Toma v. The Queen, 95 DTC 5356, [1995] 2 CTC 239 (FCTD)

Jerome A.C.J.:—This appeal by the plaintiff came on for hearing before me at Edmonton, Alberta, on November 17, 1994. At issue is whether the plaintiff appropriated, to his benefit, the property of Meridian Seed Company Ltd., and if so, whether the value of that benefit should have been included in the computation of his income for the 1985 taxation year by the Minister pursuant to subsection 15(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71- 72, c. 63) (the ’’Act”). At the conclusion of argument, for reasons given orally, I allowed the appeal and indicated that these written reasons would follow.

Facts

For some time prior to 1985, the plaintiff owned and operated a farm, growing and selling the normal range of agricultural products for the Alberta region. The plaintiff had incorporated the farm operation under the name Meridian Seed Farm Ltd. and he was the majority shareholder and president. After a number of successful years as a producer, the plaintiff decided to try his hand at becoming a grain dealer for his own products and for those around him.

The business of dealing in grain is not only more complex, it is also highly regulated requiring a license and an elevator permit. Significantly for this case, the plaintiff was also required to form a separate company and to retain auditors independent from the ones he had used personally or for Meridian Seed Farm Ltd. The company, also incorporated prior to 1985, was Meridian Grain Ltd., and again the plaintiff was the president and majority shareholder.

The custom of the trade is also a significant factor. It allowed the producer to sell his grain to Meridian Grain Ltd. on a given date but to retain an open option to settle the price at any later date. What the grain dealers did, as did this plaintiff, was take a position on the commodities futures market which had the effect of balancing any exposure to risk.

All went well for several years until in 1985, for the first time, grain prices increased more in a day than would have been normal for a month. In a matter of days, Meridian Grain Ltd. was facing a loss of $110,000. The option of bankrupting the grain company would have spared the plaintiff any personal loss, but he rejected it because his clients were all family and close friends. He also tried to convince his bank to provide interim financing, but to no avail. The banks were unfamiliar with the grain futures business and in the difficult times of 1985, were overwhelmed with failed enterprises.

As a final hope, the plaintiff called the representative of the company to whom he had been selling all of his grain in Vancouver, Allstate Grain Company Ltd., which quickly agreed to put up the money to cover the shortfall. Arrangements were made in a telephone conversation and the following day, the plaintiff flew to Vancouver and picked up the cheque which was made payable to Mr. Toma personally. In return, the plaintiff signed a personal note and agreed to pre-sell a like amount of produce from Meridian Seed Farm Ltd. The plaintiff returned to his home and used all of the money to rescue Meridian Grain Ltd. In a few weeks, all of the grain to cover the transaction was delivered to Allstate.

The only failure on the part of the plaintiff was to record the transactions on the books of either corporation. Indeed, it was not until a year later, in attempting to prepare returns for all three taxpayers, that all of this came to light.

The plaintiffs 1985 tax return did not include the transaction in the calculation of income, which resulted in a tax obligation for that year of $45.73. The plaintiff received a notice of reassessment, dated March 18, 1988, for the taxation year 1985 indicating that the money lent out by Allstate was considered to be funds or property of Meridian Seed Farm Ltd. that was appropriated to a taxpayer in that year and which, by virtue of paragraph 15(1)(b) of the Income Tax Act, should have been included in computing his income. As a result, the $110,000 was added to his income by Revenue Canada Taxation and his total tax payable rose to $36,150.87. The plaintiff filed a notice of objection on May 30, 1988 on the basis that it was factually incorrect for the Minister to attribute the money as being appropriated by the taxpayer from Meridian Seed Farm Ltd. given the true nature of the transaction. The Minister confirmed the reassessment by notification dated November 17, 1988.

The plaintiff now appeals the decision of the Minister on the basis that he did not receive any personal benefit from the transaction and that the Minister misapplied section 15 of the Income Tax Act in light of the pith and substance of the transaction.

The relevant portions of subsection 15(1) reads as follows:

15(1) Where in a taxation year

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

The Supreme Court of Canada in decisions such as Stubart Investments Ltd. v. Canada, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373, and Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, makes it clear that the Court may ascertain the true commercial and practical nature of the taxpayer’s transaction to avoid a slavish application of the text of the law in a way that defies common sense and logic.

In a recent decision, Penny v. M.N.R., [1995] 1 C.T.C. 114, 95 D.T.C. 5083, Madame Justice Simpson, when commenting on the interpretation of paragraph 15(1 )(b) of the Act stated that while the word ’’appropriate” does not necessarily require a formal documented taking, it does require intention on behalf of the taxpayer and cannot be inadvertent.

As indicated in my brief oral comments at the conclusion of the trial, I accept the plaintiffs credibility and his version of all of these events. However, far from standing to gain, the taxpayer was always at risk of personal loss. In a time of crisis when he could have avoided such a risk by putting his grain company into bankruptcy, he instead pursued every avenue to keep it alive. Section 15 might have some application if, having picked up the money from Allstate, the plaintiff kept it for his personal use, but he did no such thing.

I also find that he entered into the transaction with Allstate to save Meridian Grain Ltd., a corporate taxpayer with its own identity and tax liability. To bring about the rescue, he signed a personal note, but also guaranteed repayment through pre-sale of the products of Meridian Seed Farm Ltd., also a corporate taxpayer with a separate identity and separate tax liability. I therefore conclude that at all times, he was acting as he did for several years, as the operating mind of both corporations rather than in his personal capacity.

For the above reasons, on November 17, 1994, I allowed the appeal with costs indicating that the time to appeal the decision would begin to run when the written reasons were filed. The reassessment is therefore referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $110,000 should not be included in computing the appellant’s income for the 1985 taxation year. The plaintiff is also entitled to costs.