Chopp v. R., 98 DTC 6014, [1998] 1 CTC 407 (FCA)

Denault J.A.:

This is an appeal from a decision of the Tax Court of Canada allowing an appeal by the respondent taxpayer from a reassessment issued by the Minister of National Revenue in respect of the 1989 taxation year.

While the taxpayer was away on vacation during the summer of that year, his daughter, then an inexperienced bookkeeper, used a presigned blank cheque of his corporation’s bank account to pay an amount of $28,490.37 requested by the law firm representing her father to complete the purchase of his new home. The payment was erroneously posted as a corporate expense (legal corporate) while it should have been debited to the shareholder’s loan account. At all relevant times, this taxpayer’s shareholder loan account with the Corporation had a credit balance of not less than $150,000.

After the error was discovered in 1991, the corporate expense was disallowed, the corporation was reassessed to increase its income by that amount and the taxpayer was also reassessed to increase his income by the same amount on the basis that the corporation had conferred a benefit upon him as shareholder pursuant to subsection 15(1) of the Income Tax Act.

In allowing the taxpayer’s appeal, Mogan J.T.C.C. interpreted subsection 15(1) as follows:

I think a benefit may be conferred within the meaning of subsection 15(1) without any intent or actual knowledge on the part of the shareholder or the corporation if the circumstances are such that the shareholder or corporation ought to have known that a benefit was conferred and did nothing to reverse the benefit if it was not intended. I am thinking of relative amounts. If there is a genuine bookkeeping error with respect to a particular amount, and that amount is truly significant relative to a corporation’s revenue or its expenses or a balance in the shareholder loan account, a court may conclude that the error should have been caught by some person among the corporate employees or shareholders or outside auditors. Shareholders should not be encouraged to see how close they can sail to the wind under subsection 15(1) and then plead relief on the basis of no proven intent or knowledge.

We have not been persuaded that the intervention of this Court is justified.

In our view, Judge Mogan properly assessed the facts when he concluded that it was through the taxpayer’s “ignorance and innocence in not knowing that an error had been made when the amount of $28,490 was posted” as a corporate expense when it should have been debited to the shareholder’s loan account. There is nothing in Judge Mogan’s findings that is not reasonably supported by the evidence before him.

As to Judge Mogan’s interpretation of subsection 15(1) of the Income Tax Act, we find no reason to intervene. He rightly referred to Simons v. Minister of National Revenue, (1985), 85 D.T.C. 105 (T.C.C.) and Robinson v. Minister of National Revenue, (1993), 93 D.T.C. 254 (T.C.C.) which relied on the decision in Minister of National Revenue v. Pillsbury Holdings Ltd., (1964), 64 D.T.C. 5184 (Can. Ex. Ct.) where Cattanach, J. had this to say about the predecessor of subsection 15(1). That statement, still applicable, reads like this:

In applying paragraph (c) full weight must be given to all the words of the paragraph. There must be a “benefit or advantage” and that benefit or advantage must be “conferred” by a corporation on a “shareholder”. The word “confer” means “grant” or “bestow”. Even where a corporation has resolved formally to give a special privilege or status to shareholders, it is a question of fact whether the corporation’s purpose was to confer a benefit or advantage on the shareholders or some purpose having to do with the corporation’s business such as inducing the shareholders to patronize the corporation. If this be so, it must equally be a question of fact in each case where the Minister contends that what appears to be an ordinary business transaction between a corporation and a shareholder is not what it appears to be but is in reality a method, arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder.

The same reasoning lead Bowman J.T.C.C. to a similar conclusion in a very recent case, Long v. R. (July 24, 1997), Doc. 96-4714(IT)I (T.C.C.) where the taxability asserted by the Minister was based upon an erroneous failure to adjust a loan account. Judge Bowman found that a simple error of this sort, readily susceptible of correction, does not create taxability. He further added: “...that a bookkeeping error of which the sole shareholder was not aware and which he did not sanction and that was not in accordance with the company’s established practices [does not] constitute in reality a method, arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder.”

For the above reasons, this appeal must be dismissed, with costs.

Appeal dismissed.