Beaubier
J.T.C.C.:-This
matter
was
heard
at
Vancouver,
British
Columbia,
on
August
17,
1994,
pursuant
to
the
rules
of
general
procedure.
The
appellant
testified
and
called
his
accountant,
Robert
Buxton,
C.A.
The
respondent
called
Gary
Bonderud,
auditor
for
Revenue
Canada
on
the
appellant’s
file.
At
issue
are
assessments
respecting
$333,766
paid
by
Kiwa
Lumber
Ltd.
("Kiwa")
to
the
appellant’s
former
wife
Ann
Johanson
("Ann")
and
alleged
to
be
taxable
respecting
$323,766
in
1987
and
$10,000
in
1988
as
benefits
to
the
appellant
pursuant
to
subsection
15(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-
72,
c.
63)
(the
"Act")
or
in
the
alternative
pursuant
to
subsection
56(2)
of
the
Income
Tax
Act.
The
appellant
is
67
years
old.
He
married
Ann
in
June
1951.
They
moved
to
Valemount,
British
Columbia
where
the
appellant
conducted
a
logging
and
sawmill
business.
In
1961
Ann
and
their
five
children
moved
to
Edmonton,
Alberta,
but
the
appellant
stayed
in
Valemount.
In
1961
the
appellant
formed
Yellowhead
Sawmills
Ltd.
("Yellowhead")
in
which
he
had
999
shares
and
Ann
had
one
share.
In
1969
he
formed
Kiwa
in
which
he
had
99
shares
and
Ann
had
one
share.
Both
were
in
the
logging
and
sawmill
business.
In
1975
Ann
issued
an
originating
notice
(Exhibit
A-l)
for
rectification
of
the
share
registers
of
Kiwa
and
Yellowhead
to
show
an
equality
of
shareholding
between
Ann
and
the
appellant
from
their
dates
of
incorporation,
or
for
a
declaration
that
the
appellant
held
1/2
of
all
his
shares
in
Kiwa
and
Yellowhead
in
trust
for
Ann,
and
for
other
remedies.
In
1977
Ann
issued
a
writ
of
summons
(Exhibit
A-2)
against
the
appellant
for
declarations
of
trust
that
the
appellant
held
489
shares
of
Yellowhead
and
48
shares
of
Kiwa
in
trust
for
her
benefit
and
that
49
per
cent
of
lot
7
(etc.)
and
50
per
cent
of
lot
2
(etc.)
were
held
by
the
appellant
in
trust
for
her,
and
for
other
remedies.
In
December
1977
the
appellant
issued
an
amended
petition
for
divorce
(Exhibit
A-3).
A
decree
nisi
was
ordered
on
January
9,
1979
(Exhibit
R-8)
and
a
decree
absolute
was
issued
on
July
11,
1979
(Exhibit
R-9).
Essentially
all
property
claims
by
Ann
were
adjourned
by
the
divorce
orders.
On
November
19,
1979
Ann,
the
appellant,
Yellowhead
and
Kiwa
signed
an
agreement
(Exhibit
A-4).
The
appellant’s
signature
was
witnessed
by
his
own
solicitor.
Ann’s
signature
was
witnessed
by
a
different
solicitor.
Portions
of
Exhibit
A-4
which
are
particularly
germane
to
this
matter
read:
This
Agreement
made
this
November
19,
1979
between
William
Osadchuk
(herein
called
Mr.
Osadchuk)
of
the
first
part
and
Ann
Osadchuk
(herein
called
Mrs.
Osadchuk)
of
the
second
part
and
Yellowhead
Sawmills
Ltd.
(herein
called
Yellowhead)
of
the
third
part
and
Kiwa
Lumber
Ltd.
(herein
called
Kiwa)
of
the
fourth
part
whereas:
(a)
There
are
now
pending
in
the
Supreme
Court
of
British
Columbia,
Vancouver
Registry,
Action
No.
C774659
between
Ann
Osadchuk
as
plaintiff
and
William
Osadchuk
as
defendant,
and
the
counter-petition
of
Mrs.
Osadchuk
as
petitioner
by
way
of
counter-
petition
and
Mr.
Osadchuk
as
respondent
by
way
of
counter-petition
No.
5936/D729765;
(b)
In
the
said
proceedings
Mrs.
