|
Citation: 2004TCC226
|
|
Date:20040319
|
|
Docket: 2001-3563(IT)G
|
|
BETWEEN:
|
|
WILLIAM G. PEDDLE,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Campbell, J.
[1] This appeal is in respect to the
Appellant's 1998 taxation year. The Appellant in 1998
reported a total income of $19,375.00. In reassessing the
Appellant the Minister of National Revenue (the
"Minister") included in his income an unreported
shareholder benefit in the amount of $46,000.00 and unreported
interest income of $3,600.00. Penalties of $5,805.25 were also
assessed. The Minister relies on subsections 15(1), 56(2) and
163(2) and paragraph 12(1)(c) of the Income Tax Act
(the "Act").
The Evidence:
[2] The Appellant was involved in
several corporations and partnerships. He was a 50% shareholder,
along with his brother-in-law Michael Hennick, in 058541 New
Brunswick Ltd., which operated under the trade name Riverside
Estates ("Riverside"). He testified that he was a major
decision-maker in this company's affairs. This company was a
general contracting company involved in road and residential
construction. The Appellant's evidence was that he resigned
from this company, and was no longer a part of it, as of January
19, 1998, due to a falling out with the other shareholder
Michael Hennick. He produced (Exhibit A-3) a certified
copy of a Notice of Change of Directors form which had been filed
with Consumer and Corporate Affairs for the Province of New
Brunswick on January 15, 1998. Although he testified that he
intended to resign as shareholder, he produced no evidence,
except for this resignation of directors form, to support this
claim.
[3] The Appellant was involved at this
time with another New Brunswick company, 504897 New Brunswick
Ltd. He testified that he was a shareholder in this company along
with his wife. He stated that Michael Hennick was
"involved to a certain degree" with the company but
that the Appellant himself was the sole decision-maker, as well
as the individual authorized to sign cheques for this company.
The company operated under two trade names, Brunswick Auto Mart
("Brunswick") and River Road Auto Sales ("River
Road"). Brunswick was involved in commercial automobile
sales. Again he testified that he had sole control of
Brunswick.
[4] On September 15, 1997, Riverside
purported to purchase an excavator from Big 'D' Farm
Machinery ("Big D") for $310,000.00, with financing to
be arranged and a certified cheque provided on delivery. The
handwritten invoice (Tab 7 of Exhibit R-1) for the excavator
was prepared by Dana Atkinson, an employee of Big D. The
Appellant testified that Dana Atkinson also worked on a part-time
basis for Brunswick selling automobiles on commission. This
invoice listed the HST at $46,500.00 with a deposit being paid of
$5,000.00 and then incorrectly quoted the balance due as
$341,500.00, instead of the correct balance of $351,500.00.
According to the Appellant, he was surprised by the discrepancy
of $10,000.00 in the bottom figure amount and said that he had
not seen this invoice before. It appeared that no one involved in
this transaction had caught this error or if they had, they
neglected to bring it to the Appellant's attention.
[5] The Appellant signed and filed the
HST return for Riverside on October 1, 1997 claiming an
input tax credit of $46,500.00 in respect of the purchase of this
excavator.
[6] According to the evidence of the
auditor his investigations disclosed that the excavator, which
matched the serial number on the invoice, had been sold elsewhere
in Massachusetts in October 1997.
[7] The Appellant did confirm that he
was aware that Riverside had not purchased the excavator before
January 1998 when he testified he had walked away from the
company. He also confirmed that he had never arranged any
financing for the purchase of this excavator.
[8] On January 2, 1998, pursuant to
the HST return filed by Mr. Peddle on behalf of Riverside,
the Government issued a refund cheque to 058541 N.B. Ltd. c/o
William Peddle in the amount of $45,359.85. The difference in the
amount claimed and refunded was due to prior payroll liabilities
and tax owed by Riverside. This refund cheque was endorsed by the
Appellant and deposited into the bank account of Riverside on
January 12, 1998.
[9] According to the Appellant, as of
January 19, 1998, he had parted ways with Riverside. He testified
that he knew that Eagle Auto Sales ("Eagle"), a company
that Brunswick did business with in respect to buying and selling
vehicles, was interested in purchasing his shares. He decided to
just pass his shares over to Eagle for no consideration at a time
when Riverside owned three lots, an older excavator and now had
the refund amount of $45,359.85 sitting in its account. He
produced no corporate records or any other evidence to support
that this share transfer actually occurred.
