Gene K. White v. Minister of National Revenue, [1988] 1 CTC 2317, 88 DTC 1192

Tremblay, T.C.J.:—This appeal was heard on April 7, 1987 at the City of Calgary, Alberta. It was taken under advisement on reception of the last argument on August 31, 1987.

1. The Point at Issue

Pursuant to the pleadings: the notice of appeal and the reply to the notice of appeal, the point at issue is whether the appellant is correct in the computation of his income with respect to his taxation year 1979 not to include $2,425.00 and $9,051.23 received following a resolution of the directors of Alberta Petrochemical Consultants and Contractors (1976) Ltd. (hereinafter called the "company").

The appellant contends that these sums represent a return of capital not subject to tax because they are a reimbursement of expenses made by him on behalf of the company.

The respondent's contention is that the appellant, in 1979, sold to his partner, Gene C. Jorgensen, the 100 shares he owned in the company.

By resolution of the directors of the company, the latter acknowledged on May 28, 1979 that the company still owed $25,000 to the appellant. However, 17 days before, precisely on May 11, 1979, the appellant's shareholder loan balance was $13,448.77. In fact, pursuant to the respondent, the said balance was increased by $2,500.00 (bonus expenses) and $9,051.23 (fee expenses) and the appellant received a cheque of $10,000, dated May 15, 1979, from the company and a promissory note for $15,000 guaranteed by Gene C. Jorgensen.

The respondent contends that $2,500.00 and $9,051.23 were respectively received by the appellant by virtue of an office or employment. Alternatively, the respondent contends that these amounts are appropriations.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessments were also deemed to be correct. In the present case, the assumed facts are described in paragraphs 2(a) to (h) of the reply to notice of appeal as follows:

2. In reassessing the Appellant for his 1979 taxation year and, in respect of the matters in issue, he made, inter alia, the following assumptions of fact:

(a) at all material times, the Appellant was:

(i) the owner of one hundred (100) common shares in the capital stock of Alberta Petrochemical Consultants and Contractors (1976) Ltd. (hereinafter referred to as the company); [admitted by the appellant]

(ii) one of two directors of the company, the other being Gene C. Jorgensen. [admitted by the appellant]

(b) from the time of incorporation of the company, the Appellant advanced the company $50,000.00 by way of shareholder's loan; [admitted by the appellant]

(c) as at May 11, 1979, the Appellant's shareholder loan balance, being the amount still owed by the company to the Appellant, stood at $13,448.77; [not admitted by the appellant]

(d) by written agreement dated May 25, 1979, the Appellant sold to Gene C. Jorgensen one hundred (100) common shares in the capital stock of the company; [admitted by the appellant]

(e) by resolution of the directors of the company dated May 28, 1979, the company acknowledged that the Appellant was still owed $25,000.00 in respect of advances by way of shareholder's loan; [admitted by the appellant]

(f) The Appellant's shareholder loan balance was increased to $2,500.00 [corrected to $25,000.00 at trial] from the May 11, 1979 balance of $13,448.77 by the addition of two subsequent entries being $9,501.23 [corrected to $9,051.23 at trial] charged to fee expenses and a credit of $2,500.00 charged to bonus expenses, both in the Appellant’s 1979 taxation year. [not admitted by the appellant]

(g) The Appellant received $10,000.00 by cheque dated May 15, 1979 and a Promissory Note for $15,000.00 guaranteed by Gene C. Jorgensen in payment of the company's indebtedness, [admitted by the appellant]

(h) Fees and bonuses in the amount of $9,501.23 [corrected to $9,051.23 at trial] and $2,500.00, respectively, were received by the Appellant during his 1979 taxation year by virtue of an office or employment with the company. [not admitted by the appellant]

3. The Facts

3.01 The company was incorporated in 1976. The appellant was the only shareholder until 1979 when Mr. Gene C. Jorgensen purchased the appellant's 100 shares.