Osadchuk
claims
to
be
entitled
either
by
way
of
trust
or
under
the
Family
Relations
Act
S.B.C.
1978,
to
49
or
50
per
cent
of
the
issued
shares
of
Yellowhead
and
Kiwa;
(c)
In
the
proceedings
by
counter-petition
Mrs.
Osadchuk
claims
for
herself
and
certain
children
of
the
parties
maintenance;
(d)
Under
the
Family
Relations
Act
Mrs.
Osadchuk
makes
certain
other
claims
to
assets
standing
in
the
name
of
Mr.
Osadchuk;
And
whereas:
(a)
The
companies
in
the
year
1978
concluded
a
sale
to
Canyon
Creek
Forest
Products
Ltd.
of
certain
assets
of
the
companies
for,
in
the
case
of
Yellowhead,
$252,500
payable
$78,500
on
or
before
closing
and
the
balance
by
debenture,
and
in
the
case
of
Kiwa,
$992,500
payable
$211,500
on
or
before
closing
and
the
balance
by
debenture;
(d)
The
sales
to
Canyon
Creek
have
and
will
result
in
substantial
tax
being
due
by
the
companies.
And
whereas
it
is
the
intention
of
the
parties
that,
inter
alia,
Mrs.
Osadchuk
will
receive
one-half
of
the
net
proceeds
of
the
Canyon
Creek
sale;
And
whereas
Mr.
and
Mrs.
Osadchuk
have
agreed
to
settle
their
outstanding
differences
on
the
terms
herein
set
forth
and
the
companies
have
agreed
to
join
in
this
agreement
for
the
purpose
of
ensuring
the
carrying
out
of
its
terms
and
thereby
avoiding
a
dispute
between
shareholders
of
the
companies
which
would
be
detrimental
to
the
companies.
Now
therefore
this
agreement
witnesseth:
1.
Mr.
Osadchuk
will
convey
to
Mrs.
Osadchuk
all
his
right,
title
and
interest
in
and
to
that
certain
parcel
of
land
and
premises
in
the
city
of
Edmonton
in
the
province
of
Alberta
known
as
13308-136th
Avenue,
Edmonton,
Alberta.
2.
Mrs.
Osadchuk
will
transfer
to
Mr.
Osadchuk
all
her
right,
title
and
interest
in
and
to
those
certain
parcels
of
land
and
premises
in
the
village
of
Valemount
in
the
province
of
British
Columbia
more
particularly
known
and
described
as
Lots
11
and
12
District
Lot
5708
Cariboo
District
Plan
16593
3.
The
parties
shall
continue
to
own
in
joint
tenancy
Lot
13
District
Lot
5708
Cariboo
District
Plan
16593
8.
In
respect
of
the
lands
and
premises
outside
the
village
of
Valemount
now
registered
in
the
name
of
Mr.
Osadchuk:
(a)
Mr.
Osadchuk
will
pay
to
Mrs.
Osadchuk
one-half
of
all
sums
received
by
him
in
respect
of
a
portion
of
the
lands
sold
by
him
to
the
Canadian
National
Railroad
and
will
further
pay
to
her
one-half
of
all
sums
received
in
future
in
respect
of
the
sale
to
the
Canadian
National
Railroad
as
and
when
such
sums
are
received.
(b)
Mr.
Osadchuk
will
convey
the
remaining
parcel
to
himself
and
Mrs.
Osadchuk
in
joint
tenancy.
9.
Mrs.
Osadchuk
shall
receive
from
Yellowhead
one-half
the
net
proceeds
of
the
sale
of
the
logs
known
as
the
Jatel
money
in
accordance
with
the
scheme
to
be
established
for
the
distribution
of
her
share
of
the
net
proceeds
of
the
Canyon
Creek
sale.
"Net
proceeds"
means
the
proceeds
less
income
tax
thereon.
10.
Mrs.
Osadchuk
shall
receive
from
Yellowhead
and
Kiwa
pursuant
to
the
scheme
and
terms
of
agreement
to
be
settled
as
hereinafter
set
forth
one-half
of
the
net
proceeds
of
the
sale
of
assets
by
Yellowhead
and
Kiwa
to
Canyon
Creek
Forest
Products
Ltd.
11.
