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Citation: 2004TCC764
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Date: 20041119
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Docket: 2001-3906(IT)G
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BETWEEN:
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ANTONIO SANTORO,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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Docket: 2001-3907(IT)G
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AND BETWEEN:
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ARCHITECTURAL PRECAST SYSTEMS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip J.
Issues
[1] Appellant Antonio Santoro is the
sole shareholder of the appellant Architectural Precast Systems
Inc. ("APS"). The appellants have appealed respective
assessments for their 1995 taxation years. The issues in these
appeals revolve around two possible acquisitions of shares in HLE
Capital Corp. ("HLE"). The issues are firstly, to
determine if there were one or two acquisitions of shares in HLE
by an appellant, secondly, which appellant purchased the shares
and, thirdly, whether the losses on the dispositions of shares
were on income or capital account[1]. If I find that Mr. Santoro acquired the
HLE shares, then I am also to determine whether an amount of
income ought to be included in his income as a shareholder's
benefit pursuant to subsection 15(1) of the Income Tax Act
("Act"). The appeals were heard on common
evidence.
[2] The appellants claim that APS
purchased shares in HLE in January 1995 for $125,000 and in
February 1995 for $150,000. The appellants say the $125,000 was
money borrowed by APS and the $150,000 was from APS' own
funds. APS claimed a loss of $278,000 from the disposition of the
shares and interest paid on the borrowed funds in 1995. The Crown
denies that either appellant purchased shares in HLE for $125,000
but admits that Mr. Santoro personally purchased HLE shares for
$150,000 in February 1995.
Facts
[3] Prior to 1995 Mr. Santoro had been
working as a vice-president for E & M Precast Ltd.
until it shut down operations in 1994. Mr. Santoro incorporated
APS in April 1994. Mr. Santoro started buying shares in public
companies in February 1993 when he was introduced to Mr. Eric
West, a representative of Scotia McLeod.
[4] Mr. Santoro recalled that his
first investments were "small", the source of his funds
was from his salary at E & M Precast. However, between
February 1993 and 1995 he was actively engaged in buying and
selling shares. In his 1995 tax return, for example, he reported
over 45 dispositions of shares, all reported as capital
transactions. He relied on Mr. West to recommend short-term
investments and "long-term RRSP's". He made
all his investments through Mr. West.
[5] At all relevant times APS carried
on its business of constructing exterior wall systems for
buildings.
[6] In late summer 1995 an individual
by the name of Pino Guido suggested Mr. Santoro purchase HLE
shares. Mr. Guido had worked with Mr. Santoro at E & M
Precast. They had been introduced by Danny Delmedico, a son of
the principal shareholder of E & M Precast. Mr. Guido was a
vice-president of the McCauley Club of Sun Life
Insurance Company. Mr. Santoro stated that the McCauley Club
is made up of persons who achieved high sales with Sun Life.
[7] Mr. Guido represented to Mr.
Santoro that HLE was an "over the counter" stock that
was trying to get listed on NASDAQ in New York. Mr. Santoro would
be able to purchase shares from treasury at between 10 cents and
20 cents per share. HLE would apply funds raised to acquire
technologies. HLE "had a lot of contacts" and that it
would do well with "a lot of movement within a
two-year period". Mr. Guido indicated the price of the
shares could reach $2.00 in fairly short order. He was promoting
the stock to corporations, according to Mr. Santoro, trying
to sell blocks of HLE shares for $150,000 each. HLE wanted
corporate participation, Mr. Guido told Mr. Santoro, so as
to give it "stability". According to Mr. Santoro, Mr.
Guido was aware that APS was generating revenue and would have
money to invest.
[8] Mr. Santoro testified that Mr.
Guido told him HLE had purchased "laser peak
technology" and was dealing with the United States
military.
[9] When Mr. Santoro first asked Mr.
West if he ever heard of HLE, Mr. West said he had no
knowledge of the company. Mr. West later determined that HLE had
a head office in Montreal and in late 1994 opened an office in
Toronto. Mr. Santoro said Mr. Guido introduced him to
HLE's president in November or December 1994 at HLE's
office on the 48th floor, he believed, at BCE Place in
Toronto. Mr. Santoro recalled that the president of HLE,
Mr. Joe Perolini, told him that HLE had paid rent one
year in advance for 10,000 square feet of space at
BCE Place. Mr. Perolini said that HLE was a good company
with a good future. The next day Mr. West visited Mr. Perolini
and according to Mr. Santoro, he "felt that there was
something going on there ...".
