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Citation: 2005TCC184
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Date: 20050324
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Docket: 95-2684(IT)G
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BETWEEN:
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MAC J. SHAHSAVAR,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
CampbellJ.
Introduction:
[1] These appeals are in respect to
the Appellant's 1991 and 1992 taxation years. The Minister of
National Revenue (the "Minister") conducted an audit of
Excelco Systems Inc. ("Excelco") and Canex
International Consultants Inc. ("Canex"). Subsequent to
this audit the Appellant was reassessed for these years.
[2] In reassessing the Appellant for
the 1992 taxation year the Minister added to the Appellant's
taxable income, amounts received from Excelco, on the basis that
a benefit had been conferred upon the Appellant pursuant to
subsection 246(1) of the Income Tax Act (the
"Act"). The Minister alleged that this benefit
arose when amounts were credited to the Appellant's loan
account without adequate consideration.
[3] The alleged benefit was comprised
of two amounts, $80,591.20 and $36,851.09. The first amount of
$80,591.20 was part of a court ordered monetary award arising
from litigation involving three of the Appellant's companies,
Creative Touch Mills Inc. ("CTMI"), Anesco Management
Ltd. ("Anesco") and Ansco Enterprises Ltd.
("Ansco"). This amount was credited to the
Appellant's loan account with Excelco.
[4] The second amount of $36,851.09
was credited to the Appellant's loan account with Excelco in
respect to a transaction referred to on the general ledger as
"TRSF CANEX TO S/H".
[5] These two amounts, which total
$117,442.29, were included in the Appellant's taxable income
in the 1992 taxation year because the Minister contended that a
benefit was conferred on the Appellant pursuant to
subsection 246(1) of the Act.
The Evidence:
[6] In addition to the Appellant, one
witness was called, Frank Metanchuk, an appeals officer with the
CRA. The Respondent did not call witnesses.
[7] The Appellant graduated from the
University of Saskatchewan in 1983 as a professional engineer.
His family has a long history of patented inventions in the
medical field. He has followed this family tradition and has a
number of patented medical inventions including development of
the only robotic arm that can perform a number of applications at
the same time.
[8] He has been involved in a number
of companies throughout the years. In the late 1980's, the
Appellant formed several companies to carry on the business of
millwork and carpentry. In particular CTMI was incorporated to
carry on some of this business. CTMI was 100% owned by a second
company, Ansco, but the Appellant was the President and CEO. A
third company, Anesco, was incorporated to hold the buildings and
warehouse facilities from which CTMI operated. The Appellant was
the sole shareholder of Ansco and owned 90% of the shares of
Anesco. Johanna Cummings owned the remaining 10% of the
shares of Anesco.
[9] CTMI operated from two separate
locations in Saskatoon. The buildings and some of the equipment
at one of these locations was damaged by fire on June 9,
1987. The insurers took issue with the origin of the fire,
arguing that the damage was caused by wear and tear and therefore
was not covered by the policy. Although the manufacturing
facility had been destroyed, CTMI was still obligated to complete
its contracts in the midst of suing the insurers. The Appellant
testified that the actions of the insurers forced CTMI to close
its doors. In addition to CTMI, the lawsuit named three other
plaintiffs, Ansco, Anesco and the National Bank, a secured
creditor of CTMI. The lawsuit was presented to the Court in two
phases, the reasoning being that if the plaintiff corporations
were not successful in the first phase, the second phase would
not be continued in the Courts. The first phase was decided
favourably for the plaintiff corporations in April 1991. The
second phase is still ongoing in the Saskatchewan Courts.
[10] Before the first phase of the lawsuit
proceeded to trial, CTMI went into receivership. Because it had a
number of bonded contracts which it could not now complete, it
was sued in respect to these contracts. As a result several
judgments were registered personally against the Appellant, and
also CTMI. The Appellant stated that these were attempts by the
insurers to prevent the lawsuits from proceeding. The judgment
against the Appellant meant that he could not keep a personal
bank account. Because CTMI was basically bankrupt, it could no
longer operate or have a bank account. During this time the
Appellant stated that he scrambled to borrow money from family
and friends, to pay the lawyers directly to keep the lawsuits
active.
[11] In 1991 Excelco was incorporated as a
holding company. The Appellant's wife was the sole
shareholder and the Appellant was the director, manager and
president. His wife may have been a director for a short time
from the inception of Excelco but after the birth of their child,
in 1991, she was no longer involved in any way with the business
and the Appellant was its sole directing mind.
