Mele v. The Queen, 85 DTC 5192, [1985] 1 CTC 257 (FCTD)

Cullen, J:—This action, and one involving Tony Mele Incorporated, came on for trial at London, Ontario on the 15th day of January 1985. Counsel agreed that these two actions be tried on common evidence.

By notice of reassessment, dated the 31st day of December, 1981, the Minister of National Revenue (“Minister”) reassessed the plaintiff for his 1978 taxation year (“1978 Reassessment”) by adding to his income alleged appropriation of funds of Tony Mele Incorporated (“Incorporated”) in the amount of $18,950.

By notice of reassessment, dated the 31st day of December, 1981, the Minister reassessed the plaintiff for his 1980 taxation year (“1980 Reassessment”) by adding thereto appropriation of funds in the amount of $17,100.

By notice of objection dated the 22nd day of March, 1982, the plaintiff objected to the foregoing reassessments.

By confirmation, notice of which was mailed to the taxpayer and dated the 3rd day of September, 1982, the Minister confirmed the foregoing reassessments, in particular that “the taxpayer’s income for the taxation years has been properly determined in accordance with the provisions of section 3 and subsection 9(1) of the Act”.

The plaintiff states that with respect to the alleged appropriation of funds of Tony Mele Incorporated, as set forth in the 1978 reassessment and the 1980 reassessment, the plaintiff did not receive any benefit or advantage with respect to these alleged appropriations and the same should not have been added to his income for his 1978 taxation year and his 1980 taxation year respectively. As with the taxation case involving Tony Mele Incorporated, the plaintiff here alleges that the amounts of $18,950 in 1978 and the amount of $17,100 in 1980 respectively were bona fide loans made by Incorporated to third parties and were not transfers of property by the plaintiff within the meaning of subsection 56(2) of the Income Tax Act.

The Minister of National Revenue, in reassessing the plaintiff for his 1978 and 1980 taxation years, assumed the following as shown in paragraph 5 of the statement of defence, namely:

(a) the Plaintiff is the controlling shareholder, director and officer of Tony Mele Incorporated, a corporation carrying on business as a contractor in Ontario (“the Corporation”);

(b) the corporation, pursuant to the direction of the Plaintiff, made payments to certain other individuals in the total amount of $18,950.00 and $17,100.00 in the 1978 and 1980 taxation years respectively on behalf of or for the benefit or advantage of the Plaintiff or as a benefit the Plaintiff desired to have conferred on such certain individuals;

(c) the payments were made to the following individuals in the following amounts and at the following times:

Payee	Amount Amount		Time	Time
Joe Serratore	$ 3,200.00			February 1978
		2,600.00		April 1978
		6,000.00		May 1978
Carlo Diorio	$	650.00		May 1978
		500.00		September 1978
R Leckyre	$ 1,000.00			July 1978
		1,000.00		July 1978
	$18,950.00
Joe Serratore	$ 2,900.00			February 1980
		7,200.00		February 1980
		2,000.00		March 1980
		5,000.00		April 1980
	$17,100.00

(d) the corporation’s fiscal period ends August 31 of each year;

(e) the corporation, in its 1979 taxation year, deducted in computing its income those amounts set out in subparagraph (c) hereinabove paid in 1978, as bad debts;

(f) the corporation, in its 1980 taxation year, deducted in computing its income those amounts set out in subparagraph (c) hereinabove paid in 1980, as subcontract expenses;

(g) the payments, if loans to the certain individuals, were loans personal to the Plaintiff, and such payments were not made by the corporation on its own behalf but rather on behalf of the Plaintiff;

(h) the corporation was not, wholly or in part, in the business of lending money in its 1978, 1979 or 1980 taxation years;

(i) the payments were not made by the corporation pursuant to a bona fide business transaction with either the certain individuals or with the Plaintiff;

(j) the payments, if made to the Plaintiff, would constitute an appropriation of funds of the corporation to the Plaintiff.

Having already written my reasons for judgment in the case involving Tony Mele Incorporated, I simply incorporate the reasons given there to indicate the plaintiff corporation was not in the money-lending business.

In presenting the case for the defendant, counsel makes the point as well at pages 218-219 of the transcript:

Now, the Minister then pleads, in (h): “the corporation was not, wholly or in part, in the business of lending money in its 1978, 1979 or 1980 taxation years . . 99

Now, what evidence is before this Court to dislodge that assumption? Well, the only evidence again is that of Mr Garnier. Mr Garnier tells of overhearing some transactions that took place in his office and, as it turns out, the only transactions he remembers are precisely the transactions in issue at this trial. There were other attempts, he tells us, of people to borrow money from Mr Mele but he cannot remember. He remembers one name, a Mr Cisco. There were others. He cannot remember them. He cannot remember the terms of any of the requests. But again, he has a remarkable memory on these discussions that took place in 1978 between Mr Serratore and Mr Mele and which he says took place between Mr Leckyre and Mr Diorio and Mr Mele.

Now, he could not tell us who was there, aside from Mr Mele and Serratore. He could not tell us whether it was day or night but he remembers that there was an amount of money asked for, that there was interest terms specified and they were not the same in every case . . . oh yes, and he remembers that at the end of the day they would all have — Mr DeDominicus would cook up dinner on the site and they would all have dinner together at their conclusion of the transaction.

