Ronald D. Berube, Morray Investments Limited and Joanne Berube v. Her Majesty the Queen (Informal Procedure), [1994] 1 CTC 2655

Kempo, J.T.C.C.:—The informal procedure appeals of Morray Investments Ltd., of Ronald D. Berube and of his wife, Joanne Berube were, on consent application, joined for hearing on common evidence.

The taxation years under appeal were 1986 to 1990 inclusive for Mr. Berube and were 1987 to 1990 inclusive for Morray Investments Ltd. (the "company"). Mrs. Berube’s appeals were for her 1988 to 1990 inclusive taxation years which put in issue the amount allowable respecting her claim for child tax credit and married exemption which had been adjusted by the respondent, acting through the Minister of National Revenue (the "Minister"), to take into account Mr. Berube’s adjusted net income. Mr. Berube’s appears concerned disputed amounts included by the Minister into his net income for each of his years under appeal. Mrs. Berube did not appear at the hearing and it was understood that the degree of success of her appeals turned on the outcome of her husband's appeals on this subject.

Mr. Berube holds 51 per cent of the issued shares of the company with Mrs. Berube holding 49 per cent. Evidence respecting all three appellants was given by Mr. Berube. Apparently his wife held shares in the company solely to satisfy corporate law purposes at the time of incorporation.

At the commencement of the hearing jurisdictional issues arose for both Mr. Berube and the company because of their non-conformity with the appeal procedures outlined in the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act"), particularly sections 165, 166.1, 167 and 169.

With respect to the company's 1987 taxation year appeal, the Minister sent a notice of loss determination therefor on February 8, 1993, no notice of objection was filed, the 90th day thereafter expired on May 10, 1993 however the notice of appeal was filed in this Court on August 18, 1993. With respect to the company's 1988 taxation year, and following the filing of a notice of objection, the Minister reassessed by notice dated April 13, 1993, the 90th day thereafter expired on July 12, 1993 however its notice of appeal was filed on August 18, 1993. Accordingly, there having been non-compliance with the statutory appeal procedures, with no orders of time extensions being obtained, the purported appeals of Morray Investments Ltd. for its 1987 and 1988 taxation years are quashed. The validity of the appeals respecting the company's 1989 and 1990 taxation years appears to be in order.

As to Mr. Berube's appeals concerning his 1988 and 1990 taxation years, both are in respect of a nil assessment of tax from which there is no appeal; see Consoltex Inc. v. The Queen, [1992] 2 C.T.C. 2040, 92 D.T.C. 1567 (T.C.C.), in which the leading authorities on this issue are reviewed. In line with these authorities Mr. Berube's purported appeals concerning his 1988 and 1990 taxation years are quashed. The parties have agreed that his 1986, 1987 and 1989 taxation year appeals were properly before the Court.

At this juncture with respect to Mrs. Berube's 1988 and 1990 taxation year appeals, the fact that her husband's tax liability for those years turned out to be nil does not, in my view, impugn her right and ability to put the calculation of his net income into issue because it is that amount which enters into the calculations concerning the married exemption and the child tax credit. It was for that reason that the Court heard Mr. Berube’s testimony concerning his net income for these two years and any connection therewith arising out of the company's affairs.

Mr. Berube is an accountant. He ran the company's business and did all of its books, records and financial statements. He testified he had funded the company at all times through his shareholder loan account and that this is what had effectively kept it afloat. He said his wife's earnings were used to pay for all personal, domestic and family matters and that all expenses paid by the company in connection with his automobile use and for promotion and insurance were solely for business purposes. The Minister's field auditor, Mr. Miranda who also testified, said his review of the expenses indicated 80 per cent personal use with 20 per cent for business but that after discussions, and for settlement purposes, he ana Mr. Berube agreed to a 50-50 allocation. Mr. Berube opined at trial that notwithstanding this agreement the allocation should have been greater for business purposes. However no supporting material was produced, apart from Mr. Berube’s oral statements, that personal funds had been used to fund personal expenditures and therefore (to him at least) all expenses paid by the company must have been business related.

The evidence of both Mr. Berube and Mr. Miranda confirmed the company was charged $100 a month for the use of an in-house office located in Mr. Berube’s residence. This, in my view, was merely an accommodation for his convenience and benefit because the company had its own business office elsewhere.

The company claims to have a credit balance in a 1986 source deduction account number VHL 325717 which it seeks to apply on its own tax liabilities. As this issue concerns matters of tax payment or collection, the Court is without authority to grant any declaratory relief thereto. Ms. Gill of Revenue Canada, payroll source accounts, testified and confirmed the existence of a credit balance in this account, that it would be available once proper payroll particulars had been provided, and that it was interest bearing.

Mr. Berube raised the subsection 220(3.1) fairness provisions of the Act respecting the penalties and interest assessed against himself and the company. He said the Minister had declined their request for waiver. This Court is not the appropriate tribunal for judicial review of administrative discretion; see also Towers v. The Queen, T-706-93, a decision of Noël, J. of the Federal Court-Trial Division dated November 17, 1993, a copy of which has been given to Mr. Berube.

