Bowman J.T.C.C.:— This appeal is from an assessment for the appellant's 1986 taxation year whereby the Minister of National Revenue included in the appellant's income $69,263. The issue is whether a bookkeeping entry in the books of a company controlled by the appellant changing a designation from "bonus payable" to a designation "due to shareholder" constitutes a receipt of an amount giving rise to income in the appellant's hands.
The appellant is the president and controlling shareholder of Trans World Oil & Gas Ltd. The appellant, his brother and a lawyer were the directors. Although the appellant held all of the voting shares the equity of the company was represented by non-voting shares which were held by his children.
In 1983, the company retained the services of a former Revenue Canada employee, Mr. Les Somlyai, who appears to have assumed responsibility for the company's accounting and tax affairs. Mr. Phillips’ evidence was not of great assistance in clarifying some of the entries in the financial statements of the company. The facts however are not substantially in dispute.
In 1984, the company declared a bonus of $330,000 in favour of the appellant, described as a "management bonus and director’s remuneration". It was deducted in the computation of its income and declared in its balance sheet as a "bonus payable". It is not disputed that of this amount $70,737 was declared as income by the appellant.
In 1985, a further bonus of $300,000 was declared in favour of Mr. Phillips. In Trans World's balance sheet a “bonus payable” of $500,000 is recorded. Under current liabilities $30,000 is shown as "due to shareholder" and another entry of $9,944,278 is designated as "due to shareholder".
The apparent discrepancy in these figures may be explainable as follows. Of the total bonuses payable to Mr. Phillips of $630,000, $30,000 was moved down one line and shown as "due to shareholder". Also, note 8 to the 1985 financial statements discloses that of the $9,944,278 designated due to shareholder $9,811,899 represented an "unsecured, non-interest bearing promissory note with no fixed terms of repayment". Mr. Phillips testified that this represented a loan he made to the company. The remaining $132,379 was described as "other unsecured, non-interest bearing advances with no fixed terms of repayment" andevidently included $100,000 credited from the bonus payable at the end of 1984.
It is not disputed that of the amounts shown as "due to shareholder" the appellant declared $90,000 as income in 1985.
The difference between the $500,000 and $630,000 lies in the $30,000 and $100,000 recorded in 1985 under the two entries "due to shareholder".
In 1986, the $300,000 bonus declared in 1985 in favour of Mr. Phillips was "reversed due to current economic conditions". It is not really relevant to this case, but it seems the "reversal" took the form of an add-back to income, or a reduction of expenses, in 1986 since no change was made in the 1985 deduction of $788,066 for general and administrative expenses and I assume the $300,000 was deducted under this head in 1985. This issue is not before me and I make no further comment on it.
In any event, Mr. Phillips included a further $100,000 in his income for 1986 in respect of the amounts payable to him.
In the balance sheet for 1986 the $500,000 bonus payable and the $30,000 shown under current liabilities in 1985 as "due to shareholder" disappeared and the $9,944,278 shown as "due to shareholder" in 1985 became $10,302,580. Note 5 to the 1986 financial statements indicates that the increase in this amount by $358,302 was attributable to an increase from $132,379 shown in 1985 to $490,681 in the "other unsecured, non-interest bearing advances with no fixed terms of repayment".
The Minister’s assumption, as pleaded, was that the company credited the "shareholder account”, i.e., the amount described as "due to shareholder" with $100,000 in 1985 and $230,000 in 1986, thereby making up the total of $330,000 declared as a bonus in 1984. The evidence seems more consistent with a crediting of $130,000 in 1985 and $200,000 in 1986.
It is not disputed that the appellant declared $100,000 in income as part of the amount "due to shareholder" that had been moved from the entry “bonus payable".
In 1986, the Minister added $69,263 to the appellant's income as "unreported salary". This amount was arrived at by deducting from the bonus declared in 1984 of $330,000 the amounts of $70,737, $90,000 and $100,000 declared by the appellant in 1984, 1985 and 1986 in respect of the bonus.
Counsel for the respondent put in evidence (Exhibit R-1) a copy of a document signed by the appellant as creditor and the company as debtor. It refers to an investment advisory fee of $200,000 incurred in 1984. The parties agreed:
THAT the unpaid amount shall be deemed to have been paid bythe debtor and received by the creditor on the first day of the third taxation year following the taxation year in which the outlay or expense was incurred;
THAT the creditor shall be deemed to have made a loan to the debtor on the first day of the third taxation year equal to the amount deemed to have been paid by the debtor, less any tax deducted or withheld therefrom by the debtor on account of the creditor's tax.
The document seems to be appropriate under subsection 78(1) which deals with non-arm's length relationships, rather than subsection 78(3) as it read in 1986 which deals with unpaid remuneration. The effect of the document would be to deem Mr. Phillips to have received $200,000 in 1987 as income and to have reloaned it to the company in that year. It has no real bearing on 1986, the year under appeal. I cannot imagine why it was signed. By the end of 1986 Mr. Phillips had included in income $260,737 in respect of the bonus. Why he would sign a document deeming him in 1987 to have received as income $200,000 when only $69,263 remained out of the bonus of $330,000 remains a mystery. He seems to have had a tendency to sign anything that was put before him in complete reliance upon Mr. Somlyai’s expertise. I am aware of no reason why he included $70,737, $90,000 and $100,000 in his income for 1984, 1985 and 1986. He testified, and I accept his evidence, that he never received any part of the $330,000 bonus. The amounts included in his income by him do not even correspond to the accounts transferred from "bonus payable” to "due to shareholder". Given this manner of reporting it is not surprising that the Minister on assessing should have considered it a logical consequence to include in 1986 the balance of the bonus unpaid.
The unilluminating and confusing method of accounting and the lack of any logic in the method of reporting income cannot determine the outcome of this case. The fact remains that the sum of $69,263 which the Minister included in his income in 1986 was not received by him in that year. It is true that as controlling shareholder he could have required the company to pay it to him but he did not do so. Employment income must be received, not receivable, to be taxed. The decision in M.N.R. v. Rousseau,  C.T.C. 336, 60 D.T.C. 1236 (Ex. Ct.), is too firmly entrenched in our law to permit any erosion of the principle for which it stands.
Nor can I accept that the mere bookkeeping entry of moving the amount of bonus owing to Mr. Phillips from "bonus payable” to "due to shareholder" connotes receipt. Accounting entries are supposed to reflect reality, not create it and, as Lord Brampton said in Gresham Life Society Co. Ltd. v. Bishop,  4 T.C. 464 at page 476:
But to constitute a receipt of anything there must be a person to receive and a person from whom he receives andsomething received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.
The Minister's assumptions, as pleaded, do not include specifically an assumption that the appellant received anything, in fact or even constructively. Rather, I am asked to infer from the change in designation from "bonus payable” to "due to shareholder" that there had been an actual payment to the appellant followed by a reloaning to the company. That inference is not warranted.
The appeal is therefore allowed with costs and the assessment referred back to the Minister of National Revenue for reconsideration and reassessment to delete from the appellant's income for 1986 the amount of $69,263.