Toews v. The Queen, docket 2000-3896-IT-G

Date: 20021114

Docket: 2000-3896-IT-G

BETWEEN:

VICTOR A. TOEWS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

2000-3886(IT)G

AND BETWEEN:

448059 B. C. LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1]            These appeals pursuant to the General Procedure were heard together on common evidence by consent of the parties at Kelowna, British Columbia on November 4 and 5, 2002.

[2]            Victor A. Toews testified. The Appellants also called Mark McPhail, the accountant for Mr. Toews and his corporation, Vic Toews & Co. Ltd. at all material times and Lawrence Miller, the accountant for 448059 B.C. Ltd. ("448059") and for Eric Speijer at all material times. The Respondent called Judy Chipney, C.G.A., the auditor on these files.

[3]            The cases before the Court are best summarized by paragraphs 3 to 8 inclusive of the Reply to the Notice of Appeal of Mr. Toews. They read:

3.              By Notices of Reassessment dated June 11, 1999, the Minister reassessed Toews for the 1995, 1996 and 1997 taxation years, on the basis that the shareholder's loan account debit balances of $87,771.00 and $19,213.00, for the 1995 and 1996 taxation years, respectively, were to be included in the income of Toews for those years, under ss. 15(2) of the Income Tax Act (the "Act"), and that the repayment of $106,984.00 in the 1997 taxation year would be deductible for that year under para. 20(1)(j) of the Act.

4.              In so reassessing Toews, the Minister relied on the following assumptions of fact:

a)              448059 B. C. Ltd (the "Company") was incorporated under the laws of the Province of British Columbia on June 1, 1993, and has a fiscal year-end of May 31st;

b)             the Company operated as a land developer and was involved in residential construction, carrying on business as JanKar;

c)              at all material times, the Company was owned equally by Toews and Eric Speijer ("Speijer");

d)             on December 31, 1994, Speijer transferred his 50% share in the Company to Toews and resigned as a director of the Company;

e)              a handwritten buy-out agreement was drawn up for the sale of the share and the assumption of the debit balance in Speijer's shareholder's loan account;

f)              the buy-out agreement was between Toews and Speijer, and the Company was not a party to the agreement;

g)             the intent of the parties was to transfer ownership from Speijer to Toews, in that Speijer would relinquish his interest in the Company, would give up his authority as principal of the Company, and would not be entitled to any further funds from the Company;

h)             the agreement was solely for the purchase of Speijer's interest in the Company, and payments for services or expenses were not mentioned in the agreement;

i)               the total consideration under the agreement was set at $100,000.00, and all of the installment payments scheduled under the agreement were allocated by the parties to the cost of shares;

j)               the payments made under the agreement were capital transactions, and did not represent current expenses;

k)              the payments formed part of a transaction which transferred capital property from Speijer to Toews;

l)               during the period May 31, 1994 to May 31, 1996, the Company recorded amounts owing from the shareholders (debit balances in the shareholder's loan account), which were later written-off to zero against the income statement;

m)             the amounts do not represent expenses for services rendered or materials provided by the shareholders, as no invoices were issued for services or materials relating to these amounts;

n)             the amount of $86,281.00 represents the shareholder's loan account of Eric Speijer, and the amount of $4803.00 represents the shareholder's loan account of Vic Toews;

o)             the amount of $20,942.00 relates to a May 12, 1995 payment made to the Bank of Nova Scotia by Vic Toews and Co. Ltd. on behalf of the Company, and the payment was issued to pay out the balance of the principal owing on a loan;

p)             no part of the payment to the bank was made with respect to interest on the loan, and accordingly the payment is a return of capital, and is not a current expense;

q)             the debits were correctly recorded in the shareholder's loan account as amounts due from the shareholder, and they were not expenses relating to subcontract, materials or purchases;

r)              the amounts of $86,281.00, $20,942.00 and $4803.00 were not outlays or expenses made or incurred for the purpose of gaining or producing income from a business or property;

s)              the debit balances in the shareholder's loan account of $87,771.00 in 1995 and $19,213.00 in 1996 represent amounts that were borrowed by Toews, but were not repaid within one year; and

t)              the shareholder's loan account balance of $106,984.00 was repaid by Toews in 1997.

