically sanctions it.
When the balance in the corporate account was transferred to the appellants’ joint account the funds became the property of the appellants. That
fact is not changed by the fact that they did not make any withdrawals from the
investment account. They owned it; it was being put to use for their benefit by
Nesbitt Burns; any accretions to the account were for their benefit; had they
chosen to do so, they could have withdrawn any or all of the funds in the
account and put them to any purpose they wished.
[12] The 1997 appeals are dismissed and the 1998 appeals
are allowed and the reassessments are referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that the taxable
capital gain of each taxpayer is $37,504.18. The Respondent is entitled
to one set of costs.
Signed at Ottawa, Canada, this 8th day of August, 2007.
E.A. Bowie
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