[OFFICIAL ENGLISH TRANSLATION]
Citation: 2005TCC675
Date: 20051026
Docket: 2004-915(IT)I
BETWEEN:
CLAUDE BOLDUC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] These are appeals
for the taxation years 1999
and 2000.
[2] The issue is
whether the amounts of $2,854.48 and
$7,942.37 respectively are to be included in the calculation of the
appellant’s income as benefits deemed to have been received from the company
Habitations Durab Inc. (the “Company”), within the meaning of Section 80.4
of the Income Tax Act (the “Act”).
[3] The facts on which
the reassessments by the Minister of National Revenue (the “Minister”) are based are outlined in
paragraph 12 of the Reply to the Notice of Appeal and read as follows:
[TRANSLATION]
a) the company “Habitations Durab Inc.”
operated a residential construction and renovation business during the fiscal
years ending on December 31, 1999 and December 31, 2000;
b) the Appellant was a shareholder and
employee of the company “Habitations Durab Inc.” during the taxation years in
question;
c) the Minister audited the accounting
records of the company Habitations Durab Inc. and the Appellant’s personal bank
accounts;
d) during the fiscal years of “Habitations
Durab Inc.” ending on December 3, 1999 and December 3, 2000, the annual balance
of advances granted to the Appellant by the said company are as follows :
i) on January 1, 1999 $24,500.86
ii) on December 31, 1999
$134,394.55
iii) on December 31, 2000 $90,273.00;
e) the Appelant did not pay any amount for
interest to the company Habitations Durab Inc. during the years in
question;
f) to calculate the annual benefit deemed to
have been received by the Appellant, the Minister used the interest rates 5%
and 6% respectively for the taxation years 1999 and 2000.
[4] From the Notice of Appeal, I quote paragraphs 2 to 8 and 16 which read
as follows:
[TRANSLATION]
2. On July 11, 1997, the Appellant personally
borrowed from the Caisse populaire Desjardins du Vieux-Québec an amount
totalling one hundred and twenty thousand dollars ($120,000), by two (2)
separate loan agreements in the amount of sixty thousand dollars ($60,000)
each, as can be seen from a copy of the mortgage agreements, which copy will be
submitted in the Court file as Document A-1;
3. The total amount of the loans, that is the
sum of one hundred and twenty thousand dollars ($120,000), was to serve to
cover the costs of construction of two semi-detached homes to be built on de
Chamerolles Street, in Neufchâtel, as can be seen from a letter dated June 2,
1997 from the Caisse populaire Desjardins du Vieux-Québec to which the offer of
financing was attached, which documents are to be submitted in the Court file
as Document A-2;
4. According to the offer of financing, one
of the loans in the amount of sixty thousand dollars ($60,000) was to be
secured by a first mortgage on the building situated at 9725 de Chamerolles
Street, in Neufchâtel;
5. The lots on which the semi-detached homes
were to be built were purchased not by the Appellant, but by Les Habitations
Durab Inc., by an agreement of sale reached with la Fédération des Caisses
populaires Desjardins de Québec dated August 19, 1997, copy of which will be
submitted in the Court file as Document A-3;
6. The entire amount totalling one hundred
and twenty thousand dollars ($120,000) having been loaned by the Caisse
populaire Desjardins du Vieux-Québec was paid out to the Appellant, as can be
seen from the disbursement slips, copies of which will be submitted in the
Court file as Document A-4;
7. The amount totalling one hundred and
twenty thousand dollars ($120,000) which was paid out to the Appellant was
subsequently deposited in instalments in the operations account of the company
Les Habitations Durab Inc., for which evidence will be submitted;
8. The entire amount totalling one hundred
and twenty thousand dollars ($120,000) which was personally borrowed by the
Appellant served to pay the construction costs of the semi-detached homes on
the lots owned by Les Habitations Durab Inc.;
…
16. The reassessments issued to the Appellant
for the taxation years 1999 and 2000 as well as the Minister’s decision to
confirm them are without basis and are erroneous for the following reasons:
a) The Appellant himself paid, on behalf of
the company Les Habitations Durab Inc., all the interest payable on the
