Sutherland v. The Queen, 91 DTC 5318, [1991] 1 CTC 495 (FCTD)

Joyal, J.:—On November 4, 1985, the Island Hall Hotel on Vancouver Island closed its doors and was called into receivership as a result of its failure to pay the required interest on current and long-term bank loans. The plaintiff was, at that time, a director, officer and shareholder of the company, which was located in Parksville, British Columbia. In addition to losing a loan of $100,000, which had been secured by a promissory note, the plaintiff was also unable to collect $95,987.61 representing unpaid management fees for the 1981 and 1982 taxation years. It is the characterization of the loss of those fees which is at issue in the present action.

In short, I must determine whether the plaintiff may deduct the amount of $95,987.61 as a bad debt pursuant to paragraph 20(1)(p) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") or whether the sum constitutes a business investment loss within the meaning of paragraph 38(c) of the Act.

Background

Island Hall Hotel Ltd. had 20002 authorized and issued shares, of which the taxpayer owned 600 and his two sisters, Josephine Gemma and Katherine Walker, each owned another 600 shares. The remaining 18202 shares were held by Island Bay Investments Ltd., of which the plaintiff owned 51 of the 100 Class "A" voting shares. His mother, Mary Sutherland, owned the remaining 49 Class "A" shares. The 9999 Class"B" non-voting shares of Island Bay Investments Ltd. were held in trust to the benefit of the taxpayer and his two sisters.

It appears that the Island Hall Hotel had been in the family for quite some time prior to the present litigation and that at some point, Mary Sutherland inherited ownership of the hotel. However, in 1973, at the age of 83, she became incapacitated and thereafter a manager was hired to run the hotel, while the plaintiff agreed to oversee everything.

Initially, the plaintiff did not receive a fee for his services, but in 1977, the plaintiff and his mother decided that he should receive a management fee and they proceeded to set up a company drawing account for him. (It was also at about this same point in time that the plaintiff and his mother became estranged with the plaintiff's two sisters.) The amount of the management fee varied from year to year, but was substantial. However, the plaintiff indicated at the hearing that the fees also included an amount as recognition of past services rendered by the plaintiff on the company's behalf.

In 1981 and 1982, the plaintiff received management fees of $85,000 and $75,000 respectively, but due to a working capital deficiency, the company could not pay the full amount of these fees. Thus, the plaintiff only actually received a total of $64,012.39 in fees, leaving a balance of $95,987.61 outstanding in his company account. Nevertheless, the plaintiff declared the full amount of the management fees as income from business in his 1981 and 1982 personal tax returns.

In addition to being owed the uncollected management fees, the plaintiff had also lent money to the company in 1978 by mortgaging a property of which he was half-owner. His mother, the other half-owner of the property, did likewise. The mortgage principal originally totalled $160,000 but was increased to $200,000 in 1980. In exchange for the loan, the company issued a promissory note in favour of the plaintiff and his mother and agreed to pay the interest on the mortgage directly to the mortgagee.

It seems that no major problems surfaced until the middle of 1982 when a combination of continuing cash flow problems and a third party demand by Revenue Canada against the Hotel on account of the plaintiff's unpaid taxes slowed down any progress in the plaintiff's recovery of his unpaid fees. Effectively, no further withdrawals were made from the company's account.

Meanwhile, the balance owing to the taxpayer in respect of his management fees for 1981 and 1982 was retained by the hotel and was classified as a shareholder's advance in the notes to its financial statements. The company's financial statements also showed that from 1979 to 1981, the hotel's net income decreased steadily from $32,153 to $3,261 and that from 1982 onwards, the hotel experienced net losses every year.

Finally, as mentioned above, in November 1985, the hotel closed and went into receivership. It remained closed for the first five months of 1986, but was reopened by the Receiver until the end of the same year. However, the net income generated was not sufficient to meet the interest requirements of the outstanding debts and the hotel was sold in April 1987.

