Altenhof v. MNR, 73 DTC 239, [1973] CTC 2303 (T.R.B.)

The Assistant Chairman:—This is the appeal of John Altenhof from an income tax assessment in respect of the appellant’s 1968 and 1969 taxation years.

The appellant and his brother, Jack Altenhof, are the only two beneficiary shareholders of J and J Tool and Mold Limited. The third director of the company holding one share was the appellant’s counsel, Mr Walter L McGregor. Closely connected with the company since 1954 was Mr Walter J Kulyk, a chartered accountant, who generally supervised the bookkeeping and was the company’s auditor.

Owing to marital problems, the appellant sold his old home and sought to build a new house on 25 acres of land which he had purchased. As a result of these problems, the appellant incurred heavy expenses and needed $30,000 for the construction of the proposed house.

In February of 1968 the appellant called in Mr Kulyk to seek his advice on the possibility of obtaining the needed capital from the company. A meeting of the company’s directors was held at which the appellant and his brother Jack were present and Mr Kulyk also attended. At the meeting the appellant’s problem was discussed and allegedly a $30,000 advance to the appellant, without interest and payable over a period of ten years, was approved. It was also stated that agreement was reached to defer the initial repayment of the $30,000 for a couple of years. Mr Kulyk took notes of the discussions and the decisions reached. No promissory note or document confirming the repayment arrangements was signed by the appellant. It was stated at the hearing that loans made by the company to either brother were not usually recognized by promissory notes.

From February 14, 1968 to December 22, 1969 the amount of $30,000 was advanced to the appellant by means of a series of cheques. Mr McGregor, counsel and director of J and J Tool and Mold Limited, was to have entered the purport of the February 1968 meeting in the minute book of the company. Owing to illness, a considerable delay occurred before the February 1968 meeting was finally entered in the minute book. In the meantime Mr Kulyk lost the notes which he had taken at the February 1968 meeting and was obliged to reconstruct the notes from memory and from these notes the minutes of the meeting were eventually drafted (Exhibit A-3). It will be noted that in the reconstructed notes (Exhibit A-3), along with the decisions taken in respect of the alleged loan to the appellant and the waiver of notice of the calling of a meeting, there appears a promissory note signed by the appellant and dated February 12, 1968. Mr Kulyk testified that no promissory note was signed in February 1968 and that notes were not customary between the two owners of the company. Mr Kulyk further stated that he did not know why, in reconstructing the notes, he included a promissory note which he knew had not been given in February 1968. No explanation was given as to how and why the appellant’s signature appears on the promissory note dated February 12, 1968 when the appellant acknowledges that no promissory note was given by him at that time.

Strangely enough, when the minutes of the meeting were finally inscribed in the company’s minute book from Mr Kulyk’s notes, the date of the meeting was changed from February 12, 1968 to May 13, 1971. What is alleged to be a typographical error was also made in respect of the promissory note which is a separate document and distinct from the minutes, but also dated May 13, 1971 (Exhibit A-1 and Exhibit A-2). Again, the promissory note for $30,000 dated May 13, 1971 was signed by the appellant.

The point in issue in this appeal is whether or not bona fide arrangements for the repayment of the loan were made at the time the loan was made pursuant to subsection 8(2) of the Income Tax Act. Even if one were to admit, as counsel for the appellant contends, that the Act does not require that the bona fide arrangements for the repayment of the loan be in writing, there must be sufficient proof to satisfy the Board that arrangements for the repayment did, in fact, exist at the time the loan was made.

In the absence of a written document, the Board must rely on the facts and the credibility of the appellant. The facts of this appeal pose more questions than they answer. Admitting that the meeting took place in February 1968 and that advances were made to the appellant for the purpose of building a house how, under the circumstances of this case, can the Board determine whether or not arrangements for repayment were made at the time the loan was made? From Mr Kulyk’s notes which were lost and had to be reconstructed from memory? From the company’s minute book which dated the loan as at May 13, 1971? From the promissory notes dated February 12, 1968 and May 13, 1971, both of which were signed by the appellant knowing he had not given a promissory note in February 1968? From the facts of the case, just how credible has the appellant proven to be?

Counsel for the appellant places a good deal of importance on the statement that the repayment of the loan was started before the inquiry of the Department of National Revenue had begun and even before June 15, 1971, when he was required to do so. Nevertheless, even though the onus of proving this important allegation rests on the appellant, no evidence whatsoever was offered to the Board to establish and confirm that fact, and the evidence given by the appellant in this respect was most ambiguous in spite of efforts made to clarify the point.

The nature of the repayment of the loan also poses some questions. The loan of the company was not repaid from the appellant’s bank account. In order to repay the loan the appellant was given a raise of $4,600 a year which was charged as a bonus in the company’s salary account—$3,000 of which went for the repayment of the appellant’s loan and the balance went towards the payment of the appellant’s additional income tax. Although this bookkeeping technique might be considered as a legal repayment of the loan, can such a procedure in the circumstances of this appeal be considered as having been part of the bona fide arrangements for the repayment of the loan made at the time the loan was approved, or did the company advance $30,000 to the appellant without there being any requirement that the money be paid back?

From the facts of this case, I feel that the credibility of the appellant leaves much to be desired, and ! am of the opinion that the appellant has not proven to the satisfaction of the Board that at the time the $30,000 was advanced by the company to the appellant bona fide arrangements for the repayment of the $30,000 advance were made or even contemplated by the appellant and consequently subsection 8(2) of the Income Tax Act does not apply to the facts of this appeal.

The appeal is therefore dismissed.

Appeal dismissed.