loans totalling one hundred and twenty thousand dollars ($120,000) taken out
with the Caisse populaire Desjardins du Vieux-Québec, up until November 15,
2000, at which date the Caisse populaire Desjardins du Vieux-Québec
acknowledged having received all the amounts owed by the Appellant on account
of the mortgage loans made to him on July 11, 1997, as can be clearly seen on a
discharge from the Caisse populaire Desjardins du Vieux-Québec, copy of which
will be submitted in the Court file as Document A-9;
b) The mortgage loans taken out by the
Appellant for the benefit of Les Habitations Durab Inc. bore interest at a rate
varying from 5.2% per year to 6.75 % per year;
c) Moreover, up to the time of the discharge,
the Appellant himself made, on behalf of Les Habitations Durab Inc., all
the mortgage payments owed to the said financial institution, for which
evidence will be submitted;
d) The amounts that the Appellant borrowed
for the benefit of Les Habitations Durab Inc. totalling one hundred and
twenty thousand dollars ($120,000), as well as the interest that he paid on
those loans from July 11, 1997 on, constituted a loan to the benefit of Les Habitations
Durab Inc., the principal and interest were therefore to be considered as being
an amount owed to the Appellant;
e) The financial statements of the company
Les Habitations Durab Inc. for the fiscal periods ending on December 31,
1999 and December 31, 2000 clearly show as liabilities loans in the amount
of one hundred and twenty thousand dollars ($120,000) which were in fact taken
out personally by the Appellant;
f) It is in error that the loans totalling
one hundred and twenty thousand dollars ($120,000) appear in the financial
statements of the company Les Habitations Durab Inc., since these should
have been shown as an amount owed to a director, bearing interest at the rate
agreed to with the Caisse populaire Desjardins du Vieux-Québec;
g) As can be seen in the calculation document
Exhibit A-6, Louise Laroche, the Respondent’s employee, acknowledged that
the sum of one hundred and twenty thousand dollars ($120,000) owed on the
houses in stock should have been applied against the advances owed by the
Appellant to Les Habitations Durab Inc.;
h) The Respondent’s employee erred however,
since she should have applied in favour of the Appellant personally, a credit
of one hundred and twenty thousand dollars ($120,000), and that from the date
when the latter took out these loans, namely from July 11, 1997, as well as all
the interest that the latter paid on the said loans, since this amount was as a
matter of fact borrowed on that date and was owed to the Appellant from that
date;
i) If the Respondent had correctly credited
to the Appellant the amounts that were owed to him as principal and interest
from July 11, 1997, the assessments with regard to the interest demanded from
the Appellant would have been null.
[5] As can be read in
the Notice of Appeal, the Appellant claims that he himself took on the
obligations related to the mortgage loan and that in advancing funds to him,
the Company was simply compensating him for the debt it owed him. We shall see
that that is not what was revealed by the evidence. The evidence revealed that
the entire principal as well as the remaining interest were reimbursed by the
Company after the sale of the houses that the Company had built on the lots.
During the term of the loan, did the Appellant pay certain amounts of interest
related to the mortgage debt? The evidence is not clear. However, the evidence
clearly revealed that if the Appellant did pay some, he was reimbursed for all
of it by the Company.
[6] The Appellant was
one of the shareholders of the Company which operated in the area of
residential construction.
[7] On July 11, 1997, the Appellant personally obtained
from the Caisse populaire Desjardins two loans in the amount of $60,000 each,
guaranteed by a mortgage on the lots and the houses under construction on them
having civic numbers 9725 and 9735 des Chamerolles, Quebec. The total loan was
for $120,000.
[8] A representative of
the Caisse came to explain to the court that the Caisse would not have made a
loan to the Appellant if it had known that it was not the latter that had
become the owner of the lots against which the mortgage was made.
