Citation: 2009TCC452
Date: 20090911
Docket: 2004-3357(IT)G
BETWEEN:
DOUGLAS G. RUDOLPH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellant
was reassessed to include $1,104,427 in his income in 1999 pursuant to subsection
15(2) of the Income Tax Act (the “Act”). This reassessment arose
as a result of the Canada Revenue Agency (the “CRA”) not accepting a number of
credits that the Appellant had applied against his shareholders loan account
(which resulted in the Appellant owing $1,104,427 to Gravel Ridge Investments
Inc. (“Gravel Ridge”) and which was not repaid within the time period as set
out in subsection 15(2.6) of the Act). The issue in this case is whether
any of the credits that have not been accepted as valid reductions in the
amount that the Appellant owed the company should be accepted and therefore
reduce the liability of the Appellant to Gravel Ridge. There is also an
additional issue with respect to a credit that the Appellant claims was
corrected by a subsequent journal entry.
[2] The Appellant
was also reassessed for 1998 to include $10,237 in his income for standby
charges and operating cost benefits. For 1999 he was reassessed to include $11,270
in his income for standby charges and operating cost benefits. At the
commencement of the hearing the Respondent acknowledged that these amounts were
not to be included in the Appellant’s income and therefore the reassessment of
the Appellant’s 1998 taxation year is vacated and the amount of $11,270 is not
to be included in the Appellant’s income for 1999 as standby charges and
operating cost benefits.
[3] The remaining
issue at the hearing was whether some of the credits to the shareholders loan account
of the Appellant that were not accepted by the CRA should be recognized as
reducing the liability of the Appellant to Gravel Ridge. Several of the credits
that were not accepted by the CRA are set out in a letter from the Appellant
dated January 31, 2006. After the commencement of the hearing counsel for the
Respondent acknowledged that a number of these credits were now being accepted
by the Respondent. The Appellant read these into the record at the start of the
second day of the hearing. These credits reduce the Appellant's income for 1999
by the amount thereof. The credits that were accepted by the Respondent are the
following:
|
Item Reference
|
Date of the Credit
|
Amount
|
|
A
|
November 16, 1998
|
$5,500
|
|
B
|
December 8, 1998
|
$33,000
|
|
C
|
December 11, 1998
|
$7,500
|
|
E
|
December 31, 1998
|
$25,000
|
|
G
|
January 13,
1999
|
$2,750
|
|
H
|
January 13, 1999
|
$5,000
|
|
I
|
January 21, 1999
|
$6,230
|
|
J
|
February 19, 1999
|
$16,000
|
|
M
|
June 29, 1999
|
$74,000
|
|
O
|
March 3, 2000
|
$200,000
|
|
R
|
June 20, 2000
|
$29,000
|
|
S
|
July 14, 2000
|
$5,000
|
|
Total:
|
|
$408,980
|
[4] The Appellant,
at the hearing, addressed the following credits identified in the letter dated
January 31, 2006:
|
Item Reference
|
Date of the Credit
|
Amount
|
|
F
|
|
$70,000
|
|
K
|
May 30, 1999
|
$500,000
|
|
L
|
June 17, 1999
|
$150,000
|
|
N
|
October 28, 1999
|
$10,000
|
|
P
|
April 7, 2000
|
$80,300
|
|
Q
|
April 13, 2000
|
$7,500
|
|
Total:
|
|
$817,800
|
[5] The item
identified as D in the letter dated January 31, 2006 (a credit for $10,000
dated December 17, 1998) was not accepted by the CRA and the Appellant stated
that he was not pursuing his claim for this credit.
[6] The credits in
issue are credits applied against the shareholders loan account of the
Appellant with Gravel Ridge. In general in order to justify the credit to this
account the Appellant would need to demonstrate that he either increased the
assets of Gravel Ridge by the amount of the credit or decreased the liabilities
of Gravel Ridge by the amount of the credit. Simply showing that the journal
entry was made is not sufficient.
[7] In Trudel-Leblanc
v. The Queen, 2003 DTC 257, 2004 DTC 3188, [2005] 2 C.T.C. 2361,
Justice Tardif stated that:
27 ... Too
often, some accounting and tax professionals have a tendency to assume that the
facts should be shaped by accounting entries whereas, in reality, the figures
should reflect the facts, not the contrary.
[8] In VanNieuwkerk
v. The Queen, 2003 TCC 670, [2004] 1 C.T.C. 2577, Associate Chief Justice
Bowman (as he then was) stated that:
6 ... It has
been said on many occasions in this Court that accounting entries do not create
reality. They simply reflect reality. There must be an underlying reality that
exists independently of the accounting entries…
[9] It is the
underlying reality that will determine whether the Appellant has reduced the
amount that he owed to Gravel Ridge. His liability to Gravel Ridge is not
reduced simply by making a journal entry. His liability to Gravel Ridge will be
reduced if he transferred assets to Gravel Ridge or he reduced the liabilities
of Gravel Ridge.
[10] The Appellant
described the business of Gravel Ridge as follows:
MR. RUDOLPH:
Gravel Ridge was a company that was set up to basically seek companies to
purchase with high upside. They bought and sold receivables. They basically did
everything in relation to business consulting and the purchase and sale of
business. Anything business related, Gravel Ridge was involved in it.
[11] When Gravel Ridge
was formed there were four shareholders. The Appellant was one of these four
shareholders. While he was the controlling shareholder in the beginning he
ceased to be the controlling shareholder as the number of shareholders
increased. The Appellant stated that at the end there were maybe six or seven
or even eight shareholders. It is not clear why the Appellant would not know
the number of shareholders of Gravel Ridge. The Appellant did not identify any
of the other shareholders of Gravel Ridge. It is not clear whether the
appellant was the controlling shareholder of Gravel Ridge in 1999 however the
Appellant's role with Gravel Ridge was described by him as “the person who was
responsible for seeking the business and facilitating all the deals”.
F – Credit for $70,000
[12] The Appellant
described the background to this credit as follows:
MR. RUDOLPH:
A-4, the seventy thousand dollar bank draft. Gravel Ridge had been contracted
by a company in Sackville, Davis and Davis. They were a personal empowerment
company and Gravel Ridge was to handle all the consulting and to help the
company raise some bridge capital.
As has been my
history, Your Honour in my whole career, often things are done with a
handshake. And when I say that I'll go good on something I do even if the
market conditions don't allow it to be done right away, I'm still responsible
for it.
So I had raised
or helped to raise some bridge funds for this company. There was a company by
the name of Front-Line Investments that put seventy thousand dollars on the
table. And basically the agreement was if the company could not repay then I
would have to be responsible for the money.
[13] Initially the
Appellant stated that he had guaranteed to Front-Line Investments Ltd. the
repayment of the money that it had advanced to Davis and Davis. Later the
Appellant stated that Gravel Ridge and he had guaranteed the repayment of this
money. There are two issues that arise in relation to this credit. Did the
Appellant personally pay the $70,000 to Front-Line Investments Ltd.? If the
Appellant did personally make this payment, did the payment of $70,000 to
Front-Line Investments Ltd. reduce the liability of Gravel Ridge by this
amount?
[14] The Appellant
produced three documents in support of his argument for the credit:
(a) an unsigned Factoring
Agreement between the Appellant and K & K Marsh Consultants Incorporated
(“K & K Marsh”) dated January 11, 2001 (which, according to the Appellant,
reflected the source of the funds used to pay the $70,000 to Front-Line
Investments Ltd. on January 29, 1999);
(b) a copy of a bank statement from
the Royal Bank for 2110956 Nova Scotia Limited for the period from January 29,
1999 to February 26, 1999 in which over 90% of the information is redacted; and
(c) a copy of a bank draft dated
January 29, 1999 payable to Front-Line Investments Ltd. for $70,000.
[15] Since the payment
to Front-Line Investments Ltd. which purportedly gave rise to the credit in the
shareholders loan account was made on January 29, 1999, the Factoring Agreement
dated almost two years later (January 11, 2001) could not have reflected the
source of funds used to pay Front-Line Investments Ltd.
