Esnouf v. The Queen, docket 2001-372(IT)I (Informal Procedure)

Date: 20020529

Docket: 2001-372-IT-I

BETWEEN:

PHILIP V. ESNOUF,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Little, J.

A.       FACTS

[1]      The facts may be summarized as follows:

1)        The Appellant was the founder of Omega Biotech Corp. ("Omega"). Omega was a private company incorporated under the laws of the Province of British Columbia in 1991;

2)        Omega carried out research to develop skin protection products that would prevent skin cancer;

3)        From 1991 to 1995, Omega expanded its business operation and established a production facility;

4)        In 1997, Omega encountered significant financial problems and a dispute arose between the Appellant and three investors who had lent substantial funds to Omega;

5)        On the 18th day of June 1997, the Appellant and his wife Anne Esnouf signed a royalty agreement (the "Agreement") with Omega. The Agreement provided that Omega would pay the Appellant and his wife a royalty based on the sale of products produced by Omega;

6)        The Agreement also provided that the Appellant would consent to a redemption of 1,900,000 shares of Omega owned by him. The total consideration received by the Appellant for the 1,900,000 shares was $1.00;

7)       The Agreement also contained the following clause:

12.        Release

12.01    Save and except for the terms of this Agreement, Mr. and Mrs. Esnouf hereby release and forever discharge Omega and Omega (Marketing) and Omega Corporate Services from any and all claims of any nature whatsoever arising out of their position with the companies as directors, officers or employees. Without limiting the generality of the foregoing, Mr. and Mrs. Esnouf specifically release the companies for any claims for salaries, bonuses, dividends, expenses and shareholders loans.

8)        The Appellant received a number of payments from Omega during his 1996 taxation year;

9)        A T-4 slip was issued which indicated that the Appellant received employment income of $45,000 from Omega in his 1996 taxation year;

10)      The Appellant's 1996 taxation year was reassessed by the Minister and the amount of $45,000 was added to the Appellant's income for that year.

B.       ISSUE

[2]      The issue before the Court is whether the Appellant is required to include the amount of $45,000 referred to in the T-4 slip in determining his income for the 1996 taxation year.

[3]      The Appellant maintains that any payments made to him by Omega in the 1996 taxation year were repayments of a portion of the shareholder's loan owed to him by Omega. The Appellant therefore maintains that he is not required to include any portion of the $45,000 in determining his income for the 1996 taxation year.

C.       ANALYSIS

[4]      I have carefully considered all of the documents that were filed as exhibits by the Appellant and counsel for the Minister and the statements made by the Appellant and the other witnesses and I have concluded that the Appellant has not established that the payments made to him by Omega, in his 1996 taxation year, were repayments of the shareholder's loans. I have reached this conclusion for the following reasons:

1)        The Appellant produced a summary of his experience with Omega (Exhibit A-1). In the summary there was a reference to a shareholder's loan in the amount of $139,700. However, no evidence was presented by the Appellant to document or establish the existence of the shareholder's loan owing by Omega to the Appellant. When the Appellant was asked to provide evidence as to advances made by him to Omega the Appellant said:

I have a huge volume of paper ... but, I don't have it with me.

2)        The Appellant said that some of the original bank records were lost in a flood. The Appellant testified that these records would establish the existence of the shareholder's loans. However, the Appellant never attempted to obtain copies of the lost documents from the bank, although counsel for the Minister recommended that he do so;

3)        In Exhibit A-1 the Appellant noted that he had filed a "diary" of the shareholder's loans with Omega and the corporate accountant, A. Kerdachi. The Appellant also stated that a copy of the "diary" was given to Mr. W. Hachie. The Appellant said that he could not locate a copy of the "diary". Mr. Kerdachi, who was called as a witness by the Crown, stated that he does not recall the "diary" referred to by the Appellant. Mr. Hachie was not called as a witness by the Appellant.

4)        Mr. Kerdachi also stated that when he commenced to work as an accountant for Omega (in July 1996) there were no accounting records for Omega.

