Ivan Graham and Mount Cartier Cedar Products v. Minister of National Revenue, [1991] 2 CTC 2140

Kempo, T.C.J. [Orally] : — I am delivering these reasons for judgment orally, however I expressly reserve the right to edit and expand upon them subsequently if need be and I reserve the right to correct my arithmetic if it should happen to be wrong.

The appeals of Ivan Graham and Mount Cartier Cedar Products Ltd. (the "Company") were, on consent application, joined for hearing on common evidence. Many issues were raised in the pleadings as filed however at the opening of the hearing counsel for the Minister, with the concurrence of Mr. Graham (who was unrepresented), announced that recent meetings between the parties had produced the following agreements:

With respect to the Company:

for the 1984 fiscal year the following items and amounts are deductible pursuant to paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"):

and therefore this appeal would be fully allowable

for the 1985 fiscal year of the $22,269.48 interest expense disallowed, the amount of $17,369 is to be allowed pursuant to paragraph 18(1)(a) of the Act. The unresolved issue concerned unreported income of $10,747.75

for the 1986 fiscal year the following items and amounts are deductible pursuant to paragraph 18(1)(a) of the Act:

The unresolved issues concerned the respondent's disallowance of one-half of $15,600 which had been journal-entried for power saw rental expenses, and one-half of $24,660.59 which had been journal-entried for cash wages and the inclusion of $24,494.35 as unreported income. The aforementioned disallowances were due to unvouchered record-keeping; the one-half allowed representing an administrative accommodation and reasonableness as to their likelihood.

With respect to the appeals of Mr. Graham:

for his 1984 taxation year, the appellant agreed that the amount of unreported interest income of $6,819.88 has been properly included into his income but he contested the amount of $11,703.80 included pursuant to subsection 15(2) of the Act

for his 1985 taxation year, the appellant contested the amount of $55,650.26 included into his income pursuant to subsection 15(2) of the Act; and

for his 1986 taxation year, the appellant advised he had no quarrel with the reassessment dated November 8, 1989 whereby purported management fees of $21,000 were removed and $10,000 in wages were added back into income as requested in the notice of objection and therefore no issues remained to be litigated for 1986.

The Unresolved Issues

Mr. Graham has explained his inability and difficulties surrounding the production of all of the Company's records and its books of account. He was able to obtain quite a few, but not all, just two days ago. He urged the Court to note that any adjustments allowed to the Company should correspondingly effect, and reduce, the subsection 15(2) unpaid shareholder loan amounts allocated to himself for 1984 and 1985.

The auditor called by the respondent, Mr. McCready, testified that as a result of the recent conferences with Mr. Graham and his further production of documents, he noted that the amount of $5,000 had simply been moved between banks and therefore the unreported income for the Company's 1985 fiscal year ought to be reduced thereby to $5,747.75. Concurrently, the subsection 15(2) unpaid shareholder loan amount for Mr. Graham's 1984 taxation year should also be reduced thereby, and it should now be $6,703.80 rather than $11,703.80.

Carrying on in the same vein, and having regard to the documents recently produced, Mr. McCready prepared a schedule (Exhibit R-2) to concurrently revise Mr. Graham's 1985 unpaid shareholder's loan account downward from $55,650.26 to $34,802.14. The $20,848.11 difference arose as a consequence of Mr. McCready's allowance to company expenses of $2,760 respecting B.C. telephones, $8,929.50 for subcontract payments and $9,158.61 for assignments of revenue.

As to the remaining matters, the Court expresses its sympathy for Mr. Graham's plight with respect to his subsisting inability to produce further records, such as cheques, so as to corroborate the cash wage calculations and also those of the power saw rentals. Both of these items had been calculated by him and his accountants on an estimated basis, and while the amounts may appear prima facie reasonable, I am unable to say with any degree of certainty that the accommodation allowed of one-half of the estimates was unreasonable. Therefore on the evidence presented they will not be disturbed.

No evidence has been produced which would justify the Court in disturbing the reduced amount of $5,747.74 with respect to the Company's unreported income for its 1985 fiscal year.

The last issue raised, and not mentioned earlier because it arose for the first time during Mr. Graham's direct testimony, pertained to the amount of $1,012 added to his 1985 shareholder loan account with respect to the lease payments made on the Company's 1985 Ford four-wheel drive vehicle. Mr. Graham submitted that this should be expensed to the Company. After hearing his description of why and how it was used, I agree that he is right in this respect. His description was such that the vehicle had actually been used by him principally in the course of his employment and that its use was rarely, if ever, related solely to getting himself to and from the work site.

Conclusion

In summary then, Mr. Graham's appeal for his 1986 taxation year is to be dismissed, and his appeals for his 1984 and 1985 years together with the Company's appeals for its 1984, 1985 and 1986 taxation years are to be allowed without costs and are to be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis as set out in these reasons for judgment.

Appeal allowed in the main.