[16] The mostly
redacted account statement (which only had one item that was not redacted – a
reference to a cheque for $70,000) only shows that 2110956 Nova Scotia Limited
had issued a cheque for this amount. Since the date was redacted as well, it is
impossible to determine when the cheque was issued.
[17] The bank draft
does not identify the purchaser of the bank draft. Although it is impossible to
read the first part of the reference on the bank draft, the Appellant stated
that the reference written on the bank draft was “D G R Accounting Services”,
which was the sole proprietorship of the Appellant. This does not confirm the
purchaser of the bank draft - it only provides a reference. However since the
amount ($70,000) matches the amount of the cheque ($70,000) shown on the
account statement for 2110956 Nova Scotia Limited, and since it was the
Appellant’s evidence that this bank statement was related to the bank draft, it
appears to me that 2110956 Nova Scotia Limited paid Front-Line Investments
Ltd., not the Appellant. The Appellant stated that he had borrowed the money
personally, transferred the money to 2110956 Nova Scotia Limited and then
effectively withdrew the money from 2110956 Nova Scotia Limited. If the
Appellant owed the money to Front-Line Investments Ltd. and had borrowed the
money to pay Front-Line Investments Ltd., why would the Appellant flow the
money in and out of 2110956 Nova Scotia Limited?
[18] As a result I am
not satisfied that the Appellant personally paid $70,000 to Front-Line
Investments Ltd. However, even if the Appellant did personally pay this amount
to Front-Line Investments Ltd., it is not at all clear how this reduced the
liability of Gravel Ridge. The Appellant initially referred to the guarantee as
one provided by him personally. If he provided the guarantee, then Gravel Ridge
would not have been liable and his payment of his personal obligation would not
reduce the liabilities of Gravel Ridge.
[19] The Appellant
later stated that Gravel Ridge had also guaranteed this payment. There was no
written documentation to support this guarantee and it was confirmed, as stated
by the Appellant, by a handshake. No one from Front-Line Investments Ltd. was
called by the Appellant to testify to confirm that Gravel Ridge was also
liable. The funds for the bridge financing for Davis and Davis went directly
from Front-Line Investments Ltd. to Davis and Davis. It is not clear whether
the representatives of Front-Line Investments Ltd. were even aware of the involvement,
if any, of Gravel Ridge in arranging this financing.
[20] The Appellant
called three witnesses (in addition to himself). The Appellant called the CRA
auditor, Keith Marsh (one of the clients of Gravel Ridge) and Henry Rudolph
(the Appellant’s brother).
[21] Keith Marsh
clearly stated during his testimony that his dealings were with the Appellant.
During cross examination of Keith Marsh, the following exchange took place:
Q. Yeah. And I
just want you to be careful when you use your language with me, because Douglas
Rudolph and Gravel Ridge Investments are two different legal entities. So ---
A. Okay. Well
-- okay. I -- all my dealings were with Douglas Rudolph. Gravel Ridge is a
vehicle that I learned that Doug uses as part of his investments.
[22] It is not clear
when Mr. Marsh learned that Gravel Ridge was the vehicle that the Appellant was
using. It does appear however that the Appellant was not clear with Mr. Marsh
during his dealings with him that Gravel Ridge was actually the company that
was involved. There is no reason to believe that the Appellant was any clearer
when dealing with the representatives of Front-Line Investments Ltd. and
therefore there is nothing to suggest that the representatives of Front-Line
Investments Ltd. were even aware of the existence of Gravel Ridge. The evidence
presented is insufficient to establish that Gravel Ridge was liable to
Front-Line Investments Ltd. for $70,000.
[23] The bridge
financing was advanced by Front-Line Investments Ltd. directly to Davis and
Davis who defaulted on the loan. Without a guarantee provided by Gravel Ridge,
there is nothing to indicate that Gravel Ridge would be liable to Front-Line
Investments Ltd. The only evidence of this guarantee of Gravel Ridge was the
statement of the Appellant that Gravel Ridge had guaranteed the payment (which
was only made after the initial statement by the Appellant that he was
personally responsible). Given Mr. Marsh’s testimony that his dealings were
with the Appellant and with no evidence to suggest that the Appellant was any
clearer in dealing with Front-Line Investments Ltd., it seems to me that the
guarantee provided by the handshake of the Appellant was made by the Appellant
and not by Gravel Ridge.
[24] As a result, the Appellant
cannot succeed in relation to his claim for this credit of $70,000 related to
the payment to Front-Line Investments Ltd.
K – Credit for $500,000
[25] This credit
relates to guarantees that the Appellant stated that he had provided by
executing a promissory note for $250,000 dated May 31, 1999 to K & K
Marsh and another promissory note for $250,000 dated May 31, 1999 to Sirah
Consulting Limited (“Sirah”). The Appellant had stated that he and those with
whom he was dealing would refer to a promissory note as a guarantee. To date no
payments have been made to K & K Marsh or Sirah under these promissory
notes.
[26] These promissory
notes relate to the acquisition of shares of a numbered company – 2485969 Nova
Scotia Limited. K & K Marsh was one of the investors in this numbered
company. Keith Marsh and his wife are the shareholders of K & K
Marsh.
[27] The following
exchange took place between the Appellant and Keith Marsh in relation to this:
Can you tell
the Court, in approximately May 1999, what business may have transpired between
Gravel Ridge Investments, owned by myself partially, and K&K Marsh
Consultants, owned by yourself and your wife?
A. Yeah. In
1999 it was in the early stages of my knowing you and we were in -- we were
doing several meetings, doing investments and transactions. I can't be specific
about any particular one, but there were several that went on.
Q. Okay.
That's great. Thank you.
At the end of
May K&K Marsh agreed to buy shares of a numbered company, 2485969 Nova
Scotia Limited. Can you recall for the Court the cost of that acquisition of
those shares, please?
A. As I said,
there were several at the time. To the best of my memory, that one was two
hundred and fifty thousand.
Q. Yes. Thank
you. The two hundred and fifty thousand dollars ($250,000.00), the -- at the
time was Gravel Ridge Investments indebted to your company, K&K Marsh
Consultants, for approximately that amount of money on any one particular deal?
A. Can I --
could you rephrase? So that I understand -- "indebted." Do you mean
does that company owe me the money?
Q. Yes. Did
Gravel Ridge owe money to K&K Marsh Consultants?
A. Yes.
Q. And did
Gravel Ridge -- was it a considerable amount of money or a small amount of
money?
A. It was a
considerable amount of money.
Q. Thank you.
When the agreement was entered, was there anything special or any additional
security that K&K Marsh may have requested when this deal took place?
A. Yes. We
wanted a personal guarantee.
Q. And from
whom did you want the personal guarantee?
A. From the person
who we were talking to, Mr. Rudolph, yourself.
[28] Keith Marsh described the guarantee as follows:
THE WITNESS:
The guarantee was that the two hundred and fifty thousand dollars ($250,000.00)
that we invested as part of the group -- we all invested the same money -- that
that capital would be guaranteed. So if the investments didn't materialize as
was suggested, that we would have an initial capital return of two hundred and
fifty thousand.
[29] In an e-mail from
the Appellant to Keith Marsh dated May 21, 1999, the proposed deal was
described as follows:
Investment in
shell – 2485969 Nova Scotia Limited
Keith, Gary
& Grant pay $250K each to purchase 25% (75% in total) of shell 2485969 Nova
Scotia Limited.
The $250K is
deferred – if by the end of 5 years each shareholder hasn’t received $500K in
annual draws (consulting and dividends) from the shell, the $250K shares will
be repurchased.
The company at
present will derive income from two methods:
1)
Consulting fees from placement of money from the $150K clubs or the $75K
clubs;
2)
Promotion of the leasing concept – direct sales, franchise sales and
royalties.
