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Citation: 2004TCC838
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Date: 20041221
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Docket: 2002-3018(IT)G
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BETWEEN:
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JOSEPH A. WILLIAMS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Margeson J.
[1] The parties agreed upon a Partial
Agreed Statement of Facts as follows:
A.
CORPORATE STRUCTURE OF THE GROUP
1.
The Appellant operated a group of companies that were in the
business of manufacturing rolled metal products. The group
included Metal Shapes Manufacturing Inc. ("MSMI"), Metal
Shapes Inc. ("MSI"), 1058522 Ontario Ltd. ("105"), 657708 Ontario
Ltd. ("657") and Proma International Inc. ("Proma International")
(collectively, the "Metal Shapes Group").
2.
MSMI was in the business of producing rolled metal products.
3.
MSI owned and managed the real property on which MSMI carried on
its business.
4.
657 was a holding company, and owned shares of MSI and MSMI.
5.
On February 14, 1994, 105 was incorporated in order to facilitate
the crystallization of the Appellant's capital gains
exemption. Pursuant to an internal reorganization, the
Appellant transferred shares of 657 to 105 under subsection 85(1)
of the Income Tax Act (the "Act") and elected proceeds of
disposition in an amount to allow the capital gains exemption to
be crystallized.
6.
On or around February 17, 1994, 105 redeemed its shares of
657.
7.
On February 21, 1994, the Appellant exchanged 9,650 common shares
of 657 for 500,000 Class B special shares, 5,580 Class A special
shares, and 1,000 new common shares of 657.
8.
Subsequent to the 1994 reorganization, the Appellant believed
that he owned the shares of 105 which in turn owned the shares of
657. Attached as Schedule "A" is a diagram of the Appellant's
understanding of the corporate structure of the Metal Shapes
Group.
9.
In or about 1999, the Respondent undertook an audit of the
Appellant. In the course of the audit, the Respondent took
the position that the corporate structure of the Metal Shapes
Group was as set out in Schedule "B".
10.
As a regular practice, the various companies in the Metal Shapes
Group made advances to facilitate the business operations of the
Group as a whole.
B.
PROMA INTERNATIONAL
11.
In March 1994, Proma Inc., a supplier to the Metal Shapes Group,
contacted the Appellant and offered to sell the assets of Proma
Inc. (the "Proma Assets").
12.
On March 25, 1994, MSI purchased the Proma Assets from
Skovsbo Holdings Inc., a secured creditor of Proma Inc.
13.
The Appellant caused Proma International to be incorporated to
operate the newly-acquired business, which leased the Proma
Assets from MSI.
14.
No shares of Proma International were issued on incorporation as
the accountants for the Metal Shapes Group wished to consider
where the shareholding should properly be placed.
Litigation ensued shortly after incorporation, and, as a
consequence, no shares of Proma International were ever
issued.
15.
Various companies in the Metal Shapes Group, including 105,
advanced funds to Proma International in order to facilitate
its day-to-day operations.
16.
As well, the CIBC advanced funds to Proma International, which
advances were guaranteed by 105. The Appellant did not
personally guarantee any such advances, nor was he asked to
provide any guarantees. The CIBC released 105 from its
guarantee obligations on March 8, 1996.
17.
The general ledgers of 105 for the year ending March 31, 1996
show that there was a loan from 105 to Proma International in the
amount of $156,008.48.
18.
The general ledgers of 105 for the year ending March 31, 1997
show that there was a loan from 105 to Proma International in the
amount of $119,197.43.
19.
The Minister reassessed the Appellant on the basis that he
received benefits relating to the inter-company advances of the
Metal Shapes Group.
20.
On November 3, 2004, the Minister conceded that the Appellant did
not receive a benefit in respect of inter-company advances by MSI
and MSMI.
[2] The parties also agreed that the
only issues remaining before the Court
were as follows:
A. Was a benefit conferred on
the Appellant in the 1996 taxation year under subsection 56(2) of
the Income Tax Act ("Act") year in the
amount $155,008.48? and
B. Was a benefit conferred on
the Appellant in the 1997 taxation year under subsection 56(2) of
the Act in the amount $119,197.43?
