Date:
20070215
Docket:
A-465-04
Citation:
2007 FCA 62
CORAM: LÉTOURNEAU
J.A.
EVANS J.A.
MALONE
J.A.
BETWEEN:
DONALD LUST
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT
MALONE J.A.
I. Introduction
[1]
The
appellant is a self-employed researcher and has worked for a number of years to
develop a leaching technology for the extraction of gold from raw ore (the
Process). Mr. Lust appeals to this Court from a judgment of a Judge of the Tax
Court of Canada (Judge) dated July 30, 2004 (unreported), which upheld personal
assessments against him for the taxation years 1998 and 1999 totalling $117,849
inclusive of interest.
[2]
The
Minister of National Revenue (Minister) grounded these assessments on
subsection 15(2) and section 80.4 of the Income Tax Act,
R.S.C. 1985, c. 1
(5th Supp) (Act), having determined that certain expense
monies advanced to Mr. Lust were loans received in his capacity as the majority
shareholder of Extrac Minerals Ltd. (Extrac) that remained unpaid (see
Respondent’s Reply at paragraph 3). Extrac is an Alberta company that Mr. Lust incorporated to
advance the development and promotion of the Process.
[3]
In
case of reference, subsection 15(2) is reproduced in part as follows:
|
15(2) Where
a person (other than a corporation resident in Canada) or a partnership
(other than a partnership each member of which is a corporation resident in Canada) is
(a) a shareholder of a particular
corporation,
…
and the person or partnership has in a taxation year received
a loan from or has become indebted to the particular corporation,
any other corporation related to the particular corporation or a partnership
of which the particular corporation or a corporation related to the
particular corporation is a member, the amount of the loan or indebtedness is
included in computing the income for the year of the person or partnership
[Emphasis added].
(2.6) Subsection 15(2) does not apply to a loan or an
indebtedness repaid within one year after the end of the taxation year of the
lender or creditor in which the loan was made or the indebtedness arose,
where it is established, by subsequent events or otherwise, that the repayment
was not part of a series of loans or other transactions and repayments.
|
15(2) La personne ou la société de personnes --
actionnaire d'une société donnée, personne ou société de personnes rattachée
à un tel actionnaire ou associé d'une société de personnes, ou bénéficiaire
d'une fiducie, qui est un tel actionnaire -- qui, au cours d'une année
d'imposition, obtient un prêt ou contracte une dette auprès de la société
donnée, d'une autre société liée à celle-ci ou d'une société de personnes
dont la société donnée ou une société liée à celle-ci est un associé est
tenue d'inclure le montant du prêt ou de la dette dans le calcul de son
revenu pour l'année. Le présent paragraphe ne s'applique pas aux sociétés
résidant au Canada ni aux sociétés de personnes dont chacun des associés est
une société résidant au Canada.
(2.6) Le paragraphe (2) ne s'applique pas aux prêts ou aux dettes
remboursés dans un délai d'un an suivant la fin de l'année d'imposition du
prêteur ou du créancier au cours de laquelle ils ont été consentis ou
contractés, s'il est établi, à la suite d'événements postérieurs ou
autrement, que le remboursement n'a pas été fait dans le cadre d'une série de
prêts, de remboursements ou d'autres opérations.
|
II. Proceeding in the Tax Court of Canada
[4]
The
appellant appealed the assessments to the Tax Court of Canada under its
informal procedure. Although it is difficult to characterize Mr. Lust’s
various complaints before the Tax Court, his core argument was that the
Minister erroneously interpreted the meaning of a July 17, 1995 contract (the
Development Agreement) between Pre-Min Resources Ltd., a Saskatchewan corporation
(Pre-Min), and Extrac as well as the nature of certain expense monies advanced
there under.
[5]
Mr.
Lust gave evidence and called two witnesses from Canadian Revenue Agency
(CRA). The evidence of Brenda Gay Rahier, who was in the Verification and
Enforcement Branch of CRA at the time of Mr. Lust’s reassessment, is relevant
to the current appeal. No witnesses were called by the Minister.
[6]
While
Mr. Lust did not retain legal counsel and the court record is somewhat muddled,
the following facts are uncontested:
(a) Mr. Lust incorporated
Extrac and was at all material times a director and majority shareholder of
that company. No income tax returns were ever filed on behalf of Extrac
because, according to Mr. Lust, it never had income to report.
(b) Mr. Lust was
also a director of Pre-Min until 2001.
(c) The
Development Agreement was drawn by Mr. Lust who has no legal training and no
legal or tax advice was ever sought or obtained prior to its execution.
(d) Under the
Development Agreement, Pre-Min obtained from Extrac the worldwide rights to use
the Process. Extrac agreed to supply, pay for and make available to Pre-Min
its proprietary chemicals used in the Process. In return, Pre-Min agreed to
pay Extrac a gross overriding royalty of 5% on all ore processed.