In
this
agreement
"net
proceeds"
means
the
amounts
received
and
to
be
received
from
Canyon
Creed
Forest
Products
Ltd.:
Less...
12.
Upon
the
completion
of
the
scheme
and
terms
of
agreement
as
hereafter
set
forth
Osadchuk
shall
cause
each
of
Kiwa
and
Yellowhead
to
pay
to
the
wife
her
share
of
the
net
proceeds
received
by
each
of
them
in
accordance
with
such
scheme
and
terms
of
agreement
as
of
the
date
of
completion
less
the
deductible
amounts
which
at
that
date
have
either
been
paid
or
are
due
forthwith,
it
being
the
intention
of
the
parties
that
the
wife
shall
receive
as
much
of
the
downpayments
made
to
Yellowhead
and
Kiwa
as
is
consonant
with
those
companies
discharging
their
lawful
obligations
as
and
when
due
to
The
Queen
in
Right
of
Canada
and
The
Queen
in
Right
of
British
Columbia
for
income
tax.
13.(a)
The
parties
understand
and
agree
that
in
order
to
carry
out
the
true
intent
of
this
agreement,
namely,
that
Mrs.
Osadchuk
shall
receive
half
the
net
proceeds
of
the
sale
to
Canyon
Creek
of
certain
assets
of
the
companies
and
half
the
Jatel
money,
it
may
be
necessary
to
vary
the
share
structure
of
the
companies
or
one
or
other
of
them
or
carry
out
other
corporate
acts
including,
but
without
restricting
the
generality
of
the
foregoing,
the
purchase
by
the
companies
of
their
own
shares,
the
issuing
of
preference
shares
or
debentures
and
the
declaring
of
dividends.
(b)
If
the
parties
having
consulted
the
companies’
auditor
and
such
other
professional
advisers
as
each
may
deem
necessary
are
unable
to
agree
within
90
days
on
a
scheme
to
enable
the
companies
to
pay
lawfully
to
her
such
one-half,
the
question
of
what
scheme
shall
be
adopted
shall
be
referred
to
a
single
arbitrator
who
shall
have
the
power
and
jurisdiction
to
settle
the
scheme
and
make
and
impose
such
terms
of
agreement
between
the
parties
as
he
deems
necessary
or
appropriate
to
carry
out
the
true
intent
of
this
agreement.
(c)
For
the
purpose
of
the
arbitrator
making
such
determination,
it
is
hereby
declared
(i)
if
legally
possible
moneys
due
to
Mrs.
Osadchuk
shall
be
paid
by
way
of
dividend
to
enable
her
to
claim
the
dividend
tax
credit;
(ii)(a)
Mrs.
Osadchuk
shall
have
no
right
at
any
time
to
vote
any
share
or
shares
issued
to
her
pursuant
to
such
scheme
or
to
vote
the
shares
now
registered
in
her
name
or
which
may
be
transferred
to
her
by
Mr.
Osadchuk
pursuant
to
such
scheme
save
for
the
purpose
of
carrying
such
scheme
into
effect;
(b)
Mrs.
Osadchuk
shall
have
no
rights
as
a
shareholder
save
the
right
to
receive
by
whatever
method
is
adopted
one-half
the
net
proceeds
of
the
sale
to
Canyon
Creek
and
half
the
Jatel
money.
(d)
No
scheme
shall
be
settled
or
terms
made
which
(a)
will
make
Mr.
Osadchuk
personally
liable
for
any
income
tax
on
moneys
received
by
Mrs.
Osadchuk;
(b)
will
require
any
moneys
to
be
paid
to
Mr.
Osadchuk
by
way
of
dividend
unless
he
consents
thereto;
(c)
will
make
the
companies
liable
for
any
income
tax
consequent
upon
the
distribution
of
moneys
to
Mrs.
Osadchuk;
18.
Mr.
Osadchuk
and
Mrs.
Osadchuk
each
hereby
remise,
release
and
discharge
the
other
of
and
from
all
claims
and
demands
which
each
may
have
against
the
other
save
the
right
to
require
the
performance
of
this
agreement
including,
but
without
restricting
the
generality
of
the
foregoing,
any
claim
by
either
of
them
under
the
Family
Relations
Act,
1972,
the
Family
Relations
Act,
1978,
and
the
Divorce
Act
of
Canada,
save
in
the
case
of
Mrs.