B.             ISSUES TO BE DECIDED

5.              The issues to be decided are:

a)              Whether the debited amounts of $86,281.00, $20,942.00 and $4803.00 represent expenses which are deductible by the Company in the 1996 taxation year; and

b)             Whether the shareholder's loan account balances of $87,771.00 and $19,213.00 represent amounts borrowed by Toews which remained unpaid after one year, and therefore would be included in his income for the 1995 and 1996 taxation years, respectively.

C.             STATUTORY PROVISIONS RELIED ON

6.              He relies, inter alia, on s. 3, ss. 9(1), ss. 15(2), para. 18(1)(a), para. 20(1)(j), s. 54, and ss. 248(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act").

D.             GROUNDS RELIED ON AND RELIEF SOUGHT

7.              He submits that the amounts of $86,281.00, $20,942.00 and $4803.00 were not outlays or expenses made or incurred for the purpose of gaining or producing income from a business or property, and that they are not deductible by the Company under para. 18(1)(a) of the Act.

8.              He further submits that the shareholder's loan account balances of $87,771.00 and $19,213.00 represent amounts borrowed and not repaid within one year, and were therefore properly assessed as income to Toews, under ss. 15(2) of the Act, but as the balance of $106,984.00 was repaid in a later year, a deduction was allowed under paragraph 20(1)(j) of the Act for the year of repayment.

All of the assumptions were confirmed by the evidence.

[4]            Mr. Toews described himself as a carpenter. He is 50 years of age. From 1980 until October, 2002 he conducted his trade in the town of Nelson, British Columbia, where the events in question occurred. He built, repaired and renovated houses under his personal trade name "Vic Toews & Co." from 1980 until 1993 and then under the corporate name Vic Toews & Co. Ltd. ("VTCL"). In the spring of 1993 he was approached by Eric Speijer to build 12 condominium units in Nelson, consisting of three buildings with four units each. VTCL agreed to do this for $25,000 per unit to frame each building to close in, plus another $15,000 to oversee the subtrades. Materials and subtrades would be paid by Mr. Speijer as separate consideration.

[5]            Shortly after that Mr. Speijer asked Mr. Toews to become a partner in the project and they agreed, in Mr. Toews' words, to become "50-50 partners in that joint venture". They set up a shelf corporation through an accountant - 448059 - on June 1, 1993, and Mr. Speijer's corporation, Pend Oreille Development Ltd. transferred the project's land into it at an agreed value of $120,000. Mr. Toews paid $60,000 to Mr. Speijers corporation for one-half the land and they each took one share in 448059. Mr. Toews became 448059's president. Mr. Toews' $60,000 was paid by his corporation VCTL's cheque dated June 11, 1993 to Mr. Speijer's corporation which had title to the land, "Pend Oreille Dev. Co." (Exhibit A-1, Tab 2).

[6]            Mr. Toews and Mr. Speijer signed an undated, hand printed buy sell agreement respecting their interests in 448059 in which they also agreed to "invest $20,000 each to inc. co. #448059" (Exhibit A-1, Tab 1).

[7]            Mr. Toews testified that the two men never went to a lawyer for legal advice and did not seek legal advice from the accountant, Mr. Miller, from whom they acquired the shelf corporation, 448059. After setting up 448059, they each "lent" a further $20,000 in Mr. Toews' words. As a result, they regarded themselves as having each put a total of $80,000 into 448059. In addition to that they were to provide services to 448059, for which they or their corporations would be paid by 448059.

[8]            Mr. Toews testified that he and Mr. Speijer agreed that they would, when 448059 received profits, first take out the total of $80,000 each "that we in effect loaned to JanKar". JanKar was the trade name which they adopted for 448059.

[9]            The project proceeded. 448059 arranged a construction loan from the Bank of Nova Scotia. Mr. Toews and his sons did the framing. Mr. Speijer installed the floor coverings, dealt with the bank in Trail, British Columbia, and marketed the condominiums for 448059. Mr. and Mrs. Toews and Mr. and Mrs. Speijer guaranteed the bank's construction loan from the Bank of Nova Scotia.