[12] An assignment agreement dated October
15, 1991 between Excelco, CTMI and Anesco was entered as Exhibit
A-5. The Appellant testified that this document transferred all
legal rights and interests, including the lawsuit, belonging to
CTMI and Anesco to Excelco. In exchange for these rights, Excelco
agreed to "... fund the expenses incurred in collecting the
monies from the court actions" (transcript pages 55-56)
and to pay the secured and judgment creditors of CTMI and Anesco
and to retain any balance as net revenue.
[13] In April 1991, the Saskatchewan Court
of Queen's Bench delivered judgment in the first phase of the
litigation. As a result $710,000.00 was collected from the
insurers and approximately $80,000.00 from the sale of corporate
assets held by the receiver and paid to the plaintiffs. The money
was received by Hnatyshyn Singer law firm which attended to the
defence of the various corporate entities that were being sued. A
second law firm, Jamieson Baits, was responsible for pursuing the
claim against the insurers through the Courts. The Appellant
agreed that the Respondent's Exhibit R-7 was an accurate
reflection of the amount retained by Hnatyshyn Singer for its
outstanding legal fees. In total $60,591.20 was retained by the
law firm for fees from monies paid out of court in 1991 and 1992.
On cross-examination he was referred to Exhibit R-6, which was
the law firm's reconciliation of billings and reconciliation
of trust funds together with a handwritten one page document by
David Hnatyshyn in 1992 (Exhibit R-7). Exhibit R-7 lists the
various amounts that were paid into court together with the
amounts that were paid out by the law firm to the various
parties. On both exhibits two separate sums are referred to as
being the balances held in trust by the law firm after payment to
various parties and those amounts are $51,322.19 and $16,304.96.
Exhibit R-6 shows receipt by the law firm of an additional amount
of $12,964.05 from McKercher & Co. law firm that had
represented one of the defendants in the lawsuit. This meant that
Hnatyshyn Singer law firm had a total balance of $80,591.20 to
disburse. The Appellant consented to the firm deducting its legal
fees and instructed that the balance, $20,000.00, be paid to
Excelco pursuant to the assignment. After the firm deducted its
fees, a cheque for $20,000.00 was issued to Excelco in March or
April of 1992. He stated that if CTMI had not gone into
receivership and had not assigned its rights respecting this
lawsuit to Excelco, the money would have been paid to CTMI. He
would then have directed CTMI to pay Anesco for the shareholder
loan made to CTMI and then for Anesco to pay the Appellant for
shareholder loans made to Anesco. Finally he testified that he
would have invested these monies in Excelco to pay legal fees and
costs of pursuing the second phase of litigation. By allowing
Hnatyshyn Singer to retain its legal fees of $60,591.20 and
instructing the firm to transfer the balance of $20,000.00 to
Excelco, with a notation on his loan account for the total amount
of $80,591.20, the Appellant achieved the same result with fewer
transactions.
[14] The Appellant stated that the motive,
in completing the assignment of the CTMI action to Excelco, was
simply to enable Excelco to pursue the lawsuit. He stated there
was no intention to transfer losses between these companies as
there were no losses. He testified that the Court had already
issued a 93 page ruling in favour of the plaintiff corporations
guaranteeing at least $600,000.00 as compensation for business
interruption.
[15] The second amount in issue is the
amount of $36,851.09 from Excelco to Klemmer Seed. Klemmer Seed
was a business operating out of Rosetown, Saskatchewan. It
exported seed to South America but wanted to expand its market in
other parts of the world where the Appellant's companies had
contacts. Canex was a newly incorporated company, created to
export products to the Middle East. Klemmer Seed advanced
approximately $60,000.00 to Canex in the hope of expanding its
markets and business. Within a year, Klemmer Seed ran into
financial difficulties which necessitated it withdrawing the
investment to Canex. Since Canex was a new company and had
already spent the Klemmer Seed money, the Appellant had to come
up with an alternate means to repay Klemmer Seed. Although he did
not recall the exact details of the transaction, as it occurred
almost 12 years earlier, he was sure that he paid Klemmer Seed
through Excelco. His evidence was that he either repaid it
directly to Klemmer Seed or he wrote a cheque to Excelco, which
in turn paid the funds to Klemmer Seed on behalf of Canex. He
thought the likely scenario was that he already had money
personally in Excelco, so when he needed this money, he directed
Excelco to simply write a cheque. In the end, the $36,851.09
remains outstanding on Excelco's books today, representing
Excelco's indebtedness to the Appellant for his share of the
loan repayment to Klemmer. He did admit that for clarity he
should have made the payment through Canex to Klemmer Seed. In
the end however he stated that the result was the same via an
inter-company loan from Canex to Excelco. This resulted in a
debit to Excelco's inter-company account and a credit to the
Appellant's loan account with Excelco. The Appellant
referenced the transaction, entitled "TRSF CANEX TO
S/H", which credited the $36,851.09 to the Appellant's
loan account in the company, as linked directly to this payment
by the Appellant personally through Excelco to Klemmer Seed but
made on behalf of Canex. On cross-examination, the Appellant was
asked to explain why a credit was recorded to the Appellant's
loan account in the general ledger but a debit was not recorded
which would correspond to this actual payment. In response, the
Appellant noted that the Respondent had introduced and shown him
general ledger pages 24 through 26 only and that if all of the
record had been produced instead of a portion, the entire
transaction would be clearly set out.
