Doyon v. MNR, 90 DTC 1132, [1990] 1 CTC 2242 (TCC)

Lamarre Proulx, T.C.J.:—This appeal was heard at the same time as that of Mr. Jean Leduc, as the parties asked that the evidence be joined for these appeals.

The taxation years at issue are 1981, 1982, 1983 and 1984.

In making his reassessments, the respondent Minister of National Revenue added certain amounts to the total income reported by the appellant, as follows:

Counsel for the respondent indicated to me at the start of the hearing that the amount of $19,228.62 should in fact be $18,908.62.

There are two points at issue. The first is as to the nature of the benefits received by the employees and minority shareholders of a corporation. The second concerns the penalties imposed pursuant to subsection 163(2) of the Income Tax Act.

Counsel for the taxpayers submits that the benefits are benefits within the meaning of the provisions of subsection 6(9) and section 80.4 of the Act, because they are loans to employees, and so only the interest on loans can be included in the taxpayer's income. Counsel for the respondent submits that the case is one requiring application of paragraph 15(1)(b) or section 3 of the Act and that the benefits are not loans.

Facts

The company S.L.M. Ltée operates a plumbing business. At the time, it had a very high turnover. According to what appears from their testimony, the two taxpayers were two key figures in the business. Mr. Doyon was the secretarytreasurer of the company and, as such, signed cheques with the accountant.

It was admitted that the expenses added by the respondent to the appellant's income were indeed personal expenses paid by the company. Among these bills paid by the company, some were factual and others were accommodation bills. I will explain: in the case of accommodation bills, the creditor indicated either an incorrect description of the goods, as for example nails when the sale was that of sports equipment, or a contract number or address of a work site when the goods were delivered to the residence of one of the taxpayers.

The taxpayers testified that this was an accepted practice which Mr. Roger, the majority shareholder and principal director of the business, was aware of and in fact encouraged. Mr. Roger testified that he was not aware of this practice by his employees and fellow shareholders.

Prior to the years at issue all three, including Mr. Roger, were reassessed by the respondent for not reporting income in the amount of $15,000 respectively, and a penalty was imposed on them pursuant to subsection 163(2) of the Act.

According to Messrs. Doyon and Leduc, they had worked extremely hard in this business and built up a clientele throughout the province of Québec. They had for some time been desirous of providing for the future of the business, hiring people who could carry it on and furnishing themselves with managerial positions corresponding to their expertise and age. Mr. Roger was not interested in any of these necessary changes. Realizing it would be useless to discuss the matter and wanting to dispose of their shares when the business was still flourishing, they submitted an offer of sale to Mr. Roger for the shares they held in the business amounting to $1,596,194.40 on April 24, 1984.

Mr. Roger went to his offices that same weekend to look at the books of the business. He discovered expenses that were not connected with the operation of the business. He hired auditors. The following Monday, he dismissed two employees and asked Mr. Doyon to leave the premises. Mr. Leduc left some time afterwards.

An agreement for the purchase of the shares was not made between the parties until February 21, 1985, for about half of the price requested. The purchase price clause contained the following stipulation:

Doyon and Leduc acknowledge indebtedness to the Company in the amounts of Fifty Four Thousand Ninety-One Dollars ($54,091) and Sixty-One Thousand Four Hundred and Forty-Three Dollars ($61,443) respectively. Such amounts shall be paid or settled by the Purchaser on behalf of the Vendor at the date of the closing of the sale of the Purchased Shares.

In his preliminary remarks, counsel for the appellant explained what happened with these amounts as follows:

(TRANSLATION)

The quantum was determined unilaterally by the company's majority shareholder when the two taxpayers left the company. At that point, the majority shareholder submitted an amount owed by the minority shareholders as personal expenses. It was thus the majority shareholder who unilaterally decided what the nature of the expenses and their quantum were at the time, in connection with general negotiations for the sale of the shares and termination of relations between the parties. At that point, the taxpayers agreed without negotiating, without further investigation, accepted in general terms the amounts suggested by the majority shareholder.

These remarks clearly indicate what was disclosed by the evidence. At the time the company's books were audited, Mr. Roger determined what was for personal use. The amount of the personal expenses was deducted from the selling price of the shares. However, it should be noted that the appellant and Mr. Leduc do not dispute that personal expenses were paid for from the company's funds.

The appellants stated that Mr. Roger was aware of their practice and that these "advances^ from the corporation were thus only loans.

Counsel for the appellant and for Mr. Leduc argued that if the majority shareholder was aware of the practice, this meant that the amounts appropriated were loans made by the company. I am not of this view. For there to be a loan, as in any contract, certain things must be clear. In the case of a loan, the amount loaned and the intention to lend and to borrow must be certain. There must be a meeting of minds on a purpose. The evidence did not disclose any of these. There was, on the one hand, no entry in the company's books indicating "advances" to employees or shareholders, and on the other, the borrowers kept no records indicating their loans. Accordingly, there was no certainty as to the amount borrowed or lent and this indicates that there was no intention to repay or ask for a repayment. If no disagreement had arisen between the two groups, the appellants would never have repaid the company. All these expenses would continue to have been included in calculating the company's income as operating expenses. Further, the majority shareholder maintained that he was not aware of this practice.

If this appropriation was done with the principal shareholder's knowledge, I would say that subsection 15(1) of the Act applies. If not, section 3 must apply. In any case, the respondent based his assessment on either section. I cannot find that there was a loan in the circumstances of this case. There was no document, no entry in the books, no certainty as to the amount and no manifest intent to repay. It was an appropriation of company property, not a loan.

As the amounts appropriated were not reported in the taxpayer's income for the years at issue, as there is certainty as to the source of the amounts not reported in income, as because of their nature they should have been included in calculating the appellant's income, and as the appellant failed with full knowledge of the facts to include them in his income, I find that the respondent was correct in imposing a penalty on the appellant pursuant to subsection 163(2) of the Act.

For these reasons, I find the reassessments of the respondent to be correct in fact and in law, except as regards the amount mentioned at the start of this judgment. The appeal is allowed for this part only.

Appeal allowed in part.