(e) Because the Process
still needed refinement, section 7 of the Development Agreement was drafted to
cover certain start-up expenses, including the purchase of equipment and
chemicals by Extrac, and its promotion of the Process. It reads as follows:
i.
7. Pre-Min
agrees to pay for the development of the process until such time that the
royalty payments to Extra cover these expenses. Pre Min in the interim will
supply to Extrac and/or Donald Lust expense money to work on the process as a
loan the amounts to be determined from time to time by mutual agreement. This
loan is to be repaid out of the 5% royalty to be paid to Extrac upon going into
production at a mutually agreed upon rate.
(f) Under Clause
7 of the Development Agreement, Pre-Min advanced directly to Mr. Lust $50,000
in 1998 and $60,000 in 1999. Neither amount has been repaid to Pre-Min
according to its balance sheet placed in evidence. Specifically, the Pre-Min
balance sheet for 1999 lists these amounts as loan receivables owed by Extrac.
(g) None of these
direct advances to Mr. Lust were ever repaid.
(h) Pursuant to formal
notices dated March 19, 2001, the Minister increased the appellant’s income in
the following terms and in the following amounts:
1998 Subsection 15(2)
shareholder loan $50,000
Subsection 80.4 interest
benefit $ 1,424
________
Total $51,424
1999 Subsection
15(2) shareholder’s loan $60,000
Subsection 80.4 interest
on benefit $ 6,425
________
Total $66,425
[7]
In
his reasons, the Judge first reviewed the wording of the Development Agreement
and determined that Pre-Min and Extrac were the only parties to that agreement
and that the funds advanced by Pre-Min were not loans to Mr. Lust personally,
but rather were loans to Extrac. As no receipts were placed in evidence by Mr.
Lust for any of the alleged expenditures, the Judge reluctantly determined that
the appellant had “siphoned off” all of the advances for his own use, thus giving
rise to the Minister’s assessments, which he confirmed. There is no analysis
in his reasons as to the application of subsections 15(2) of the Act.
III. Analysis
[8]
The
purpose of subsection 15(2) is to include in a shareholder’s income amounts
received from a corporation in the guise of loans or other indebtedness. In
his reply to the appellant’s notice of appeal, the Minister characterized the
funds received by Mr. Lust as subsection 15(2) shareholder loans and relied on
a number of assumptions including the following:
j) the Payments were a loan made to Extrac and not to the Appellant;
…
l)
Extrac is responsible for the repayment of the loan;
m) the Appellant
received the Payments in his capacity as majority shareholder of Extrac;
[9]
In
my analysis, the Judge correctly determined that the parties to the Development
Agreement were Pre-Min and Extrac, and not Mr. Lust, and that Extrac was
responsible to repay the loan. Mr. Lust was mistaken that he was a party to
that agreement. The Judge also correctly determined that Clause 7 amounted to
a direction from Extrac to Pre-Min to pay expense advances to Extrac and/or Mr.
Lust in the amounts and at the times agreed upon by these two corporate
parties. Essentially, Mr. Lust was a third party to the Development Agreement
and was expected to use the money for the benefit of Extrac for developing and
promoting the Process. On this evidence, assumptions j) and l) advanced by the
Minister that the payments were made as a loan to Extrac stand.
[10]
A
dispute exists, however, as to the nature of the benefits received by Mr. Lust;
i.e. are they shareholder loans as the Minister alleged in his notice of March
19, 2001 or is there another basis for Mr. Lust’s indebtedness to Extrac for
the purpose of that subsection?
(1) Shareholder Loan?
[11]
The
evidence on this point comes from Ms. Rahier, a CRA auditor. Her testimony is
reproduced below:
Mr. Grewal, Counsel for
the Respondent, Cross-Examines the Witness:
Q Miss
Rahier, can you tell us why you assessed this money as a loan to (sic) Extrac
to the Appellant rather than a straight appropriation of the money?
A I
considered it an appropriation. That was the original letter. And went
towards 15(2), which the Income Tax Act simply says, any loans or indebtedness
of a shareholder to its company can be assessed to the shareholder.
…
in your capacity as the shareholder of Extrac [you] are responsible for those
funds since they were paid in your name. We assessed you as if they were a loan
so if you did, in the future, repay them or prove the expenses, you could be
allowed a deduction.
…
So it’s actually a loan. It’s not a loan between you and Extrac. It’s an
indebtedness that you’ve created by being paid from Pre-Min for money that’s supposed
to be Extrac’s (Appeal Book, page 283 at lines 13-14).