On April 23,1987, the plaintiff's accountant, Mr. Tanaka, who worked for Thorne Ernst & Whinney, submitted a request for a loss carry-back form to the Minister of National Revenue, claiming the sum of $97,994 as an allowable business investment loss. This sum represented the unpaid management fees owing for the 1981 and 1982 taxation years and the $100,000 loan, which was evidenced by the promissory note. However, in a letter to Revenue Canada dated August 21, 1987, the accountant provided a breakdown of the sum claimed as a loss and indicated that the $95,987.61 in uncollected management fees should be allowed as a bad debt pursuant to paragraph 20(1)(p) of the Act, rather than as a business investment loss.

By letter dated December 8, 1987, the Enquiries and Office Examination Section of Revenue Canada informed Mr. Tanaka that it proposed to allow the claim for an allowable business investment loss and for a bad debt for 1985 in full, subject to the submission of a revised loss carry-back form for loss application to 1982 and 1983. This revised form was completed on December 11, 1987. In the revised form, the unpaid management fees were claimed as a bad debt.

However, on January 13, 1988, Revenue Canada officers advised Mr. Tanaka that the unpaid management fees were to be treated as a business investment loss, rather than as a bad debt. This was confirmed by letter on January 28, 1988. As a result, a further Request was submitted on February 8, 1988 once again claiming the amount as a business investment loss, but without prejudice to the plaintiff's right to dispute the Minister's assessment.

By notice of objection dated April 25, 1988, the plaintiff objected to the Minister’s assessment. The Minister notified the plaintiff on July 15, 1988 of the confirmation of the assessment and the plaintiff then appealed to the Tax Court of Canada. On July 6, 1989, Judge Rip dismissed the appeal on the ground that the notes to the hotel's financial statements showed that the money was in fact a shareholder's loan: "The note could have explained that this was as a result of management fees that were not paid. Faced with such evidence I have no option but to dismiss the appeal."

As a result, the plaintiff is now appealing the Minister's reassessment before this Court by way of trial de novo.

Pleadings

(a) Plaintiff

The plaintiff argues that the unpaid management fees were credited to his management fee drawing account with the company. The amount so credited for 1981 and 1982 totalled $160,000. From 1981 to 1983, the plaintiff withdrew $64,012.39, leaving a balance in his account of $95,987.61.

The plaintiff points out that he reported the full $160,000 as business income in his 1981 and 1982 tax returns and that he paid the tax thereby incurred upon this amount. However, in 1985, when the hotel was forced into receivership, the $95,987.61 in unpaid fees became a bad debt.

According to the plaintiff, the system of placing the management fees in a drawing account for his benefit had been implemented well before 1981 and remained consistent throughout the years that such fees were paid. The terminology used by the taxpayer and his accountant at times could lead to some confusion, but in one sense a debt which becomes bad may also be considered a "loan" of money. In each case, money is owed but remains unpaid.

The plaintiff argues that he could withdraw his fees at any time simply by having the company issue him a cheque. However, after July 1982, any payout to the plaintiff would have been subject to garnishment in favour of Revenue Canada. Additionally, the hotel at that time had run into financial difficulties and the bank was controlling all expense payments. Any withdrawals made by the plaintiff would have had to be justified to the bank.

The plaintiff also argues that just because he was being "accommodating" towards the company by not demanding immediate payment of his fees, he was not thereby necessarily advancing more money to the company so as to increase his already significant financial exposure. This was especially true because the plaintiff had only a one-third beneficial interest in the hotel.

The plaintiff and his wife, Ute Sutherland, both testified at the trial that the plaintiff had several other real estate projects in the Parksville area and that the Island Hall Hotel was not his only source of activity or income. He had already lent $100,000 to the hotel, but under very specific terms and with a predetermined rate of interest. No such terms or conditions were attached to the unpaid management fees because they were not considered to be a loan, but were treated as an account receivable.

The plaintiff also had Mr. Tanaka, who became his accountant in 1985, testify at the hearing. Mr. Tanaka explained to the court that as the plaintiff and the hotel company were non-arms length parties, all liabilities were simply lumped together under one note in the financial statements. Mr. Tanaka did not consider it misleading to third parties to put all of the company's liabilities vis- a-vis the plaintiff and other non-arms length parties together in one common account for purposes of the financial statements. Mr. Tanaka, however, pointed out that it is clear from the working papers, which preceded the preparation of the statements, that the $95,987.61 represented management fees which had been credited to the plaintiff's drawing account.

