Date: 20000621
Docket: 2000-3306-IT-I
BETWEEN:
ARTHUR BALLEGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2000-3307-IT-I
AND BETWEEN:
LINDA BALLEGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2000-3308-IT-I
AND BETWEEN:
A & L CONSULTING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
GENERAL:
[1]
The cases of A & L Consulting Ltd. ("Ltd."), Arthur
Ballegeer ("Arthur") and Linda Ballegeer
("Linda") were heard together on common evidence.
ISSUES:
[2]
1.
Whether a benefit was conferred on each of Arthur and Linda, in
the 1995 and 1996 taxation years, by Ltd., within the meaning of
subsection 15(1) of the Income Tax Act
("Act") in the following amounts:
|
|
1995
|
1996
|
|
Arthur
|
$14,565.71
|
$7,257.81
|
|
Linda
|
$14,565.71
|
$7,257.81
|
2.
Whether the Minister of National Revenue properly assessed Arthur
and Linda for penalties for each of the 1995 and 1996 taxation
years pursuant to subsection 163(2) of the Act.
3.
Whether Ltd. was entitled, in its 1995 and 1996 taxation years,
to deduct the following amounts as expenses incurred by it for
the purpose of gaining or producing income from a business or
property within the meaning of paragraph 18(1)(a) of the
Act, namely:
|
|
1995
|
1996
|
|
Ltd.
|
$34,436.07
|
$14,358.11
|
|
4.
Whether the Minister of National Revenue properly assessed Ltd.
for penalties for each of the 1995 and 1996 taxation years
pursuant to subsection 163(2) of the Act.
FACTS:
[3]
Each of Arthur and Linda owned fifty percent of the issued and
outstanding shares of Ltd. throughout the 1995 and 1996 taxation
years. In both years Ltd. owned and operated two transport
rigs.
[4]
Arthur, in describing the organization of Ltd.'s business,
testified that he cashed in registered retirement savings plans
to advance money to the company. He said that bookkeeping was
close to non-existent at the start of the company's operation
and that accounting was, at best, done in a "shoebox"
style. He said that he assembled records at the end of the year
and took them to an accountant. He stated that during the two
years in question Ltd. contributed to the operating cost of the
residence in lieu of office rent. He stated that entries to the
shareholders' loan account were made by journal entry by the
accountant at the end of each year. The shareholder loans as at
February 28, 1995 are shown on the balance sheet of Ltd. as
$40,656.15. The amount of the shareholder loans on the February
28, 1996 balance sheet is $49,581.70.
[5]
Arthur said that he operated the business as if it were his own
and he described it as an exercise of survival. In short, he paid
little, if any, attention to Ltd. as an entity. He said that he
never tried to hide any expenses and he simply did not understand
what were valid business expenses, for example, travel, et
cetera. He said that sloppy bookkeeping, involving documents
being thrown into a box 11 to 12 months later, resulted in the
reassessment. He stated that he just assumed they were company
expenses. For example, he said that Costco was the source of a
number of supplies and that both company supplies and personal
supplies were purchased at Costco. He also explained how, in the
past three years, Ltd.'s accounting system has been
altered.
[6]
Appellants' counsel conceded at the beginning of the hearing
that Ltd.'s expenses in the amounts above shown were not
business expenses. Among other features, Ltd. now pays monthly
rent for office space in Arthur and Linda's home.
APPELLANTS' SUBMISSIONS:
[7]
Appellants' counsel submitted that the amounts paid by Ltd.
on behalf of Arthur and Linda should be offset against the
shareholders' loans which were in excess of these amounts. He
said that it simply made sense that expenses incurred by the
company on behalf of the individuals should decrease the
shareholders' loan account. He argued that if Ltd. wished to
pay the other Appellants' expenses, it should just debit the
shareholder loan account because there was money there to do so.
He submitted that the Appellants thought that the expenses
deducted by the company were business expenses, that they had a
very crude financial organization in 1995 but now had very
careful analysis of and separation of personal and corporate
expenses.
[8]
He also submitted that endorsement for that action comes from the
fact that if money was spent for the company it was added to the
loan account, thereby increasing the shareholders' loans. He
argued that one could logically assume that that displays a
two-way intent. He also said that this does not imply that Ltd.
would not reduce the loan account if it spent money on its
taxpayers.
RESPONDENT'S SUBMISSIONS:
[9]
Respondent's counsel referred to several authorities which
set forth the proposition that it was an unacceptable notion that
a company and its shareholder are entitled, for purposes
affecting the rights of third parties, to rewrite history and to
treat imaginary events as having happened.[1] In Gannon v. M.N.R.,
88 DTC 1282 this Court dismissed a similar appeal by
saying:
This is simply a case in which the company and the Appellant
each owe the other money. There is no authority for the
proposition advanced by the Appellant which is, in effect, that
mutual debts cannot co-exist and that in all cases where they
might arise a set-off is automatically effected.
