Long v. R., 98 DTC 1420, [1998] 1 CTC 2995 (TCC)

Bowman T . C.J.:

This is an appeal from an assessment for the appellant’s 1992 taxation year whereby the Minister of National Revenue added $13,569.23 to Mr. Long’s income as a shareholder benefit under subsection 15(1) of the Income Tax Act.

Mr. Long is the sole shareholder of O.C. Long Contracting Limited which carried on a general contracting business.

In 1991, Mr. Long and his wife were constructing for their own use a house at Southampton. One of the suppliers was Ken Philp, a plumbing, heating and air conditioning contractor. On June 30, 1992, long after the work was completed, he submitted a bill for plumbing work that he had done in the amount of $13,569.23. He should have submitted it to Mr. Long personally but by mistake he sent it to the company and an inexperienced bookkeeper paid it out of the company’s account and charged it as “purchases”.

The mistake remained undetected until some time in 1994 when during an audit of O.C. Long Contracting Limited the payment was discovered. The accountant immediately reversed the charge in the company’s books and requested that the shareholder loan account be reduced by a similar amount. The amount of the shareholder loan account (1.e. the amount owed by the company to Mr. Long and his wife) was at that time far in excess of $13,569.23.

The Department of National Revenue refused to sanction such a procedure, and without some assurance that the Department would not tax him on the amount, Mr. Long did not instruct the bookkeeper to make the correction in the loan account.

The Minister’s position is that an error of this sort cannot be rectified, at least after the end of the year. As we know from Dale v. R., (1997), 97 D.T.C. 5252 (Fed. C.A.) this is not the law. Counsel also points out, probably with some justification, that had the departmental assessor not picked up the error in auditing the company it would never have come to light and the company would have deducted it and Mr. Long would not have been taxed on it. There may be some merit in the observation but it does not really answer the question that I have to decide. We are dealing here with an honest and inadvertent error made by a bookkeeper. The appellant did not know of the error and he did not intend (either in his capacity of shareholder or in his capacity of controlling mind of the company) that the company pay his bill. As soon as the error was discovered the expense was deleted from the company’s accounts and the appellant was prepared — and continues to be prepared — to amend the shareholder’s loan account. Obviously it would be absurd to amend the shareholder’s loan account if the department was going to tax him in any event.

I find as a fact that the practice was to reflect such payments in the shareholder’s loan account and that the intent was to do so. That it was not done was attributable to a simple bookkeeping error of which the appellant had no knowledge. The payment of the Philp account by the company did not in itself constitute a benefit. Had the transaction been properly reflected in the company’s books by an appropriate reduction of the loan account there would have been no possible basis for the assessment under subsection 15(1). The charging of the payment as a deductible expense of the company, while erroneous, obviously has nothing to do with whether the appellant is taxable on it, although the reversal of the expense when the appellant learned of it demonstrates his bona fide readiness to correct the error.

Thus the taxability asserted by the Minister is based upon an erroneous failure to adjust the loan account. A simple error of this sort which is readily susceptible of correction does not create taxability. In Gresham Life Assurance Society Ltd. v. Bishop, (1902), 4 Tax Cas. 464 (U.K. H.L.) Lord Brampton said at p. 476:

My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something 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.

See also Prosperous Investments Ltd. v. Minister of National Revenue, (1992), 92 D.T.C. 1163 (T.C.C.), at 1169 . For a bookkeeping entry to be evidence of the conferral of a benefit it must at least accurately depict the legal state of affairs between the company and the shareholder. The books did not reflect the true legal relationship in this case.

In Minister of National Revenue v. Pillsbury Holdings Ltd., (1964), 64 D.T.C. 5184 (Can. Ex. Ct.) Cattanach J. in dealing with the predecessor to subsection 15(1), said at p. 5187:

In applying paragraph (c) full weight must be given to all the words of the paragraph. There must be a “benefit or advantage” and that benefit or advantage must be “conferred” by a corporation on a “shareholder”. The word “confer” means “grant” or “bestow”. Even where a corporation has resolved formally to give a special privilege or status to shareholders, it is a question of fact whether the corporation’s purpose was to confer a benefit or advantage on the shareholders or some purpose having to do with the corporation’s business such as inducing the shareholders to patronize the corporation. If this be so, it must equally be a question of fact in each case where the Minister contends that what appears to be an ordinary business transaction between a corporation and a shareholder is not what it appears to be but is in reality a method, arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder.

I do not see how it can be said that a bookkeeping error of which the sole shareholder was not aware and which he did not sanction and that was not in accordance with the company’s established practices constitutes “in reality a method, arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder”.

Ms. Levesque, counsel for the respondent, very fairly referred me to a number of decisions of this court, in particular Robinson v. Minister of National Revenue, (1993), 93 D.T.C. 254 (T.C.C.), Simons v. Minister of National Revenue, (1985), 85 D.T.C. 105 (T.C.C.), and Chopp v. R., (1995), 95 D.T.C. 527 (T.C.C.) where erroneous bookkeeping entries were held not to be an appropriate basis for taxation. I understand that the Robinson and Choppcases have been appealed to the Federal Court. Broadly speaking these cases support the conclusion I have reached and I think that as a matter of policy the judges of this court should strive, to the extent possible, to achieve consistency. Each case under subsection 15(1), however, as stated in Pillsbury, turns on its own facts and I find as a fact that no benefit was conferred on the appellant qua shareholder within the meaning of subsection 15(1) of the Income Tax Act.

The appeal is allowed and the assessment for 1992 is referred back to the Minister of National Revenue for reconsideration and reassessment to delete from the appellant’s income the sum of $13,569.23. It is of course implicit in my disposition of the case that the appellant cause his company to adjust the shareholder loan account accordingly. The appellant is entitled to his costs, if any.

Appeal allowed.