Osadchuk
the
right
to
claim
maintenance
for
the
children
of
the
marriage,
it
being
the
intention
of
the
parties
that
this
agreement
shall
be
a
full,
final
and
complete
settlement
of
all
issues
existing
between
them.
19.
The
terms
of
this
agreement
as
to
maintenance
for
the
children
shall
be
embodied
in
an
order
of
the
Court.
All
other
claims
of
Mrs.
Osadchuk
in
the
pending
proceedings
shall
be
dismissed
without
cost
to
any
party.
20.
Each
of
the
parties
shall
bear
his
or
her
own
costs
and
Mr.
Osadchuk
shall
not
collect
any
costs
due
to
him
in
the
previous
proceedings
under
the
Companies
Act.
In
witness
whereof
the
parties
hereto
have
set
their
hand
and
seals
this
November
19,
1979.
The
"scheme"
described
in
paragraphs
9,
12
and
13
was
never
agreed
to
or
arbitrated.
The
appellant’s
accountant
and
lawyers
devised
two
proposals,
at
least
one
of
which
was
submitted
to
Ann’s
advisers,
but
neither
was
signed
by
the
parties.
Ann
simply
telephoned
the
appellant
for
money
and
the
appellant,
as
sole
signing
officer,
caused
cheques
to
be
sent
to
her
from
Kiwa.
Particulars
respecting
these
payments
are
contained
in
assumptions
9(h)
and
(j)
of
the
reply.
They
read
as
follows:
(h)
the
appellant
caused
Kiwa
to
make
the
following
payments
to
Johanson,
which
payments
were
all
signed
by
the
appellant
on
behalf
of
Kiwa:
[Not
reproduced.]
(j)
the
following
balances
were
shown
on
the
financial
statements
of
Kiwa
Lumber
Ltd.:
[Not
reproduced.]
Assumption
9(h)
was
not
refuted.
Assumption
9(j)
was
agreed
to
by
Mr.
Buxton,
the
appellant’s
accountant.
The
appellant
adopted
all
of
Mr.
Buxton’s
accounting
testimony
as
his
own.
Paragraph
A10
and
section
B
of
the
amended
notice
of
appeal
read:
10.
In
1987,
Kiwa
deducted
$323,766
from
its
retained
earnings
to
reflect
the
fact
that
the
amounts
paid
to
Ann
Johanson
were
to
be
treated
either
as
uncollectable
advances
or
as
the
constructive
redemption
of
the
shares
of
Kiwa
that
she
beneficially
owned
and
the
corresponding
extinction
of
her
interest
in
Kiwa.
B.
Reasons
for
the
appeal
15.
The
advances
made
by
Kiwa
to
Ann
Johanson
were
advances
made
to
her
on
Kiwa’s
obligation
to
her
under
the
agreement
and
in
her
capacity
as
a
shareholder
of
Kiwa.
16.
Ann
Johanson
was
properly
taxable
under
either
subsection
15(1)
of
the
Act
on
the
advances
paid
to
her
in
that
the
advances
were
either
benefits
or
loans
from
Kiwa
or
proceeds
of
the
constructive
reduction
of
her
beneficial
interest
in
one-half
of
the
shares
of
Kiwa.
17.
The
advances
were
not
a
benefit
or
advantage
conferred
on
the
appellant
as
a
shareholder
of
Kiwa.
18.
In
the
alternative,
if
the
advances
were
a
benefit
or
advantage
conferred
on
the
appellant
by
Kiwa,
the
appellant
was
not
taxable
on
more
than
$70,000
of
the
advances
in
his
1987
year
and
$10,000
of
the
advances
in
his
1988
year
as
the
balance
of
the
advances
were
made
to
Ann
Johanson
in
prior
taxation
years
and
pursuant
to
obligations
which
arose
under
the
agreement
in
1979.
In
response,
the
reply
puts
the
matter
as
follows:
B.
Issues
to
be
decided
11.
The
issue
to
be
decided
is
whether
the
amount
of
$333,766
paid
by
Kiwa
Lumber
Ltd.
to
Johanson
is
taxable
in
the
hands
of
the
appellant
in
the
amounts
of
$323,766
in
1987
and
$10,000
in
1988.