[3] In addition to the Partial Agreed
Statement of Facts the Appellant testified before the Court.
He said that he was a mechanical engineer and was familiar
with the issues presented before the Court. A group of
companies with which he was involved was in the business of
producing rolled metal products. He bought
Metal Shapes as an existing company. This company had
been in existence since the 1950's. He agreed with the
facts set out in the Partial Agreed Statement of Facts.
[4] The Canadian Imperial Bank of
Commerce ("CIBC") was the financial body that provided
all of the principal financing to the metal groups. The
bank always wanted cross guarantees from all of the companies
whenever they were created. It also required, as further
security, a general assignment of all receivables and inventory.
He identified the document in Exhibit A-1 at Tab 7 as a typical
Guarantee and Postponement of Claim which was put in place by
CIBC. It also proposed the corporate structure for 1058522
Ontario Ltd. ("105") He did not give any personal
guarantees for the groups' indebtedness.
[5] The various companies in the group
made inter-company loans on different occasions. Some of
the companies had no American dollar bank account and might be
required to pay for stock in the United States.
Therefore all of the United States accounts were handled
through Metal Shapes International Inc. A flow of funds between
the various corporate entities took place.
Metal Shapes International Inc. would be paid by United
States' customers then it would be invoiced for the work done by
the other companies and these companies would be reimbursed.
[6] Loans made between the different
companies were set up and reflected in the books of various
companies. These were reflected in the daily and general
ledgers. They were inputted into the general ledger at the end of
the year.
[7] This witness might have had some
monies outstanding in his name for his expenses incurred but he
never loaned any money to any of the companies. He took no loans
from the company except some years ago for a car loan and it had
to be repaid within several years. He took no other loans.
He received no other funds from any of the companies
except for salary or bonuses.
[8] No dividends were ever declared by
any of the companies. In particular, no shares of Proma
International Inc. ("Proma") were ever issued. He
explained that the accountant at the time was not sure how to
handle this matter and it was put on hold and nothing was ever
done about it.
[9] Proma was offered to the group and
they bought the assets. It would market the group
internationally and would do the work of the group. The
Proma assets were purchased by Metal Shapes Incorporated i.e.
equipment from the secured creditor. These assets were then
released to Proma.
[10] He referred to the Asset Purchase
Agreement found in Exhibit A-2 at Tab 6. The company
paid one dollar for the assets and assumed all of the
liabilities. They made arrangements for financing for the
purchase. The bank requested the cross guarantees. This was only
normal practice. No personal guarantees were ever asked for nor
given.
[11] Proma was profitable before the first
year but in the middle of the second year one of the largest
companies involved with it cancelled a major order, another
employee of Proma was marketing the same product and using the
drawings of Proma and taking over some of the customers and a
large user of Proma's equipment decided not to take the equipment
which it had ordered. These three events used up all of the
capital of Proma.
[12] Skovsbo Holdings Inc. was a secured
creditor of Metal Shapes Inc. ("MSI") and it took back
the assets in October 1995 and the bank called their loans.
The group attempted to sell the assets of Proma and attempted to
find investors but these actions did not come to fruition. A
possible deal to sell some of the assets to the employees did not
come to fruition either.
[13] The CIBC called the loan on all of the
companies for $155,008 and decided how the debt was to be
repaid. MSI was the owner of the building and it was
required to remortgage it and pay the money to the bank as part
of the indebtedness. Once the debt was paid off Proma and
all of the companies were released from any liability to the
bank. The amount of $119,197 in issue was an entry in the
general ledger of 105.
[14] At that time Proma was in limbo. This
amount was set up as a loan to Proma but it repaid no amount of
the loan. 105 was considered to be head of the group of
companies or the tip of the pyramid and it made more sense to set
up the loan from the bank through this corporate entity. 105 also
loaned money to other companies in the Metal Group as can be seen
from the document in Exhibit A-1 at Tab 12. He explained
the figure in this summary amounting to $156,008.48 as being the
amount of $155,008 in dispute together with another $1,000
advanced by 105 to Proma which can be seen in the BDO Summary,
Exhibit A-1 at Tab 12. He was asked why 105 would loan
money to the other companies in the group. He said that that
would be reasonable in the event that it had money and the other
companies needed it to carry on. If 105 had not made the
loans in question he would not have made them personally.
