Burgeo Trawlers Limited v. Minister of National Revenue, 91 DTC 231, [1991] 1 CTC 2053 (TCC)

Hamlyn, T.C.J.:—This appeal involves assessments of taxes payable by the appellant for the 1983, 1984 and 1985 taxation years. The Minister of National Revenue assessed on the basis that an amount due from shareholders was a deemed dividend paid to non-residents under paragraph 214(3)(a) and that withholding tax was exigible under subsection 212(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The appellant is a body corporate, duly organized under the laws of Newfoundland. During the years in question the appellant caused funds to be advanced on behalf of two shareholders of the appellant, Margaret Lake and Spencer Lake. For the years in question Margaret Lake was not a resident of Canada. For the years 1984 and 1985 only, Spencer Lake was also not a resident of Canada.

The appellant ceased operations in 1983. Thereafter advances were made to the shareholders. On July 26, 1985 the company commenced a voluntary winding up under the Companies Act, R.S.N., c. 54 and a liquidator was appointed for the purpose of winding up the affairs of the company and distributing the property.

At the commencement of the appeal certain assumptions of the Minister of National Revenue were accepted by the appellant.

(b) At all material times, Margaret Lake and Spencer Lake were shareholders and directors of the appellant;

(c) In 1983, 1984 and 1985, Margaret Lake and Spencer Lake received loans from the appellant as follows:

Year	Margaret Lake	Spencer Lake
1983	$43,148.00	$49,869.00
1984	34,399.00	34,399.00
1985	237.00	236.00
(d) In 1983, Spencer Lake was a resident of Canada;

(e) In 1984 and 1985, Spencer Lake was a resident of the United States;

(f) In 1983, 1984 and 1985, Margaret Lake was a resident of the United States;

(j) In 1983, 1984 and 1985, the appellant did not deduct or withhold a non-resident tax from the amounts paid to Margaret Lake and Spencer Lake and referred to in paragraph 4(c);

(k) In 1985, the appellant made a payment of a taxable dividend to Margaret Lake and Spencer Lake in the amount of $225,000 and $225,000, respectively;

(I) The appellant made the payment referred to in paragraph 4(k) from a term deposit in the amount of $450,000 and from retained earnings reported in December 31, 1984 in the amount of $456,956;

(m) In 1985, the appellant witheld a non-resident tax from the amounts paid to Margaret Lake and Spencer Lake and referred to in paragraph 5(k).

At the commencement of the hearing the appellant conceded that the assessment in relation to Margaret Lake for 1983 was correct and the appellant also conceded that the characterization of the advances in 1984 and 1985 were loans to shareholders.

The sole issue was whether the loans to shareholders had been repaid within one year from the end of the taxation year of the appellants in which the debt occurred, pursuant to paragraph 15(2)(b).

The viva voce evidence tendered was by way of Russell Pelley, C.A., the appointed liquidator of Burgeo Trawlers Ltd.

At a meeting of shareholders on July 26, 1985, it was decided that the capital of the shareholders would be returned to the shareholders and that this capital return would be offset against advances to shareholders.

The witness tendered a document in his own handwriting on his stationery that evidenced this decision. Also the witness tendered the working papers of himself as the liquidator (dated November 1, 1985) in which the entry reflected this decision.

The Minister tendered a document sent to Revenue Canada by the liquidator which indicated the decision was a proposal only. This document was dated in 1986.

The issue was therefore: Was the decision of the shareholders a reality or was it only a proposal?

The evidence clearly indicates a decision was made and it was carried forth by virtue of the notation of the liquidator and the entry in the working papers. The letter to Revenue Canada was an inquiry only and as such was not the financial records of the company.

The advances made in 1984 and 1985 were loans to shareholders and they were repaid within one year from the end of the taxation year of the appellant in which the debt occurred by the offsetting entries of reduction of capital of the shareholders.

The appeal is therefore allowed for the transaction involving the years 1984 and 1985 in relation to the shareholders' loans and the reduction of capital. The appeal is dismissed in relation to the transactions involving shareholders' loans for 1983. Success being divided there will be no order as to costs.

Appeal allowed in part.