The
shareholders will receive funds in two different ways:
1) Net income above $200K will be evenly distributed to the
four shareholders as consulting fees;
2) The $200K will be $164K after tax and these funds will be
distributed as dividends.
- The original
amount of $250K will continue to have deductible interest.
Keith, general
info for you. I’m meeting with Richard early next week to finalize share
structure.
Doug
[30] The e-mail
suggests that each shareholder would receive $500,000 in annual draws. In a
separate document (which was introduced by Keith Marsh as a document he had
received from the Appellant) there is a reference to $500K after 5 years
and an annual return on investment of 81.88%. This document also states that:
These funds
are for purchase of shell, no funds are [sic] put in back to company.
[31] It is not clear
what is meant by “no funds are put in back to company”. No explanation of this
was provided. In the line above the part referred to above, there is a
reference to a $250,000 investment by each of Gary, Grant and Keith and an
investment of $0 by Doug.
[32] Keith Marsh
described the proposed investment as follows:
A. We were
putting money together to make up a capital of one million dollars that Mr.
Rudolph was going to use for investments, of which one was going to be the
leasing.
[33] A copy of a
letter dated October 4, 2007 from the solicitor[1] for the Appellant to counsel for the Respondent was
introduced as an Exhibit. Among the documents attached to this letter were the
following:
(a) an unsigned agreement dated
June 30, 1999 between Rodney Mullen (as the vendor) and K & K Marsh (as the
purchaser) which stated that Rodney Mullen owned 50 common shares of 2485969
Nova Scotia Limited and the purchase price for 25 of these shares was to be $1[2];
(b) a copy of an unsigned agreement
dated June 30, 1999 between Rodney Mullen (as the vendor) and Sirah (as
the purchaser) which stated that Rodney Mullen owned 50 common shares of
2485969 Nova Scotia Limited and the purchase price for 25 of these shares was
to be $1;
(c) a copy of an agreement dated
June 30, 1999 that appears to be signed by the Appellant on behalf of Gravel
Ridge in which it is stated that Gravel Ridge agrees to sell 25 common shares
of 2485969 Nova Scotia Limited to 3030267 Nova Scotia Limited for $1.
[34] Since these
agreements were sent by the solicitor for the Appellant to counsel for the
Respondent these were presumably the agreements related to the acquisition of
the shares of 2485969 Nova Scotia Limited. The purchase price of $1 for the
shares of 2485969 Nova Scotia Limited to be acquired by each investor is
consistent with this company being a shell company. Therefore it seems to me
that the shares of 2485969 Nova Scotia Limited were purchased for $1 and the
$250,000 was contributed to 2485969 Nova Scotia Limited as a contribution of
capital or as a shareholder loan.
[35] The Appellant
stated that Gravel Ridge had sold shares of 2485969 Nova Scotia Limited to one
of the investors (3030267 Nova Scotia Limited) for $250,000 (which would mean
that the other two investors would have paid $250,000 each to Rodney Mullen).
However this is not consistent with the description of 2485969 Nova Scotia
Limited as a shell company or the agreements attached to the letter from the
solicitor for the Appellant including the agreement that appears to be signed
by the Appellant on behalf of Gravel Ridge indicating that the shares of
2485969 Nova Scotia Limited were sold by Gravel Ridge to 3030267 Nova Scotia
Limited for $1 or the description of Keith Marsh in relation to the proposed
pooling of $1 million in capital to make investments. It also does not seem
logical that a shell company would be purchased from other shareholders for
$750,000 (the total of the investment amount by Gary, Grant and Keith) when a
new company could be incorporated for a small fraction of this amount.
[36] As well if the
shares would have been sold by Rodney Mullen for $250,000 for 25 shares
($500,000 for 50 shares) and by Gravel Ridge for $250,000 for 25 shares, it
would seem logical that an agreement of purchase and sale for these shares reflecting
this purchase price would have been prepared. The only agreements submitted
were the unsigned agreements stating a purchase price of $1 and the one
agreement signed by Gravel Ridge with the same $1 purchase price for shares of
2485969 Nova Scotia Limited. If $500,000 would have been paid to Rodney Mullen
and $250,000 to Gravel Ridge, how would 2485969 Nova Scotia Limited (which was
described as a shell company) have the capital to invest in the concept leasing
business (which was to be one of the businesses to be carried on by 2485969
Nova Scotia Limited) or any other enterprise? From the description of the
concept leasing business that was provided it appears that this was to be a new
business venture and not an existing operating business.
[37] As a result I
find that the shares of 2485969 Nova Scotia Limited were acquired by K & K
Marsh and Sirah for $1 and each investor was to contribute $250,000 to 2485969
Nova Scotia Limited as a contribution of capital or as a shareholder loan.
[38] K & K Marsh
did not have $250,000 in cash. In order to fund this investment, K & K
Marsh used the amount payable to it by Gravel Ridge (which included an interest
bonus on this debt to increase the amount to $250,000). The Appellant stated as
follows:
MR. RUDOLPH:
That's the deal that we've been discussing, the two hundred and fifty thousand
dollars and at that time the balance that Gravel Ridge owed K&K Marsh from
this summary was two hundred and thirty-three thousand zero twenty‑nine
thirty two.
It was agreed
between Mr. Marsh and myself that Gravel Ridge would offer an interest bonus.
It would move that amount to two hundred and fifty thousand dollars so that
K&K Marsh would have the money to cover off the share agreement with
2485969 Nova Scotia Limited.
So at that
time, Your Honour, it was agreed that -- and there is a third party involved
and I'm trying to keep things simple -- it was agreed that Gravel Ridge
Investments no longer owed K&K Marsh two hundred and fifty thousand
dollars.
They were
getting the benefit of the shares valued at two hundred and fifty thousand
dollars in 2485969 Nova Scotia Limited and there was a performance clause with
that company. But the issue became and the issue that's before the Court if I
ask Your Honour to refer to Respondent's Book I, Tab 7, page 2.
Halfway down
the page approximately you'll see May 30th, '99, K&K Marsh Consultants,
share two hundred and fifty thousand dollars. All that happened, Your Honour,
is that Mr. Marsh on behalf of K&K Marsh Consultants agreed with myself on
behalf of Gravel Ridge that Gravel Ridge no longer owed K&K Marsh any
money.
And the reason
they no longer owed K&K Marsh any money was because I immediately assumed
that debt with a promissory note/bank or a personal guarantee so that no matter
what went on in the future K&K Marsh Consultants always had me personally
on the hook for the two hundred and fifty thousand dollars as Mr. Marsh
testified yesterday. And it remains to this day.
[39] However it seems
to me that the reason why Gravel Ridge no longer owed $250,000 to K & K
Marsh was that K & K Marsh had converted that debt into shares of 2485969
Nova Scotia Limited (or shares and debt of this company). It does not seem to
me that the deal was that K & K Marsh would have both the shares of the
numbered company (with its proposed returns of 81.88% annually) and the debt of
$250,000.
[40] The numbered
company did not perform as anticipated and by letter dated June 1, 2002, the
Appellant, as President of 2485969 Nova Scotia Limited stated in a letter to
the other investors as follows:
Re: Purchase and Sale Agreement dated
June 30, 1999
This letter is to inform you that the company could not meet the
conditions as outlined in the above agreement. The market saturation of used
vehicles has been detrimental to our “Concept Leasing Strategy”.
Pursuant to
the above agreement, I have instructed our lawyer to cancel the share
certificates issued to you.
[41] This letter,
written June 1, 2002, suggests that it was not until then that it was
determined that 2485969 Nova Scotia Limited would not be able to meet the
conditions set out in the agreement dated June 30, 1999.
[42] By letter dated
December 31, 2003 the Appellant wrote to Keith Marsh and his wife and stated as
follows:
Please accept
this letter as notification, that as a condition of our verbal agreement, our
group will be reacquiring the shares that you hold of 2485969 Nova Scotia
Limited.
The purchase
price will be equal to your original cost of Two Hundred and Fifty Thousand
Dollars ($250,000).