[10]          Lawrence Miller practiced accounting in Fruitvale, British Columbia, near Trail. He did 448059's accounting on Mr. Speijer's instructions and for the remainder of the fiscal year ending May 31, 1995, after Mr. Speijer left 448059. Mr. Miller was clear in his testimony that he was relying on distant memory.

[11]          Mr. Toews' and Mr. Speijer's monies in 448059 were recorded as shareholders' loans in the financial statements drawn by Mr. Miller and attached to 448059's income tax return for the May 31, 1995 year end. It was signed by Mr. Toews. It recorded shareholders' loans as follows:

Loans Payable                                               May 31, 1995                  May 31, 1994

V. Toews & Co.                                                       212,067                                      40,000

(Note #3)

E. Speiger                                                           DR 67,068                             DR 13,491

                                                                                              

                                                                                  144,999                                      26,509

                (Exhibit R-1, Tab 12)

Notes 3 and 4 read:

Note #3 Loan Payable $212,067

Reflects monies loaned to 448059 B.C. Ltd. to pay trade accounts, monies advanced to cover operating cash deficits and monies advanced to buy out shareholder E. Speijer.

Note #4 Land $51,844

Includes lot $20,702.57 to be transferred to E. Speijer as part of payment of interest in 448059 B.C. Ltd.

(Exhibit R-1, Tab 12)

[12]          In the spring of 1994 Messrs. Toews and Speijer were repaid with some of the money they had advanced to 448059. Mr. Toews received $40,000 on April 14, 1994 (A-1, Tab 19). Mr. Speijer received $40,000 at the same time (A-1, Tab 12) by three cheques. On May 30, 1994, Mr. Speijer said that he needed more money and he was paid back $25,000 by 448059 (A-1, Tab 12, page 1). On July 4, 1994, Mr. Speijer asked for his remaining $15,000 and an advance for what Mr. Toews described as his services; he received a cheque from 448059 for $50,000.

[13]          By July 4, 1994, Mr. Speijer had sold three of the condominiums being built to his relatives and acquaintances. The condominiums sale prices were in the range of $130,000 or more.

[14]          In the late fall of 1994, Mr. Speijer admitted to Mr. Toews that he had not paid a carpet supplier its money from funds which he had been paid upon its installation in the condominiums. As a result they agreed that 448059 would pay the supplier, West Kootenay Carpets, the $14,278.50 that was owed. They also agreed that this sum would constitute a payment back to Mr. Speijer of $15,000 on his advances to 448059. VTCL had to advance $14,278.50 to 448059 to make the payment.

[15]          After that, Mr. Speijer told Mr. Toews that he was in financial trouble and in danger of bankruptcy. He proposed that Mr. Toews should buy him out so that his bankruptcy would not endanger 448059. Mr. Toews agreed to do this. The project was then about half completed. Mr. Toews asked for some time to figure it out.

[16]          Mr. Toews did the following calculations, which were exhibited on the right hand side of Exhibit A-1, Tab 16. In summary, at its conclusion Mr. Toews calculated that, at that stage:

Eric gets $100,000 buy out

(original interest                                    $40,000

profit                                                       60,000)

[17]          Mr. Speijer also wanted the "Montrose Lot". Mr. Toews agreed to that. As a result, without any legal or accounting advice, Mr. Toews drew a buy sell agreement in his own handwriting which both of them signed on January 4, 1995. Mr. Toews witnessed it. It reads:

-THE FOLLOWING CONSTITUTES A BUY-OUT AGREEMENT

BETWEEN VICTOR TOEWS (VIC TOEWS & CO. LTD.) AND ERIC SPEIJER RE: 448059 B.C. LTD. D.B.A.-(JAN-KAR)

-TERMS AND CONDITIONS

                In consideration of the total sum of $100,000.00 Eric Speijer will relinquish all interest in 448059 B.C. Ltd. Eric will sell all his ownership in said company including his shares for that said amount ($100,000.00). At this point Eric has no further voting authority in said company. Upon full receipt of the monies mentioned Eric will have no further funds due from 448059 B.C. Ltd. now or ever in the future.

