Bowman,
T.C.C.J.:—This
appeal,
from
an
assessment
for
the
1987taxation
year,
was
heard
under
the
informal
procedure
of
this
court
and
has
to
do
with
an
amount
of
$12,000
which
the
Minister
of
National
Revenue
included
in
the
appellant's
income
under
subsection
15(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
central
issue
is
whether
this
amount,
which
was
loaned
to
the
appellant,
who
was
"connected"
with
a
shareholder
of
the
corporation,
was
repaid
within
one
year
from
the
end
of
the
taxation
year
of
the
corporation
that
made
the
loan,
within
the
meaning
of
paragraph
15(2)(b)
of
the
Act.
The
evidence
was
complicated
by
the
fact
that
an
integral
part
of
the
series
of
events
culminating
in
the
assessment
in
question
was
a
marital
breakdown
and
an
acrimonious
family
dispute.
Although,
in
a
sense,
such
matters,
which
seldom
surface
in
this
court,
were
tangential
to
the
main
issue,
they
nonetheless
impinged
upon
it.
Cindy
Gilbert
("Cindy")
and
the
appellant
were
married
in
July
of
1987.
Cindy
was
the
daughter
of
Jack
Gilbert,
a
lawyer
and
businessman
who
ran
a
company
called
Steel
Investments
Ltd.
("Steel")
which
engaged
in
a
variety
of
business
and
investment
activities.
Jack
Gilbert
was
not
a
shareholder
of
Steel
but,
as
I
recall
the
evidence,
his
three
children,
including
Cindy,
were,
as
well,
possibly
as
Mr.
Gilbert’s
wife.
Cindy
was
also
a
shareholder
of
a
numbered
company,
586582
Ontario
Ltd.,
which
carried
on
business
as
Mural
Graphics
Unlimited.
There
was
some
evidence
that
the
shares
of
this
company,
which
I
shall
refer
to
as
Mural,
were
originally
owned
by
Cindy's
mother
but
at
the
material
times
it
seems
Cindy
was
the
principal
shareholder.
It
was
her
company
and
it
carried
on
business
in
a
f’eld
of
artistic
endeavour.
The
appellant
is
now
a
chartered
accountant
but
at
that
time
had
not
completed
all
the
steps
necessary
to
so
qualify.
He
was
working
for
a
firm
of
chartered
accountants,
Smith,
Selby
and
Deluca
of
which
Steel
was
a
client
in
1987.
Mural
needed
money
and,
since
Cindy
was
reluctant
to
approach
her
father,
the
appellant,
who
at
that
time
was
on
good
terms
with
his
father-in-law,
agreed
to
approach
him.
The
result
was
that
two
cheques
in
the
amount
of
$6,000
each
were
issued
in
September
and
November
1987
by
Steel
to
the
appellant
who
immediately
paid
them
to
Mural.
They
were
set
up
in
the
books
of
Steel
as
loans
receivable
and
were
so
described
in
the
unaudited
financial
statements
of
Steel
for
the
year
ended
November
30,
1987.
In
reviewing
the
books
of
Steel
at
year
end
Mr.
William
Selby,
C.A.
prepared
a
memo
in
which
he
posed
a
number
of
questions,
including
one
relating
to
this
loan:
“Is
the
debtor
an
'employee
for
15(2)'".
I
presume
he
meant
^shareholder".
In
any
event
the
appellant
wrote
an
answer
to
this
as
follows:
"Amount
to
be
repaid
against
spouse's
S/H
loan
per
J.G.”.
The
appellant
testified
that
this
was
the
understanding
that
he
had
with
Jack
Gilbert,
referred
to
as"J.G."
in
the
note.
For
the
1988
fiscal
year
a
new
firm
of
chartered
accountants,
Fruitman,
Kates
&
Co.
was
retained
by
Steel.
The
appellant
was
by
then
working
for
that
firm.
He
was
aware
of
the
necessity
of
repaying
the
liability
to
Steel
before
the
end
of
the
1988
fiscal
period.
Evidently
a
journal
entry
was
made
eliminating
his
liability
to
Steel
and
reducing
the
amount
owing
to
Cindy
by
Steel
in
her
shareholder's
loan
account.
It
is
not
certain
from
the
evidence
when
this
entry
was
made
but
the
result
was
clearly
reflected
in
the
financial
statements
of
Steel
for
the
period
ending
November
30,
1988,
which
were
discussed
with
Jack
Gilbert
by
the
auditors
and
were
approved
by
him
on
behalf
of
the
board.