C.
Statutory
provisions
upon
which
the
minister
relies
and
the
reasons
which
he
intends
to
submit
13.
The
respondent
submits
that
the
appellant
has
been
properly
assessed
for
his
1987
and
1988
taxation
years
pursuant
to
subsection
15(1)
of
the
Act
on
the
basis
that
benefits
were
conferred
on
the
appellant
by
Kiwa
or
that
funds
of
Kiwa
were
appropriated
to
or
for
the
benefit
of
the
appellant
in
the
amounts
of
$323,766
in
1987
and
$10,000
in
1988
in
respect
of
payments
made
by
Kiwa
to
Johanson.
14.
In
the
alternative,
he
submits
that
the
appellant
has
been
properly
taxed
for
the
aforesaid
taxation
years
in
respect
of
the
aforesaid
amounts
in
accordance
with
subsection
56(2)
of
the
Act.
The
Court
finds
that
any
claims
by
Ann
as
a
beneficiary
under
a
trust
were
concluded
by
the
agreement
of
November
19,
1979.
After
that
date
any
property
matters
outstanding
between
the
parties
were
to
be
dealt
with
by
determining
their
respective
contractual
entitlements
under
that
agreement.
There
were
no
trust
issues
remaining
as
between
Ann
and
the
appellant
after
November
19,
1979.
Paragraphs
1
and
2
on
page
3
of
the
November
19,
1979
agreement
were
not
carried
out
by
Ann
and
the
appellant;
they
have
not
yet
transferred
the
properties
to
one
another.
Paragraph
8
has
been
carried
out
by
the
appellant.
Paragraphs
9
and
10
state
that
Ann
"...shall
receive
from
Yellowhead..."
and
"...shall
receive
from
Yellowhead
and
Kiwa...".
However
the
Court
finds
that
these
paragraphs
must
be
read
within
the
context
of
the
recitals
already
quoted
on
page
3
of
the
agreement
which,
to
repeat,
state:
And
whereas
it
is
the
intention
of
the
parties
that,
inter
alia,
Mrs.
Osadchuk
will
receive
one-half
of
the
net
proceeds
of
the
Canyon
Creek
sale;
And
whereas
Mr.
and
Mrs.
Osadchuk
have
agreed
to
settle
their
outstanding
differences
on
the
terms
herein
set
forth
and
the
companies
have
agreed
to
join
in
this
agreement
for
the
purpose
of
ensuring
the
carrying
out
of
its
terms
and
thereby
avoiding
a
dispute
between
shareholders
of
the
companies
which
would
be
detrimental
to
the
companies.
On
this
basis
the
Court
finds
that
the
agreement
is
between
Mr.
and
Mrs.
Osadchuk
and
the
corporations
merely
executed
the
document
as
"en-
surers".
Thus
the
appellant
as
sole
signing
officer
and
owner
of
99
per
cent
and
99.9
per
cent
of
the
shares
of
the
two
corporations
caused
Kiwa
to
make
the
payments
to
Ann
to
settle
his
obligations
to
her.
Mr.
Buxton
testified
that
he
told
the
appellant
to
stop
writing
Kiwa
cheques
to
Ann
"until
the
scheme
was
put
in
place"
in
order
to
force
her
to
agree
to
a
scheme.
Despite
this
appellant
continued
to
write
cheques
at
Ann’s
request.
The
cheques
were
inadvertently
credited
to
shareholders
loan
accounts
according
to
Mr.
Buxton’s
testimony.
However,
Mr.
Buxton
also
testified
that
the
only
accounting
question
the
appellant
concerned
himself
about
was
the
amount
of
taxes
that
had
to
be
paid.
The
Court
saw
the
appellant
testify.
He
has
a
grade
8
education.
He
is
slow
to
answer,
careful
of
his
own
interests
and
shrewd.
He
has
a
country
cunning.
He
does
not
give
anything
away
by
his
words.
He
testified
that
way
and
he
conducted
his
litigation
with
Ann
that
way.
He
caused
the
payments
in
question
to
be
made
to
her
that
way.
Mr.
Buxton
testified
that
he
considered
the
payments
to
Ann
to
be
advances
in
the
money
due
under
the
agreement
if
a
scheme
was
ever
adopted.