Mr. Berube felt that in all fairness, and since he had been financing the company, the aforenoted purported personal benefits assessed to him under subsection 15(1) of the Act, and denied to the company by virtue of paragraphs 18(1 )(a) and 18(1 )(h), should have been treated and allowed under subsection 15(2) of the Act by the application of set-off principles. The Court does not accede to this position. For a set-off to apply there must be some evidence supportive of a finding of the existence of a conscious decision on the part of the company on the one hand, and Mr. Berube on the other, at the appropriate time (which would be no later than the fiscal year end) for these personal expenses to actually be set-off against the debt. Ex post facto arrangements are essentially retrospective in nature; they purport to change reality and rewrite history in order to correct what might have, or perhaps should have, been done at the appropriate time. There is little doubt but that Mr. Berube is his own author of these difficulties which he now recognizes. He is an accountant and an entrepreneur who had intertwined personal and corporate affairs not only as to travel and promotional etc. matters out also to the extent that he could not remember with any degree of certainty as to whether it was himself or the company who had owned the Apple Auto Glass and the Twilight Hobbycraft ventures.

In any event, for Mr. Berube's 1986 taxation year the amounts of $10,000 for management fees and $2,980.34 for personal benefits were correctly included into his income pursuant to subsections 5(1) and 15(1), respectively, of the Act, the latter for the reasons already noted.

For Mr. Berube's 1987 taxation year, the amounts of $5,000 for management fees and $2,808.02 for personal benefits were correctly included into his income pursuant to subsections 5(1) and 15(1), respectively, of the Act. The further sum of $5,256.53 included arose, according to the company records entered as Exhibit R-5, out of the Apple Auto Glass disposition which Mr. Berube allocated to his shareholder loans account. He was unable to give any particulars, his recall being that since the Apple Auto sale proceeds had been paid directly to him and then deposited into the company account, it was thereby probably himself who had owned this venture and that he had loaned the sale proceeds to the company. That he was guessing or attempting a mental reconstruction was obvious. No documents of purchase and sale, which could have resolved the matter, were produced. Given the above and that the company's records prepared by Mr. Berube at the time, January 31, 1987 (Exhibit R-5) show he had allocated $5,256.63 to his shareholder loan account, I am unable to determine an error had occurred through the Minister's inclusion of this amount into Mr. Berube’s income pursuant to subsection 15(1) of the Act.

At the hearing Mr. Berube claimed a deduction for an allowable business investment loss for his 1987 taxation year concerning a purported investment by him in a business known as Twilight Hobbycraft. The evidence, both oral and by document Exhibit A-5, supports the finding that an amount of $12,000 was borrowed through mortgage security on Mr. Berube’s residence in March of 1983, and that these funds were advanced by cheques dated March 29, 1983 in respect of the Twilight Hobbycraft venture. However by February of 1984 it had failed completely and Mr. Berube was unsure as to whether he or the company had owned it. In any event it is obvious that the loss arose in 1984 and that it ought to have been claimed for that year and not for 1987. Mr. Berube was not aware of any 1984 claim having been made in this respect. For these reasons, no relief is available on this issue as claimed.

For Mr. Berube’s 1989 taxation year, the amount of $5,547.29 respecting personal benefits paid for by the company has in my view been appropriately included into his income pursuant to subsection 15(1) of the Act for the reasons already expressed.

For the company's 1989 taxation year, the Minister correctly disallowed expenditures of $3,217.66 in accordance with paragraphs 18(1 )(a) and 18(1 )(h) of the Act and correctly added back into its income accrued management fees of $2,680.27 pursuant to subsection 78(4) of the Act.

For the company's 1990 taxation year, the Minister correctly disallowed expenditures of $5,718.27 and $1,307.30 in accordance with paragraphs 18(1 )(a) and 18(1 )(h) of the Act and management fees of $1,311.69 pursuant to subsection 78(4) of the Act.

With respect to Mrs. Berube's 1990 taxation year, it is my view that Mr. Berube’s net income for 1990 had been overstated by $1,637. While this figure appears on the company's January 31, 1990 journal entries document (Exhibit R-4) as outstanding wages payable since 1985 purportedly being credited to his shareholder loan account, Mr. Berube said this was an error in that it was not wages payable to him at all but rather was wages and a lien registered in 1984 against his house (see Exhibit A-4) by a former employee of Twilight Hobbycraft which is still unpaid. He could not explain why this journal entry had been made and stated it should not be there. The Court accepts this explanation. The circumstances in Weisdorf v. The Queen, [1993] 2 C.T.C. 2756 (T.C.C.), are analogous here and so is the result, at pages 2759-60, that (I am paraphrasing) accounting entries reflect rather than create reality, and that a mere bookkeeping entry in a shareholder loan account does not in and of itself constitute a taxable benefit without something more. Apart from a mere mathematical reduction of the shareholder loan account having occurred, there was no evidence here that anything otherwise had arisen therefrom prior to identification and awareness of this particular accounting error. For these reasons the Court finds that the loan amount owing by the company to Mr. Berube at January 31, 1990 was understated to the extent of that erroneous entry.

Summary and conclusion

The Morray Investment Ltd. appeals for its 1987 and 1988 taxation years are quashed, and for its 1989 and 1990 taxation years are dismissed for the reasons given.

The Ronald D. Berube appeals for his 1988 and 1990 taxation years are quashed, and for his 1986, 1987 and 1989 taxation years are dismissed for the reasons given.

The Joanne Berube appeals for her 1988 and 1989 taxation years are dismissed. The appeal for her 1990 taxation year is allowed, without costs, and is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the revised net income of her spouse, Ronald Berube, for that year is to be reduced by $1,627 with respect to the calculation of the married amount and child tax credit amount pursuant to paragraph 118(1)(a) and section 122.2, respectively, of the Act.

Appeals dismissed for the most part.