The
financial
statements
disclosed
that
the
loan
receivable
from
David
Weisdorf
of
$12,000
owing
in
1987
had
disappeared
in
1988
and
note
3
states
in
part
under
"Loans
Receivable""Previous
year
loans
were
due
to
shareholders,
or
persons
connected
and
were
repaid
during
the
year".
By
the
time
the
1989
financial
statements
were
to
be
prepared
matters
had
started
to
deteriorate
between
the
appellant
and
Cindy
and
between
the
appellant
and
the
Gilbert
family
generally.
In
March
of
1990
Cindy
and
the
appellant
separated
and
for
a
variety
of
reasons,
both
personal
and
financial,
relations
between
the
appellant
and
Jack
Gilbert
became
extremely
acrimonious.
The
appellant
called
as
witnesses
Jack
Gilbert,
Cindy
and
Jack
Gilbert's
brother-in-law,
Percy
Sherman.
None
of
these
witnesses
was
particularly
helpful
to
the
appellant
and
the
strained
relations
were
obvious,
particularly
in
the
case
of
Jack
Gilbert,
who
was
an
unco-operative
and
truculent
witness
whose
antipathy
toward
the
appellant
was
undisguised.
He
categorically
denied
ever
authorizing
the
set
off
of
the
appellant's
indebtedness
to
Steel
against
Cindy's
shareholder
loan
account.
Cindy
stated
that
she
knew
essentially
nothing,
including
whether
she
was
a
shareholder
of
Steel,
whether
she
ever
received
bonuses
from
Steel
or
whether
she
had
a
shareholder's
loan
account
with
Steel.
The
draft
financial
statements
for
the
period
ending
September
30,
1989
do
not
show
any
amount
owing
by
the
appellant
to
Steel.
However,
on
July
23,
1990
Jack
Gilbert
wrote
to
Cindy
and
the
appellant
demanding
repayment
of
a
number
of
loans
made
to
the
appellant
and
to
Mural,
including
the
two
$6,000
loans
made
to
the
appellant
in
September
and
November
1987.
Among
the
assumptions
pleaded
by
the
Minister
as
the
basis
of
the
assessment
were
the
following:
(g)
Steel
had
engaged
the
accounting
firm
of
Frurtman,
[sic]
Kates
and
Co.
to
prepare
its
1987
and
1988
financial
statements.
The
appellant
was
employed
by
the
firm
and
he
was
assigned
to
perform
the
year
end
audit
of
Steel.
In
preparing
the
1988
financial
statements,
the
appellant
offset
his
loan
receivable
balance
of
$12,000
against
a
credit
balance
in
Cindy's
shareholder
loan
account
(the
"entry");
(h)
the
loan
to
the
appellant
was
interest
bearing
where
as
[sic]
Cindy's
shareholder
loan
account
was
non-interest
bearing;
(i)
the
entry
was
not
approved
by
Cindy
or
by
the
management
of
Steel;
(j)
there
were
no
corporate
resolutions
nor
any
authorizations
for
the
entry;
(k)
Steel
had
engaged
another
accounting
firm
to
prepare
its
1989
financial
statements
and,
at
management's
request,
the
firm's
accountants
reversed
the
entry
and
reclassified
the
appellant's
loan
of
$12,000
as
receivable
from
1987;
and
(l)
the
appellant’s
loan
was
not
repaid
before
the
end
of
the
first
taxation
year
of
Steel
following
the
year
in
which
the
loan
was
made,
nor
was
any
part
payment
made
before
the
end
of
the
first
taxation
year
of
the
lender
following
the
year
in
which
the
loan
was
made.
The
appellant
did
not
challenge
assumptions
(g)
or
(k).
Assumption
(h)
was
abandoned
by
the
respondent
as
a
basis
for
upholding
the
assessment.
The
relevance
of
(h)
was
not
apparent
to
me
in
any
event.
I
am
therefore
proceeding
on
the
basis
that
assumptions
(g)
and
(k)
are
correct.
Notwithstanding
the
somewhat
unsatisfactory
state
of
the
evidence
and
the
fact
that
some
of
the
witnesses
were
considerably
less
than
forthcoming
in
their
testimony
I
am
prepared
to
find
as
a
fact
that
there
was
an
understanding
between
Jack
Gilbert
and
the
appellant
that
the
loan
to
the
appellant
would
be
offset
against
Cindy’s
shareholder's
loan
account.
Jack
Gilbert
seems
to
have
taken
upon
himself
a
general
authority
to
run
Steel
and
its
relationship
with
its
shareholders,
including
the
shareholders’
loan
accounts,
as
his
own
fiefdom
and
the
appellant,
in
the
period
before
relations
between
him
and
the
Gilbert
family
deteriorated,
relied
on
that
authority
as
sufficient
to
justify
his
making
of
the
offsetting
entries
referred
to
in
assumption
(g)
without
obtaining
any
further
specific
written
authorization
from
Steel
or
Cindy.
