Paul L Mullins v. Minister of National Revenue, [1991] 2 CTC 2503, 91 DTC 173

Sobier, T.CJ.:—The appellant appeals from an assessment by the Minister of National Revenue (the "Minister") pursuant to section 160 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The Minister claims that the appellant indirectly received moneys from Shaudrey Holdings Limited ("Shaudrey") at the time Shaudrey owed $20,705.44 in income tax.

The appellant is a solicitor practising alone in Windsor, Ontario. He acted for Shaudrey and others involved in receiving the mortgage proceeds referred to below. At one time he and his wife were shareholders of Shaudrey to the extent of 2/3 of the outstanding shares and Mr. and Mrs. Lavin owned the remaining 1/3.

Near the end of 1983, the appellant's tax advisors, Ward Mallette Chartered Accountants, advised the Mullins and Lavins that Part II tax would come into force in 1984 whereby certain types of dividends would be taxed if the shares of Shaudrey remained in their hands.

Tax planning was put into effect in 1983 to avoid paying this tax. The individual shareholders sold their shares to a holding company in which they were also the shareholders. The Lavins incorporated 538572 Ontario Ltd. ("Ontario") to hold their shares and the Mullins rolled their shares into an existing company owned by them, namely, Woodslee Estates Inc. ("Woodslee"). Woodslee was specifically chosen since it owed considerable amounts to Mr. Mullins by reason of shareholder's loans previously made by him to Woodslee.

In 1983, Shaudrey was owed approximately $750,000 by Amex Developments Limited ("Amex"). This amount was secured by a mortgage and payment of the principal and accrued interest was due in March 1984.In anticipation of payment of the mortgage and in order to avoid Part II tax, in December 1983, Shaudrey declared dividends to its shareholders in amounts which Shaudrey believed would be forthcoming from the payment of the Amex mortgage, which amounts would be adjusted when the actual receipt was ascertained. Woodslee received a dividend of $500,000 and Ontario a dividend of $250,000. Since there was no available cash until the mortgage was paid, the indebtedness for the dividends owing was evidenced by two non-interest bearing promissory notes (the “Notes” or singularly a "Note") payable on demand 30 days after receipt by Shaudrey of the proceeds of the Amex mortgage.

Evidence was given by Mr. Michael McCreight, Chartered Accountant of Ward Mallette, that this type of Part II Strip was approved by Revenue Canada and that warning of the Part II tax was given to taxpayers in order that they could put their affairs in order to avoid payment of the tax or a large part of it.

The proceeds of the Amex mortgage, namely $776,302.24 were paid to "Mr. Paul L. Mullins (In Trust)" by an Amex cheque dated March 30, 1984.

Nr. Mullins stated that in normal circumstances the cheque would have been deposited to his trust account. Cheques drawn on that account would be issued to the persons beneficially entitled to the funds, in this case, Woodslee and Ontario. Mr. Mullins stated that he gave instructions to his secretary to carry out the foregoing and also gave her a list of ultimate payees. Rather than doing that, the secretary caused Mr. Mullins bank to issue bank drafts as follows:

A term deposit of the Canadian Imperial Bank of Commerce was issued to Paul Mullins In Trust in the amount of $450,000. This amount together with the previous amount totalled $776,302.24.

Mr. Mullins stated that the Lavins were anxious to have their funds immediately. Therefore, Ontario was paid $200,000 on March 30, 1984 with the balance to be paid at a later date when the full entitlement of each of the shareholders was known and any tax liability of Shaudrey determined and an amount set aside for it. The dividend was determined to be $711,010 and Shaudrey paid this amount, as well as some Part II tax. The 1983 balance sheet of Shaudrey showed $464,010 owing to Woodslee and 237,000 owing to Ontario. The 1984 balance sheet of Shaudrey shows these amounts of indebted- ness reduced to $135,218 and $37,000 respectively. The 1983 Statement of Operations and Deficit of Shaudrey also shows $711,000 of common dividends having been paid.

Mr. McCreight painstakingly took the Court through the financial statements and other financial records indicating the source of moneys and how they were expended and the reasons for such expenditures.

It was Mr. Mullins' evidence, corroborated Mr. McCreight, that at all times Woodslee was indebted to Mr. Mullins in an amount in excess of the amount of the dividends. He also stated, as mentioned above, it would have been normal practice for Shaudrey to issue a cheque to Woodslee and thereafter Woodslee would issue a cheque to himself in satisfaction of the indebtedness to him and he would then pay his various creditors, but because of the actions of his secretary, the drafts were issued directly to these creditors.

The Canada Trust draft was used to repay Mr. Mullins’ home mortgage; the National Bank draft to repay a car loan and the draft to Nolan and Dumont In Trust was to repay amounts owed by Terra Lou Ltd.

It was the Minister's contention that Mr. Mullins received moneys in trust and directed that these trust funds be used to repay indebtedness of himself and companies controlled by him. It was the Minister's position that he treated the money as his own without regard to the real beneficiary. The appellant argues that the moneys were given to the person to whom Mr. Mullins owed a fiduciary obligation by reason of being a solicitor and having the funds paid to him in trust; that is to say, Ontario and Woodslee. However, rather than carrying out the series of transactions in the trust account, the amounts were paid from Woodslee directly or indirectly to the persons who were owed moneys by Mr. Mullins in order to reduce the indebtedness owed by Woodslee to Mr. Mullins. The Court believes that this was the case. The reason Woodslee initially was chosen to hold the Shaudrey shares was in order to put it in funds by way of dividends in order that Woodslee could repay Mr. Mullins. Woodslee did so by paying some of the dividends to Mr. Mullins creditors. There is nothing improper in this.

The entire transaction was recorded in the financial statements of Shaudrey and Woodslee and was also recorded in the Revenue Canada working papers.

It was pointed out several times that although Ontario was treated in the same fashion as Woodslee, its shareholders were not called upon to pay the tax owed by Shaudrey under section 160 of the Act.

In order for section 160 to have application, the amount transferred to the transferee must exceed the fair market value of amounts given in return. Here, the fair market is established by proving the value given for the Notes which were reduced by actual payment of the dividends to Woodslee and Ontario.

The respondent argues that Mr. Mullins received these moneys indirectly without having given fair value for the moneys. This was not so. Woodslee received what it was owed and in return paid Mr. Mullins what he was owed by Woodslee. If anyone may have been liable under section 160, it may have been Woodslee but that is not the issue in this instance.

The Court finds that the appellant has discharged the onus placed upon him to establish that he did not contravene section 160 of the Act.

Accordingly, the appeal is allowed with costs.

Appeal allowed.