[10] On January 26, 1998, the Appellant
issued a cheque for $46,000.00 from Riverside to Eagle Auto
Sales, although according to his evidence he was no longer a
shareholder of Riverside. He stated that he issued this cheque to
Eagle because he neglected to have the Riverside corporate bank
account transferred over to Eagle at the time of the sale of his
shares.
[11] A subsequent transaction involving the
Appellant occurred on this same day, January 26, 1998, when
Eagle issued a cheque for $39,000.00 to Brunswick. It was then
deposited to Brunwick's account on January 26, 1998. The
Appellant entered an invoice (Exhibit A-5) dated January 26,
1998 from Brunswick to Eagle for the purchase of a 1990 Toyota
vehicle, a boat, a hoist and tools in support of this
transaction. The Respondent alleges that the difference of
$7,000.00 between the $46,000.00 cheque issued by Riverside to
Eagle and the $39,000.00 cheque issued by Eagle to Brunswick was
retained by Eagle to satisfy an existing debt owed to Eagle by
Brunswick on the purchase of a Ford Escort vehicle. The
Appellant's evidence was that he did not know anything about
that particular vehicle as Brunswick and Eagle were involved with
many vehicle transactions.
[12] Following the transactions involving
the cheques for $46,000.00 and $39,000.00, on the same day,
January 26, 1998, Brunswick issued a cheque to the Appellant in
the amount of $9,000.00. Brunswick issued additional cheques to
the Appellant for $3,000.00 each on February 22, 1998 and March
22, 1998. Another cheque for $1,000.00 was issued on April 18,
1998. These four cheques were referred to as "for
shareholder loan" in the working papers of Brunswick (Tab 4
of Exhibit R-1) which listed specifics of cheques issued to the
Appellant in 1998. The other cheques on this list were not
referenced as shareholder loans. The Appellant testified that he
put money into Brunswick and most of these cheques on that list
represented repayment of loans. He produced no evidence to
support this claim except for his testimony.
[13] In 1998, Brunswick expensed $3,600.00
on account of interest in shareholder's loans. The corporate
1998 tax return expensed this amount as one of its operating
expenses (Tab 14, Exhibit R-1). The Appellant did not report this
interest income.
Issues:
[14] Following are the four issues which
must be decided in this appeal:
(1) Whether the Appellant failed to
report a benefit of $39,000.00 received from Riverside, and if
so, whether subsection 15(1) applies to include this amount in
the Appellant's income;
(2) Whether the Appellant failed to
report a benefit of $7,000.00 conferred on Brunswick, and if so,
whether it is to be included in his income pursuant to subsection
15(1), or if it cannot, whether it can be included pursuant to
subsection 56(2);
(3) Whether the Appellant failed to
report interest income of $3,600.00 and if he did, whether this
amount should be included in his income pursuant to paragraph
12(1)(c);
(4) Whether penalties were properly
assessed pursuant to subsection 163(2).
Analysis:
Issue No. 1
[15] Subsection 15(1) states:
15. (1) Where at any time in a taxation year a benefit
is conferred on a shareholder, or on a person in contemplation of
the person becoming a shareholder, by a corporation otherwise
than by
(a) the
reduction of the paid-up capital, the redemption, cancellation or
acquisition by the corporation of shares of its capital stock or
on the winding-up, discontinuance or reorganization of its
business, or otherwise by way of a transaction to which section
88 applies,
(b) the
payment of a dividend or a stock dividend,
(c)
conferring, on all owners of common shares of the capital stock
of the corporation at that time, a right in respect of each
common share, that is identical to every other right conferred at
that time in respect of each other such share, to acquire
additional shares of the capital stock of the corporation, and,
for the purpose of this paragraph,
(i) where
(A) the voting rights
attached to a particular class of common shares of the capital
stock of a corporation differ from the voting rights attached to
another class of common shares of the capital stock of the
corporation, and
(B) there are no other
differences between the terms and conditions of the classes of
shares that could cause the fair market value of a share of the
particular class to differ materially from the fair market value
of a share of the other class,
the shares of the particular class shall be deemed to be
property that is identical to the share of the other class,
and
(ii) rights are not
considered identical if the cost of acquiring the rights differs,
or
(d) an action
described in paragraph 84(1)(c.1), (c.2) or (c.3),
the amount or value thereof shall, except to the extent that
it is deemed by section 84 to be a dividend, be included in
computing the income of the shareholder for the year.