He never did. If this money had not been loaned by 105 to
Proma the money would have been left in the account of 105 until
it was required to assist the other companies in the group to
cover their day-to-day business
expenses.
[15] The group wanted to "grow the
companies". Therefore, they left the funds in the
group instead of borrowing money to finance purchases.
[16] In cross-examination, he said that 105
was incorporated 1984. In 1996 and 1997 he was the sole
shareholder, director and president. He made all
decisions. He operated the other companies as well.
657708 Ontario Ltd., ("657") was the holding company
for the shares of all other companies.
[17] He did not agree with the Respondent's
understanding of Metal Shapes Group set out in Schedule
"B" of the Partial Agreed Statement of Facts. His
understanding was as set out in Schedule "A" of
that agreement. This was the same structure as set out in
the document created by BDO Dunwoody, Chartered Accountants dated
September 14, 1998 and found in the
Exhibit A-1,Tab 9.
[18] He took the position that he did not
own 100 percent of the shares of 657, but that 105 did. He
was aware that the Minister's position was different. He
took the position that he did because he would discuss the
shareholdings with their accountant and they would make decisions
based upon the structure. The actual structure was
important to him and the bank.
[19] The bank felt that 657 was at the top
of the pyramid and it would have made this entity the principal
borrower. In March of 1994 Proma received a line of
credit. This witness requested it. It was secured by 105
and all of the other companies. This can be seen from the letter
from the CIBC dated March 8, 1996 as set out in Exhibit A-1, Tab
7.
[20] He admitted that he had made the
decision to have 105 give the guarantee. No monies flowed to this
operation from Proma. Other companies, including 105 may have
advanced funds to Proma during its existence. Proma's financial
difficulties started in August or September of 1995. This was a
cash flow problem. By October 1995 it stopped operating. There
was no chance that it could carry on business. He tried to sell
it. By the end of 1995 these attempts had fallen through. CIBC
demanded payment immediately from Proma and then from 105 and the
other companies in the group and they made the payments. After
the payments were made CIBC released Proma from all obligations
contained in the guarantee bond dated March 4, 1994 which had
been signed by 105. When Proma went out of business the Appellant
did not pay any of the money it owned. CIBC suggested the
way that the monies were to be gathered up and paid. He had
nothing to do with it. Mr. Tonn was their accountant and
did all of the groups financial transactions and the year-end
returns.
[21] At the time that Proma went out of
business things were quite hectic during the last number of days,
consequently much of the information was lost. In March of
1996 the loans were "booked" to Proma from 105 and
payments were made on behalf of Proma. The amounts were paid out
to other entities such as the bonding company and other creditors
after Proma had ceased operations.
[22] In redirect he referred to the $155,008
paid by 105 on behalf of Proma which was seen in a bank
reconciliation statement for the month of March 1996 for 105.
This amount reflected those amounts taken out by CIBC under the
guarantee signed by 105.
[23] His position was that he could not see
where he received any benefit whatsoever from these transactions.
He saw no funds and he received no relief from any debt that he
might have owed.
[24] In response to a question from the
Court, he said that the bank never asked him for any personal
guarantee, this was not a condition that they set. It appeared to
be satisfied with the financial situation of the group of
companies
[25] Monty Smith was a Chartered Accountant.
He was partner in a firm of chartered accountants for 25 years
He was familiar with the Appellant's finances and those of
the Metal Group of companies over the last three and a half
years. He referred to the document in the Exhibit A-1, Tab
10 which was referred to as the Metal Shapes Group-Adjusting
Journal Entries dated the 28th day of
September 1995. This was referable to the crystallization
process which took place in 1994. These were records of various
inter-company loans and transfers. He referred to Tab 11, the
figure $119,197.43 and said that that was a loan booked to 105,
which was made earlier.
