John Galon and A.C.G. Investments Co. v. Minister of National Revenue (Informal Procedure), [1995] 2 CTC 2521

Rowe D.J.T.C.C. (orally):-The appellant John Galon appealed with respect to his 1990 and 1991 taxation years. The appellant A.C.G. Investments Co. appealed with respect to its 1987, 1989 and 1990 taxation years. It was agreed by counsel that these appeals should be heard together on the basis of common evidence.

With respect to the A.C.G. matter there was no issue at all with respect to the 1989 taxation year and as a consequence at the outset of the appeal it was indicated that the appeal for that taxation year would be dismissed. The 1990 taxation year was a nil assessment. However there was an event which occurred in 1990 which had consequences by way of a carryback to the appellant A.C.G.’s 1987 taxation year. However, the 1990 taxation year, being a year of nil assessment, the appeal for that year will be dismissed. That leaves us then with an issue arising as it affects both Mr. John Galon in 1990 and 1991 and as it affects A.C.G. Investments on a carryback basis for its 1987 taxation year.

John Galon was a member of a related group which controlled A.C.G. He owned 20 per cent of the voting shareholding interest in A.C.G. at all material times thereto and he was a shareholder of John Galon Insurance Services Limited at all material times, and he had also acquired three units in a limited partnership called Celebrations Club, Limited Partnership, in 1985. Celebrations was not doing that well and was in arrears on a lease to a building owned by A.C.G. and was also substantially in arrears on insurance premiums to John Galon Insurance. A.C.G. then on April 7, 1987 wrote a cheque to Celebrations Salon Ltd. for $12,000 with the notation that it was for a unit cash call for units owned by John Galon. On August 22, 1988 A.C.G. wrote a cheque in the sum of $10,500 to John Galon Insurance which was to reduce the amount of the account owing for premiums by the nightclub operated under the name of Celebrations.

Initially in the 1989 financial statement of A.C.G. filed as Exhibit R-1, the sum of $22,500 was shown as shareholder’s loan. In the 1990 financial statement of A.C.G. filed as Exhibit R-2, that amount was then to be found in an entry relating to the sum of $24,681 for accounts receivable but placed under the column for the 1989 year. A.C.G. then attempted to write-off the $22,500 by way of a bad debt as though that bad debt were really advanced to Celebrations, who by this time had gone broke.

The issue is whether or not the applicable portion of the Income Tax Act to govern both of these appellants is subsection 6, subsection 15, or whether or not it is subsection 15(1.2). Subsection 6(15) deals with forgiv ing employee loans and 15, subsection 1.2 deals with forgiveness of shareholder’s loans. The difference is that if 6(15) applies then the appellant A.C.G. can deduct it; if 15(1.2) is applicable, then it is not deductible to A.C.G. and the effect of it is double taxation.

In my view, while Mr. John Galon as President of A.C.G. and shareholder of A.C.G. was not a traditional employee in the sense he was on a monthly salary, notwithstanding that, there is no question that the loan was made to him as a consequence of his office as President and under Section 248 in any event "office" is also included in employment. Accordingly there that benefit was caught by the general broad wording to be found in paragraph 6(1 )(a).

Having regard to the evidence, in my view there is nothing which would preclude me from applying as the appropriate subsection to these matters subsection 6(15) which deals with forgiveness of a loan to an employee. The one difference is that by so categorizing this transaction it does not lead to double taxation, which unless there is a valid reason therefor, should, wherever possible, be avoided. I don’t particularly see any moral turpitude attaching here to the appellants in their attempt to categorize the transaction, any more than it should be attached to the Minister who from time to time undertakes a series of reassessments on exactly the same set of facts. That is the very nature of tax litigation and it is fundamentally one of the reasons for our existence for those of us who occupy ourselves in this field of endeavour.

Accordingly therefore, the appeal of A.C.G. Investments Co. is allowed with respect to its 1987 taxation year and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the $22,500 advanced on behalf of its officer and shareholder John Galon be treated as having been paid to him under subsection 6(15). In other words, as having been an employee loan forgiven in 1990. The resultant effect on the 1987 taxation year by way of carryback will then be looked at by the Minister in the course of his reassessment.

With respect to Mr. John Galon and his appeal, while as I understand it there will be no fundamental difference in the bottom line to him, notwithstanding that, his appeal is allowed and the reassessment referred back to the Minister for the 1990 and 1991 taxation years for reconsideration and reassessment on the basis that in reassessing the appellant for the 1990 taxation year the Minister include an amount of $22,500 as benefits conferred by A.C.G. pursuant to subsection 6, subsection 15 of the Income Tax Act.

Now gentlemen there is no difference for 1991 though is there, because ’91 just deals with —

Mr. Love: Correct, there is no matter concerning that appeal. It is just a capital loss.

His Honour: So the appeal for John Galon’s 1991 taxation year can be dismissed, can it?

Mr. Love: I believe that is the case.

His Honour: Because there is really no issue arising, is there?

Mr. Love: No issue arising in ’91. At that point in time there was a - just a cost basis and partnership units were increased and a capital loss was taken and that was approved in ’91.

His Honour: There is no need to change the Minister’s reassessment for John Galon’s 1991 taxation year and accordingly the appeal as it relates to that year is hereby dismissed.

Now with regard to the matter of costs, I’m not sure in the overall scheme of things when you take a look at the pleadings, I don’t really know overall whether you would be in the situation where you won a substantial victory as called for by the rules or not.

Mr. Love: I don’t think we are really asking for costs. We are happy to let each party bear their own costs.

His Honour: All right, there will be no costs requested and non awarded.

Appeal dismissed.