[16] The Minister wants to use this
subsection to include in the Appellant's income for the 1998
taxation year the $39,000.00 received by Brunswick from Eagle on
January 26, 1998. None of the conditions or exceptions
referred to in this subsection are applicable here.
[17] The taxability asserted by the Minister
is based upon a chain of events which has its origin in the
purported purchase of an excavator by Riverside. I accept as a
fact that Riverside never purchased this excavator. The
auditor's inquiries revealed that it had been sold in the
United States and not in Canada. The Appellant himself testified
that the excavator had not been purchased by Riverside as late as
January 1998. Because no excavator was purchased, Riverside never
became liable to pay the tax pursuant to Part IX of the Excise
Tax Act. Therefore it was never entitled to claim the input
tax credit of $46,000.00 which it claimed in October 1997 and
received in January 1998. The Appellant's only explanation of
why, on October 1, 1998 he filed a return claiming this input tax
credit for an excavator that had not been purchased was that he
thought that was usual and good practice to file for it before
the tax was paid.
[18] The Appellant was a 50% shareholder of
Riverside and testified he was involved 100% in all
decision-making in that company. Several weeks after this amount
was received from the Government and deposited to Riverside's
corporate account, the Appellant, on January 26, 1998, directed
and authorized the issuance of, and signed a cheque in the amount
of $46,000.00 from Riverside to Eagle.
[19] There were no documents or any other
type of evidence produced during the hearing which would connect
the issuance of this cheque to a business transaction or any type
of transaction between these corporate entities, other than the
Appellant's vague, unacceptable and unsubstantiated claims of
the sale of his shares to Eagle.
[20] His evidence was that he had divorced
himself from Riverside about mid-January 1998 and that the only
reason he was able to sign this cheque was because the corporate
account had not been signed over to Eagle, which had supposedly
purchased his shares. According to the Appellant, by writing this
cheque he was merely emptying the account and providing the money
in the corporate account to the new owner, Eagle. However I
simply cannot accept his evidence. He brought nothing to Court to
substantiate this claim other than a Notice of Change of Director
form which says nothing about his status as a shareholder in
Riverside in January 1998. I did provide him with an opportunity
to seek additional documentary evidence during the hearing, but
he produced nothing further. It strikes me as a very odd sort of
way to do business even if one is conducting one's business
affairs informally.
[21] After Eagle received the $46,000.00, it
immediately, on the very same day, issued a cheque for $39,000.00
to Brunswick, another corporate entity for which by his own
admission, he was the directing mind and sole decision-maker.
Brunswick credited this amount to the Appellant as a loan
payable. Subsequently, commencing again on the same day, January
26, 1998, cheques began issuing to the Appellant, as referenced
in the working papers "for shareholder loan".
[22] There is no evidence before me to
support any of the Appellant's claims. The handwritten
invoice produced by the Appellant (Exhibit A-5), to
substantiate the exchange of the $39,000.00 between Eagle and
Brunswick, listed the items sold by Brunswick to Eagle in a very
different and unique manner, unlike that which normal business
practice would dictate; for example the least expensive item (the
Toyota vehicle) worth $9,000.00 was listed beside "total
sale price", with the remaining items (hoist, tools and
boat) valued at $30,000.00 listed in a box on the invoice
entitled "remarks". This alone is not sufficient to
invalidate this invoice but according to the auditor's
evidence, which I accept, a search of Eagle's corporate
records disclosed no such purchases. The Appellant's
corporate records were never made available either to the auditor
or the Court for review. There was no other documentation except
this invoice produced by the Appellant to suggest that Eagle had
actually purchased these items and, according to the auditor,
Eagle's books contained no such reference.