[10] Mr. Santoro reviewed no contracts of
HLE nor did he examine HLE's other assets. HLE did make
available to him their future plans and an explanation of the
laser peak technology. Mr. Santoro "talked to people [HLE]
was making deals with". The people he spoke to, he said,
included Messrs. Guido, Perolini, Delmedico and West.
[11] During his examination for discovery,
Mr. Santoro said he trusted Mr. Guido because he sole him
all his life insurance, "he knew all my banking and I did
investments with Sunlife ... I trusted him".
January 1995 Payment
[12] Mr. Santoro testified that APS first
invested in HLE in January 1995 when it acquired a block of
shares for $125,000.
[13] According to Mr. Santoro Mr. Guido
informed him that a block of HLE shares was available from
brokerage firm Thomson & Kernaghan which he could purchase
and sell immediately; he would not be compelled to hold the
shares for any minimum time. However, in his examination for
discovery Mr. Santoro stated that the shares were part of a
private placement and he could not sell the shares for three or
six months.
[14] APS did not have the funds to acquire
the HLE shares. In January 1995, APS was starting to get a
cash flow but "I was stretched because the projects that I
was dealing in [sic] so I couldn't take the funds out
of APS", Mr. Santoro asserted. Therefore, he explained, he
asked two friends to invest and "help me invest".
[15] In paragraphs 4. b. of their notices of
appeal, the appellants claimed that:
... APS entered into two arrangements with business associates
whereby the associates purchased shares of HLE - in one case
$100,000 worth and in the second case, $25,000 worth. The
business associates agreed that they would only deal with such
shares as advised by APS. APS agreed to guarantee them a return
of 30% on their original investment. As consideration for the
guarantee, APS was entitled to any increase in value on the HLE
investments over and above the guarantee return. Based on the
trading history of the HLE stock, there was more than a
reasonable expectation of profit to APS in respect of the
arrangement.
[16] At trial Mr. Santoro testified that he
borrowed money from Rocco Liscio, a long time friend who was
a partner in a consulting engineering firm and with whom he had
worked at E & M Precast, and Vince Persico, the general manager
of APS[2]. He
represented to them that in consideration of each lending him
money, he would guarantee repayment of their loans "within
six months plus 30 per cent" and that APS
"would be paying it". On discovery, Mr. Santoro stated
the loan was for three to six months. He was sure the shares
would increase in value so he was not too concerned about the
interest rate, he declared.
[17] The cash flow from APS would guarantee
the loans from Messrs. Liscio and Persico "no matter
what the actual stock was", Mr. Santoro insisted.
Mr. Persico loaned $25,000 and Mr. Liscio advanced
$100,000. Mr. Liscio's cheque dated January 27, 1995, is
payable to Thomson & Kernaghan. "We gave the money to
Pino and it went through Thomson & Kernaghan." (There is
no evidence how or when Mr. Persico advanced the $25,000.) Mr.
Santoro believed APS was purchasing the HLE shares in January at
between 10 cents and 20 cents each and thinks that some time
later the purchase price was established at 20 cents per
share. He said that he anticipated APS turning over the shares in
six to eight months. It was suggested to Mr. Santoro that the
shares could reach $9.00. It appears that only $125,000
worth of shares were purchased, notwithstanding that Mr.
Guido's representation that a block would cost $150,000.
Respondent's counsel queried whether, since this appeared to
be a private placement, and only a portion of a block of shares
was acquired, Mr. Santoro contravened s. 72(1)(d) of
the Ontario Securities Act[3].
[18] The loan agreements with Messrs. Liscio
and Perscio were not reduced to writing since, Mr. Santoro said,
"these are friends that I have known for a long period of
time and I think that they trusted me". He recalled his time
at E & M Precast where contracts were made on a
handshake.