-Payment Schedule-

July 1994	-$50,000.00	Cheque from Jan-Kar 448059 B.C.L.
October 31, 1994	-$15,000.00	Payment from Jan-Kar for Eric's carpet bill at West Kootenay Carpet
December 7, 1994	-$10,000.00	Payment to Eric
January 7, 1995	-$ 5,000.00	"       "
February 7, 1995	-$ 5,000..00	Payment to Eric
March 7, 1995	$ 5,000.00	Payment to Eric
April 7, 1995	5,000.00	"        "
May 7, 1995	5,000.00	Payment to Eric

- For banking purposes Eric Speijer will be left on the board of directors of 448059 B.C. Ltd. until such a time that our current agreement with Bank of Nova Scotia can be financially terminated, at which point Eric shall be removed from his positions in 448059 B.C. Ltd.

                                                                "signature" - ERIC SPEIJER

Jan 4/95                                   "signature" - VICTOR TOEWS

                                                                "signature" - WITNESS

(Exhibit A-1, Tab 15)

[18]          Mr. Toews met the remaining schedule of payments, but the payment due on April 7, 1995 was paid in the amount of $4,100 due to disbursements required for the Montrose property; this adjustment was agreed to by Mr. Speijer. The payments were shown in the accounting records as loans to 448059. Thereafter 448059 retained title to the Montrose Lot on Mr. Speijer's instructions. It sold on Mr. Speijer's instructions for $19,212.60 and the proceeds were paid to Mr. Speijer on May 2, 1996 by 448059 (Exhibit A-1, Tab 18).

[19]          Throughout the period in dispute it is clear that Mr. Toews referred to the money advanced to 448059 as "loans". He did this from time to time when he testified and some hand-written documents that he prepared at the time refer to them as loans. He protested in his testimony that he was not and is not a sophisticated person with legal knowledge. The Court accepts that to be true and finds that the money he advanced to 448059 either himself or, commonly, through VCTL constituted loans to 448059. That is the way that a lay person would regard them. Moreover, Mr. Toews testified at one point that since this audit began he has learned a great deal about loans to corporations that he did not know before.

[20]          Mr. Toews' position is that they were not loans and that he did not acquire Mr. Speijer's remaining loans. But he testified, and the January 4, 1995 agreement with Mr. Speijer confirms, that he was buying all of Mr. Speijer's interest in 448059 so that Mr. Speijer would never be able to come back for anything. In addition, the Resolution of Directors dated December 31, 1994 signed by Messrs. Toews and Speijer confirms the transfer of Mr. Speijer's share to Mr. Toews. It describes the $1.00 as "par value".

[21]          On about May 12, 1995, 448059 sold a condominium to Zuback and the Bank of Nova Scotia insisted that its entire construction loan be paid out. As a result VTCL paid it a further $20,942.18 on behalf of Mr. Toews. Ms. Chipney testified that she calculated the amounts and none of the $20,942.18 was interest. That is logical, since the Zuback money would be applied first and so it would pay the interest and then the balance of $20,942.18 would constitute the principal only.

[22]          Mr. Miller testified that he wrote off the $86,281 shareholder's loan in the name of Mr. Speijer at the end of fiscal 1996 on Mr. Speijer's instructions. This is reflected in the financial statements filed while Mr. Toews was 448059's sole shareholder and director. Moreover Judy Chipney verified that the $86,281 did not reflect any goods and services tax ("GST") charged by Mr. Speijer, so that it did not arise from services rendered. Her evidence is accepted as correct.

[23]          The Court finds that Mr. Toews paid $100,000 for the purchase of Mr. Speijer's interest in 448059 and that he lent the money to 448059 in order to do so. Some of this money was paid to Mr. Speijer after January 4, 1995 by 448059 as a direct flow through to Mr. Speijer as testified to by Mr Miller respecting, for example, the $34,100. The record indicates that all of the money directly referred to in testimony was on VTCL's cheques written to 448059 and credited to Mr. Toews. The assumptions of the Minister that the funds were all Mr. Toews' were not refuted.