[23] Once the $39,000.00 had been
transferred by Eagle to Brunswick, four cheques totalling
$16,000.00 and referenced as shareholder's loans were issued
by Brunswick to the Appellant between January 29, 1998 and April
18, 1998. The working paper lists other cheques which were issued
to the Appellant in 1998 for various amounts but they were not
referenced as shareholder loans and the evidence was unclear as
to what these cheques were for. If all of the cheques issued to
Bill Peddle in this time period were in respect to the repayment
of shareholder loans as he contends, then they should have all
been so referenced.
[24] There is no doubt that the $16,000.00
which the Appellant received from Brunswick via four cheques is
taxable to him as a benefit conferred pursuant to subsection
15(1). Regardless of how this scheme evolved, the $39,000.00
clearly found its way into the corporate account of Brunswick and
as a result is a shareholder benefit to the Appellant. Without
supporting documentation from the Appellant, I accept the
Minister's assumptions that the funds are traceable back to
Riverside. Although there is no clear evidence of the additional
$23,000.00 being paid by Brunswick to the Appellant, it is
clearly a debt created by the company to the Appellant for no
consideration and therefore subsection 15(1) is engaged and the
benefit is considered conferred.
[25] The Minister's assessment of the
shareholder benefit under subsection 15(1) is based on the
premise that the Appellant set up a scheme whereby an input tax
credit based on a false claim filed by Riverside was transferred
from Riverside to Brunswick through Eagle and eventually
dispersed to the Appellant via payment of shareholder loans. I
think it makes very little difference where this $46,000.00
originated, although all of the evidence points to it arising
from the input tax credit claimed by Riverside. I think it is
sufficient here that the funds left Riverside and, with totally
inadequate or absolutely no supporting records and documents,
flowed into Eagle and from Eagle found its way into
Brunswick's account and eventually, some or all of it, to the
Appellant.
[26] Before I deal with the next issue, I
believe a few comments are necessary in respect to two of the
Respondent's assumptions. These assumptions at
paragraph 8(m) and (n) state:
8. In so
reassessing the Appellant, the Minister relied on, inter
alia, the following assumptions:
. . .
(m) Dana Atkinson received a
cheque issued by Riverside and signed by the Appellant, dated
September 30, 1997, in the amount of $5,000.00 purportedly as a
deposit for the excavator;
(n) Dana Atkinson
issued a cheque dated September 27, 1997 payable to the Appellant
and Brunswick in the amount of $4,400.00 as reimbursement of the
deposit amount on the excavator;
[27] These assumptions were demolished at
the hearing by the Respondent's own exhibits. The cheque
referred to in assumption (m) was actually issued by River Road
Auto (Tab 9, Exhibit R-1) and not by Riverside. The cheque
referred to in assumption (n) was made payable to the Appellant
and River Road Auto (Tab 8, Exhibit R-1) and not to the Appellant
and Brunswick. These assumptions were meant to implicate Dana
Atkinson in the preparation of the false excavator invoice
between Riverside and Big D Machinery. Although these two
specific assumptions failed, I do not view that failure as fatal
to the Minister's remaining assumptions. Even if Dana
Atkinson had never been involved and the $39,000.00 had flowed
into Brunswick's coffers by more legitimate avenues than
utilized here, the Appellant in accessing the monies would have
run afoul of subsection 15(1).
[28] The appeal will be dismissed as it
relates to this first issue.
Issue No. 2
[29] This issue arises when Riverside's
cheque for $46,000.00 is deposited to Eagle's account and
Eagle uses some of these funds to satisfy a debt of $7,000.00
owed to it by Brunswick in respect to a Ford Escort vehicle. The
Minister submitted that pursuant to the Appellant's
direction, Riverside paid $46,000.00 to Eagle and from this
amount further directed Eagle to deduct the balance Brunswick
owed Eagle respecting the purchase of a Ford Escort and to pay
the remaining $39,000.00 to Brunswick. In satisfying
Brunswick's indebtedness to Eagle, the Respondent argued that
subsection 15(1) applied to properly include the $7,000.00 in his
income.
[30] Subsection 15(1) does not apply here. I
conclude that it was not a shareholder benefit because Brunswick
received the benefit, not the Appellant and Brunswick was not a
shareholder of Riverside.