[12]
There
is no doubt that by receiving the expense monies and using some of it for his
own personal use Mr. Lust received a benefit. However, there is no evidence
that the money paid directly to Mr. Lust by Pre-Min was a shareholder loan by
Extrac to Mr. Lust, a fact of which CRA officials were aware of (Appeal Book at
page 283, lines 10-13). The only repayment requirement that is evident from
the record is Extrac’s obligation to repay Pre-Min. It is noteworthy that the reported cases in connection
with subsection 15(2) involve a direct loan of money by a corporation to the
shareholder (see,
for example: Lavoie v. Canada (1995), 95 D.T.C. 673 (T.C.C.); Newton v. Canada,
[1997] 3 C.T.C. 2631 (T.C.C.); Meeuse v. Canada
(1994), 94 D.T.C. 1397
(T.C.C.)).
(2) Another basis of
Indebtedness?
[13]
In
his reasons, the Judge failed to characterize the nature of the indebtedness,
which he determined did exist (see Appeal Book at page 14, lines 15-17). The question
must be asked, therefore, is there a legal basis on which to find that Mr. Lust
was obliged to pay to Extrac a sum equivalent to the amounts advanced to him by
Pre-Min? In my analysis, there is as far as the advances have been used by Mr.
Lust for personal expenses.
[14]
Under
Clause 7 of the contract, Mr. Lust has received money which another, Extrac, is
liable to repay to Pre-Min. In other words, Mr. Lust received a benefit from
Pre-Min at Extrac’s expense, for which he is liable to Extrac for unjust
enrichment, if indeed the enrichment is unjust. Whether an enrichment is
unjust depends on whether there is an enrichment of the defendant,
a corresponding deprivation of the plaintiff, and an absence of juristic
reason for the enrichment (see Garland v. Consumers' Gas Co., 2004 SCC
25, [2004] 1 S.C.R. 629 at para. 30, 237 D.L.R. (4th) 385).
[15]
In
purchasing this benefit for Mr. Lust under Clause 7, Extrac cannot be taken to
have intended to make him a gift. Corporations cannot normally give away
company property to a shareholder. However, Extrac, and its shareholders, have
an interest in the development of the Process, since this will enable them to
earn royalties from Pre-Min. Hence, if the money advanced by Pre-Min to Mr.
Lust was spent on this purpose, the advance was for the benefit of Extrac.
[16]
A
person is liable in restitution to pay for benefits acquired as a result of
services rendered by another if the services were requested. In my view, Clause
7 is a sufficient indication that Extrac requested that the advances to Mr.
Lust be spent on the Process. In these circumstances, Mr. Lust would not be
unjustly enriched at Extrac’s expense as long as he spent the money on
developing and promoting the Process.
[17]
The
Minister assumed that the entire advances from Pre-Min were spent on Mr. Lust’s
living expenses. Mr. Lust would not produce into evidence any receipts for
chemicals and equipment purchased for the Process due to confidentiality
issues. However, he did produce receipts for expenses for accommodation, meals
and fuel incurred for promotional activities. He said at one point that more
than half of the advances were spent on purchasing supplies for the Process
over the entire period from 1996 to 1999.
[18]
His
evidence was less clear when it came to the 1998 and 1999 taxation years, by
which time most of the equipment had been purchased. Consequently, he said
that he must have spent a significant portion of the advances in those years on
promotion, which, as I understand it, he estimated at $1,000 per month. The
Judge discussed this issue with Mr. Lust at pages 24-26 of the transcript and
it is the subject of cross-examination and further discussion at pages 51-63.
[19]
The
Judge believed that Mr. Lust had spent some of the money on the stipulated purposes;
however, he declined to allow him to deduct any amounts in the absence of
receipts (see Appeal Book at page 15, lines 6-21). He believed that Mr. Lust
could get back from the company any money that he had spent on purchasing
chemicals. On this evidentiary record, I do not think that it is possible to
say that the Judge made a palpable and overriding error in concluding that
there was not adequate proof of what portion of the advances Mr. Lust had spent
for the benefit of the company as opposed to personal expenses. Accordingly,
unjust enrichment has been established.
IV. Conclusion
[20]
In
summary, Mr. Lust was indebted to Extrac on the basis of unjust enrichment for
the amount of the advances used for his personal expenses. In the absence of
evidence of how much he spent for the benefit of the company, he is liable to
Extrac, for the full amount, which must be included in his income for 1998 and
1999. When and if Extrac pays Pre-Min, Mr. Lust may be called upon to
discharge his indebtedness to Extrac. At that time he will then be able to
deduct any payment that he makes to Extrac from his income for that year.
[21]
Accordingly,
I would dismiss the appeal but without costs.
"B.
Malone"
"I
agree
Létourneau J.A."
"I
agree
Evans J.A."
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