[19] In his 1995 tax return Mr. Santoro
reported personal income of $70,682. He did not believe the loans
to be a significant financial commitment, as suggested by
respondent's counsel, since in 1995, he thought, APS grossed
between $6,000,000 to $9,000,000 and in 1996, its second year of
operation, between $12,000,000 to $15,000,000. In fact, APS'
gross revenue for 1994 was $2,389,611 and for 1995, $10,780,385.
APS reported net earnings for 1995 in the amount of $481,506,
after deducting the amount of $278,000, the sum in issue, as a
loss on short-term investments. The fiscal year-end
of APS is August 31.
[20] Mr. Santoro confirmed that the
guarantees referred to in paragraph 4 b. of the Notices of
Appeal were guarantees by APS to his business associates,
Messrs. Liscio and Perscio. APS was making the
investment and that Messrs. Liscio and Perscio were each to
be guaranteed a 30 per cent return. Mr. Santoro insisted APS
was the purchaser of the shares, not Messrs. Liscio and Perscio,
notwithstanding paragraph 4 b. suggests otherwise. He declared
that Messrs. Liscio and Perscio "didn't invest in the
stock market". Mr. Santoro testified that Messrs. Liscio and
Perscio "didn't know that I was going to be purchasing
shares of HLE Capital Corp.".
[21] Counsel for the respondent asked Mr.
Santoro the reason he was willing to pay Messrs. Liscio and
Perscio 60 per cent interest, since the loans were for
six months, when he could have received a much lower
interest rate from Scotia McLeod or a chartered bank. Mr.
Santoro had some difficult answering the question, first stating
that APS borrowed the money and the lenders felt comfortable with
APS that they would be repaid in six months and finally replying
that he may have been able to negotiate a loan with a bank but
APS had no line of credit "so I didn't even think of
actually going to the bank".
[22] Mr. Santoro stated that he is
still in contact with Messrs. Liscio and Perscio but they would
not be called upon to testify.
[23] During the summer of 1995 Mr. Liscio
began asking Mr. Santoro for repayment of his loan. Mr. Santoro
asked him to "hold on for a couple of months" but by
the end of the year Mr. Liscio required the money. The
company's third year of operations was to begin in September
and the company required all of its resources for its business
operations. It could not repay the loan. On December 20,
1995 Mr. Santoro issued to Mr. Liscio a cheque in the amount of
$127,800 out of his personal Powerline account at Canada Trust.
Mr. Santoro believes that the interest on the Powerline
account was 1 1/2 per cent or 2 per cent
above prime. Mr. Santoro testified the money came out of his
personal account rather than APS's account because he did not
want to "weaken the situation" with APS[4].
[24] Effective August 31, 1995, an adjusting
entry of $128,000[5] was made by HLE's chartered accountants from the
shareholder's loan account of Mr. Santoro to the short-term
investment account of APS. The adjustment was purportedly made to
record additional amounts with respect to short-term
investments paid directly by Mr. Santoro by personal cheque.
Mr. Santoro was given credit on the shareholder's loan
account for $128,000, a payment that was not previously in the
records of APS.
[25] In filing its 1995 tax return APS
claimed a loss of $278,000 on account of income. Included in the
loss was the $128,000 originally credited to
Mr. Santoro's loan account and then allocated to the
short-term investment account. (The difference of $150,000
is considered later in these reasons.) The Minister added the
amount of $278,000 to Mr. Santoro's income for 1995 pursuant
to subsection 15(1) of the Act on the basis APS conferred
a benefit of $278,000 on Mr. Santoro in his capacity as a
shareholder of APS.
February 1995 transaction
[26] A month later, in February 1995, a
second block of HLE shares was purchased for $150,000. This time,
because APS had cash from completed projects, Mr. Santoro
explained, APS issued a cheque on February 28, 1995 payable to
HLE in the amount of $150,000, which he gave to Mr. Guido.
APS says it purchased the block of HLE shares, the Minister says
Mr. Santoro purchased the HLE shares with money loaned to him by
APS.
[27] Apparently when APS issued the cheque
in the amount of $150,000 in February 1995 APS' bookkeeper
was told by the company's external accountant, Samuel Stern,
to allocate it to an account and that he would review it when he
prepared the books of the company at the end of the year.