[9] In any case, the
lots and the houses are the property of the company as of August 19, 1997. It
is also at that time that the monies were paid out by the Caisse through a
notary. The notary paid the purchase price of the lots and turned over an
amount of $48,059.27 to the Company. Subsequently, the balance of the loan was
also turned over to the Company.
[10] The Respondent
accepts that a certain amount of interest on the loan may have been paid by the
Appellant. In fact, at the time of the sale of the houses, a payment of $24,000
was made to the Appellant by the Company as a reimbursement for interest. This
amount was accepted by the Minister as a reimbursement of a debt owed to the
Appellant by the Company. There is an entry in the books indicating a payment
in the amount of $24,000. There is no document which explains its exact
significance.
[11] According to the
financial statements, it is the Company that took on the responsibility for
repayment of the principal and interest on these loans. It always considered
the mortgage as its own debt.
[12] The financial
statements (Exhibit A-14) show that the amounts [TRANSLATION] “Advances without
interest to a director” at the end of 1999 and 2000 are $134,395 and $108,416. These amounts are
identical to those mentioned by the auditor on her worksheets (Tab 1 of Exhibit
I-1). She made a detailed calculation of the amounts of interest imposed
pursuant to Section 80.4 of the Act on the basis of the entries in the
Company’s books relative to advances made to a director.
Arguments
[13] The calculation of
interest is not contested by the Appellant. The Appellant’s claim is that he
advanced to the Company an amount of $120,000 which compensates for the amounts
that were advanced to him. Counsel for the Appellant contends that in
calculating the benefit, the Respondent should have taken into account as of
the end of December 1997 a credit in favour of the Appellant in the amount of
$120,000.
[14] According to the
document showing the calculation of the interest (Exhibit A-6), the amount
of the advances made to the Appellant by the Company as of January 1, 1999 was
$24,500.86. Counsel suggests that the true situation was different, since in
his view, at that date, it was rather the Company that owed the Appellant the
sum of $107,865.10.
[15] Counsel for the
Appellant refers to the concept of compensation in Section 1672 of the Civil
Code of Quebec (the “Code”) which provides that: “Where two
persons are reciprocally debtor and creditor of each other, the debts for which
they are liable are extinguished by compensation, up to the amount of the
lesser debt.”
[16] Section 1673 of
the Code stipulates that: “Compensation is effected by operation of
law upon the coexistence of debts that are certain, liquid and exigible and the
object of both of which is a sum of money … A person may apply for judicial
liquidation of a debt in order to set it up for compensation.”
[17] The Company owed the
Appellant, as of the end of 1997, amounts totalling $120,000 plus interest,
amounts which were used by the Company to purchase the lots and to build the
residences. The Company advanced money to the Appellant. The debts for which
the two parties were liable were extinguished by compensation.
[18] Finally, according
to the provisions of Section 80.5 of the Act, the benefit deemed to
have been received by the taxpayer during a taxation year is deemed, for the
application of the provisions of subparagraph 8(1)(j)(i) and of
paragraph 20(1)(c), to represent interest paid during a year in compliance
with a legal obligation to pay interest on borrowed money. Thus, the Respondent
errs in taxing the taxpayer on such interest as a deemed benefit, since this
interest, according to Section 80.5 of the Act could be deducted by the
taxpayer as interest charges, since this interest was incurred in order to earn
income from property.
[19] For her part,
Counsel for the Respondent recalls certain facts. During the taxation years in
question, the Appellant was a shareholder and director of the Company. The
advances granted to the Appellant did not bear interest. Interest totalling
$2,854.48 and $7,942.37 were assessed to the Appellant for the taxation years
1999 and 2000 respectively.
[20] According to
Note 5 of the Company’s financial statements, the item [TRANSLATION] “Owed
on buildings for resale” includes two loans totalling $120,000 guaranteed by
first mortgages on the buildings located at 9725 and 9735, des Chamerolles
Street in Québec. The Company’s financial statements for the years 1998 and
1999 do not show any modification. The Company sold the residences on June 15
and 28, 2000 (Exhibit A‑11). On November 15, 2000, the Company paid
the balances of the loans taken out by the Appellant with the Caisse populaire.