I intend to
affect this purchase by December 31, 2004.
[43] It seems to me
that K & K Marsh simply converted the amount that was payable by Gravel
Ridge to K & K Marsh ($250,000 after the interest bonus) into shares of
2485969 Nova Scotia Limited and the Appellant personally guaranteed the return
of this amount to K & K Marsh if the numbered company did not meet the
required conditions. K & K Marsh needed $250,000 to fund its obligation in
relation to the acquisition of the shares of 2485969 Nova Scotia Limited. Since
the shares were acquired for $1, the $250,000 must have been part of the
working capital requirements for this company and contributed to this company
as a capital contribution in relation to the shares or as a shareholder loan.
It appears that K & K Marsh satisfied its obligation to contribute $250,000
by transferring to 2485969 Nova Scotia Limited the amount that was payable to K
& K Marsh by Gravel Ridge. As a result, the $250,000 was no longer owing by
Gravel Ridge to K & K Marsh but was then owing to 2485969 Nova Scotia Limited.
[44] This appears to
be the logical conclusion from the statements that K & K Marsh was to
contribute $250,000 to 2485969 Nova Scotia Limited (as part of the $1 million
pool of capital), the reference in the above letter from the Appellant dated
December 31, 2003 to the cost of $250,000 for the shares of 2485969 Nova Scotia
Limited, and the references by the Appellant and Keith Marsh to K & K Marsh
using the amount that was payable to it by Gravel Ridge to fund this
obligation. There was no evidence to indicate whether this amount had been paid
by Gravel Ridge to 2485969 Nova Scotia Limited.
[45] Therefore, at the
time that K & K Marsh acquired its investment in 2485969 Nova Scotia
Limited, the liability of Gravel Ridge was not reduced but the amount was
simply payable to a different person (2485969 Nova Scotia Limited).
[46] There is nothing
to indicate that Gravel Ridge had also guaranteed the repayment of the $250,000
to K & K Marsh. Even if Gravel Ridge had also guaranteed the return of
$250,000 to K & K Marsh if the investment did not materialize, the execution
by the Appellant of the promissory note dated May 31, 1999 does not justify the
credit as the Appellant has not made any payments under the note. If Gravel
Ridge had made such a guarantee, then Gravel Ridge would presumably still be
liable under the guarantee as K & K Marsh has not received any portion of
its $250,000 back.
[47] As a result the
execution by the Appellant of the promissory note dated May 31, 1999 (which the
Appellant stated was in effect a guarantee) did not reduce the liability of the
Appellant to Gravel Ridge and will not reduce the amount that has been included
in the Appellant’s income pursuant to subsection 15(2) of the Act.
[48] The balance of
the $500,000 credit is related to Sirah, another investor in 2485969 Nova
Scotia Limited. The only difference between the facts related to Sirah and K
& K Marsh is that Sirah appears to have contributed some cash (in addition
to the amount that was payable by Gravel Ridge to Sirah).
[49] The Appellant
introduced a schedule indicating that Gravel Ridge owed Sirah $98,532.50 as of
May 30, 1999 as a result of three separate factoring agreements. Two of the
factoring agreements were introduced into evidence. Each factoring agreement identified
Gravel Ridge as the Vendor and Sirah as the Purchaser and stated that the
Purchaser was buying the receivables listed in Schedule “A”, but no Schedule
“A” was attached. The agreements also provided that the Vendor (Gravel Ridge)
agreed to pay the initial purchase price plus the return on investment on the
due date. The following were the amounts owing by Gravel Ridge to Sirah based
on this schedule:
|
Date of the Factoring Agreement
|
Purchase
Price (Amount borrowed by Gravel Ridge)
|
Interest
|
Amount Payable
by Gravel Ridge on May 30, 1999
|
Annual
Interest as a percentage of the amount borrowed by Gravel Ridge
|
|
February 12, 1999
|
$28,500
|
$ 5,082.50
|
$33,582.50
|
61%
|
|
March 8, 1999
|
$30,000
|
$ 4,150.00
|
$34,150.00
|
61%
|
|
March 19, 1999
|
$27,500
|
$ 3,300.00
|
$30,800.00
|
61%
|
|
|
$86,000
|
$12,532.50
|
$98,532.50
|
|
[50] When expressed as
an annual rate of interest, the interest rate appears high.
[51] Gravel Ridge was
also indebted to 3027416 Nova Scotia Limited in the amount of $200,400. One of
the shareholders of this company (who owned 50% of the shares of this company)
also owned the shares of Sirah and he directed that $100,000 of the amount
owing to 3027416 Nova Scotia Limited be used to fund $100,000 of the amount
required to invest in 2485969 Nova Scotia Limited.
[52] As a result, the
following amounts payable by Gravel Ridge were used to fund the investment of
Sirah in 2485969 Nova Scotia Limited:
|
Amount payable to Sirah:
|
$98,532.50
|
|
Amount payable to 3027416 Nova Scotia Limited
|
$100,000.00
|
|
|
$198,532.50
|
[53] The balance of
$250,000 - $198,532.50 = $51,467.50 was paid by Sirah in two cheques – one for
$18,500 on June 3, 1999 and the balance of $32,967.50 on June 4, 1999.
Presumably both of these amounts were transferred to 2485969 Nova Scotia
Limited since Sirah was to contribute $250,000 to 2485969 Nova Scotia Limited.
[54] As with K & K
Marsh, the amounts payable by Gravel Ridge appear to have been used to fund (in
this case, part of) the $250,000 investment amount that Sirah was to pay to
2485969 Nova Scotia Limited. Although it is not entirely clear, it appears that
Sirah and 3027416 Nova Scotia Limited simply assigned their collective right to
receive $198,532.50 from Gravel Ridge to 2485969 Nova Scotia Limited. As a
result the $198,532.50 would then be payable by Gravel Ridge to 2485969 Nova
Scotia Limited. Sirah paid its required investment by assigning its receivable
(that was payable by Gravel Ridge), by causing 3027416 Nova Scotia Limited to
assign its receivable (that was payable by Gravel Ridge) to 2485969 Nova Scotia
Limited and by contributing the balance in two cheques. This seems to be the
logical conclusion from the evidence of the Appellant.
[55] As a result the
debt of Gravel Ridge was not extinguished but simply was now payable to 2485969
Nova Scotia Limited and Sirah owned shares in this company. The Appellant had
simply provided a guarantee that if the investment did not materialize he would
pay Sirah $250,000. The Appellant stated that the reference to a promissory
note was interchangeable with a guarantee. The execution of the promissory note
by the Appellant on May 31, 1999 did not relieve Gravel Ridge of its obligation
to pay $198,532.50 to 2485969 Nova Scotia Limited and does not justify a credit
of $250,000 to the shareholders loan account.
[56] Even if Gravel
Ridge had also guaranteed the return of $250,000 to Sirah if the investment did
not materialize, simply executing the promissory note does not justify the
credit as the Appellant has not made any payments under the note. If Gravel
Ridge had made such a guarantee, then Gravel Ridge would presumably still be
liable under the guarantee as Sirah has not received any portion of its
$250,000 back.
[57] As a result the
Appellant cannot succeed in relation to his claim for a credit of $500,000
(consisting of the two separate credit amounts of $250,000 each) related to the
promissory notes for $250,000 each executed by the Appellant in favour of K
& K Marsh and Sirah and dated May 31, 1999.
L – Credit for $150,000
[58] Both the
Appellant and his brother testified in relation to this credit. Henry Rudolph
(the Appellant’s brother) and the Appellant both stated that Henry Rudolph
sold shares of Town Delivery Services to 3028683 Nova Scotia Limited for
$400,000 which was paid as follows:
|
Paid to Henry Rudolph by cheques:
|
$ 204,000
|
|
|
|
|
Paid to 2485969 Nova Scotia Limited as a consulting fee:
|
$ 46,000
|
|
|
|
|
Balance payable to Henry Rudolph:
|
$ 150,000
|
[59] The Appellant
stated that Henry Rudolph had gifted this balance payable of $150,000 to the
Appellant and that he in turn had transferred this right to receive $150,000 to
Gravel Ridge (who used this receivable to purchase shares in 3028683 Nova Scotia
Limited – the company that purchased the shares of Town Delivery Services from
Henry Rudolph). The Appellant’s brother repeatedly confirmed that he was
gifting the amount to his brother but he also stated that:
THE WITNESS:
Conditions. Some day, I guess, it was going to be repaid, hopefully.