Apparently at the time Mr. Stern did not discuss the purpose of
the $150,000 with Mr. Santoro, APS' director. The
company's internal bookkeeper, Mr. George Sebastien,
allocated the cheque to the shareholder's loan account.
[28] Mr. Santoro was asked by his counsel
the reason HLE shares were purchased. He replied that his
intention was to "strengthen" APS. "I had
contracts coming through and I had no line of credit with the
bank and I wanted to make sure that I had a certain amount of
cash reserves so I can fund bigger projects." Either Mr.
Perolini or Mr. Guido had told him, Mr. Santoro declared,
that the first block of shares would be able to be sold within a
year of purchase and the second block would be sold a year
later.
[29] HLE shares were trading in 1995.
Although he could not remember the time period, Mr. Santoro said
the shares were "moving at a quick pace, $1.00, $2.00,
$3.00". At $3.00, Mr. Santoro said, pension funds were
getting involved. He said he "saw the stock go up to $4.00
and $4.40". Trading of the stock was halted several times
because of rapid increases, he recalled. However,
Mr. Santoro could not recall the dates trading in HLE shares
had been halted; he believed the permanent cease trading order
was in the fall of 1995. He believes the price at the time was
$3.30. HLE eventually shut down, he said, and the investment in
HLE was lost.
[30] Once the HLE shares were over $4.00,
Mr. Santoro complained, he was unable to reach Mr. Perolini and
it was difficult to "get a hold of" Mr. Guido.
Eventually he did manage to speak to Mr. Guido who told him that
HLE was going to be taken over by another corporation. Sometime
later HLE's name was changed to "Worldtec Sciences
Incorporated". Mr. Santoro told Mr. Guido he needed
share certificates representing the HLE shares but Mr. Guido said
he could not help him because he, also, could not get a hold of
Mr. Perolini.
[31] The persons working on APS matters are
Mr. Stern and Nagli Dawji, an associate. The accounting firm
prepares financial statements for tax and banking purposes and
perform whatever accounting services are required by APS. The
firm prepares a review engagement report which Mr. Stern
described as gathering information, reviewing the information
with the client, reviewing files, understanding the client,
understanding the business and putting the facts together to come
up with a reasonable statement for the fiscal year. An audit is
not performed.
[32] Appellant's counsel referred Mr.
Stern to APS' shareholder's loan account for the period
ending August 31, 1995. The loan account statement was prepared
by APS' bookkeeper, George Sebastien. One item on the
statement dated February 28 is an amount of $150,000 paid to HLE.
The comment "out" is written on the statement in either
Mr. Stern's or his associate's handwriting.
Mr. Stern testified that on reviewing the shareholder's
loan account with his client, he questioned the purpose of
$150,000 and was told "that it was a purchase for [APS] in a
private placement company called HLE". He questioned the
nature of the investment, he recalled, and was told it was a
penny stock, "it's going to be short term ... and
we concluded that it was misposted and we reallocated it to a
short term investment". Based on his discussions with
Mr. Santoro, Mr. Stern concluded the $150,000 was a
corporate investment. An adjusting entry was made effective
August 31, 1995 from the shareholder's loan account
to HLE's short-term investment account in the amount of
$150,000 to correct the bookkeeper's misposting, according to
Mr. Stern. This, Mr. Stern asserted, was "part of the normal
preparation of financial statements and our working
papers".
[33] The $150,000 was only one of about 30
entries that were "misposted" and reallocated for 1995,
Mr. Stern stated. In examination in chief Mr. Stern said the
number of adjusted entries on the file was a "big
high", but this was the first year he reviewed the account.
In subsequent years there were a similar number of
adjustments.
Write Down of Shares
[34] As of the 1995 year-end of APS, a
further adjustment was made by HLE's accountants to
write off the investment in HLE in the amount of $278,000.
"As we realized at the end of August and when we were
doing our review in December that the stock wasn't trading or
there was very little activity in it ... we concluded it was
dead, so we wrote it off," Mr. Stern explained, for both
accounting and tax purposes. Mr. Stern reviewed notes of a
meeting had with Mr. Santoro on February 13, 1996. These
notes include numerous adjustments for the 1995 fiscal year of
APS. One section of the notes appears to
read "R → Sh Loans" followed by a calculation
of a "loss on short term investments" aggregating
$278,000 and calculated as follows:
"$150,000 + $100,000 + $28,000". There is
also reference to crediting certain accounts which appear to be a
shareholder account.