[26] Various companies in the group advanced
funds to the other companies and these were repaid in some cases.
He was familiar with these. The amounts in issue in the present
case were with respect to loans received from Proma that were
written-off as they could not be repaid.
[27] He confirmed that the Appellant had
never taken a shareholder's loan from any of the companies or
received any dividends from any of the companies. 105 is
basically a holding company created as part of the
crystallization process in 1994.
[28] In cross-examination he was
referred to Exhibit A-1, Tab 11. He said that he was responsible
for making these journal entries but they were done at the time
of the crystallization. As far as he knew, 657 did not hold
the shares.
Argument on behalf of the Appellant
[29] In oral argument counsel for the
Appellant said that clearly the factual situation in this case
does not satisfy the purposes for which subsection 56(2) was
created. She referred to Neuman v M.N.R.[1] and McClurg
v. Canada.[2] These cases make it clear that subsection 56(2)
is dealing with the diversion of income and the factual situation
here does not bring that section into play. She admitted
that had the factual situation been different, then the section
might have some applicability.
[30] She asked the question "Was there a
loan"? She answered "yes"! If the amounts in question were not
loans then what were they? They were considered to be
loans by the Appellant. They were booked by the accountants
as loans and they were listed in the company's books for
accounting purposes as loans. Therefore, subsection 56(2)
does not apply.
[31] She also referred to Fraser
Companies Limited v. The Queen[3]. In accordance with that
case, when one asks the man in the street to categorize the
transactions involving the payment of the funds here, he would
unhesitatingly describe them as "loans" and not as "payments" or
"transfers".
[32] As in that case, money was made
available by the companies to Proma but this money was expected
to be repaid. These are the attributes of a "loan".
There is borrower and a lender. Further, she quoted from the same
case at page 5059 where the trial Judge said:
In my view, the loan from Companies to Paper, admitted to be
such, is a contract between two separate entities in the course
of business and is accordingly a business contract. As Thurlow,
C.J. has indicated a commercial transaction is not the conference
of a benefit by Companies on Paper in the sense of subsection
16(1) or its successor, subsection 56(2). I refer to the
loan of $20 million dollars in the singular for convenience in
this context although it was made in two stages.
This was the factual situation in the present case.
[33] On the second issue, if they were not a
loan as argued by the Respondent, then there has to be a benefit
in order for the Respondent to be successful here. What was the
benefit? Where was the intent to create a benefit? The
only argument was that Respondent could have is to say that the
Appellant benefited from this transaction because he did not have
to guarantee the loans. However, it is not that simple. The
Appellant never financed these ventures, he never gave a personal
guarantee, he was never ask and to do so. These
transactions that give rise to loans were part of the normal
business of the group. At the end of the day the Bank took the
money under the guarantee. The Appellant did not direct that this
would be done. No benefit was created in favour of the Appellant
because of the transfer of the funds.
[34] There was no evidence that the
Appellant negotiated his way out of a guarantee with the bank
because the group of companies guaranteed the indebtedness.
Further, there was never any real benefit to Proma. Proma merely
received the proceeds of a loan. This loan is still outstanding
and could be still collected. The funds that were in the hands
105 could stay in its account forever.
[35] The issue is not what the Appellant
might have done, but whether or not he received a benefit. He did
not! The real question to be answered is what happened on
the facts of this case?
[36] The transaction clearly indicate that
loans were made. There was a consistent pattern existent in the
company's finances. These loans were part of that consistent
pattern. There was no attempt at anytime to recategorize the
transfers into loans from something that they were initially
intended to be. There was no diversion of income through the
Appellant or a third party on his instructions.
[37] In written argument counsel emphasized
that these were valid loans by 105 to Proma. These loans
were made in accordance with the standard practice of
inter-corporate lending which was regularly and accurately
reflected as such for accounting purposes. Just because Metal
Shapes Group was able to finance its various businesses through
inter-company lending does not mean that the Appellant received a
benefit. There was no evidence that the Appellant would have to
finance Proma if 105 had not made the loans. The Appellant did
not divert funds which he would have otherwise received. In law
he was not personally entitled to receive the amounts lent by 105
to Proma.