Thus, the plaintiff submits that the $95,987.61 does indeed represent a debt which became bad in 1985, when the Island Hall Hotel closed its doors.

(b) Crown

Counsel for the Crown argues that the plaintiff used his management fees to make a shareholder's loan to the hotel and that the advance was of a capital nature. Since the plaintiff is not in the money-lending business, he cannot deduct the unpaid loan from his income as a bad debt. Furthermore, counsel claims that the taxpayer never included the amount of the unpaid loan in computing his income for any taxation year.

More specifically, some of the assumptions of fact made by the Minister when he reassessed the plaintiff are as follows:

f) the Plaintiff directed that the $160,000 management fees not be physically received by him but that adjusting journal entries be made crediting these amounts to his shareholder loan account with the company as shareholder advances;

g) the financial statements of the company described these amounts as advances payable to shareholders which were non-interest bearing and which had no specific repayment terms and therefore, as" non-current liabilities” of the company;

h) when the company was closed down on November 4, 1985 because of financial difficulties, a balance of $95,987.61 remained unpaid in this shareholder loan account;

i) the shareholder loan made to the company by the Plaintiff was capital in nature as its purpose was to provide working capital for the company of which he was a shareholder which company was in serious financial difficulty;

j) the unpaid shareholder loan was not included by the Plaintiff in computing his income for any taxation year; . . .

In the alternative, counsel for the Crown argues that even if this money is found to constitute unpaid management fees rather than an unpaid shareholder's loan, then these fees were income from employment rather than income from business. In this regard, counsel makes reference to the Federal Court of Appeal decision in Wiebe Door Services Ltd. v. M.N.R., [1986] 2 C.T.C. 200; 87 D.T.C. 5025.

Therefore, counsel argues that in any event, the unpaid fees cannot be deducted pursuant to paragraph 20(1)(p) of the Act. Rather, the plaintiff can only deduct one-half of the sum as an allowable business investment loss pursuant to section 38 et seq. of the Act.

Case Law

Perhaps the starting point should be the Supreme Court decision tn M.N.R. v. T.E. McCool Ltd., [1950] S.C.R. 80; [1949] C.T.C. 395; 49 D.T.C. 700. In that case, the respondent company had acquired certain timber rights from T.E. McCool, agreeing in exchange to assume his liabilities and to issue him shares. The company also issued the vendor a demand note for $123,097 bearing interest at five per cent. The Minister refused to allow the company to deduct the interest paid with respect to this demand note, on the ground that the money was not borrowed capital used in the business to earn income. While all of the judges were in agreement on this point (the respondent had also appealed regarding the allowance for depletion), Mr. Justice Estey's reasons were the most clearly expressed (at page 413 (D.T.C. 96-97)):

Terms such as "borrowed capital", borrowed money" in tax legislation have been interpreted to mean capital or money borrowed with a relationship of lender and borrower between the parties It is necessary in determining whether that relationship exists to ascertain the true nature and character of the transaction. In

this case the promissory note arises out of an exchange in which, . . ., the purchase price was paid by assuming outstanding obligations, a small payment of cash, allotment of capital stock and the execution and delivering of this promissory note. Under such circumstances it cannot be held that the relationship of borrower and lender in respect to this note exists between the respondent company and the payee of the note.

[Emphasis added.]

In two subsequent decisions referred to by counsel for the Crown, Modern Dairies Ltd. v. M.N.R. (1950), 3 Tax A.B.C. 66; 50 D.T.C. 442 (T.A.B.) and Boyles Bros. Drilling Co. v. M.N.R. (1951), 3 Tax A.B.C. 287; 51 D.T.C. 70 (T.A.B.) the appellant companies wanted to deduct interest paid to company officers or shareholders from whom they had borrowed money. The loans took the form of withholding dividends to which the officers or shareholders were entitled. The Minister disallowed the interest deductions on the ground that the individuals in question had simply left their money in the companies' hands and that no lender-borrower relationship existed. McCool, supra was cited as authority.

However, in both instances, the Tax Appeal Board rejected the argument and found that the loans were bona fide and were required by the companies to carry on business. The Board directed that interest be deducted at a rate to be deemed reasonable by the Minister.