[10] In both
of those cases the Appellant was unsuccessful.
[11] In
Docherty v. M.N.R., 91 DTC 537, the accountant's
testimony and working papers were considered sufficient evidence
of the intention to effect a set-off. In another case, evidence
was found in the records of the corporation, which, combined with
consistent testimony of witnesses, produced sufficient evidence
to allow the Court to conclude the existence of an intention to
set off.[2] Yet
another case determined that an Appellant could be successful
where mistakes or accounting errors had occurred, concluding that
there should be no subsection 15(1) benefit where the mistake is
the result of an act or omission of a third party operating in
good faith but on a faulty premise.[3]
ANALYSIS AND CONCLUSION:
[12] Arthur
had started a new business in the wake of a personal tragedy and
I have no doubt that that business was, as described by him, a
survival operation. He, as the operating shareholder of
Ltd.'s business, has effected the installation of an
accounting system which should, for years after 1996, accurately
categorize Ltd.'s expenditures. However there is no evidence
to support the set-off of amounts expended by Ltd. on behalf of
the other Appellants. Not only was there no such evidence but no
set-off could have been in contemplation because Ltd. was seeking
to deduct, as expenses, the amounts expended by it on behalf of
Arthur and Linda. Therefore, I cannot conclude that Arthur and
Linda were entitled during the taxation years in question to
set-off such expenditures against shareholder loans.
[13] Penalties
were assessed against all three Appellants under section163(2) of
the Act which gives authority for imposing penalties where
a person,
... knowingly, or under circumstances amounting to gross
negligence, in the carrying out of any duty or obligation imposed
by or under this Act, has made or has participated in, assented
to or acquiesced in the making of, a false statement or omission
in a return ...
[14]
Subsection 163(3) reads:
Where, in any appeal under this Act, any penalty assessed by
the Minister under this section is in issue, the burden of
establishing the facts justifying the assessment of the penalty
is on the Minister.
[15]
Respondent's counsel made no submission respecting the matter
of penalties.
[16] I
conclude, in the circumstances, that none of the Appellants
"knowingly" or "under circumstances amounting to
gross negligence" made a false statement in a return. The
Appellants, unsophisticated in business operation, were negligent
but not grossly negligent.
[17]
Accordingly, the sums aforesaid were properly disallowed as
deductions to Ltd. and the remaining sums aforesaid were properly
included in the income of Arthur and Linda pursuant to the
provisions of subsection 15(1) which states that the amount or
value of a benefit conferred on a shareholder of a corporation
shall be included in computing the income of that shareholder.
All penalties will be deleted.
[18] No costs
will be awarded.
Signed at Ottawa, Canada this 21st day of June,
2001.
"R.D. Bell"
J.T.C.C.
COURT FILE
NO.:
2000-3306(IT)I; 2000-3307(IT)I;
and 2000-3308(IT)I
STYLE OF
CAUSE:
Arthur Ballegeer v. Her Majesty the Queen
Linda Ballegeer v. Her Majesty the Queen
A & L Consulting Ltd. v. Her Majesty the Queen
PLACE OF
HEARING:
Winnipeg, Manitoba
DATE OF
HEARING:
June 1, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge R.D. Bell
DATE OF
JUDGMENT:
June 21, 2001
APPEARANCES:
Counsel for the Appellant: Sergio Pustogorodsky
Counsel for the
Respondent:
Tracy Harwood-Jones
COUNSEL OF RECORD:
For the
Appellant:
Name:
Sergio Pustogorodsky
Firm:
Thompson Dorfman Sweatman
Winnipeg, Manitoba
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3306(IT)I
BETWEEN:
ARTHUR BALLEGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeals of Linda Ballegeer
(2000-3307(IT)I) and A & L Consulting
Ltd. (2000-3308(IT)I)
on June 1, 2001 at Winnipeg, Manitoba, by
the Honourable Judge R.D. Bell
Appearances
Counsel for the
Appellant:
Sergio Pustogorodsky
Counsel for the
Respondent:
Tracy Harwood-Jones
JUDGMENT
The
appeals from the reassessments made under the Income Tax
Act for the 1995 and 1996 taxation years are allowed, without
costs, only to the extent that penalties assessed pursuant to the
provisions of subsection 163(2) of the
Income Tax Act are deleted, and the
reassessments are referred back to the Minister of National
Revenue on the foregoing basis in accordance with the attached
Reasons for Judgment.
Signed at Ottawa, Canada this 21st day of June,
2001.
J.T.C.C.
Email this Content