I submit that that evidence, taken as they are, as unsupported, undocumented transactions of which we have only second-hand evidence from Mr Garnier, who sometimes was in the office, that the Plaintiff simply has not dislodged assumption 5(h) either.

Earlier at page 216 of the transcript, counsel for the defendant states:

Now. (g), (h), (i) and (j) come, as well, to an important part of the assessment.

(g) says: “the payments, if loans to the certain individuals, were loans personal to the Plaintiff, and such payments were not made by the corporation in its own behalf but rather on behalf of the Plaintiff . .. .”.

Now, what evidence has been adduced to dislodge that assumption? The only evidence, of course, called by Mr Garnier. Whatever Mr Garnier can tell us, I do not think he can tell us anything about whether these were loans personal to the Plaintiff or not, whether or not these were loans which the Plaintiff desired to — or amounts which the Plaintiff desired to advance to these individuals or whether it was the corporation. All he can speak to is that these cheques that they were written on were altered, all except one in 1978. They were all not cheques of the corporation but cheques of someone else, either Mr DeDominicus or Mr Serratore, and that they were drawn on the corporate account. That much we admit, that they were drawn on the corporate account. That has never been in dispute.

But I submit that there has been no evidence to dislodge assumption (g).

With respect to paragraph (j):

In (j) the Minister assumes that the payments that: “the payments, if made to the Plaintiff, would constitute an appropriation of funds of the corporation to the Plaintiff’.

Well, that applies whether the payment is a payment for some reason we do not know very much about, because the one person who could tell us something of what it was about did not testify, or if it was a loan it would still be included under subsection 15(2) of the Act. Because a loan to a shareholder is included in computing the shareholder’s income in that year unless certain conditions obtain. And there is no evidence as to facts that would lead the Court to conclude that those conditions obtained.

I am satisfied that these were not corporate loans, and that Mr Mele was not acting as an officer of the company in signing these cheques.

Counsel for the plaintiff cited Nathanial C Brewster v The Queen, [1976] CTC 107; 76 DTC 6046. In that case there were a number of assumptions in the alternative, and that was successfully attacked by the taxpayer. Mr Justice Gibson, at 125 (6058 DTC) of that case, in deciding whether a number of transactions between companies were shams or simulacrums, as they were referred to in that case, said:

There is nothing in the evidence from which it could possibly be inferred that either Jalab Securities Limited or Brewster Securities Limited were “shams”, “simulacrums” (or any other pejorative characterization for tax purposes or otherwise); nor were they “puppets” of Labett or Brewster, in the sense alleged by counsel for the defendant, or in any other sense relevant to the result found in this action. Specifically, it is found as a fact that Brewster Securities Limited and Jalab Securities Limited were “genuine” corporations (using the word employed by Harris, solicitor for the plaintiff, Brewster) and the respective transactions between them and Brewster and Labett were also “genuine” in the dictionary meaning.

As counsel for the defendant puts it, and I agree,

Mr Justice Gibson looked to the evidence to see whether or not it could be inferred from the evidence put before that Court, whether these allegations of the Minister could be substantiated. He found that they could not be and the case was dismissed accordingly.

My Lord, I submit we are not in a Brewster situation at all. I believe there is — not only has the Minister not pleaded, not assumed in the alternative in his pleadings, but rather that there is evidence before this Court on the basis of which it can be inferred that these advances were personal advances from Tony Mele to people he knew and not corporate acts for the purpose of gaining or producing income from a business or property. [Emphasis added.]

I wish to refer to the case of MRT Investments Ltd et al v The Queen, [1975] CTC 354;75 DTC 5224. It is an authority for the proposition that reference to the objects of the corporation are important. Mr Justice Walsh adopts the characteristics that should be taken into consideration deciding whether a business enterprise is active or not includes as one of the things “the objects declared in its letters patent. As counsel for the defendant states, “On the basis of the objects set out in the Charter of Tony Mele Inc it is abundantly clear that the corporation is not in the business of lending money”.

Counsel for the plaintiff suggested the ancillary powers of the Business Corporations Act (Ontario) were sufficient to allow the corporation into the money- lending business. In Adanac Apparel Limited v MNR, [1969] CTC 484; 69 DTC 5300, an Exchequer Court Case, Deputy Judge Shepherd sets out that,

The “powers” being ancillary and incidental to the objects have no independent existence . . . but rather pertain to those objects set out in the memorandum or the objects of incorporation.

One of the troubling features of this case, and my decision, is the fact that the corporation cannot claim advances as deductible, and the end result is that a significant sum of money is credited to the taxpayer Mr Mele personally. In the two Thompson cases, Robert L Thompson and Evelyn M Thompson v MNR, [1982] CTC 2187; 82 DTC 1168, and Garneau Marine Ltd v MNR, [1982] CTC 2191; 82 DTC 1171, we had a situation with on the one hand a disallowed deduction to the corporation, and on the other hand an amount included by way of section 15 in the income of the taxpayer. That is taxing the same amount twice. Unfortunately if that is the manner in which a taxpayer sets up his affairs or conducts his affairs, as is the situation here, then he must accept the consequences of the Income Tax Act because that is the way it reads and must be applied.

It is clear, in the assumptions that these were payments or advances made by Mr Mele for personal reasons using corporate money, that such assumptions have not been dislodged.

This action is dismissed with costs.

Appeal dismissed.