[38] The four conditions required to make
subsection 56(2) applicable have not been met.
[39] Subsection 56(2) is an anti-avoidance
section designed to prevent avoidance by the taxpayer through the
direction of the funds to a third party of funds that he or she
would otherwise have received. It just did not happen here.
[40] The first condition was not met because
there was a loan. A loan does not constitute a transfer of
property. See Dunkelman v. M.N.R.[4]
[41] Inter-corporate advances that are
recorded as loans are generally treated by the Courts as such.
See M.N.R. v. Stewart & Morrisson Ltd.[5]
[42] As indicated there is ample evidence
that all parties, including the auditor, viewed the
inter-corporate advances as loans. There was no evidence that the
amounts reflected in the shareholder loan account in 1996 and
1997 were any different from any other inter-corporate loans
within the Metal Shapes Group.
[43] Counsel admitted that the Appellant was
aware that the shareholder loan account reflected a loan from 105
to Proma in 105's 1997 taxation year.
[44] With respect to the third precondition,
there was no benefit to the Appellant. There was no intention to
divert income of the taxpayer. A bona fide business
transaction, including an inter-corporate loan, is not a
"benefit" for the purposes of subsection 56(2) as indicated in
Fraser Companies, supra.
[45] The loans in question were legitimate
and served a valid business purpose. These corporations were all
independent legal entities and entitled to enter into commercial
transactions and be treated as such. The loans were made as valid
business transactions entered into in good faith in course of the
normal business operations of the Metal Shape Group and were
consistent with the historical lending practices of the
Group.
[46] With respect to the fourth precondition
the application of subsection 56(2), there was no evidence that
the Appellant was entitled to receive the funds that 105 loaned
to Proma. This entitlement requirement is consistent with the
stated purpose of subsection 56(2) in accordance with
Neuman, supra, at 788.
[47] If the loan should not have been made
by 105 to Proma, there is no evidence to even suggest that the
funds would have been transferred to the Appellant. The amount
could have flowed to the Appellant as a dividend, but he was not
entitled in law to the funds when no dividend was declared.
Nothing would have stopped 105 from retaining the funds
within the corporation and not declaring a dividend.
[48] The Appellant asked to have the appeals
allowed on the basis that subsection 56(2) of the Act
does not apply to treat the amounts loaned by 105 to Proma as
benefits received by the Appellant. The Appellant also seeks
costs of this action.
Argument on Behalf of the Respondent
[49] In written and oral argument counsel
for the Respondent stated the four requirements or preconditions
for the application of subsection 56(2) of the Act:
1. There must be a payment or transfer
of property to a person other than the taxpayer (other than a
loan);
2. The payment or transfer of property
must be made pursuant to the direction of, or with the
concurrence of, the taxpayer;
3. The payment or transfer of property
must be for the benefit of the taxpayer or for the benefit of the
person to whom the payment is made; and
4. The payment or transfer must be an
amount which would have to be included in the taxpayer's income,
if it had been received by him or her instead of the other
person.
[50] She sumitted that all four
preconditions have been met in this case. Amounts advanced by 105
to Promo were not loans even though they were so recorded in the
books of 105. Even though there were no records of actual payment
in 1997 of the amount in question of $119,197, the parties agreed
that there was an actual cash payment in the amount of $155,008
in the 1996 taxation year. Therefore both of the amounts are
payments or transfers of property accordance with precondition
two.
[51] The payments were not loans because
there was no loan agreement between the parties. Proma did
not have an obligation to repay the amounts advanced and at the
time the advances were made Proma had ceased operating and,
accordingly, no implied prospect of repayment existed. She
cited Davisson v. The Queen[6] in that regard.
[52] As earlier indicated she took the
position that the amount $119,197 was recorded as having been
advanced by 105 to Proma in the 1997 taxation year, even though
there were no documents to establish that an actual transfer was
made. However accounting entries reflect transactions and it is
the reality of the facts that determine the true nature and
substance of transactions. Accounting entries are evidence of the
true facts. She relied upon Hickman Motors Ltd. v. The Queen[7] and
Vander Nurseries Limited v. The Queen[8]. In accordance with those
cases the record of the advances in the books of 105 is the best
evidence of the truth. Condition one as been met.