[31] In the alternative the Respondent
argued that subsection 56(2) applied to catch this $7,000.00,
which required the Appellant to include it in his income.
[32] Subsection 56(2) states:
56. (2) A payment or transfer of property made pursuant
to the direction of, or with the concurrence of, a taxpayer to
some other person for the benefit of the taxpayer or as a benefit
that the taxpayer desired to have conferred on the other person
(other than by an assignment of any portion of a retirement
pension pursuant to section 65.1 of the Canada Pension
Plan or a comparable provision of a provincial pension plan
as defined in section 3 of that Act or of a prescribed provincial
pension plan) shall be included in computing the taxpayer's
income to the extent that it would be if the payment or transfer
had been made to the taxpayer.
The Department of Finance Technical Note to this subsection
makes it clear that it was not intended to make an amount taxable
that might not otherwise be so. It reads:
1987 TN: Subsection 56(2) provides that where a taxpayer
directs or concurs in the payment of an amount to another person,
that amount shall be included in the taxpayer's income where,
if it had been paid to him, it would have be so included. ...
In other words, subsection 56(2) is meant to operate in the
circumstances where a taxpayer attempts to avoid paying tax on an
amount that would otherwise be taxable to him under one of the
other provisions of the Act, by directing that the amount
be paid to another taxpayer instead. Where a taxpayer directs an
amount taxable to him to another person, he cannot escape
taxability on that amount because this subsection will come into
play. However, the amount so directed must have been taxable
under one of the other provisions of the Act before
subsection 56(2) will apply.
[33] Cattanach, J. in Fraser Companies
Ltd. v. The Queen, 81 DTC 5051 set out the following four
preconditions that must be satisfied in order for
subsection 56(2) to apply:
1. There must
be a payment or transfer or property to a person other than the
taxpayer.
2. The payment
or transfer is pursuant to or with the concurrence of the
taxpayer.
3. The payment
or transfer must be for the taxpayer's own benefit or for the
benefit of some other person on whom the taxpayer desired to have
the benefit conferred.
4. The payment
or transfer would have been included in computing the
taxpayer's income if it had been received by him instead of
the other person.
[34] All four criteria are satisfied in the
present case because:
(1) Property was transferred from
Riverside to Brunswick through Eagle Auto Sales.
(2) The payment was made pursuant to
or with the concurrence of the Appellant.
(3) The payment was made for the
benefit of Brunswick.
(4) The payment would have been
taxable to the Appellant if it had been received by him.
[35] However since there is no requirement
that a taxpayer actually receive or be entitled to the payment in
order to be held liable under subsection 56(2), the Federal Court
of Appeal added a fifth element to the test in order to prevent
the Minister from using it to tax the same amount twice.
[M.N.R. v. Bronfman, [1965] C.T.C. 378, at paragraph 15.]
In Smith v. Canada, [1993] F.C.J. No. 740 at paragraph 22
Mahoney, J. quoted with approval the following comments of
Marceau, J. in Winter v. R.:
. . . the validity of an assessment under subsection 56(2) of
the Act when the taxpayer had himself no entitlement to
the payment made or the property transferred is subject to an
implied condition, namely that the payee not be subject to tax on
the benefit he received.
And that:
. . . when the doctrine of constructive receipt is not clearly
involved, because the taxpayer had no entitlement to the payment
being made or the property being transferred, it is fair to infer
that subsection 56(2) may receive application only if the benefit
conferred is not directly taxable in the hands of the transferee.
Indeed, as I see it, a tax-avoidance provision is subsidiary in
nature; it exists to prevent the avoidance of a tax payable on a
particular transaction, not simply to double the tax normally due
nor to give the taxing authorities an administrative discretion
to choose between possible taxpayers. [Outerbridge Estate v.
Canada (subnom Winter v. R.), [1991] C.T.C. 113 at
117-118.]
[36] In other words, subsection 56(2) should
not apply where it results in double taxation. The applicability
of this so-called fifth condition was confirmed in both the
Supreme Court decision of Neuman v. The Queen, 98 DTC 6297
(S.C.C.) and the Federal Court decision of The Queen v.
Ferrel, 99 DTC 5111 (F.C.A.).