Crown counsel relied on these decisions presumably to indicate that a bona fide shareholder's loan can be created when a company withholds money due to a shareholder. Thus, the argument is that the retention of the management fees by Island Hall Hotel Ltd. constitutes a shareholder's loan in the same way as if the plaintiff had lent funds which he already possessed to the company.

However, it should be noted that in Modern Dairies, supra and Boyles, supra, the parties had taken specific steps to formalize the agreement and to convert the withholding of dividends into a shareholders' loan. For instance, in Modern Dairies, the officer in question entered into an agreement with the company whereby he loaned the company $60,000 at an interest rate of 4 1/2 per cent per annum. In Boyles, supra, the company sent its shareholders a letter requesting that they make a loan of their dividends to the company. The company agreed to pay 5 per cent interest per annum, payable quarterly. To signify acceptance of these terms, the shareholders had to return a form to the company agreeing to lend the funds to it. Promissory notes were then issued to these shareholders.

In those two cases, then, the shareholders clearly intended to make a loan to the companies. The loan agreement was put in writing and the company agreed to pay a specific amount of interest on the funds. Likewise, in the present case, the plaintiff mortgaged real estate in order to lend $100,000 to the company, which was secured by a promissory note. The company agreed to pay the interest on this sum directly to the mortgagee of the lands. Thus, this $100,000 was indeed a shareholder's loan made by the plaintiff to the Island Hall Hotel.

However, no such agreement was ever made with respect to the unpaid management fees owed to the plaintiff. He never agreed to lend those funds back to the company at a specific rate of interest. Therefore, I fail to see how Modern Dairies, supra and Boyles, supra assist the Crown in demonstrating that the unpaid fees were in fact a shareholder's loan.

Counsel for the Crown also mentioned No. 353 v. M.N.R. (1956), 15 Tax A.B.C. 395; 56 D.T.C. 419 (T.A.B.) where a lawyer had agreed to have a portion of his profits from the firm withheld to pay his partner's income tax arrears. Two years later the partnership dissolved and the lawyer sought to deduct these amounts as business losses or alternatively as bad debts. The Tax Appeal Board decided that the payments were of a capital nature and dismissed the appeal. Assistant Chairman Snyder stated that a bad debt must relate to the conduct of the taxpayer's business and that a payment made to protect the reputation of a partnership and to maintain its professional standing is a transaction on account of capital.

However, I do not interpret that decision as meaning that whenever money owed to a taxpayer is withheld by a partnership or by a company and is in fact never paid to him, then the resulting loss must be of a capital nature. Rather one must look to the reason for the withholding of the money and to the application of the funds by the entity. As Mr. Justice Estey stated in McCool, supra, in order to determine whether a lender-borrower relationship exists, one must ascertain the true nature and character of the transaction.

For example, in William B. Ackerman Ltd. v. M.N.R., [1967] Tax A.B.C. 329; 67 D.T.C. 262 (T.A.B.) the appellant company had included in its income moneys received as management fees. It was subsequently unable to collect the fees and the Tax Appeal Board allowed it to deduct the outstanding amounts as bad debts, even though it found that the taxpayer's ordinary business was not that of lending money.

In Malone v. M.N.R., [1979] C.T.C. 2619; 79 D.T.C. 540 (T.R.B.) the taxpayer was the president and a substantial shareholder of a stock brokerage company. He made several advances to the company to maintain its working capital but the company eventually went bankrupt. The issue before the Board was whether the loss constituted a business loss or a non-deductible capital loss. The Board found in the taxpayer's favour. I find some of the comments of Roland St-Onge (at pages 2622 and 2625 (D.T.C. 542 and 544)) of particular interest:

[Counsel for the Minister] argued that the appellant was not in the money-lending business, but only an employee of the company and, as such, he could not claim as business losses the money he advanced to his company. It was an investment and consequently a non-deductible loss of capital. If the investment goes bad, he says, one loses capital

He terminated his argument by saying that, in the case at bar, the appellant earned employment income and there was no section in the Income Tax Act to provide for that kind of loss.