3.02 The agreement of purchase and sale, dated May 28, 1979, is filed as Exhibit R-1. The introductory paragraphs and paragraphs 1, 2(a) and 3(a) read as follows:

WHEREAS GENE K. WHITE (hereinafter referred to as "White") is the beneficial owner of One Hundred (100) common shares without nominal or par value in the capital stock of Alberta Petrochemical Consultants & Contractors (1976) Ltd. (hereinafter referred to as the "company"), Fifty (50) of which common shares are registered in his name and Fifty (50) of which common shares are held for him in trust by E. Susan Barnoff pursuant to a Declaration in Trust dated January 1, 1977, a true copy of which is attached hereto as Schedule "A" and forms part of this agreement;

AND WHEREAS White has agreed to sell the said One Hundred (100) common shares of the company to Gene C. Jorgensen (hereinafter referred to as "Jorgensen");

AND WHEREAS there remains owing by the company to White the sum of Fifteen Thousand ($15,000.00) Dollars, advanced to the company by White by way of Shareholder's Loan;

NOW THEREFORE THIS AGREEMENT WITNESSETH AS FOLLOWS:

1. On the basis of the warranties and representations of White hereinafter set forth and subject to the terms and conditions of this agreement, Jorgensen hereby agrees to purchase from White and White hereby agrees to sell to Jorgensen One Hundred (100) common shares without nominal or par value in the capital stock of the company (hereinafter referred to as the "shares") at and for the price of One ($1.00) Dollar per share, receipt of which is hereby acknowledged by White.

2. In consideration of White agreeing to sell the shares, Jorgensen covenants and agrees with White as follows:

(a) That concurrently with the execution of this Agreement, he will deliver to White a Guarantee whereby he and J-27 Consulting Ltd. (being a body corporate of which Jorgensen is the principal shareholder) will jointly and severally guarantee payment to White of his said Shareholder's Loan if the company shall be in default under the terms of its promissory note issued to White to secure the repayment of his Shareholder's Loan, a true copy of which promissory note is attached hereto as Schedule "B"and forms part of this agreement (hereinafter referred to as the "promissory note");

3. In consideration of White agreeing to sell the shares to Jorgensen, the company hereby covenants and agrees with White as follows:

(a) That it will pay all credit card expenses incurred by White in relation to his position as Director, officer or employee of the company to and including May 15, 1979;

3.03 The guarantors of the payment of $15,000, Gene C. Jorgensen and J-27 Consulting Ltd., signed the guarantee on May 28, 1979. It was filed as Exhibit R-2.

3.04 At the same date, on May 28, 1979, the directors of the company made a resolution concerning the amount of $25,000 owed by the company to the appellant. This document filed as Exhibit A-1 reads as follows:

WHEREAS since the incorporation of the company, Gene K. White has advanced sums of money to the company by way of Shareholder's Loan in order to finance the operations of the company and such loans have not been documented in the records of the company, nor has the company issued any form of security to Gene

K. White to secure the repayment to him of such loans;

NOW THEREFORE BE IT RESOLVED THAT:

1. The company hereby acknowledges and verifies the borrowing from Gene K. White of the sum of Twenty-Five Thousand ($25,000.00) Dollars.

2. The company hereby agrees to repay the said Twenty-Five Thousand ($25,000.00) Dollars to Gene K. White in the following manner and on the following terms:

(a) The sum of Ten Thousand ($10,000.00) Dollars forthwith;

(b) The sum of Fifteen Thousand ($15,000.00) Dollars in the following manner:

(i) Sixteen Hundred ($1,600.00) Dollars per month for nine (9) months commencing on the first day of July, 1979 and continuing on the first day of each and every month thereafter to and including the first day of March, 1980;

(ii) The sum of Six Hundred ($600.00) Dollars on the first day of April, 1980;

(c) The aforesaid sum of Fifteen Thousand ($15,000.00) Dollars shall be repaid without interest unless any payment is not made when due, in which case interest shall be payable at the rate of Fourteen (14%) percent per annum compounded monthly, calculated from the due date for payment until payment in full is made to Gene K. White;

(d) If the company shall fail to make any payments when due and if such monies and all accrued interest thereon is not paid to White in full within thirty

(30) days from the due date for payment, then so much of the said Fifteen Thousand ($15,000.00) Dollars as shall then remain unpaid to Gene K. White shall thereafter become due and payable immediately upon demand being made upon the company by Gene K. White.

3. The President and Secretary-Treasurer of the company are hereby directed to execute and deliver to Gene K. White on behalf of the company a Promissory Note in accordance with the foregoing Resolution, such Promissory Note to be substantially in the form attached hereto, subject to such amendments thereto as the President and Secretary-Treasurer in their discretion may deem to make.