However,
there
is
no
evidence
that
Ann
ever
agreed
to
that.
Nor
is
there
any
evidence,
except
Mr.
Buxton’s
testimony,
that
the
entries
described
in
paragraph
9(j)
respecting
the
shareholders’
loan
accounts
were
inadvertent.
Those
entries
were
an
easy
way
to
avoid
a
tax
problem
and
they
occurred
successively
and
consistently
in
every
year
from
1978
through
1986
and
were
so
recorded
by
Kiwa’s
financial
statements.
Mr.
Osadchuk
relied
on
Mr.
Buxton
to
deal
with
the
problem
in
this
way
and
the
Court
is
satisfied
that
he
understood
and
recognized
what
the
entries
meant
and
what
they
were
related
to
in
each
year.
As
long
as
he
didn’t
have
to
pay
tax
on
them
and
they
didn’t
affect
his
business
operations
he
was
satisfied
to
deal
with
them
in
that
way
as
was
Mr.
Buxton.
However
in
1987
Mr.
Buxton
had
to
face
the
situation
from
a
professional
accounting
standpoint
and
deal
with
it.
The
result
was
the
write-off
in
Kiwa
to
retained
earnings
in
1987.
The
same
procedure
was
followed
in
1988.
Kiwa’s
financial
statements
recorded
these
procedures.
The
appellant
owned
99
out
of
100
shares
of
Kiwa
and
was
its
sole
signing
officer.
Mr.
Buxton
was
instructed
by
the
appellant
to
deal
with
all
of
the
appellant’s
and
Kiwa’s
accounting
problems
and
tax
problems
and
did
so.
The
Court
is
satisfied
that
the
appellant
knew
about
these
changes
in
1987
and
1988
and
had
a
general
understanding
of
their
meaning.
The
funds
in
question
were
moneys
Ann
asked
the
appellant
for.
In
response
to
those
requests,
the
appellant
wrote
cheques
on
Kiwa,
many
of
which
were
issued
contrary
to
professional
advice
from
his
accountant.
The
appellant
signed
those
cheques,
as
signing
officer
of
Kiwa,
for
his
own
purposes
and
for
his
own
benefit.
The
appellant
had
to
pay
Ann
sooner
or
later.
He
also
had
to
devise
a
scheme
that
was
acceptable
to
her
or
put
the
matter
into
arbitration.
Until
the
retained
earnings
changes
in
1987
and
1988,
Kiwa’s
financial
statements
showed
the
advances
to
Ann.
Moreover
the
appellant,
by
making
the
payments
to
Ann
avoided,
to
adopt
the
words
of
the
recitals
to
the
agreement
"...a
dispute
(or
an
arbitration)
between
shareholders
of
the
companies
which
would
be
detrimental
to
the
companies"
and
those
companies
were
wholly
operated
and
almost
wholly
owned
by
the
appellant.
By
charging
the
results
of
those
payments
to
the
retained
earnings
of
Kiwa
in
1987
and
1988
the
appellant
and
Mr.
Buxton
caused
bookkeeping
entries
to
be
made
which
reduced
Kiwa’s
retained
earnings.
It
recognized
the
payments
to
Ann
as
irrecoverable.
The
payments
were
completely
outside
of
the
payments
contemplated
by
the
November
19,
1979
agreement.
They
were
merely
payments
made
by
the
appellant
to
his
former
wife
at
her
request.
There
is
no
evidence
before
the
Court
that
the
appellant
or
the
corporations
had
any
legal
obligation
to
Ann
to
make
the
payments.
The
result
is
that
the
charges
to
retained
earnings
in
1987
and
1988
constituted
a
benefit
or
advantage
conferred
on
Mr.
Osadchuk
by
Kiwa
because
they
recognized
the
amounts
that
he
had
given
to
Ann.
Ann
could
not
take
that
money
or
levy
the
charges
in
1987
and
1988.
Only
Mr.
Osadchuk
could
do
those
things.
Thus
the
charges
to
retained
earnings
in
1987
and
1988
constituted
benefits
conferred
on
the
appellant
by
Kiwa
pursuant
to
subsection
15(1)
of
the
Income
Tax
Act.
The
appeal
is
dismissed.
The
Crown
is
awarded
its
costs.
Appeal
dismissed.
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