The Board believes that the case at bar is not as simple as presented by counsel for respondent. The appellant was not an ordinary salesman who advanced money to a company, but a very special one. He was the backbone of his company and without him, the company had no existence. Furthermore, this company was kept in existence to allow the appellant to generate substantial profit . . . because the appellant could not have been in this kind of business without resorting to Malone Lynch, the use of which as a mere vehicle was born out of necessity. ....

The appellant never pretended he was in the money-lending business, but according to the evidence, taken as a whole, he was in the profit-making business. His intention was to earn substantial profit and he did so by buying and selling stock for clients and the best way to do it was to use Malone Lynch.

The evidence has revealed that the method employed by the appellant was the most efficient and appropriate way to earn considerable profits. The advances he made to his company became an integral part of his current profit-making activities and there is no doubt that these advances were made as a businessman intending to continue in business and in accordance with the ordinary principles of commercial trading or well-accepted principles in the practice of the stock market business.

I conclude that on the facts of this case the reimbursement of losses made to clients of the plaintiff were made with a view to producing income according to the provisions of paragraph 12(1)(a) of the Act and were not a payment on account of capital by virtue of paragraph 12(1)(b).

The facts are different in this case, of course, but the Malone decision, supra, shows that a taxpayer may incur a business loss, even if he is an employee of the corporation who is not in the money-lending business.

Findings

If we examine the facts of the present case, there is no doubt that the plaintiff was owed management fees which were never paid by the hotel. No objection is taken by the Minister to the amount of the management fees claimed. The taxpayer included the full amount of these fees in his income for tax purposes in 1981 and 1982 and it appears that even if he had demanded payment of the balance remaining in his drawing account, the hotel would not have been financially capable of obliging.

The Minister feels that in these circumstances, the taxpayer made a shareholder's advance or loan te the hotel. The taxpayer argues that the debt remained an account receivable. In order to come to terms with the true nature of this outstanding"debt", I must rely upon the evidence which was put before me in order to ascertain the plaintiff's intentions during the relevant period.

Although the hearing before me is a trial de novo, so that I am not bound by Judge Rip's findings, I would like to indicate that the plaintiff was able to adduce additional evidence before this Court, which the Tax Court Judge did not have the benefit of hearing or of seeing. Perhaps the most important new evidence was the testimony of Mr. Tanaka combined with the production of the working papers used to prepare the financial statements of the company for the years 1981 to 1984.

Counsel for the Crown relied mainly on the notes to these financial statements to demonstrate that the unpaid fees constituted a shareholder's advance. In these notes, the unpaid management fees are indeed described as an advance from the plaintiff. For instance, in the 1983 statement, note 6 describes the company's liabilities vis-à-vis its shareholders as follows:

Promissory note—interest payable monthly at 14%, principal balance due April 1, 1984 . . .

Advances—non-interest bearing, no specific repayment terms . . .

The promissory note is due to two shareholders who mortgaged land owned by them to obtain the funds on behalf of the company. Under the terms of the note, interest is the same as that payable on the mortgage and is paid directly to the mortgagee.

The amounts payable to shareholders are due within the next fiscal year. However, the shareholders have indicated that they will not request payment of this amount within the next fiscal year. Consequently, this amount has been classified as a non- current liability in the accompanying financial statements.

(Note 6 also gives the specific amounts of the loans and advances for 1982 and 1983.)

This is the evidence which the Tax Court Judge found so compelling and indeed, if this were the only evidence before me, I might have to agree that the appeal should be dismissed. As I have indicated in previous judgments, assertions by a taxpayer as to his intentions are only persuasive to the extent that they may be directly or indirectly confirmed by or be consistent with overt and objective fact. (See Maritime Forwarding Ltd. v. The Queen, [1988] 1 C.T.C. 186; 88 D.T.C. 6114 at 189 (D.T.C. 6116).)

Thus, the plaintiff's assertion that he did not intend to lend the unpaid fees to the company and thereby increase his financial exposure is by itself of limited probative value. However, the plaintiff was able to substantiate his assertions by the testimony of Mr. Tanaka and by the production of the working papers, to which I have already referred. An analysis of these working papers founded on Mr. Tanaka's explanations of them persuades me that the Minister's assumption as to the nature of the unpaid management fees is mistaken and that the plaintiff's appeal must therefore succeed.

