Fred Vieira v. Her Majesty the Queen, [1995] 2 CTC 2218

Sobier J.T.C.C.:-The appellant appeals from the assessment by the Minister of National Revenue (the ’’Minister”) for his 1987 taxation year whereby the Minister included in the appellant’s income the amount of $151,663.24 (the "amount”) on the basis that the appellant appropriated the amount from Budding Construction Inc. (the "company"), a corporation controlled by him. The Minister also assessed the appellant for penalties under subsection 163(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act") with respect to his failure to include the amount in his income.

On March 4, 1987, as a result of successfully collecting an account receivable from Inti Housing Co-operative (1985), which had been previously characterized as either a doubtful account or a bad debt, the company received a cheque for the amount. The cheque represented the account receivable plus interest.

Contrary to usual practice, the amount was not deposited in the company’s account with the Toronto-Dominion Bank (the "TD Bank") but was deposited by the appellant on March 4, 1987 in a company account opened on that date at the Vancouver City Savings Credit Union (the "Van City company account"). On March 4, 1987, the amount was transferred by the appellant from the Van City company account to another account at Van City, being a joint account in the name of the appellant and his wife (the "Van City personal account") which was also opened on March 4, 1987.

The usual practice when banking at the TD Bank was to deposit company funds to a company account (the "TD company account") and later transfer the funds to a joint account also in the name of the appellant and his spouse (the "TD personal account"). The purpose of this procedure was to permit the funds to earn interest in their names, which would not be possible if the funds were in the TD company account. This interest was always reported as company income in its tax return.

When funds were needed by the company, there would be a transfer from the TD personal account to the TD company account. Cheques were then drawn on that account for business purposes.

When I say that depositing the amount first in the Van City company account and then in the Van City personal account was contrary to usual practice, I mean that it was done to suppress the amount as company income. The cheque for the amount was deposited with a different financial institution in furtherance of this scheme of suppression.

The company’s accountants were not made aware that the account receivable had been collected.

In the fullness of time the scheme was discovered and the company was convicted of tax evasion, paid a fine, the tax and a penalty. The appellant also pleaded guilty to offences in his capacity as a director of the company.

The amount remained in the Van City personal account and earned interest until November 1987, when it was used to satisfy $157,000.00 of the purchase price of certain real property, purchased by the company for development. This $157,000.00 represented the amount together with interest.

It should be noted that the $157,000.00 coming from the Van City personal account did not find its way through either of the TD Bank accounts but went directly to the vendor’s solicitor to be used to satisfy part of the purchase price. This arguably was done to further hide the amount as being an asset of the company.

Title to the property was in the name of the company and the entire proceeds of the subsequent sale of the same property was taken into the company’s income. Therefore prior to December 31, 1987, the amount found its way back to the company in the form of real property.

Of course, when all was discovered, and the appellant assessed for the appropriation, it was revealed that the amount was at all times a company asset.

Counsel for the respondent argues that by depositing the amount in the Van City personal account in March 1987, the appellant appropriated the amount and did so at that time. In addition, she argues that one-half of the interest earned on the amount in 1987 was declared by the appellant on his 1987 income tax return, indicating that he considered it to be his own.

The appellant argues that the amount was not appropriated by him because the amount was used for corporate purposes. As for the interest being reported by him in 1987, he points out that the interest made up a portion of the $157,000.00 used in the real estate transaction closed in November 1987, and therefore was a company asset.

The respondent maintains that the amount was appropriated by the appellant when first deposited in the Van City personal account. It was then lent to the company as part of the $157,000.00 needed to close the transaction. This "loan" was later evidenced in a shareholder’s loan account which showed the amount owing by the company to the appellant. The evidence indicated that this characterization as a shareholder’s loan was made by the company’s accountant from his own assumptions and not from any statement made by the appellant or documents submitted by him to show that it was a loan.

That the company suppressed income is not denied. What the appellant denies is that this constituted an appropriation.

In support of this position, counsel for the appellant argues that not withstanding the suppression of income, the shareholder ’’must have either received the money or its value in the form of a benefit or advantage" [1] if there is to be an appropriation. Counsel maintains that the appellant received no benefit or advantage. At December 31, 1987, the amount was no longer under the appellant’s control. It was transformed into an asset of the company. Nothing remained in the appellant’s hands.

In Abelson v. M.N.R., [1985] 2 C.T.C. 2302, 85 D.T.C. 604 (T.C.C.), moneys appropriated by the appellant from his company and used for corporate purposes were held not to be included in the income of the taxpayer.

In Berbynuk, supra, Mr. Justice Mahoney said at page 450 (D.T.C. 6324):

I do, however, have difficulty with the attribution of that income to the plaintiff personally when she did not, in fact, receive any of it.

and later on the same page, he stated:

I see nothing in any of those provisions which would authorize the attribution of a corporation’s suppressed income to an employee or a shareholder simply because it was suppressed income. In order for it to be attributable the individual, whatever the relationship to the corporation, the individual must have either received the money or its value in the form of a benefit or advantage.

No benefit is received by a taxpayer if during the course of a year, amounts are advanced to him from a corporation of which he is a shareholder, unless at the end of such year, he is indebted to the corporation as a result of advances to him which remain unpaid. Similarly if, at the end of the year, all amounts which have been alleged to have been appropriated have been returned to the corporation, there can be no appropriation. The measure of the benefit must be taken at the end of the taxation year. As was put by counsel, "Is the appellant better off at the end of the year than he was at the beginning?" The answer here is no. However, if the appellant used the amount to earn income for himself, there would be a benefit. Yet, all the income from the amount was handed over to the company, notwithstanding the appellant including it in his income for the 1987 taxation year.

In the authorities cited by counsel for the respondent, the appropriated funds were not returned to the corporation or used by it.

In Tobis v. M.N.R., [1981] C.T.C. 2161, 81 D.T.C. 126 (T.R.B.), the appellant’s argument was that since at the time of the appropriation, the corporation was indebted to the appellant, there was a right of set-off and accordingly, no appropriation. The Tax Review Board rightly rejected this argument, since the amount appropriated by the appellant did not concurrently reduce the liability of the corporation to him. Therefore, he received the money and the books and records of the corporation did not show a like amount as either having been received by it or the liability to the taxpayer being reduced in a like amount.

Similarly in Groeneveld v. M.N.R., [1990] 1 C.T.C. 2314, 90 D.T.C. 1211 (T.C.C.), the set-off argument again failed. In both these cases, the appropriations were not returned and it was held to be irrelevant that at the time of appropriation the appellant was owed more than was appropriated.

For these reasons, the appeal with respect to the benefit conferred on the appellant under subsection 15(1) of the Act is allowed and the assessment vacated.

The appellant having been successful on the first part of the appeal, the assessment of the penalty under subsection 163(2) must fail and the assessment of the penalty under subsection 163(2) is also vacated.

The appellant is entitled to his costs.

Appeal allowed.