[53] The payments made by 105 to Proma were
made at the direction of, or with the concurrence of, the
Appellant because he was the sole shareholder, director and
president of 105. As such, he made all decisions for 105,
including financial decisions. These payments could only
have been made with his concurrence or at his direction.
[54] Further, the payments were made for the
benefit of the Appellant in 1996 and 1997. Proma
had ceased operating. Accordingly, even if 105 had been related
to Proma, which it was not, 105 had nothing to gain from the
advances even if Proma benefited from the advances because it was
relieved of its outstanding financial difficulties. This is
sufficient to satisfy the requirement of
precondition three.
[55] With respect to precondition four, it
has been met because if payments had been made to the Appellant
directly, without repayment obligations, these amounts would have
been required to have been included in his income in accordance
with subsection 15(1) of the Act. This liability to
taxation of the Appellant might not have resulted in double
taxation and consequently subsection 56(2) of the Act
still applies.
[56] Counsel referred to Neuman v.
M.N.R. supra; at paragraph 53;
Outerbride Estate v. The Queen,[9] and Peddle v. The
Queen.[10]. The payments involved are not dividend
income and no issue of double taxation arises.
[57] Counsel submitted that the appeals
should be dismissed and the Minister's assessments confirmed.
Analysis and Decision
[58] The Court is of the opinion that these
appeals must succeed. The factual situation as outlined by the
evidence, and any reasonable inferences that the Court is
entitled to draw from the evidence, do not lend themselves to the
application of subsection 56(2).
[59] The evidence makes it clear that the
payments in question were made within the Metal Shapes Group, in
accordance with the standard practice of inter-corporate
lending. These transactions were regularly and accurately
reflected in the records of the various companies for accounting
purposes. The companies accountant testified to this effect and
there was nothing in his cross-examination which would bring into
question the efficacy of what he had to say. His evidence was
reflective of this situation.
[60] A typical situation where subsection
56(2) should be applied is set out in Neuman v. M.N.R.
supra. From that case it is easy to discern that the section
was intended to cover cases where taxpayers seek to avoid receipt
of property which would be income in their hands by seeking to
have the amount transferred to a third party. However, the
benefit referred to is a benefit on behalf of the taxpayer giving
the direction.
[61] It was indicated in that case that
where there is a business contract with that person for added
consideration there is no benefit. This situation is reflected by
the evidence given in the case at bar. There is no question about
the accuracy of the statements of account, there is no question
about their records, there was no question that the inter-company
transfer of funds was done according to normal business practices
and there was nothing "under the table" about them nor indeed
about the transfer of the amounts in question in this case.
[62] The situation in the case at bar is
also similar to that found in M.N.R .v. Stewart
& Morrison Limited[11]. The Court is satisfied that in the case at
bar, 105 arranged and guaranteed a bank loan to Proma as can be
seen from the document in Exhibit A-1, Tab 7. The
Guarantee and Postponement of Claim in favour of the CIBC signed
by 105, guaranteed payment to the bank immediately and after
demand, of all of the debts and liabilities which Proma had
incurred with the bank. The Court is satisfied that the payments
in question were made on the basis of that Guarantee and
Postponement of Claim as directed by the bank.
[63] As indicated by the Appellant himself
in his testimony before the Court, once the bank decided to call
it's security, the Appellant had no say in what was going to be
done, how the funds would be dispersed or what accounts were to
be paid out. This was at the complete discretion and
control of the bank.
[64] It can hardly be said that under those
circumstances "the payment or transfer of property was made
pursuant to the direction of, or with the concurrence of the
taxpayer to some other person for the benefit of the taxpayer or
was the benefit that the taxpayer desired to have conferred on
the other person ...".
[65] At that time all matters were out of
105's hands and the hands of the taxpayer. The bank was the
entity that directed such payments be made. The Appellant and the
group of the companies were just bystanders at that point in time
waiting for the bank's indebtedness to be paid out before 105 and
the other group of companies could be released. At the end of the
day this indeed took place.