The Evidence of Frank Metanchuk:
[16] Mr. Metanchuk testified that he was not
the appeals officer throughout this matter but that he was
familiar with the audit completed by the predecessor appeals
officer. He was aware that there had been a fire in 1987, which
damaged a building and equipment and that as a result a lawsuit
was commenced against the insurers. He confirmed that the
assignment agreement dated October 15, 1991 was discovered during
an audit of Excelco and Canex. He also stated that he had no
evidence to dispute the date of this assignment or to dispute the
fact that from the balance amount, after payment of secured
creditors, the law firm of Hnatyshyn Singer paid itself
$60,591.20 for legal expenses. As a result of the litigation only
$20,000.00 was paid to Excelco although Metanchuk said he had no
explanation why the law firm paid this amount to Excelco. He
agreed that the law firm accounted for these monies in its August
7, 1992 correspondence to the Appellant. Metanchuk stated that
the Appellant received a credit to his shareholder's loan
account that he could draw out tax-free, based on the fact that
he drew down the loan account to $35,992.34 by year end, which
included the $80,591.20 figure and the $36,851.00 (Exhibit
R-3).
The Issues:
(1) Whether CTMI and Anesco assigned
the right to litigate with respect to the dispute with the
insurers and Excelco;
(2) Whether the Appellant received a
benefit from the credit of $80,591.20 to his shareholder's
loan account as a result of the resolution of the first phase of
the litigation against the insurers;
(3) Whether the Appellant paid
Canex's debt to Klemmer Seed.
The remaining issues as contained in the pleadings were agreed
upon between the parties prior to the hearing and will be
incorporated within this judgment together with my reasons on the
above stated issues.
The Appellant's Position:
[17] The Appellant alleges that both amounts
were properly credited to his loan account on Excelco's
general ledger. He argues that the right to the litigation from
which the first amount arises was properly assigned to Excelco
and that the amounts paid out by Excelco to the Appellant and on
his behalf were properly credited to his loan account. Of the
total balance remaining from the first phase of the lawsuit,
after secured creditors were paid, Hnatyshyn Singer law firm
deducted its legal fees of $60,591.20. The remaining $20,000.00
amount was transferred to Excelco pursuant to the assignment. The
entire balance of $80,591.20 was recorded in Excelco's
general ledger as an investment from the Appellant in recognition
of his right to the funds as a shareholder and investor in the
companies involved in the litigation.
[18] With respect to the second amount in
dispute of $36,851.09, the Appellant's position is that this
amount was credited against his loan account in recognition of a
debt paid by the Appellant through Excelco to Klemmer Seed on
behalf of Canex. The general ledgers of both Excelco and Canex
contain adjustments in recognition of this transaction, which
resulted in Excelco owing the Appellant the amount of $36,851.09,
as a reimbursement of the amount paid to Klemmer Seed. Therefore
no benefit was conferred on the Appellant through this credit to
this loan account.
[19] The Appellant also submitted that
taxing these amounts would amount to double taxation as both
amounts represented after-tax funds belonging to the Appellant
that were transferred through Excelco.