After
the
breakdown
of
relations
between
the
appellant
and
the
Gilbert
family,
the
entry
was
reversed
on
the
instructions
of
Jack
Gilbert.
Notwithstanding
these
facts,
I
do
not
think
they
are
sufficient
to
enable
the
appellant
to
succeed.
I
do
not
accept
the
appellant's
alternative
argument
that
he
was
a
mere
agent
or
conduit
for
Mural
in
borrowing
the
money
from
Steel.
For
whatever
reason,
tax
or
otherwise,
the
loan
was
treated
throughout
as
a
loan
to
the
appellant
and
not
to
Mural
and
the
evidence
does
not
support
the
view
that
the
substance
differed
from
the
form.
Nor
can
I
accept
the
contention
that
the
loan
was
repaid
by
the
end
of
Steel's
1988
taxation
year.
For
one
thing,
even
if
the
bookkeeping
entries
had
the
effect
contended
for
—
and
for
reasons
that
I
shall
set
out
in
greater
detail
below
I
do
not
believe
they
did
—
there
is
no
evidence
that
they
were
made
in
Steel's
1988
taxation
year.
The
entries
relied
upon
in
the
financial
statements
were
obviously
made
after
the
end
of
November
1988,
when
the
financial
statements
were
being
prepared.
Accounting
entries
do
not
create
reality.
Their
function
is
to
reflect
it.
There
seems
to
be
an
assumption
that
an
accounting
entry
made
after
year
end
can
retroactively
determine
the
nature
of
events
that
purportedly
occurred
before
the
end
of
the
year.
This
Court
stated
in
Sinclair
v.
M.N.R.,
[1992]
1
C.T.C.
2218,
92
D.T.C.
1163
at
page
2226
(D.T.C.
1169):
In
addition
the
Minister
sought
to
tax
Mr.
Sinclair
on
$50,750
credited
to
his
loan
account
by
Prosperous
Investments.
It
would
appear
from
paragraphs
6(p)
and
(q)
of
the
reply,
which
set
out
the
Minister’s
so-called
"assumptions"
that
he
assumed
that
the
mere
fact
of
crediting
to
a
shareholder
loan
account
gives
rise
to
taxation
in
the
hands
of
the
principal
shareholder,
irrespective
of
whether
the
shareholder
or
employee
has
appropriated
any
funds
from
the
account
or
whether
the
crediting
of
the
account
affects
in
any
way
the
legal
relationship
with
the
corporation
or
indeed
whether
the
shareholder
has
condoned
or
even
knows
of
the
bookkeeping
entry.
A
mere
bookkeeping
entry
in
a
loan
account
by
itself
does
not
constitute
a
taxable
event
unless
there
is
something
more,
such
as
receipt.
In
Gresham
Life
Society
Co.
v.
Bishop
(1902),
4
T.C.
464
at
page
476,
Lord
Brampton
said:
My
Lords
I
agree
with
the
Court
of
Appeal
that
a
sum
of
money
may
be
received
in
more
ways
than
one
e.g.
by
the
transfer
of
a
coin
or
a
negotiable
instrument
or
other
document
which
represents
and
produces
coin,
and
is
treated
as
such
by
business
men.
Even
a
settlement
in
account
may
be
equivalent
to
a
receipt
of
a
sum
of
money,
although
no
money
may
pass;
and
I
am
not
myself
prepared
to
say
that
what
amongst
business
men
is
equivalent
to
a
receipt
of
a
sum
of
money
is
not
a
receipt
within
the
meaning
of
the
Statute
which
your
Lordships
have
to
interpret.
But
to
constitute
a
receipt
of
anything
there
must
be
a
person
to
receive
and
a
person
from
whom
he
receives
and
something
received
by
the
former
from
the
latter,
and
in
this
case
that
something
must
be
a
sum
of
money.
A
mere
entry
in
an
account
which
does
not
represent
such
a
transaction
does
not
prove
any
receipt,
whatever
else
it
may
be
worth.
The
observations
are
equally
relevant
here.
I
have
a
certain
sympathy
for
the
appellant.
He
obtained
no
benefit
from
the
loans
and
he
acted
in
good
faith
upon
what
he
believed
was
an
acceptable
practice.
His
difficulties
were
compounded
by
the
development
of
a
bitter
family
dispute.
Although
he
presented
his
case
with
skill
and
thoroughness
I
cannot
find
that
the
loan
was
repaid
before
the
end
of
Steel's
1988
taxation
year.
Accordingly,
the
appeal
is
dismissed.
Appeal
dismissed.