I find that Mr. Tanaka's explanation of the way in which the financial statements for the hotel were prepared is entirely consistent with the plaintiff's allegations of intention. Mr. Tanaka stated that the unpaid management fees represented a company liability, as did the loan of $200,000 secured by a promissory note. Thus, all liabilities were mentioned together in the notes in order to inform third parties of their existence. The notes to the statements were not intended to be a definitive classification of the nature of the various liabilities for any purpose, but rather, were intended to inform third parties that such liabilities did in fact exist.

Furthermore, Mr. Tanaka was able to demonstrate how the amount of these "advances" was calculated by referring to the working papers previously pre- pared by the plaintiff's accountants. These papers are, I believe, the key to the whole case. They indicate that during the 1981 to 1984 period, the plaintiff had a drawing account from which he made various withdrawals throughout the year and into which, at the end of the year, the company placed a sum representing accrued management fees, if the parties decided that such fees should be paid.

For example, the working paper for 1981 shows that as of December 31, 1980, Mr. Sutherland’s account had been credited with $124,713.34. During 1981, the company paid him $125,830, leaving a balance of $1,116.66. From this overpayment, the sum of $85,000 in management fees was deducted, leaving a total of $83,883.34 owing to Mr. Sutherland at the end of 1981. Amounts from the accounts of Bedford Investments (a related company), Island Bay Investments Ltd. and Josephine Gemma were then debited or credited accordingly to give a total of $49,265.61 in "advances" for the year. This corresponds to the amount of the non-interest bearing advances shown in the notes to the financial statements for 1981.

Although the term "Shareholders' Accounts" appears in the heading of the working papers, it appears that one account listed, that of Bedford Investments, does not belong to a shareholder of the company. It is also interesting to note that at the bottom of the 1981 working paper, the following notation appears:

There are no long-term advances.

Source of all information on this schedule was Dennis Scott, general manager.

The working paper for 1982 shows the opening balance of $83,883.34 from December 31, 1981 for Mr. Sutherland. From this amount, payments made on his behalf by the company and withdrawals, together totalling $62,359.33, are deducted, leaving a credit of $21,524.01. To this amount, $75,000 in accrued management fees are added to give a final credit of $96,524.01. Again, the total balance of non-interest bearing advances for 1982, computed by adding the plaintiff's balance with that of Bedford Investments, Island Bay Investments Ltd. and Josephine Gemma, corresponds with the total appearing in the notes to the 1982 financial statements, namely $48,152.78.

For the year ending December 31, 1983, $549 is credited to the plaintiff's account minus a $12.60 adjustment. When this amount is deducted from the opening balance along with a credit of $5,548.33 as a reclassification, presumably relating to Bedford Investments, the closing balance in the plaintiff's account for 1983 totals $90,439.28.

There were no transactions affecting the plaintiff's account during 1984 and consequently, the opening balance of $90,439.28 did not change.

Thus, the working papers filed at the hearing show how the figures given in the notes to the financial statements for Island Hall Hotel Ltd. for the 1981-1984 period were calculated and give credence to the taxpayer's explanation of what transpired. More specifically, the 1981 working paper confirms that the plaintiff was making withdrawals from his account throughout the year, which was then offset by the payment of a management fee at the end of the year.

It will also be remembered that 1982 was the year in which the hotel experienced a net loss and began to run into serious financial difficulties. The plaintiff's willingness to waive immediate payment of his management fees was no doubt also influenced by his knowledge that even if he did demand payment, the company would not be in a position to oblige.

I cannot find that in these circumstances the plaintiff's intention was to make a shareholder's loan to the company. He simply did not have any choice but to leave the money where it was. The previous $100,000 loan to the company had been given a term and was subject to the payment of interest. The plaintiff had also taken a promissory note as evidence of the company's indebtedness towards him.

As the notes to the financial statements indicate, the plaintiff's fees and other "advances" were due in the same year, but the plaintiff was simply not going to request immediate payment for reasons largely beyond his control. By this, I mean that the financial position of the company was such that the Bank would probably not have allowed the payout of the money while the company was falling further and further behind in its obligations towards the Bank.

