Denis Cloutier v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2216

Lamarre Proulx, T.C.C.J.:— Mr. Cloutier is appealing by the informal procedure from an assessment by the Minister of National Revenue (the "Minister") for 1986.

The point at issue concerns income from office or employment within the meaning of sections 5 and 6 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Subsection 15(2) of the Act is also involved, regarding advances made to the appellant as a shareholder.

Facts

Paragraph 3 of the reply to the notice of appeal describes the facts on which the Minister relied in making the assessment for 1986:

(a) the appellant was an employee of, and a shareholder in, Les Systèmes Intérieurs Jean Bernard Inc.;

(b) during 1985 and 1986 the company advanced money to the appellant, money which was due to the company and which breaks down as follows:

	AMOUNT
Advances paid in 1985	$ 6,515.89
Advances paid in 1986	14,270.00
Representation expenses	1,300.00
Appellant's personal tax paid by the company	3,918.50
Personal insurances paid by the company	313.38
Reimbursement of appellant	(250.00)
July 1986 payments	2,350.00
August 1986 payments	940.00
Total	$29,352.77
(c) in 1986 the company paid the appellant a salary of $13,800.01;

(d) between August and December 1986 the company processed advances owed by the appellant as salary by debiting the appellant's salary account and crediting his advances account;

(e) during 1986 the company issued a statement of investment income (T 5) to the appellant indicating that the appellant had earned income from a Canadian source amounting to $29,605.07;

(f) the appellant reported $16,880.00 as advances received from the company during the 1986 taxation year;

(g) the Minister found that the appellant had failed to report the following income:

Total advances:	$29,352.77
Deduct: amount reported:	$16,880.00
Additional income:	$12,477.77
	[Translation.]

The appellant, who represented himself, told the Court that he and three other individuals were shareholders in Les Systèmes Intérieurs Jean Bernard Inc. ("the company"). Control of the company belonged to them until late summer 1986. Thereafter the appellant continued working for the company, but was no longer part of its management.

As regards the sum of $6,515.89 described in paragraph 3(b) of the reply and consisting of advances paid in 1985, this amount was included in the salary account in 1986. This is indicated in paragraph 3(d) of the reply. The appellant did not know what the company's earlier practice concerning these advances was. He also did not remember whether he had included the said amount in his income for 1985. In this amount of advances a sum paid as the appellant's personal tax was included.

The advances amounting to $14,270 paid in 1986 and described in paragraph 3(b) of the reply were not disputed by the appellant, who has already included them in calculating his income. After the cheques were shown to him in Exhibit 1-6 by counsel for the respondent, the appellant admitted that he received the representation expenses of $1,300. There were ten cheques for $130 each. These cheques covered a period from August 12 to October 23, 1986 and were for identical amounts. The taxpayer could not explain their nature.

As to the amount of $313.38 also described in paragraph 3(b) of the reply, relating to the insurances paid by the company, the taxpayer indicated that these insurances were paid for the purposes of the business and that the amounts could not be considered salary.

The payments of July 1986 and of August 1986, described in the same paragraph, of $2,350 and $940 respectively, were allegedly salary. The amount of $2,350 was cancelled, according to the company. This amount was used to set off the cost of goods purchased by the taxpayer.

Argument and analysis

The appellant contended that under subsection 15(2) of the Act, the amount of $6,515.89, as advances paid to him in 1985 and described in paragraph 3(b) of the reply, should have been included in 1985. The relevant portion of subsection 15(2) of the Act reads as follows:

15(2) Where a person . . . is a shareholder of a particular corporation . . . and . . . has in a taxation year received a loan from . . . the particular corporation . . . the amount of the loan or indebtedness shall be included in computing the income for the year of the person . . . unless

(b) the loan or indebtedness was repaid within one year from the end of the taxation year of the lender or creditor in which it was made or incurred and it is established, by subsequent events or otherwise, that the repayment was not made as part of a series of loans or other transactions and repayments.

[Emphasis added.]

The evidence showed that this advance to a shareholder was repaid in the corporation's next fiscal year by a book entry which changed the advance to salary or other remuneration of the shareholder. Accordingly, the amount of the loan does not have to be included in 1985.

The taxpayer also said that it is not correct to include in the amount of advances the amount paid by the company as income tax to the Government of Quebec and that, in this way, he is paying tax twice. There is no basis for this, as the income tax paid for him by the company will be credited to his tax account. A person is assessed on gross income, that is on income including tax deductions, pensions and other deductions, and not on net income.

Consequently, the taxpayer was properly assessed on the amount of $6,515.89 in 1986 as remuneration or salary.

As to the sum of $1,300 described as representation expenses, since the taxpayer cannot provide any proof of expenditures in this connection, it must be included in calculating his income.

The personal tax of the appellant in the amount of $3,918.50, paid by the company to the Department of National Revenue on November 15, 1986 and described in paragraph 3(b) of the reply, must also be included in calculating the income. It is for the Department in question to indicate the credit in its books to the taxpayer's account.

Although there was only oral evidence as to the sum of $313.38 for insurances, the taxpayer may be right and I give him the benefit of the doubt.

As the evidence regarding the sum of $2,350 is not very clear, since the only basis for it was the book entries of the accountant made after the takeover, I feel I should give the taxpayer the benefit of the doubt here and exclude it from the amount received by him for 1986.

The additional income of $12,477.77 must therefore be reduced by the amounts of $2,350 and $313.38. The appeal is allowed to this extent: otherwise the income added by the Minister was correctly added.

Appeal allowed in part.