[24]          As a result, the Court finds:

(a)            $86,281 does not represent expenses. Rather, it is Mr. Speijer's loan which was written off by 448059.

(b)            $20,942 paid to the Bank of Nova Scotia, Trail, British Columbia did not contain any interest component. However it was paid on 448059's construction loan with money which 448059 borrowed from Mr. Toews for the purpose of paying off the loan so as to obtain clear titles to the condominiums for sale purposes. Therefore, for income tax purposes for 448059, the $20,942 retains whatever character that loan had when it was taken out and used by 448059. However Ms. Chipney's disallowance is based on the discovery that, to quote R-1, Tab 24, it was a "loan receivable from Vic Toews written off to subcontract expense"; therefore this aspect of the assessment is confirmed by the testimony of Ms. Chipney.

(c)            $4,803 was written off by Mr. Miller for reasons he did not recall. Ms. Chipney's audit R-1, Tab 24 and her testimony indicated that it was a loan receivable from Vic Toews written off to subcontract expense. This portion of the assessment is confirmed on the basis of Ms. Chipney's testimony.

[25]          In summary, after January 1, 1995, Mr. Miller received some instructions from Mr. Speijer and no instructions from Mr. Toews. Mr. Toews was 448059's sole shareholder and director and he signed the 1995 income tax return and caused the 1996 income tax return of 448059 to be filed with Mr. Miller's financial statements which were based on the corporate records and the state of its transactions at those times. After the audit began, Mr. Toews began to understand the tax consequences of what he had done and what 448059 had done. He then began to reconstruct his version of the events based upon his new understanding.

[26]          For these reasons, the Court finds that the loan account balances of $87,771.00 and $19,213 represent amounts owed by Mr. Toews, which remained unpaid after one year and therefore would be included in his income for the 1995 and 1996 years respectively.

[27]          The appeals are dismissed. The Respondent is awarded party and party costs respecting each appeal, but only one set of costs for two full days of hearing, to be divided evenly between the Appellants.

                Signed at Ottawa, Canada, this 14th day of November, 2002.

               

"D. W. Beaubier"

J.T.C.C.COURT FILE NO.:                                   2000-3896(IT)G and 2000-3886(IT)G

STYLE OF CAUSE:                                               Victor A. Toews v. The Queen

                                                                                                448059 v. The Queen

PLACE OF HEARING:                                         Kelowna, British Columbia

DATE OF HEARING:                                           November 4 and 5, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge D. W. Beaubier

DATE OF JUDGMENT:                                       November 14, 2002

APPEARANCES:

Counsel for the Appellant: Joni D. Metherell

Counsel for the Respondent:              Karen A. Truscott

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Joni D. Metherell

Firm:                  Pushor, Mitchell

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-3896(IT)G

BETWEEN:

VICTOR A. TOEWS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on common evidence with the appeal of

448059 B. C. Ltd. (2000-3886(IT)G) on November 4 and 5, 2002

at Kelowna, British Columbia, by the Honourable Judge D. W. Beaubier

Appearances

Counsel for the Appellant:                  Joni D. Metherell

Counsel for the Respondent:                              Karen A. Truscott

JUDGMENT

                The appeals from the reassessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are dismissed, with costs, in accordance with the attached Reasons for Judgment.

                Signed at Ottawa, Canada, this 14th day of November, 2002.

"D. W. Beaubier"

J.T.C.C.

2000-3886(IT)G

BETWEEN:

448059 B. C. LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeals of

Victor A. Toews (2000-3896(IT)G) on November 4 and 5, 2002

at Kelowna, British Columbia, by the Honourable Judge D. W. Beaubier

Appearances

Counsel for the Appellant:                  Joni D. Metherell

Counsel for the Respondent:                              Karen A. Truscott

JUDGMENT

                The appeal from the reassessment made under the Income Tax Act for the 1996 taxation year is dismissed, with costs, in accordance with the attached Reasons for Judgment.

                Signed at Ottawa, Canada, this 14th day of November, 2002.

"D. W. Beaubier"

J.T.C.C.