[37] There was no evidence before me which
would indicate whether or not Brunswick paid income tax on the
$7,000.00 benefit which it received when its debt to Eagle was
paid for nil consideration. It is unlikely Brunswick paid tax.
But if it paid tax, the application of subsection 56(2) would
result in the inappropriate double taxation which the Federal
Court spoke of.
[38] I would allow the appeal in respect to
this issue as the Respondent simply failed to address let alone
prove all necessary preconditions to the application of
subsection 56(2).
Issue No. 3
[39] The Minister alleges that Brunswick
paid $3,600.00 to the Appellant as interest on a shareholder loan
and that the Appellant failed to report this amount in computing
his income.
[40] Paragraph 12(1)(c) states:
12. (1) There shall be included in computing the income
of a taxpayer for a taxation year as income from a business or
property such of the following amounts as are applicable:
. . .
(c) Interest - subject to subsections (3) and
(4.1), any amount received or receivable by the taxpayer in the
year (depending on the method regularly followed by the taxpayer
in computing the taxpayer's income) as, on account of, in
lieu of payment of or in satisfaction of, interest to the extent
that the interest was not included in computing the
taxpayer's income for a preceding taxation year;
[41] At page 3 of Tab 14 of Exhibit R-1, the
income tax return for 504897 New Brunswick Ltd., Brunswick
expensed $3,600.00 as interest on a shareholder loan. The
Appellant argued that although this amount did appear on his
books as an interest expense payable to him it was an accounting
error and was therefore never paid to him.
[42] The onus is on the Appellant to
overcome the assumptions and he did not do so here. Mere
allegations without appropriate records and books to substantiate
his claim cannot be accepted in circumstances and facts such as
these which were set in motion to deceive.
[43] Since he has not discharged the onus
which is upon him the appeal as it relates to this issue will be
dismissed.
Issue No. 4:
[44] The Minister imposed penalties here
because through a series of events the Appellant knowingly or
under circumstances amounting to gross negligence appropriated
funds from Riverside to his own use and to the use of Brunswick,
which he controlled.
[45] The onus here shifts and is clearly
upon the shoulders of the Respondent.
[46] Subsection 163(2) states:
163. (2) Every person who, knowingly, or under
circumstances amounting to gross negligence, has made or has
participated in, assented to or acquiesced in the making of a
false statement or omission in a return, form, certificate,
statement or answer (in this section referred to as a
"return"), filed or made in respect of a taxation
year for the purposes of this Act, is liable to a penalty . .
.
[47] The false statement made in respect of
the purchase of the excavator was for the purpose of obtaining an
input tax credit under the Excise Tax Act, and is
therefore not relevant to the assessment of penalties under
subsection 163(2) of the Income Tax Act. However, the
Appellant has also clearly and knowingly participated in,
assented to and acquiesced in the making of other false
statements in respect of amounts appropriated from Riverside and
diverted to his own use and the use of Brunswick. Depending on
how the Appellant directed Brunswick to treat the $7,000.00
amount referred to in issue 3, he may have also participated in a
false statement in this respect. There is simply no evidence in
this regard.
[48] The Appellant's actions here go far
beyond a mere oversight or the failure to use reasonable care.
The Appellant was involved in a number of companies and
businesses. He produced no reasonable documentation to support
his claims. There is much more than mere inadvertence here. The
Appellant's conduct is both reckless and wilful. The Minister
was justified in assessing the penalties pursuant to subsection
163(2) for the 1998 taxation year.
Signed at Ottawa, Canada, this 19th day of March 2004.
Campbell, J.
|
COURT FILE NO.:
|
2001-3563(IT)G
|
|
STYLE OF CAUSE:
|
William G. Peddle and
Her Majesty the Queen
|
|
PLACE OF HEARING:
|
Fredericton, New Brunswick
|
|
DATE OF HEARING:
|
January 15, 2004
|
|
REASONS FOR JUDGMENT BY:
|
The Honourable Justice Diane Campbell
|
|
DATE OF JUDGMENT:
|
March 19, 2004
|
|
For the Appellant:
|
The Appellant himself
|
|
Counsel for the Respondent:
|
Marcel Prevost
|
|
For the Respondent:
|
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
|
Email this Content