…
Q. Okay. And
you testified that you expect to be repaid this hundred and fifty thousand
dollar ($150,000.00) amount?
A. Some day
when he can do it I'm sure he will.
Q. And at
present has he made any payment in relation to the hundred and fifty thousand
dollars ($150,000.00)?
A. No.
[60] These statements
indicate that it may have been a loan and not a gift. However for the purposes
of this appeal nothing turns on whether Henry Rudolph lent the Appellant this
property or gave him this property. In either case, it would appear that this
property (the right to receive $150,000 from 3028683 Nova Scotia Limited) was
transferred from Henry Rudolph to the Appellant. The position of the Respondent
is that since no cash exchanged hands, there could not be a gift or a transfer.
However it seems to me that a person can gift any property which would include
a right to receive a payment.
[61] In Hickman
Motors Ltd. v. Her Majesty the Queen, [1997] S.C.J. No. 62, Justice L’Heureux-Dubé
of the Supreme Court of Canada made the following comments in relation to an
Appellant's onus of “demolishing” the Minister’s assumptions:
92 It
is trite law that in taxation the standard of proof is the civil balance of
probabilities: Dobieco Ltd. v. Minister of National Revenue,
[1966] S.C.R. 95 (S.C.C.), and that within balance of probabilities, there can
be varying degrees of proof required in order to discharge the onus, depending
on the subject matter: Continental Insurance Co. v. Dalton Cartage
Ltd., [1982] 1 S.C.R. 164 (S.C.C.); Pallan v. Minister of
National Revenue (1989), 90 D.T.C. 1102 (T.C.C.) at p. 1106. The Minister,
in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v.
Minister of National Revenue (1959), 59 D.T.C. 1098 (Can. Ex. Ct.), at
p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister's
assumptions in the assessment (Johnston v. Minister of National
Revenue, [1948] S.C.R. 486 (S.C.C.); Kennedy v. Minister of
National Revenue (1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The
initial burden is only to “demolish” the exact assumptions made by the Minister
but no more: First Fund Genesis Corp. v. R. (1990), 90 D.T.C.
6337 (Fed. T.D.), at p. 6340.
93 This
initial onus of “demolishing” the Minister's exact assumptions is met where the
Appellant makes out at least a prima facie case: Kamin v. Minister
of National Revenue (1992), 93 D.T.C. 62 (T.C.C.); Goodwin v. Minister
of National Revenue (1982), 82 D.T.C. 1679 (T.R.B.). In the case at bar,
the Appellant adduced evidence which met not only a prima facie standard, but
also, in my view, even a higher one. In my view, the Appellant “demolished” the
following assumptions as follows: (a) the assumption of “two businesses”, by
adducing clear evidence of only one business; (b) the assumption of “no
income”, by adducing clear evidence of income. The law is settled that
unchallenged and uncontradicted evidence “demolishes” the Minister's
assumptions: see for example MacIsaac v. Minister of National Revenue
(1974), 74 D.T.C. 6380 (Fed. C.A.), at p. 6381; Zink v. Minister of
National Revenue (1987), 87 D.T.C. 652 (T.C.C.). As stated above, all of
the Appellant's evidence in the case at bar remained unchallenged and
uncontradicted. Accordingly, in my view, the assumptions of “two businesses”
and “no income” have been “demolished” by the Appellant.
94 Where
the Minister's assumptions have been “demolished” by the Appellant, “the onus
shifts to the Minister to rebut the prima facie case” made out by the Appellant
and to prove the assumptions: Magilb Development Corp. v. Minister of
National Revenue (1986), 87 D.T.C. 5012 (Fed. T.D.), at p. 5018. Hence, in
the case at bar, the onus has shifted to the Minister to prove its assumptions
that there are “two businesses” and “no income”.
95 Where
the burden has shifted to the Minister, and the Minister adduces no evidence
whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac,
supra, where the Federal Court of Appeal set aside the judgment of the
Trial Division, on the grounds that (at pp. 6381-2) the “evidence was not
challenged or contradicted and no objection of any kind was taken thereto”. See
also Waxstein v. Minister of National Revenue (1980), 80 D.T.C.
1348 (T.R.B.); Roselawn Investments Ltd. v. Minister of National Revenue
(1980), 80 D.T.C. 1271 (T.R.B.). Refer also to Zink v. Minister of
National Revenue, supra, at p. 653, where, even if the evidence contained
“gaps in logic, chronology and substance”, the taxpayer's appeal was allowed as
the Minster failed to present any evidence as to the source of income. I note
that, in the case at bar, the evidence contains no such “gaps”. Therefore, in
the case at bar, since the Minister adduced no evidence whatsoever, and no
question of credibility was ever raised by anyone, the Appellant is entitled to
succeed.
96 In
the present case, without any evidence, both the Trial Division and the Court
of Appeal purported to transform the Minister's unsubstantiated and unproven
assumptions into “factual findings”, thus making errors of law on the onus of
proof. My colleague Iacobucci J. defers to these so-called “concurrent
findings” of the courts below, but, while I fully agree in general with the
principle of deference, in this case two wrongs cannot make a right. Even with
“concurrent findings”, unchallenged and uncontradicted evidence positively
rebuts the Minister's assumptions: MacIsaac, supra. As Rip T.C.J.,
stated in Gelber v. Minister of National Revenue (1991), 91
D.T.C. 1030 (T.C.C.), at p. 1033, “[the Minister] is not the arbiter of what is
right or wrong in tax law”. As Brulé T.C.J., stated in Kamin, supra, at
p. 64:
the Minister
should be able to rebut such [prima facie] evidence and bring forth some
foundation for his assumptions.
…
The Minister
does not have a carte blanche in terms of setting out any assumption which
suits his convenience. On being challenged by evidence in chief he must be
expected to present something more concrete than a simple assumption. [Emphasis
added by Justice L’Heureux Dubé.]
[62] Following the
testimony of the Appellant and his brother in relation to the gift / transfer
of the $150,000 receivable by Henry Rudolph to the Appellant, then to Gravel
Ridge and then to 3028683 Nova Scotia Limited for shares, the only evidence
adduced by the Respondent was that the auditor did not accept this credit
because the $150,000 was not paid in cash. The auditor for the CRA testified as
follows:
A. 302 ‑‑
let me see if I have this number right ‑‑ 3028683 Nova Scotia
Limited was going to be the share purchaser of Henry Rudolph's trucking
company's shares that he owned personally.
The agreement
was that those shares were worth four hundred thousand dollars ($400,000), that
3028683 would have to have proceeds or cash put into its bank account to cover
the payment of the two hundred and four thousand to Henry Rudolph and forty-six
thousand to 248 in relation to ‑‑ the 248 company in relation to
some kind of fees associated with the arrangement.
And a hundred
and fifty thousand of those proceeds was to remain in the bank account of
3028683 as per the request of Henry Rudolph, and that was an arrangement made
to ‑‑ because some of the other shareholders of 3028683, they would
not invest in this trucking company unless Gravel Ridge Investments put money
in and was at risk as well.
So, as part of
this whole arrangement it was agreed that Henry would leave a hundred and fifty
thousand in to provide for that but he ‑‑ the hundred and fifty
thousand was to be gifted to Doug personally first and in order for him to get
the credit it was for ‑‑ to allow for Gravel Ridge Investments to
acquire a hundred and fifty thousand worth of treasury shares of 3028683 to
fulfil the arrangement with these other parties.