[35] The decisions to make the adjusting
entries in the shareholder's loan account and write off the
$278,000 investment in HLE were made in December 1995 or in
early 1996.
[36] It is the amount of $278,000 that the
Minister has included in Mr. Santoro's income for 1995
as a shareholder benefit from APS.
[37] In his income tax return for 1995, Mr.
Santaro reported two dispositions of shares in HLE[6]; the first was a
disposition of 6,000 shares (purportedly acquired on January 2,
1995) for a capital gain of $5,679. The second disposition was
actually a "write off" of the cost ($216,071.83)
of 20,700 shares purportedly acquired on January 1, 1995.
Mr. Santoro testified that during the course of 1995 he
personally had purchased additional shares of HLE through Scotia
McLeod and I assume these are the shares he was referring to. I
also do not know the dates these shares were actually acquired by
Mr. Santoro. [The dates of acquisition of
January 1 and 2, 1995 are the dates of
acquisition reported in his tax return. Since January 1, 1995 is
a statutory holiday I doubt that January 1 was the date of the
order of the shares or the closing date.] Apparently,
Mr. Santoro personally commenced purchasing HLE shares
before APS claims it did. The personal dispositions were reported
on capital account.
[38] No share certificates were ever issued
by HLE to either Mr. Santoro or APS. The appellants have been
unable to obtain any records of shareholders of HLE.
[39] In 1996 or 1997, Mr. Santoro testified,
that the Royal Canadian Mounted Police and the Ontario Securities
Commission were investigating the activities of HLE. Officers of
the RCMP and OSC officials interviewed Mr. Santoro. He said he
gave the investigators documents, including cheques relating to
the Persico loan. He said that these documents have not been
returned to him.
Conclusions
[40] There was no evidence presented at
trial that could support the appellants' positions that the
Minister's assessments for 1995 were wrong. I shall consider
each transaction separately.
[41] The first transaction concerns the
purported acquisition of HLE shares in January 1995 for $125,000.
The appellants say the shares were acquired with borrowed funds.
The facts alleged in paragraph 4 b. of the
appellants' Notices of Appeal and the viva voce
evidence of Mr. Santoro concerning the January transaction
contradict each other. In their Notices of Appeal the appellants
say that Messrs. Liscio and Persico purchased the shares of HLE
and had agreed to deal with the shares as advised by APS. There
is no suggestion of loans by Messrs. Liscio and Persico to
either appellant. These persons were to be guaranteed a return of
30 per cent on their investment; APS was to receive anything
above 30 per cent. Mr. Santoro, however, testified that APS
purchased the HLE shares for $125,000 with money borrowed from
Messrs. Liscio and Persico. He also stated that Messrs. Liscio
and Persico did not know what investment was to be purchased with
their funds.
[42] Also, paragraph 4 b. of the Notices of
Appeal allege that based on the trading history of
HLE stock, "there was more than a reasonable
expectation of profit to APS in respect of the arrangement".
The appellants produced no evidence of the trading history of HLE
stock before January 1995.
[43] Messrs. Williston and Rolls[7], describe the function
of pleadings as fourfold:
1. To define
with clarity and precision the question in controversy between
litigants.
2. To give a
fair notice of the case which has to be met so that the opposing
party may direct his evidence to the issues disclosed by them. A
defendant is entitled to know what it is that the plaintiff
asserts against him; the plaintiff is entitled to know the nature
of the defence raised in answer to his claim.
3. To assist
the court in its investigation of the truth of the allegations
made by the litigants.
4. To
constitute a record of the issues involved in the action so as to
prevent future litigation upon the matter adjudicated between the
parties.
[44] The function of pleadings is to permit
opposing parties to know what they are required to meet at trial.
Each party sets out the facts of his or her case in a pleading so
that their cases are well defined and the proper evidence can be
led. It is not open to a trial judge to make a finding on a point
not raised in the pleading and where no evidence has been
particularly directed to it[8].