Respondent's Position:
[20] In reassessing the Appellant, the
Minister relied on the following assumptions of fact at paragraph
8 in the Reply to the Notice of Appeal, as they relate to the
remaining issues before me:
8. In so
reassessing the Appellant, the Minister made the following
assumptions of fact:
[ ... ]
(b) Creative Touch
Millwork Inc. ("CTMI") was at all material times hereto
the owner of any right of action against the insurers of
CTMI;
(c) no assignment of
the said right of action has been effected by CTMI to Excelco and
therefore the Appellant did not incur the legal expenses on
behalf of Excelco but for his own benefit through his direct
interest in CMTI through Ansco Enterprises Ltd.;
(d) Excelco credited
the loan account of the Appellant in the amount of $80,591.20
with respect to the professional fees;
(e) The Appellant
did not make any payment to Excelco or pay the said professional
fees;
(f) Excelco
conferred a benefit on the Appellant in the amount of $80,591.20
as a result of the credit to his loan account by Excelco;
[ ... ]
(m) at the 1992 year end
of Excelco, a journal entry was made in the intercompany account
of Canex and the loan account of the Appellant was credited with
the said amount;
(n) the Appellant
did not advance any funds to Excelco or Canex with respect to the
credit set forth in the preceding subparagraph;
(o) Excelco
conferred a benefit on the Appellant in the amount of $36,581.09
(sic) as a result of the said credit; ...
[21] Based on these assumptions, the
Respondent argued that both Canex and Excelco conferred a benefit
upon the Appellant pursuant to subsection 246(1) of the
Act. The Respondent also argued that no evidence was
adduced to contradict the assumptions. Since the Appellant has
not met the onus, the case should be decided on the assumptions
set forth in the Reply.
[22] In the alternative, the Respondent took
the position that any amounts paid to Hnatyshyn Singer law firm
were not paid to pursue the litigation against the insurers since
it was the law firm of Jamieson Bains that handled that phase of
the litigation. The Respondent argued that the Appellant was
unable to show that the payment of the legal fees of Hnatyshyn
Singer was a benefit to Excelco.
Analysis:
Issue #1: The Validity
of the Assessment
[23] Since the assignment is central to the
first two issues to be decided, I am reproducing it in its
entirety:
ASSIGNMENT
In consideration of One ($1.00) Dollar and other good and
valuable consideration, I, Mac. J. Shahsavar as principal
shareholder and director of both Creative Touch Millworks Inc.
and Anesco Management Limited have transferred all my legal
rights and interests to Excelco Systems Inc. of Saskatoon, in the
Province of Saskatchewan.
In consideration for the same Excelco Systems Inc. agrees to
fund all expenses incurred in collecting any and all outstanding
monies from present and future court actions that are active or
pending.
Excelco Systems Inc. agrees to pay all secured and judgement
creditors of the two above companies and to retain any
outstanding balance as net revenue.
This assignment shall be binding upon my heirs, executors,
successors and permitted assigns.
Dated at the City of Saskatoon, in the Province of
Saskatchewan, this 15th day of October, 1991.
SIGNED, SEALED AND
DELIVERED
)
by the said MAC J.
SHAHSAVAR
)
(signed)
in the presence
of:
)
________________________
)
Mac. J. Shahsavar
(signed)
)
____________________________________)
Witness
(A commissioner of oaths in and for the
Province of Saskatchewan.
My commission expires December 31, 1996.)
[24] The Saskatchewan Court issued its
judgment on April 4, 1991. The assignment was dated October 15,
1991, some six months after the judgment in favour of the
plaintiffs. The evidence supports that this document was
generated and signed before the Appellant was audited. It was the
Appellant who provided this assignment to the appeals officer
during the audit. The Appellant presented his evidence in a
straightforward manner. His responses were both direct and
logical. He is a resourceful businessman who felt wronged by the
insurers and took whatever steps were necessary to find the money
from family and friends to continue the lawsuit on behalf of the
companies through the Court. In fact Metanchuk, when questioned
about this assignment, stated that he had no evidence to
contradict the Appellant's testimony that the assignment was
signed on October 15, 1991. There is no doubt that this
document was executed on this date. The next question is whether
it purports to do what the Appellant alleges. It is certainly not
drafted or executed with the clarity and preciseness that one
would expect if the agreement had been professionally drafted.
However I believe it contains sufficient essentials for me to be
able to conclude that it is a valid assignment. I am comforted in
my conclusion by the Appellant's evidence respecting this
document. He was a credible witness. His evidence was not
contradicted and I have no reason not to accept what he told me.
In addition his personal conduct and his behaviour on behalf of
the companies was totally consistent with the existence of an
assignment which he believed was valid and binding on these
parties. The Appellant was the President, Director and directing
mind of these companies. I believe he simply did not think it was
necessary to sign the document three different times, on behalf
of each party to the document. I accept his evidence that he
intended to bind all parties by signing his name just once to the
assignment instead of three times, as a law firm would have had
him do. This was not an Appellant who scrambled to generate a
document to evidence prior conduct between these corporate
entities. The Appellant, as directing mind of each of these
companies, formulated and devised an arrangement whereby the
lawsuit could continue in the face of the bankruptcy of CTMI. He
committed the arrangement to writing and then all of his ensuing
behaviour evolved around this existing assignment.