5)        The Appellant stated that Mr. Fricker could establish the existence of shareholder's loans owing by Omega to the Appellant. However, Mr. Fricker was not called by the Appellant as a witness.

6)        Exhibit A-3 entitled "The Business Plan of Omega Biotech Corporation" contains a financial statement on page 14. The statement indicates that the Company had shareholder's loans of $105,000 as of October 4, 1996. However, the Appellant testified that he did not know who prepared this statement.

7)      Exhibit R-4 is a copy of unaudited financial statements of Omega prepared by Crawford, Paterson, Campbell, Chartered Accountants, as at October 31, 1996. These financial statements make no reference to a shareholder's loan owing by Omega.

[5]      From a detailed analysis of the above documents I am not satisfied that Omega owed $105,000 to the Appellant as shareholder's loans in the 1996 taxation year. It therefore follows that the amount paid to the Appellant by Omega in the 1996 taxation year was income and not a repayment of a portion of the shareholder's loan.

[6]      At the hearing of the appeal, Mr. Brian Norman, an official of the Appeals Division in the Victoria office of the Canada Customs and Revenue Agency ("CCRA"), testified as a witness for the Minister. Mr. Norman stated that according to his analysis (Exhibit R-2) the auditor with CCRA included certain management fees in the Appellant's income for the 1996 taxation year. Of the amount included $3,000 was paid by Omega to the Appellant in November 1995 and $3,000 was paid by Omega to the Appellant in December 1995. Mr. Norman conceded that had he been the auditor he would not have included, in determining the Appellant's income for the 1996 taxation year, the management fees of $6,000 that were paid by Omega to the Appellant in 1995.

[7]      The appeal will be allowed to delete the amount of $45,000 from the Appellant's income for the 1996 taxation year and to substitute the amount of $39,000.

[8]      The evidence produced at the hearing indicates that the Appellant spent a substantial amount of time and effort developing the business of Omega. The Appellant testified that he was "removed" from his position with Omega in an acrimonious dispute with the other shareholder. It is obvious that the Appellant worked very hard to develop Omega into a successful business operation and it must have been painful for him to be dismissed from his position with Omega. The Appellant is to be commended for his efforts to develop Omega into a successful business enterprise. I regret that I am unable to agree with the Appellant that Omega owed him a substantial sum of money pursuant to shareholder's loans. However, as noted above, the evidence that was presented to me did not allow me to agree with the Appellant's argument. My decision may have been different if the Appellant had provided the Court with copies of some of the bank documents and if the Appellant had produced witnesses to corroborate his version of events.

Signed at Vancouver, British Columbia, this 29th day of May 2002.

"L.M. Little"

J.T.C.C.

COURT FILE NO.:                             2001-372(IT)I

STYLE OF CAUSE:                           Philip V. Esnouf and

                                                          Her Majesty the Queen

PLACE OF HEARING:                      Victoria, British Columbia

DATE OF HEARING:                        April 11, 2002

REASONS FOR JUDGMENT BY:     The Honourable Judge L.M. Little

DATE OF JUDGMENT:                     May 29, 2002

APPEARANCES:

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Johanna Russell

COUNSEL OF RECORD:

For the Appellant:

Name:                

Firm:                 

For the Respondent:                  Morris Rosenberg

                                                Deputy Attorney General of Canada

                                                          Ottawa, Canada

2001-372(IT)I

BETWEEN:

PHILIP V. ESNOUF,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on April 11, 2002 at Victoria, British Columbia, by

The Honourable Judge L.M. Little

Appearances

For the Appellant:                      The Appellant himself

Counsel for the Respondent:      Johanna Russell

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1996 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to delete the amount of $45,000 from the Appellant's income for the 1996 taxation year and substitute the amount of $39,000 in accordance with the attached Reasons for Judgment.

Signed at Vancouver, British Columbia, this 29th day of May 2002.

"L.M. Little"

J.T.C.C.