[45] In the appeals at bar, it appears, the
appellants ignored their own pleadings and led evidence which was
contrary to the facts alleged in paragraph 4 b. of their
pleadings. The facts alleged in paragraphs 4 b. are crucial to
the appellants' cases. Facts alleged in a pleading are
admissions and are proof against the party making them. Only if
it can be proved the allegation was an error of fact can it be
revoked. In an answer to a question by me, appellants'
counsel described the reference to the guarantee in paragraphs 4
b. as "a mistaken fact ... the evidence will come out that
there was a loan and that ultimately what we have here is
[sic] acquisitions of stock, and nothing more than
that". If counsel believe the facts pleaded are mistakes,
then counsel should make an application to amend the pleadings
and prove the fact was an error so that the pleadings contain no
"mistaken" facts[9]. On the evidence before me, it did not come out that
there was a loan.
[46] As a result, I am left with
contradictory evidence presented by the appellants, none of the
evidence of which is corroborated by persons who could have
testified.
[47] I am not willing to accept Mr.
Santoro's evidence over that originally posited in the
Notices of Appeal. The rate of interest Mr. Santoro was willing
to pay to Messrs. Persico and Liscio was excessive, if not
unreasonable. He was willing to pay, he says, a
60 per cent rate of interest annually without even
making inquires at a bank or his broker for a lower rate of
interest. That APS had no line of credit is neither an excuse nor
a reason.
[48] Either or both of Messrs. Liscio and
Perscio could have been called by the appellants to corroborate
Mr. Santoro's testimony. Because they were not called,
although Mr. Santoro is still in touch with them, I must draw an
unfavourable inference that these gentlemen would not have
supported Mr. Santoro's evidence[10].
[49] With respect to the January 1995
transaction and, in particular, the Liscio payment, the
Minister's position is that the amount paid by Mr. Liscio to
Thomson & Kernaghan was not applied to purchase shares of HLE
for the benefit of either Mr. Santoro or APS. No shares were
issued to either appellant. Neither a receipt from the broker for
the money and the broker's application of the funds nor a
broker's notice confirming the purchase of HLE shares was
produced. The Minister's position is not unreasonable in the
circumstances.
[50] Not only were Messrs. Perscio and
Liscio not called to testify but neither was Mr. Guido; no reason
was given. Mr. West, who Mr. Santoro relied on for investment
matters, also was not called to testify. Mr. Guido could have
corroborated Mr. Santoro's evidence that Mr. Guido
wished a corporation to purchase the block of shares and that the
money paid to Thomson & Kernaghan was for the HLE shares. The
appellants produced a copy of a letter dated
January 18, 1999 from Worldtec Services Incorporated to
"Revenue Canada Customs and Excise" confirming
"that in August 1995, HLE entered into an agreement to sell
1,375,000 million [sic] shares to [APS]. HLE received the
balance of $150,000 from [APS] directly. In addition HLE ... also
received ... the sum of $125,000 from other parties ...".
The letter was signed by "P. Guido"[11]. That any purchases
of HLE shares may have taken place in August 1995 also
contradicts Mr. Santoro's testimony. Again,
Mr. Guido did not testify.
[51] Assuming Thomson & Kernaghan are
still carrying on business - and there is no evidence that they
are not - an employee of the firm could have been called to
testify as to the receipt of the $100,000 from Mr. Liscio and
whether the funds were applied to acquire the HLE shares. There
is no evidence corroborating Mr. Santoro's testimony as
to the use of Mr. Liscio's funds. There were no shares issued
and there is no evidence that his money was applied to purchase
HLE shares.
[52] The second transaction in February 1995
is also troubling.
[53] When the cheque for $150,000 was
issued, APS' bookkeeper was told by the company's
accountant to allocate the amount to an account and he would
review the matter when the APS' books were prepared for
year-end. The bookkeeper allocated the cheque to Mr.
Santoro's loan account which, Mr. Stern concluded almost a
year later, was an error and he reallocated the $150,000 to an
APS short-term investment account. It was not unusual for
APS to pay expenses on behalf of Mr. Santoro; these expenses were
applied to Mr. Santoro's loan account. Here, too, Mr.