Q. Okay. So,
that was your understanding. What did you want to see in order to verify that
Mr. Rudolph was entitled to this hundred and fifty thousand dollar ($150,000)
credit?
A. In order to
confirm this arrangement I would require the bank statements of 3028683 Limited
to confirm that four hundred thousand dollars ($400,000) was in its bank
account as at the transaction date and that ‑‑ so that two hundred
and fifty thousand would be provided as payment to Henry Rudolph and 248, the
248 company, and that a hundred and fifty thousand remained in the bank account
of 3028683 to provide for the ‑‑ to complete the gifting which ‑‑
again the gifting to Doug which he is really providing to Gravel Ridge
Investments to allow it to acquire shares of this company to meet this
obligation.
This ‑‑
I'll put it to you this way. This appears to simplify a series of cheques being
written. The hundred and fifty thousand in proceeds could have been paid to
Henry Rudolph, he could have wrote a cheque to Doug Rudolph, Doug Rudolph could
have wrote a cheque to Gravel Ridge Investments and Gravel Ridge Investments
could have wrote a cheque to 3028683 to allow it to acquire those treasury
shares of a hundred and fifty thousand, but this shortened it all, if you will.
Q. Right.
Okay. So, why ‑‑ maybe you can take what you've just said and tell us
why you needed to see four hundred thousand dollars ($400,000) in the ‑‑‑
A. In order to
‑‑‑
Q. ‑‑‑
302 company.
A. Sorry. To
ensure that the transactions are what they say they are, there has to be four
hundred thousand dollars' ($400,000) worth of these proceeds in 3028683, so ‑‑
and that two hundred and fifty were paid out not to Doug personally, but to
complete the gifting there has to be a hundred and fifty thousand that remains
in the bank account of 3028683 at that time.
[63] The right of Henry
Rudolph to receive $150,000 from 3028683 Nova Scotia Limited is a property that
can be gifted. This right to receive this amount could be gifted (or lent)
whether 3028683 Nova Scotia Limited had $150,000 in cash or in other assets.
The Respondent did not challenge the valuation of this right and upon the
Appellant leading evidence the Respondent did not rebut that evidence but put
forward the proposition that the gift could only occur if 3028683 Nova Scotia
Limited had $150,000 in cash. It was the right to receive payment of $150,000
that was gifted, not the cash. As a result the Appellant is entitled to succeed
in relation to this credit for $150,000.
N – Credit for $10,000
[64] The Appellant
provided two different explanations for this credit – one during discovery
examinations and another at the hearing. At the discovery examination the
Appellant stated that:
Q. The
next item is item N.
A. Yes.
Q. And
this is an amount for $10,000
A. Right.
Yeah, and unfortunately what I was referring to about the –about the timing,
this - this company was the investment club, and one of the payments that we
had made to the gentleman in New Brunswick would have been made personally by
me, and this would have just been a reimbursement of those funds. So basically
what I did, as I’ve stipulated in the explanation, instead of having the
company write the cheque to me and then me write the cheque to Gravel Ridge, I
just asked them to make the cheque payable to Gravel Ridge, and I just
increased my shareholder - so cash got debited and the shareholder loan got
credited. And keep in mind, John, that after we've gone through all of
this..."
…
Q. Now,
in terms of the third party you’re referring to, these are the quarry people up
in New Brunswick. Is that who you’re referencing?
A. Well
– oh, yeah, I’m referring to the investment Club that when we went up – some of
the money that was paid to these guys came from my own pocket. So it was just
reimbursed.
…
A. Yeah,
the 10,000. It’s just part of the 35,111 deposit,.
Q. On
the bank statement here, yeah.
…
A. This
is money that – with the investment club with that deal that was structured, I
would have given these guys some of my own money. So this was just the
investment club reimbursing me that $10,000, and instead of them writing a
cheque to me and then me writing the cheque to Gravel Ridge, I just had them
write the cheque to Gravel Ridge to repay funds owed to me as a reimbursement.
[65] At the hearing he
stated as follows:
MR. RUDOLPH:
Thank you. If I could ask Your Honour to go back to the Respondents Book I, Tab
7 again please. We are on page 3. And just about a quarter of the way down,
we're looking for October 28th, 1999 Your Honour.
And it says
3028683 Re: Jen. Cheque 5, J294 and there's a credit of ten thousand dollars.
So that is the item that we have in question that I've added to my shareholder
account.
What was
happening at the time, Your Honour, 3028683 Nova Scotia Limited was buying into
a physiotherapy clinic that was being set up by Jennifer Williamson. And
knowing Ms. Williamson for a long time and being intimately involved with all
parties what Gravel Ridge did, Your Honour, if we go one page earlier and we're
looking at the bottom of the page the third line item up, you will notice
August 20, 1999.
And it says
"Advance, Jennifer Williamson, cheque 288, Journal 240" for five
thousand dollars.
…
MR. RUDOLPH:
Okay. So Your Honour, that was five thousand dollars that Gravel Ridge paid to
Ms. Williamson as part of the buy-in for the physio clinic on behalf of
3028683. And if you flip the page, Your Honour, to page 3 ---
HIS HONOUR:
Okay, they were buying on behalf of 302, why was there a debit to your
shareholder loan account?
MR. RUDOLPH:
At the time Your Honour, 302 probably didn't have the money in the account. So
Gravel Ridge on behalf of 302 made the first advance to Ms. Williamson.
Or at the
time, Your Honour, it could have been a deal that Gravel Ridge -- that
personally I was going to do. And then when I talked to the other members of
3028683 it may have been agreed that they all wanted to be involved.
So 302 would
actually do the buy in as opposed to Doug Rudolph personally. And Your Honour
I apologize to the Court but after ten years I'm not exactly sure which one of
those would be the correct response. So again Your Honour on page 2 at the
bottom of -- sorry, Your Honour, Respondents Book I, Tab 7, page 2 at the
bottom three items up we've got the advance to Jennifer Williamson for five
thousand.
And again I
note this was -- even though the cheque was written by Gravel Ridge investments
the cheque was debited to the shareholder account. It was never put in as an
expense to the company or an asset of the company of Gravel Ridge Investments.
It went
against my shareholder account as if Doug Rudolph was drawing the money. And
then Your Honour if we flip the page and go to page 3 and we look at five items
down we'll see September 27th, 1999 entry. September - 2/'99, Jennifer
Williamson, cheque 304, J268, another five thousand dollar debit to my
shareholder account.
So Ms.
Williamson has received ten thousand dollars from Gravel Ridge Investments but
the ten thousand dollars came -- sorry, the ten thousand dollars from Gravel
Ridge Investments was debited to my shareholder account.
And Your
Honour, if we go down just ten or 11 items and we come back to the October
28th, 3028683 Re: Jen, cheque 5, 294 for ten thousand, that is the Exhibit A-10
that you have in front of you. That is 3028683 reimbursing that ten thousand
dollars.
But since the
debits came from my shareholder account and I would have requested the company
write the cheque -- sorry, I would have requested that 3028683 Nova Scotia
Limited write the cheque to Gravel Ridge what I'm suggesting, Your Honour, is
that since the two debits came from my shareholder account that the ten
thousand dollar credit should go to my shareholder account as well.
Your Honour, I
have nothing else on that item.
[66] The common ground
for the two explanations is that the $10,000 represented a reimbursement to
which the Appellant was entitled. A copy of the cheque from 3028683 Nova Scotia
Limited payable to Gravel Ridge for $10,000 was introduced as an exhibit.
[67] Since the journal
entry in question refers to “3028683 Re: Jen” it seems more likely than not
that the $10,000 related to the proposed deal with Jennifer Williamson.
The credit was small compared with the amount included in the Appellant’s
income (less than 1% of the $1,104,427 that was added to the Appellant’s
income) and with the number of deals that the Appellant was working on it seems
that he could easily have been mistaken at discovery.
