Clark G. Wood v. Minister of National Revenue, [1988] 1 CTC 2312, 88 DTC 1180

Bonner, T.C.J.: —The appellant commenced appeals from assessments of income tax for the 1982 and 1983 taxation years. The appeal from the assessment for 1983 was abandoned at the hearing and judgment will therefore be issued dismissing it.

In assessing tax for the appellant's 1982 taxation year the respondent, in reliance on subsection 80.4(1) of the Income Tax Act, added to declared income the sum of $22,703.86 which he described as "overdrawn shareholder's account benefits”.

Subsection 80.4(1), in the form applicable to the 1982 taxation year, reads in part as follows:

80.4 (1) Where a person or partnership received a loan or otherwise incurred a debt by virtue of the office or employment or intended office or employment of an individual, or by virtue of the services performed or to be performed by a corporation carrying on a personal services business (within the meaning assigned by paragraph 125(6)(g.1)), the individual or corporation, as the case may be, shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which the aggregate of

(a) the amount of interest for the year on all such loans and debts computed at such prescribed rates as are in effect from time to time during the period in the year that the loans and debts were outstanding, and

(b) the aggregate of all amounts each of which is an amount of interest that was paid or payable in respect of the year on such a loan or debt by

(i) a person or partnership (in this paragraph referred to as the "employer") that employed or intended to employ the individual,

(ii) a person (other than the debtor) related to the employer,

(iii) the entity (within the meaning assigned by paragraph 125(9)(b)), to or for which the services were or were to be performed by the corporation, or

(iv) a person (other than the debtor) related to the entity (within the meaning assigned by paragraph 125(9)(b)),

exceeds

(c) the amount of interest for the year paid on all such loans and debts not later than 30 days after the end of the year.

Of particular concern here are the words ”. . . during the period in the year that the loans . . . were outstanding . . .". The appellant, in his notice of appeal, submitted:

. . . that the Respondent erred in his computation of his shareholder's loan account, by failing to recognize his entitlement to dividends from C.G. Wood Professional Corporation, of which he is the sole shareholder and director.

The appellant is an orthodontist. At all relevant times he was sole shareholder, employee, director and officer of C.G. Wood Professional Corporation, a company engaged in the business of providing dental services to the public. The company was incorporated in 1977 under the Companies Act of the Province of Alberta [1] .

On December 31, 1981, the appellant was indebted to the company in the amount of $71,834.00. [2] At various times during 1982 money was paid to the appellant by the company. The appellant appeared to be uncertain as to the nature of those payments. At one point he testified, "I think that they were dividends to be paid out throughout the year”. At another point he indicated that he thought the payments were advances. The evidence does not establish that the respondent treated as a loan to the appellant any payment which in fact was a dividend.

On December 6, 1982, the appellant's accountant wrote to him in part as follows:

The following transactions are required to give effect to your corporate and personal tax planning:

1. Declare and pay effective January 1, 1982, a taxable dividend of $205,000 from your professional corporation. Please ensure the dividend is documented in your corporate minute book. We will credit the dividend to your shareholder's loan by journal entry.

A resolution in writing signed by the appellant as sole director of the company was passed "as at" December 6,1982, [3] as follows:

1. BE AND IT IS HEREBY RESOLVED that a taxable dividend of $205,000.00 be declared and paid effective January 1st, 1982 from C.G. Wood Professional Corporation.

DATED at the City of Edmonton, in the Province of Alberta, as at the 6 day of December , 1982.

(Signed)

CLARK G. WOOD

On June 24, 1983, the appellant's accountant wrote to the appellant's solicitor as follows:

In conjunction with the financial statements for C.G. Wood Professional Corporation for the year ended December 31, 1982, please prepare the required minutes documenting the following transactions:

1. A dividend of $243,000 payable January 1, 1982.

A resolution in writing signed by the appellant as sole director of the company was then passed as follows:

RESOLVED THAT the Company declare a dividend totalling $243,000.00 to the sole shareholder of the Company on the 1st day of January, 1982, the said dividend to be paid on the 1st day of January, 1982.

IN WITNESS WHEREOF the sole Director of the Company has hereunto affixed his signature on the 3 day of August, 1983.

(Signed)

C. G. WOOD

A further resolution signed by the appellant as sole director of the company was passed as follows:

WHEREAS pursuant to advice given by [certain accountants] in a letter dated December 6, 1982, a Directors Resolution was prepared and executed which declared a dividend totalling $205,000.00 payable on the 1st day of January, 1982.

WHEREAS pursuant to further advice given by [certain accountants] in a letter dated June 24, 1983, a Directors Resolution was prepared and executed which declared a dividend totalling $243,000.00 paid on the 1st day of January, 1982.

WHEREAS the advice given by [certain accountants] in their letter dated June 24, 1983, was meant to replace the advice given in their letter of December 6, 1982; and

WHEREAS the Directors Resolution prepared pursuant to the advice given in the letter dated December 6, 1982, should have been rescinded because it was replaced with the subsequent Resolution.