The balance on loan #1 was $57,800.66 and the balance on loan #2 was
$57,971.46, for a total of $115,772.12 (Exhibit A‑10, last page).
[21] There was no
agreement between the Company and the Appellant as to the terms of repayment of
the two loans totalling $120,000.
[22] On December 31,
2000, the Company’s financial statements indicate an item [TRANSLATION]
“Advances without interest to directors” in the amount of $108,416. In her
analysis of the amounts advanced by the Company to the Appellant, the auditor
took into account the reimbursement made by the Company for the interest paid
by the Appellant. As of December 31, 2000, she indicated a credit of $24,216
for [TRANSLATION] “Int. Taken on by Claude houses sold” (Exhibit I‑1,
Tab 1, page 5).
[23] Counsel for the
Respondent emphasizes that in this case, no agreement between the Company and
the Appellant was submitted as evidence to indicate the terms of repayment of
the debts. The terms and conditions of repayment are not known. Consequently,
since the two debts were not exigible, compensation between them could not be
effected between July 1997 and November 2000. Moreover, after the sale of the
houses in June 2000, the financial statements as of December 31, 2000 contain
an item [TRANSLATION] “Advances without interest to directors” in the amount of
$108,416. However the item [TRANSLATION] “Owed on buildings” does not appear in
the Company’s financial statements of December 31, 2000. This indicates that
there was no compensation of the two debts.
[24] In reply to the
Appellant’s argument regarding application of Section 80.5, the Respondent
contends that this provision does not apply automatically. The Appellant must
prove that the sums advanced fulfill the conditions for application of
subparagraph 8(1)(j)(i) or of paragraph 20(1)(c). Such is
not the case here. As regards subparagraph 8(1)(j)(i), the Appellant did
not show that the advances granted by the Company were used to purchase a motor
vehicle used in the performance of his office, his duties or his employment. As
regards paragraph 20(1)(c), the Appellant did not show that the advances
were granted for the purpose of earning income from a business or from
property. In fact, the Appellant did not submit any evidence as to the purpose
or purposes for which the Company advanced monies to him during the taxation
years in question.
Conclusion
[25] The concept of compensation signifies the extinction of
two reciprocal debts between the same persons up to the amount of the lesser
debt.
[26] According to this
concept, as the Company made advances to the Appellant, the Company’s debt
should have been progressively extinguished. That is evidently not the case. In
advancing monies to the director, the Company did not diminish its debt of
$120,000. It paid it in its
entirety to the Caisse after the sale of the two houses. There was no
extinction of the Company’s debt. It was paid back to the bank by the Company
according to the terms of the loan contract.
[27] The Company did not
act as if it was a debtor to the Appellant. It acted as having taken on the
Appellant’s mortgage. The Appellant did not act as if he was the creditor of a
debt owed to him by the Company. There was no loan agreement by one or the
other.
[28] Consequently,
compensation cannot be claimed. It is clearly a matter of two separate
accounts.
[29] The Appellant’s
theory is that he had loaned money to the Company which had loaned him some in
return. Did the Company benefit from money which in fact was the Appellant’s?
There would have had to be an agreement between the Appellant and the Company
specifying the terms of repayment. Contrary to this claim, what in fact took
place is that the Company took on the Appellant’s debt.
[30] It was always a
matter of two accounts shown separately in the Company’s financial statements.
One was a debt owed by the Company to the Caisse, the other an account
receivable based on the advances without interest granted to a director. The
payments were made according to this presentation of accounts. There were in
fact two separate accounts.
[31] Consequently, the
Appellant cannot rely on the effect of compensation with respect to the
advances that the Company granted to him during the years in question.
[32] As to the
application of Section 80.5 of the Act, it is my view that it cannot
apply for the reasons given by Counsel for the Respondent as stated above.
[33] As a result, the
appeals are dismissed.
Signed at Ottawa, Canada, this 26th day of October
2005.
« Louise Lamarre Proulx »
on this 22th day
of February 2004.
Jean Mongenais, Translator
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