[66] The quotation from
Fraser Companies v. R., supra, relied upon by counsel
for the Appellant speaks volumes in this regard.
"The man in the street if obliged to categorize the two
transactions
--- between Fraser Companies and Fraser Paper would, in my
view, unhesitatingly describe them as "loans" and not as
"payments" or "transfers"." Money was made available by Companies
to Paper but repayment was expected. These are the attributes of
a "loan". There is a borrower and a lender.
[67] In the case as bar, obviously the
borrower was Proma and the lender was the bank and the guarantor
was 105 and all of the subsidiary companies. Even though there
were no specific loan agreements covering these individual
transfers of funds, they were caught by the Guarantee and
Postponement of Claim between Proma, 105 and CIBC. Obviously any
monies that were transferred were on the basis of the
indebtedness incurred by 105 and Proma as a result of the
Guarantee and Postponement of Claim.
[68] In the absence of more evidence being
adduced one might wonder why funds would have been advanced to
pay off debts of Promo after they had ceased operating. However,
the bank had complete control as to how the indebtedness of Proma
would be handled by virtue of the Guarantee and Postponement of
Claim by 105. The Appellant certainly had nothing to do with that
and had no control over it.
[69] Dealing with the more specific
requirements of subsection 56(2), of the Act, the Court
finds as follows:
1. There was no transfer of property
to a person other than the taxpayer because payments were made on
the basis of loans that were incurred by the group of companies
and by Proma to the bank on the basis of normal business
transactions entered into among the parties in the normal course
of doing business which were recorded in the books of the company
and which reflected normal creditor-debtor relationships.
2. However, should the Court be wrong
in that and some higher authority be inclined to find that there
was a payment or transfer of property, then the Court is
satisfied that such payment was not made pursuant to the
direction of, or with the concurrence, of the taxpayer because
the taxpayer at the time of the transfer had no control over the
transactions whatsoever even though he was chief shareholder and
an officer of the various entities. Anything that was done was
done under the direction of CIBC and the authority which they had
by virtue of the Guarantee and Postponement of
Claim.
3. The Court is satisfied that if
there was a payment or transfer of property, then it was not for
the benefit of the taxpayer or for the benefit of the person to
whom the payment was made. All that was happening in this case
was that the indebtedness of Proma was being paid out on the
direction of the CIBC on the basis of existing security that it
held against the group of companies. Although payment of some of
the funds may have been directed to the payment of outstanding
indebtedness of Proma at a time when it appeared to be out of
business, the indebtedness of Proma to 105 and the other group of
companies still existed even though there may have been little
likelihood that the debt would ever be repaid by Proma. This does
not change the fact that such a payment was of no benefit to the
Appellant. The Appellant was in exactly the same position that he
was in before. Any benefit that incurred to Proma was not
a real benefit at the end of the day because the company was
still responsible for the monies paid on its behalf.
4. In any event, the Court
could envisage no possible benefit to the taxpayer or Proma in
the overall context of subsection 56(2).
[70] In the context of precondition four,
the Court is satisfied that under strict technical interpretation
of that section this condition may have been met. However, taking
into account the purpose of the section and the scenario as
outlined in Miller v. M.N.R., supra[12], the Court
would be hard pressed to find that this condition has been
met.
[71] At the end of the day, what the
Respondent is seeking to do is to penalize the fortunate taxpayer
for being in the enviable position of being involved with a group
of companies that were in such good financial condition
that the lending institution, CIBC, did not ask for and did not
require that the individual shareholder or officer personally
guarantee the loans but were prepared to accept guarantees of the
group of companies. Subsection 56(2) was not meant to cover
such a situation. The Court would be hard pressed indeed to
interpret it so broadly that the Appellant in the situation as
outlined in the evidence here, would be caught by it.
[72] The appeals are allowed, the
assessments of the Minister in the years still in issue, 1996 and
1997 are vacated.
[73] The Appellant is entitled to costs to
be taxed on a party and party basis.
Signed at Ottawa, Canada, this 21st day of December
2004.
Margeson J.
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