The existence of the garnishment order, in my view, would not validate the plaintiff's neglect or refusal to demand immediate payment of his fees, but it is one additional factor which tends to reveal the plaintiff's state of mind back in 1982 and 1983.

Thus, on the basis of the evidence presented at the hearing, I conclude that the plaintiff never intended to make a shareholder's loan or advance to the company, but that the unpaid management fees represented a debt which became bad in 1985, as the plaintiff has contended.

No case involving a mix of fact and intention is clear-cut and easily determined. There are, as far as the Crown is concerned, some facts to which reference is made in the pleadings which invite another look and from which different conclusions might be drawn. As in any case, however, some findings must sometimes be made at trial on a balance of probabilities more than otherwise. Having found sufficient support for the plaintiff's assertions in overt and objective facts, I should therefore find in his favour.

Income from Employment or Business

Counsel for the Crown finally argues in the alternative that should the unpaid management fees not be found to constitute a shareholder's loan or advance, then they should be considered to be income from employment, the loss of which is not provided for in the Income Tax Act. I do not agree.

The evidence presented at the hearing clearly shows that the plaintiff was not acting in the capacity of employee or of officer or company director in performing the management services. These services were not those normally performed by, or expected of, directors of a corporation. The hotel had a manager for the taxation years at issue and the plaintiff was not involved in the day to day operations of the hotel. The manager of the hotel up until the spring of 1983 was Dennis Scott and after he left, Mr. Aardell took over as manager.

The taxpayer, who lived in Vancouver, had seven lots of real estate in Parksville and usually went to the Island Hall Hotel once a week. He did not participate in the daily business of the hotel, but rather he agreed to act as the owner's representative and to generally oversee the various financial concerns of the company. It appears that the plaintiff was actively pursuing other real estate projects at the same time that he was overseeing the business of the hotel. Furthermore, he did not receive any remuneration at all for his services from 1973 until 1977.

When the taxpayer finally began to receive monetary reward for his involvement in the hotel, it took the form of a deposit of management fees once a year into an account, from which the plaintiff could make withdrawals at various times throughout the year. No deductions at source were ever made with respect to the payment of the management fees and the plaintiff was not treated as an employee of the hotel in any other respect.

The hotel constituted only one of several sources of income for the plaintiff and I think that if one applies any of the tests put forth by the Court of Appeal in Wiebe Door Services Ltd., supra, one would have to find that the plaintiff possessed the status of independent contractor vis-a-vis the hotel with respect to the provision of his management services.

I am well aware of the fact that for purposes of the Income Tax Act, an officer or director of a corporation is considered an employee, but as I have already mentioned, in the present case, the management services which the plaintiff performed went well beyond what would be expected of a director and were not related to his position as director of the company. Had the plaintiff not performed these services, it is quite possible that some third party would have been hired to perform them in the same manner.

Not all sums paid to a person who happens to be a director of a company will automatically be considered income from that office. As Mr. Justice Strayer noted in Grohne v. The Queen, [1989] 1 C.T.C. 434; 89 D.T.C. 5220 (F.C.T.D.) a director is an“ employee" of the corporation for certain purposes even though he may not receive remuneration or perform services in ways typical of ordinary employment. However, the learned trial judge went on to point out (at 438 (D.T.C. 5223)):

This does not mean, however, that every benefit flowing to a president, director, or other officer of the corporation flows to him“ ” in respect of, in the course of, or by virtue, of" such "employment". The test used in paragraph 6(1)(a) and subsection 7(5), . . ., by implication recognizes that the benefit may be conferred because of some relationship other than that of employment.

As the Federal Court of Appeal pointed out in Wiebe, supra, one must assess all of the circumstances of the case and, as found by MacGuigan, J.A., apply the four-in-one test, focusing on the combined force of the whole scheme of operations, in order to determine whether an individual is acting as employee or as independent contractor in performing certain services.

As a result, I must reject counsel's second argument as well and allow the taxpayer's appeal, on the ground that the unpaid management fees became a bad debt in 1985 and can be deducted as such, pursuant to paragraph 20(1)(p) of the Income Tax Act. The reassessments for the years 1982 and 1983 shall be varied accordingly. The taxpayer shall have his costs.

Appeal allowed.