BE IT RESOLVED therefore that the Directors Resolution declaring a dividend totalling $205,000.00 payable on the 1st day of January, 1982, and signed on the 6th day of December, 1982, is hereby null and void.

DATED at Edmonton, Alberta, this 10th day of December, 1984.

(Signed)

Clark G. Wood

Evidence was given by Durwood H. Ashcroft, a chartered accountant, tax specialist and partner in the accounting firm which acted for the appellant and his company. He produced a true copy of a sheet setting forth some of the journal entries for the company fiscal year ending December 31, 1982. One, journal entry number 8, debited retained earnings by $243,000 and credited the same amount to the shareholder's loan account to "Record dividend paid in 1982 & redeposited". Mr. Ashcroft was unable to say exactly when that journal entry was made. He did suggest that the necessity for a $243,000 dividend must have been recognized after December 31, 1982, and before March 14, 1983, the date of the financial statements for the company's year ending December 31, 1982. He agreed with a suggestion made by counsel for the respondent that the intention underlying his firm’s letters of December 6, 1982, and June 24, 1983, was to add all the drawings for the year (1982) to the balance at the end of 1981 and clear up the total debt by way of a dividend.

Two of the Articles of the company are relevant. They are Article 79:

79. A resolution signed by all the members of the Board, as such, shall be as valid and effectual as if it had been passed at a meeting of the Board, duly called and constituted, and shall be entered in the minute book of the Company accordingly, and shall be held to relate back to any date therein stated to be the date thereof.

and Article 99:

99. Subject to the rights of the holders of any shares entitled to any priority, preference or special privileges, the Board may, from time to time by resolution, declare dividends and pay the same out of the funds of the Company available for that purpose.

Counsel for the appellant argued that the assessment of the deemed benefit was not justified because the intent of both the appellant and the accountant was that the company pay dividends which were to be set off against the indebtedness of the appellant to the company which existed at the outset and against moneys paid to the appellant by the company during the course of the year. Counsel pointed out that one large dividend could have been declared at the beginning of 1982 or that dividends could have been declared from time to time as required during the year. He argued too that the respondent, who pleaded that he had assumed:

. . . that the dividend of $243,000.00 was considered effective on December 31st, 1982, the day the entry was recorded in the company's books;

did not quarrel with the principle that a resolution must be treated as relating back to the date stated to be its date. Finally, counsel suggested that the circumstances of this case do not involve the abuse that section 80.4 was intended to curb.

I do not find any part of this argument to be persuasive. Subsection 80.4(1) of the Act requires that regard be had to the period in the year during which loans or debts are outstanding. The statutory language is quite plain. At the end of any day during the year the test can be applied and the quantum of the benefit can be determined to that time subject only to reduction in respect of interest actually paid by the debtor as required by paragraph 80.4(1)(c). The length of a period during which a loan is outstanding is not affected either by the formation of an intention to cause sufficient dividends to be declared to permit a set-off or by what might have been done. Article 99 is quite clear. It provides that the Board may, by resolution, declare dividends. Dividends do not become payable unless and until an authorized organ of the company declares them. [4] It has not been shown that any resolution was, in point of fact, passed prior to January 1, 1983, and thus that any dividend was declared prior to that day. It follows that there is no basis for a finding that any dividend was owing to the appellant and available for set-off against the appellant's indebtedness to the company at any time during 1982.

The portion of Article 79 which requires that a resolution ”. . . be held to relate back to any date therein stated to be the date thereof . . .” does not operate to require persons other than the company and its shareholders to treat an event as having taken place before it in fact took place. Subsection 29(1) of the Companies Act of Alberta provided:

29 (1) The memorandum and articles, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member, his heirs, executors, and administrators, and in the case of a corporation, its successors, to observe all the provisions of the memorandum and of the articles, subject to the provisions of this Act.

Nothing in the wording of the statute makes the Articles binding on persons other than the company and its members. They do not bind the respondent who is a stranger to them. [5] I find unacceptable the notion that a company and its shareholder are entitled, for purposes affecting the rights of third parties, to rewrite history, that is to say, to treat imaginary events as having happened. A legislature has the power to enact deeming provisions. Others do not.

As noted previously, the respondent did in fact regard at least one of the resolutions passed in 1983 as having had effect on December 31, 1982. He did so by giving effect on that day to journal entry number 8. In doing so he erred. However, the result of that error was not an assessment of tax that is too high. There is no reason in logic or in law for compounding the error by finding that a dividend was on January 1, 1982, declared and paid by way of set-off. Finally, I will note that vague generalizations as to the mischief at which the legislation was aimed cannot form a substitute for statutory language construed in accordance with the "modern rule" [6] as a basis for determining liability, particularly in a case where no suggestion is made that the statutory language fails to clearly express the intention of the legislature. For the foregoing reasons the appeal from the assessment of tax for the 1982 taxation year will be dismissed.

Appeal dismissed.