Sebastien was not called to testify to explain his practice in
maintaining the books of APS and any instructions he received
from Mr. Santoro.
[54] It is the directors of the corporation
who determine a transaction, not the accountants. Mr. Santoro,
not Mr. Stern, ought to have instructed Mr. Sebastien. The
accountant merely records the transaction. Accountants do not
possess a magic wand that, at their whim, turns black into white,
white into black, a shareholder's loan into a short-term
investment.
[55] Accountants often adjust accounts or
reallocate funds between accounts after the corporation's
year-end. Indeed, adjustments should be made to correct
accounting errors, including when a transaction is recorded in
the wrong account. But, at the time of the transaction the
directors of the corporation must identify and assign a
transaction to an account in the most appropriate manner. This
requires judgement to decide which account or accounts should be
debited or credited. At the end of the accounting period,
judgement is required to identify and adjust where necessary[12]. An adjustment
is to correct, not create.
[56] When they review accounts, accountants
should have access to corporate records indicating the true
nature of the event or transaction before making adjustments or
reallocations. Because these adjustments may be made sometime
after the fact, both the client and the accountant may be led
into temptation and they must defend against this. For example,
shares of a corporation acquired in the year may lose their value
before the year-end. It may be tempting to reallocate the
ownership of the shares from a low income taxpayer to a high
income taxpayer so that the high income taxpayer incurs the loss;
one may also reclassify the nature of the shares from capital to
income account. In these examples there is nothing wrong if the
accountant reallocates accounts if he has good evidence of error
of who really acquired the shares. But where there is no evidence
to refute the original book entry, the accountant ought not make
any adjustment between accounts. The accountant is a recorder,
not a decision maker.
[57] In the appeals before me Mr. Stern made
no real effort in January 1995 to determine the nature and
application of the Liscio and Perscio loans. And in February
1995, he did nothing to determine who was acquiring a block of
HLE shares for $150,000. Indeed, in the latter case, he
determined he would wait until he prepared the corporation's
financial statements for the year. His discussions in early 1995
should not have been with Mr. Sebastien but with
Mr. Santoro. Mr. Stern simply told the bookkeeper to
enter an amount in an account - apparently any account would have
done - and he would make an adjustment later on. At the time no
discussions transpired between Mr. Santoro and Mr. Stern
concerning who was purchasing the shares.
[58] This is not good enough. The
transaction took place in February 1995 when hopes for HLE shares
were high. Discussion for the adjustments took place in December
1995 and early 1996, when HLE shares were worthless. There were
no documents prepared in February 1995 nor were instructions
reduced to writing at the time describing the transaction and the
intentions of the interested parties. All Mr. Stern had before
him at trial were notes of discussions he had with Mr. Santoro in
late 1995 and early 1996, when the result of the transaction was
known. There is absolutely no evidence contemporaneous with the
issuance of the cheque for $150,000 by APS or the purchase of the
HLE shares in February 1995 that APS was to be the
beneficiary of the HLE shares. For example, there are no minutes
of directors of APS authorizing the issuance of the cheque or the
purchase of the shares. There is no broker's confirmation of
the purchase by APS or a broker's monthly statement of
account to APS that HLE shares were held for its benefit. All we
have is Mr. Stern's decision to reallocate the funds
based on discussions with Mr. Santoro almost a year after
the event. Mr. Stern did not describe these discussions but I
note that APS' income for 1995, before deducting the
purported loss of $278,000, was $759,506 and
Mr. Santoro's taxable income for 1995 was $32,478. I
cannot satisfy myself that the original entry of the $150,000 in
the shareholder's loan account was wrong. The purchase of the
block of HLE shares in February 1995 was for
Mr. Santoro's benefit. He dealt with his other personal
acquisitions and dispositions of HLE shares in 1995 on capital
account[13]; I
have no reason to find that the block of shares was not also
acquired by him on capital account.
[59] The $150,000 was paid for the HLE
shares by APS for the benefit of Mr. Santoro. APS conferred
a benefit of $150,000 on Mr. Santoro as a shareholder of APS:
subsection 15(1) of the Act.
[60] The appeals are dismissed with
costs.
Signed at Ottawa, Canada, this 19th day of November
2004.
Rip J.
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