[68] I accept the
Appellant’s explanation provided at the hearing and I will allow this credit of
$10,000 to reduce the amount payable by the Appellant to Gravel Ridge. It
appears that 3028683 Nova Scotia Limited was repaying the amount of $10,000
that had been charged to his shareholders loan account (and presumably should
have been debited to a loan account for this company).
P – Credit for $80,300
[69] The Appellant
submitted an unsigned factoring agreement together with mostly redacted bank
records to support the Appellant’s testimony that Norman and Jan Bayers had
advanced $118,000 to Gravel Ridge on July 12, 1999. I accept that Gravel Ridge
borrowed $118,000 from the Bayers in 1999. The Appellant’s explanation for the
$80,300 credit was that Norman and Jan Bayers had agreed to reimburse the
Appellant in the amount of $80,300 for expenses that the Appellant had incurred
in relation to a quarry project in New
Brunswick. The Appellant’s explanation
was in part as follows:
….
What we had
decided was that they were very interested in the quarry project. I met with
them on several occasions and explained everything that had been done and what
the plan was. And they agreed that they would like to participate in that
venture that I was doing personally.
That the
members of 3028683 Nova Scotia Limited were involved with. There was another
company Your Honour, I think it was 3028051 Nova Scotia Limited. I had some
family members involved, I had some friends involved. A lot of people were very
excited about it.
So what I'm
going to reference, Your Honour, to is Respondents Book I, page 3 where we had
just talked about Kingsway Materials, if you go down just a little bit farther
Your Honour you'll notice an entry for 7 April, '00 to correct note adjustment
J92 and eighty thousand three hundred dollars.
What was
agreed between myself and the Bayers was very simple. Eighty thousand three
hundred dollars that was owed to them by Gravel Ridge Investments would be
removed from the books of Gravel Ridge Investments, no longer be due from or
Gravel Ridge Investments would be indebted to them in that amount.
The
shareholder loan was credited for eighty thousand three hundred and Mr. and
Mrs. Bayers were now participating in this venture, kind of a collective
venture, Your Honour, that a lot of people were involved in and excited about.
[70] However there was
no document signed by the Bayers confirming that $80,300 of the amount payable
to them by Gravel Ridge was to be transferred to the Appellant nor did either
Norman or Jan Bayers testify during the hearing. It appears that the original
factoring agreement was in writing so why would an assignment of the amount
payable not also be in writing? It seems to me that the other shareholders of
Gravel Ridge would want to know that Gravel Ridge no longer owed the Bayers
$80,300. The Appellant stated that he did many deals by a handshake including this
deal with the Bayers. If a significant amount of debt ($80,300) is transferred
from one creditor to another creditor of Gravel Ridge, it seems to me that it
would be very important to hear from the person who is transferring the debt.
Without hearing from Norman or Jan Bayers or having anything in writing from
them, the Appellant cannot succeed in relation to this claim. The journal entry
is not proof that the debt was transferred.
Q - Credit for $7,500
[71] The Appellant
stated that this reflected a payment of $7,500 that the Appellant made
personally to Avon Bayers as partial payment of the amount that Gravel Ridge
owed to Avon Bayers. A copy of the personal cheque of the Appellant payable to
Avon Bayers for $7,500 was introduced as an exhibit. The Appellant has
satisfied the onus on him with respect to this claim and therefore the
Appellant will be entitled to the credit for $7,500 in determining the amount
payable by him to Gravel Ridge.
Additional Submissions
with respect to a credit for $250,000
[72] The Appellant
raised an additional submission in relation to a credit for $250,000 that had
been denied. This was not raised by the Appellant in the letter dated January
31, 2006 however this letter does include the following near the end of the letter:
The supporting
documentation represents shareholder deposits of $1,236,780.07. There are more,
however, this amount is greater than the amount added to my personal income for
1999.
[73] The Notice of
Appeal filed by the Appellant is brief. The part of the Notice of Appeal that
addresses the issue of the shareholder loan amounts included in income consists
of the following:
The auditor
has stated I received a loan or incurred debt from/with a corporate entity of
$1,104,427 that should be added to my 1999 income. This amount represented
funds that I deposited to the account myself. Funds were deposited to the
business account and then withdrawn as needed. The company did not generate
enough revenue or increase it’s debt to support the auditor’s findings. The
auditor, in his calculations, added the draws from the bank account but did not
include the majority of the deposits made. I provided all original
documentation but the decision was confirmed. There was no information to
support that these amounts were anything other than the same amounts deposited
and withdrawn and the decision was still confirmed.
I respectfully
submit that there should be no addition to my 1999 income, given the
documentation supporting my deposits – which were ignored by the auditor – were
for an amount greater than the amount used by the auditor.
[74] It is clear from
the evidence presented at the hearing that the issue in this case related to
the denial of the credits to the shareholders loan account and that not all of
the credits in issue arose as a result of deposits that had been made by the
Appellant. It is also clear that the Respondent did not object to the Appellant
raising issues with respect to credits that did not arise as a result of
deposits that were made. The Respondent did not deny that this credit of
$250,000 had been denied. The only objection raised by the Respondent was that
the Appellant had not raised the issue related to this credit earlier.
[75] In “The Law of
Civil Procedure” by Williston and Rolls, it is stated at page 638 that:
A party is
bound by his pleadings and his case is confined to the issues raised by the
pleadings. The consequence of failure to raise a matter in the pleadings may be
that the point will not be open at the trial or on appeal.
[76] In “Canadian
Civil Procedure Law” by Abrams and McGuiness, it is stated at page 366 that:
5.10 Case law
around the Commonwealth takes a fairly standard view of the function of
pleadings, and the limitations that they impose on the availability of relief.
As noted above, in general, the purpose of pleadings is: to define the issues
in dispute, to give notice to the other side of the case to be met; to inform
the court of the matters in issue; to provide a permanent record of the issues
raised; and to define the scope of discovery.
[77] The Notice of
Appeal filed by the Appellant does indicate that the issue relates to the
failure of the CRA auditor to “include the majority of the deposits made”. As
noted, although the Appellant referred to “deposits” it is clear that the issue
is related to the failure of the CRA auditor to include the credits to the
shareholders loan account, not all of which related to deposits that were made
by the Appellant. The Respondent would be aware that this credit was one of the
credits that had been denied.
[78] As a result in my
opinion, the Appellant can raise the issue of this additional credit.
[79] The Appellant at
the hearing introduced into evidence an e-mail that he received on June 22,
2009 (after the hearing had commenced) from Grant Veroba. Mr. Veroba’s e-mail
address, the subject and the name of the attachment were all redacted.
[80] In my opinion no
weight can be given to this e-mail. Most of the comments relate to the personal
guarantee provided by the Appellant. However, the personal guarantee provided
by the Appellant to Grant Veroba’s company was not related to any credit that
was in dispute and in relation to which the Appellant provided any evidence or
made any submissions. The statements in the e-mail related to the purchase of
shares in 2485969 Nova Scotia Limited would have to be subjected to cross
examination before any weight could be given to them. There is a reference to a
share purchase agreement and a purchase price of $250,000 but the only agreement
that was admitted into evidence indicates that the purchase price for the
shares was $1. Redacting the e-mail address does not assist the Appellant. As a
result, no weight will be given to this e-mail.
[81] The Appellant’s
position is that the credit for $250,000 was adjusted (corrected) by a
subsequent debit to the shareholders loan account for $249,975. The first entry
(J130 - which gave rise to a credit to the shareholder’s loan account) was made
on May 30, 1999 and reflected a debit to accounts receivable of $250,000 and a
credit to “due to shareholder” of $250,000. The explanation was “Share ? Nova
Scotia Limited”. The Appellant stated that ? Nova Scotia Limited was 2485969
Nova Scotia Limited and that when he made the entry he knew it was a numbered
company but did not know the number.
[82] The second entry
(J338) was made on June 30, 1999 and reflected a debit to investments of $25, a
debit to “due to shareholder” of $249,975 and a credit to investment of
$250,000. The entry indicated that it was “to record sale of shares in 2485969
Nova Scotia Limited”.