WE, the undersigned, being all of the Directors of ALBERTA PETROCHEMICAL CONSULTANTS & CONTRACTORS (1976) LTD., hereby pass, adopt and approve the foregoing Resolution of the Directors of the Company, effective the 28th day of May, 1979.

GENE K. WHITE

GENE C. JORGENSEN

3.05 As Exhibit R-3, the respondent filed the photocopy of a cheque dated May 15, 1979 issued by the company to the order of the appellant, in the amount of $10,000.00. The description given on the stub reads as follows:

Initial Downpayment for Shareholders Loan and Purchase of Outstanding Shares in A.P.C. (1976) Ltd.

3.06 On a photocopy of the appellant's accountant working paper, concerning the company’s shareholder account, filed as Exhibit A-2, it appears that on May 11, 1979, the balance was $13,448.77. However, it is appropriate to quote the exhibit from the balance on October 31, 1977 to October 31, 1979.

3.07 It is important to state all the debit entries, above in paragraph 3.06, from November 7, 1978 to May 11,1979 total $4,283.72.

The cheques numbers 2262, 2386, 2488, 2415 and 2291 which, among others, are referred to in those entries above, were filed as Exhibits R-4, R-5, R-6, R-7 and R-9. The exhibits include the bills paid for. These exhibits give the following information : all those cheques were issued by the company, at the Canadian Imperial Bank, to the order of the appellant. All those cheques were issued to pay expenses incurred by the appellant and paid through credit card 410-425-133 except for cheque number 2291.

On some exhibits, it was written with a different handwriting the amount considered as personal expenses.

Concerning the latter cheque (R-9), the description says: “In acc't with Double A Stables for boarding and feed”. From the bill, it is obvious that "Double A Stables" is a horse. [sic] As the company does not own horse, it is obvious that it is a personal expense of the appellant. All the personal expenses total $4,283.72. Being paid by the company, they diminish the balance to $13,448.77 on May 11, 1979.

3.08 The credit entries on the shareholder account cited above (para. 3.06), i.e. $4,283.72, $4,767.51 and $2,500 are the amounts in dispute.

Mr. Peter Kovsher, member of the Certified Management Accountants (CMA), was the appellant's accountant from 1978 to 1984. He was not an employee. He was an outside consultant.

Under direct examination, Mr. Kovsher testified to the effect that in September 1979, the amounts of $4,283.72 and $4,767.51 were reversed and therefore, on the one hand, the shareholder account increased to $22,500. On the other hand, the drawing account was charged accordingly.

Moreover, the amount of $2,500 indicated as "bonus payable” was a bonus set payable in 1978. In fact it was paid in 1979 with the payment of $16,400 made from May to October as it appears on Exhibit A-2, cited at paragraph 3.06, leaving a balance of $8,600 in the credit of the shareholder account.

3.09 Under cross-examination, Mr. Kovsher said he was not really aware of any ill feeling between the appellant and Mr. Jorgensen. They were both directors of the company. "Mr. White was not as active as Mr. Jorgensen was, and Mr. White, I understand from Mr. Jorgensen, this is what he told me, Mr. White did travel on personal business but this is just what Mr. Jorgensen told me.”

Mr. Kovsher never read the agreement (Exhibit A-1, quoted in paragraph 3.02):

I wasn't aware. I wasn't aware of that nature of repayment. If you want, from what Mr. Jorgensen's told me, Mr. Jorgensen told me that he made some arrangement with Mr. White to buy out Mr. White's interest and he was to pay him $1,600 a month until — there was a $25,000 recorded, and he was to pay $1,600 a month until that was paid, and that was apparently paid. The last payment was probably apparently made in 1980 (TS, pp. 16, 17).

Well, we, according to the records, overpaid Mr. White about $1,700 in 1980, and I checked with Gene, with Mr. Jorgensen, what we should do with that, and he said that that is not collectible, that amount, and to charge it to contract wages or fees, and that was done in 1980 (TS, p. 17).

In fact in 1980, the overpayment was $1,789.42 to the appellant. A cheque dated May 13, 1980 issued by the company to the amount of $964.67 was filed as Exhibit R-8. The description reads as follows:

Payment in full for Credit Card Accounts with G.K. White & A.P.C. (1976) Ltd.