[25] I therefore conclude that the
assignment dated October 15, 1991 is a bona fide
document which validly transferred the legal rights of CTMI and
Anesco to Excelco.
Issue #2: The $80,591.20
credit resulting from the
resolution of the first phase of litigation
[26] In Smith v. R., [ 2000] 1 C.T.C.
33 the Federal Court of Appeal stated that the determination of
whether there is a bookkeeping error or benefit is a question of
fact. This is equally true where the Court is attempting to
determine the correct characterization of a disputed notation on
the general ledger. In Nesis v. R., [1998] 2 C.T.C. 2931,
it was decided that if credits were made to an appellant's
loan account without adequate consideration, then there will be a
taxable credit.
[27] The assignment agreement required
Excelco to fund the court actions and ensure that all secured and
judgment creditors were paid. Exhibit R-7 provides a summary of
the monies paid in and out of court as a result of the first
phase of the lawsuit. In total approximately $788,000.00 was paid
into court with two amounts received by Hnatyshyn Singer law firm
from the Court and the third amount received from McKercher &
Co. law firm. The reconciliation of trust funds of Hnatyshyn
Singer (Exhibit R-6) shows that the law firm received a total of
$80,591.20. Once the firm paid its legal fees of $60,591.20 the
balance of $20,000.00 was transferred to Excelco. I am satisfied
on the evidence that these monies were the property of the
Appellant. The Respondent argued that the clients of Hnatyshyn
Singer are listed in Exhibit R-6 but that this client list does
not include Excelco. Therefore, the Respondent argued, that legal
services were not performed for Excelco. Without the assignment,
Excelco had no right to any of the monies received by Hnatyshyn
Singer. It could not confer a benefit because Excelco had no
benefit to confer and without the assignment, the money belongs
to CTMI, which in 1990 owed the Appellant $206,000.00. This
amount, of course, is still on the books because CTMI is
insolvent. I have already concluded that this assignment is a
bona fide document and that it is not an artificial
device. The Appellant thought he had a valid assignment and he
conducted himself pursuant to this belief. I agree with the
Appellant counsel's characterization that it would have been
easier for the Appellant to tear up this assignment and simply
consider the $80,591.20 less the legal fees paid to Hnatyshyn
Singer as part of the repayment of the $206,000.00 outstanding on
CTMI's books. The law firm would never have forwarded the
balance of $20,000.00 to Excelco without the direction of the
clients it was representing in this matter. The law firm was
directed to send the balance to Excelco pursuant to the
assignment. This is why there is no particular entry or cheque.
If the money does not validly belong to Excelco pursuant to the
assignment then it belongs to CTMI. Excelco is not entitled to
any of this money except pursuant to the assignment. But everyone
believed they had a valid and binding assignment. CTMI had no
funds to continue the lawsuit. The Appellant made agreements on
behalf of the companies so the lawsuit he believed in could
continue. There was therefore no credit to the Appellant's
loan account that was not for consideration and thus no benefit
was conferred.
Issue #3: The Loan to
Klemmer Seed
[28] In dealing with the first two issues I
concluded that the Appellant was credible and truthful. I accept
his evidence that Klemmer Seed loaned money to Canex, then
encountered financial difficulty and required repayment of its
money from Canex. Canex did not have money to repay Klemmer Seed
so Excelco repaid Klemmer Seed an amount of money and the
Appellant repaid Excelco. The amount was noted in the general
ledger and remains outstanding today. I accept his evidence that
Canex, being a newly incorporated company, had already spent the
Klemmer Seed money and did not have funds available to repay
Klemmer Seed. He had to come up with the money to repay Klemmer
Seed. His evidence was that he probably should have funnelled the
money through Canex and not Excelco. Although he could not recall
specifically whether he wrote a cheque to Excelco or whether the
funds may have already been there, I do not believe the lack of
specifics here is sufficient for me to reject his evidence on
this loan. I conclude that the amount credited on the general
ledger does not represent an amount for which consideration was
not made and therefore there was no benefit.
[29] The appeal is allowed with costs to the
Appellant.
Signed at Ottawa, Canada, this 24th day of March 2005.
Campbell J.
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