[83] The Appellant’s
explanation for the two entries was as follows:
MR. RUDOLPH:
Gravel Ridge was indebted to all three of these companies. As we've -- as I've
given evidence specifically for Sirah and K&K Marsh Consultants the number
was two hundred and fifty thousand dollars in relation to this transaction.
Also indebted to Mr. Veroba.
Mr. Veroba was
going to buy shares -- or sorry, Mr. Veroba's company 3030267 actually bought
their shares from Gravel Ridge. Mr. Marsh and Mr. Sweetman bought shares from
another party.
So if you look
at -- if we're back on that tab 7, page 3 -- sorry, page 2 of Respondents Book
I, the three two fifties were entered so that everyone was being treated the same
way. The guarantees, the deal, the shares everything was great.
And I'm
expecting, Your Honour, because the adjusting entry was the 30th and that's the
date that the share issues were done by the lawyer, I'm suggesting that I was
-- I may have been reminded or I may have forgotten or I made an error with the
entry that Mr. Veroba's company 3030267 was actually buying the shares from
Gravel Ridge Investments.
What that
meant, Your Honour, is that Gravel Ridge actually had to show the income, the
revenue for the sale of those shares. So what we're looking at and yesterday
we talked about Exhibit A-2 which Your Honour do you still have A-2 there
somewhere?
HIS HONOUR:
I have A-2 yes.
MR. RUDOLPH:
So in Exhibit A-2 the two journal entries in question, the journal 130 and the
journal 338 it wasn't a reversal. It was a correction. It had to accurately
reflect in the company's books what had transpired.
And what had
transpired was that Gravel Ridge had actually sold the shares and Gravel Ridge,
you'll notice Your Honour the second entry J338 you'll see twelve ninety-four
investment twenty-seven forty due the shareholder and forty forty investment.
That forty
forty account that's a revenue account. So the transaction was being corrected
to accurately reflect the two hundred and fifty thousand dollar revenue from
the sale of the shares. So in correcting them the guarantee had to be treated
a little bit differently with Mr. Veroba in that he didn't have a full two
hundred and fifty thousand dollars owed to him by Gravel Ridge Investments at
the time or owed to his company, 3030267 Nova Scotia Limited.
And he was the
only one of the parties -- or sorry, Your Honour -- 3030267 was the only one of
the parties that was buying the shares in 2485969 Nova Scotia Limited from ---
…
3030267
actually purchased their shares from Gravel Ridge Investments where K&K
Marsh and Sirah had purchased their shares from another party. So the deal
with 3030267 is just a little bit different.
So all I was
doing was correcting to accurately reflect what had actually happened. And
what happened was 3030267 bought the shares in Gravel Ridge had to incur the
revenue.
So effectively
they owned the shares -- sorry, effectively Gravel Ridge Investments owned the
shares of 2485969, sold them to Mr. Veroba's company, 30302 -- excuse me, Your
Honour just bear with me one second. It's 30302 -- sorry, Your Honour, 3030267
Nova Scotia Limited.
So and
accurately reflecting the credit of two fifty to the shareholder account had to
be adjusted down to the two forty-nine nine seventy-five Your Honour and the
reason that it was only adjusted and left twenty-five dollars is that Gravel
Ridge had to show on the books that the twenty-five shares that they were
selling to 3030267 actually had some value and at that time the shares are
usually just given a nominal value of a dollar because they're no par value
common stock.
So what I did
was I debited the shareholder account for two forty-nine nine seventy-five.
And left the twenty-five dollars in the investment account that would represent
Gravel Ridge at one point in time acquiring the shares.
So then in A-2
Your Honour at the bottom, all I did is put them together and said what the
actual reflection inside the company's books of what happened was is that Mr.
Veroba's company, 3030267 owed Gravel Ridge Investments two hundred and fifty
thousand dollars for the purchase of the shares.
Gravel Ridge
was showing that the original share cost to be twenty-five dollars because
obviously all of the work and the concept greasing and all of the other
strategies that Gravel Ridge had put forth the net credit to the shareholder
account is now twenty-five dollars and the company had to record four -- sorry
the company had to record -- sorry, Your Honour -- Gravel Ridge Investments had
to record in its books account forty forty for revenue of the two hundred and
fifty thousand dollars from the sale.
[84] As noted above, I
find that 25 shares of 2485969 Nova Scotia Limited were sold by Rodney Mullen
to K & K Marsh for $1, 25 shares of 2485969 Nova Scotia Limited were sold
by Rodney Mullen to Sirah for $1, and 25 shares of 2485969 Nova Scotia Limited
were sold by Gravel Ridge to 3030267 Nova Scotia Limited for $1. Therefore it
seems to me that the credit to the shareholders loan account for $250,000 dated
May 30, 1999 was not correct and did not reflect reality. Also journal entry
J338 dated June 30, 1999 did not reflect reality as Gravel Ridge did not sell
its shares of 2485969 Nova Scotia Limited to 3030267 Nova Scotia Limited for
$250,000. However the only issue in this case is whether the Appellant should
be entitled to the credit dated May 30, 1999 or any part of this credit.
[85] Since the credit
of $250,000 recorded on May 30, 1999 had been corrected by the Appellant (by
the June 30, 1999 entry to the extent of $249,975) it should not have been
denied by the CRA auditor. A denial of this credit would result in the reversal
of this credit twice – once by journal entry J338 and again by denying this
credit.
[86] It seems to me
that the proper way to deal with this would be to reverse both entries (J130
and J338) and reflect a sale of shares of 2485969 Nova Scotia Limited by Gravel
Ridge for $1. However, since the only issue raised in this Appeal is related to
the credits that were denied, this is the only issue that I can address and
since it seems to me that it would not be appropriate to deny the credit dated
May 30, 1999 as it was subsequently corrected by the Appellant, the
Appellant is entitled to succeed in relation to this credit except that the
amount of the credit should be $249,975 since the correcting entry only debited
the shareholders loan account in the amount of $249,975.
Conclusion
[87] The
appeal in relation to the reassessment of the Appellant’s 1998 taxation year is
allowed, without costs, and the
reassessment of the Appellant’s 1998 taxation year is vacated.
[88] The appeal in relation to the reassessment of the
Appellant’s 1999 taxation year is
allowed, with costs, and the matter is referred back to the Minister of
National Revenue for reconsideration and reassessment on the basis that:
(a) the amount of $11,270 is not
to be included in the Appellant’s income for 1999 as standby charges and
operating cost benefits; and
(b) in determining the amount
payable by the Appellant to Gravel Ridge in 1999 that was not repaid within the
time period as set out in subsection 15(2.6) of the Act, the
following credits to the shareholders loan account that had not been accepted
are to be allowed as credits to the shareholders loan account and reduce the
amount payable by the Appellant to Gravel Ridge as of the date of the credits:
|
Item Reference
|
Date of the Credit
|
Amount
|
|
A
|
November 16, 1998
|
$5,500
|
|
B
|
December 8, 1998
|
$33,000
|
|
C
|
December 11, 1998
|
$7,500
|
|
E
|
December 31, 1998
|
$25,000
|
|
G
|
January 13, 1999
|
$2,750
|
|
H
|
January 13, 1999
|
$5,000
|
|
I
|
January 21, 1999
|
$6,230
|
|
J
|
February 19, 1999
|
$16,000
|
|
L
|
June 17, 1999
|
$150,000
|
|
M
|
June 29, 1999
|
$74,000
|
|
N
|
October 28, 1999
|
$10,000
|
|
O
|
March 3, 2000
|
$200,000
|
|
Q
|
April 13, 2000
|
$7,500
|
|
R
|
June 20, 2000
|
$29,000
|
|
S
|
July 14, 2000
|
$5,000
|
|
Additional Credit:
|
May 30, 1999
|
$249,975
|
|
Total:
|
|
$826,455
|
Signed at Ottawa,
Canada, this 11th day of September, 2009.
“Wyman W. Webb”
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