3.10 Mr. Kovsher said that at the end of 1978 and 1979, the company has retained earnings of $10,969 and $29,063 respectively.

3.11 At any time throughout the whole of the time the company was operating, the appellant did not receive wages or remuneration for his services.

3.12 The reason for the sale of the appellant’s shares was a dispute between the appellant and Mr. Jorgensen. The appellant was the salesman for the company and was responsible for the revenues of the company to date. For this he was to be repaid for all his expenses involved in obtaining, or working on obtaining revenues for the company. Mr. White was also on a personal guarantee for the banking indebtedness of the company. When the appellant discovered that Mr. Jorgensen had in fact incorporated a new company for himself and had started directing these revenues through his company, he had no alternative but to bring this situation to a head. That is the explanation given in substance by the appellant and Mr. Kovsher.

4. Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this case are subsection 6(1), paragraph 6(1)(c) and subsection 15(1). They read as follows:

6. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

(c) director's or other fees received by him in the year in respect of, in the course of, or by virtue of an office or employment;

15. (1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(d) on the reduction of capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies;

(e) by the payment of a dividend or a stock dividend,

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof, or

(g) by an action described in paragraph 84(1)(c.1) or (c.2),

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

4.02 Analysis

One of the main arguments of the appellant is that the agreement (R-1) between himself, Mr. Jorgensen and the company (para. 3.02) is to the effect that the company shall have to make "the repayment" to the appellant “of his shareholders loan”. The agent for the appellant continues . . . "the word 'repayment' means to reimburse, to pay back or, repay. When Mr. Jorgensen came up with the figure for the agreement, Mr. White was satisfied with it and therefore signed the agreement."

4.03 It is difficult for me not to see that both the appellant and Mr. Jorgensen were interested in increasing the shareholder's account credit to 25,000 (Exhibit A-1). For Mr. Jorgensen, indeed, the 100 shares were transferred to him for $1 per share.

For the appellant, it was more interesting to receive reimbursement from the company for deemed loaned money than payment of shares from Mr. Jorgensen, subject to tax. The argument that the company as a legal person (independent from its shareholder) signed the agreement (R-1) is not very strong. Indeed, one can state that its two representatives who signed for it are Mr. Jorgensen and the appellant, both interested persons.

4.04 Pursuant to Mr. Kovsher, who made the entries in the accounting book of the company, the amounts of $4,283.72 and $4,767.51 were accorded as fee expenses and the amount of $2,500 as bonus expense (Exhibits A-2 and R-10).

The evidence does not show the origin of $4,767.51. However, the evidence shows the origin of $4,283.72. From Exhibit A-2, it is indeed clear that it is formed by the appellant's personal expenses paid by the company. They were debited on May 11, 1979 to the shareholder account diminishing the company's debt due to the appellant (para. 3.07).

However, in September 1979, in view to adjusting the accounting entries with the resolution of the company (Exhibit A-1) and the Agreement (Exhibit R-1), the same amount of $4,283.72 was credited to the shareholder account increasing the company's debt. It was the same with the amount of $4,767.51. Even if we do not know its origin, we can deduce that it is of the same nature as $4,283.72: personal expenses paid by the company. Indeed, in recording those amounts, they were given the same description, “fee expenses" (Exhibits A-2 and R-10).

In increasing the company's debt with accounts of such nature, the company pays for the appellant's personal expenses. They must be included in the appellant's income just like the $2,500 bonus. They are in the nature of income.

The sincerity of Mr. Kovsher, who had seen neither Exhibit A-1 nor Exhibit R-1 when he recorded the transaction in the accounting books, does not change his testimony. He recorded as he did pursuant to the direction of Mr. Jorgensen.

4.05 The respondent's assumptions of facts described in paragraphs 2(c), 2(f) and 2(h) of the respondent's reply quoted in paragraph 2.02 still stand.

The preponderance of the evidence not only did not reverse them but confirmed them. The reassessment issued by the appellant must be maintained. The amounts involved must be included in the income pursuant to subsection 6(1), paragraph 6(1)(c) and alternatively subsection 15(1) of the Act.

5. The Conclusion

For the reasons given above, the appeal is dismissed.

Appeal dismissed.