Robert L. Barnes v. Minister of National Revenue, [1986] 2 CTC 2079, 86 DTC 1546

Brulé, T.C.J.:—This is an appeal for the 1980 taxation year. The appellant is objecting to a notice of reassessment dated July 12, 1983, wherein the Minister reassessed his 1980 income tax for an amount of $23,475.70, an increase of $7,094.92 from his previous assessment.

The facts leading to the reassessment are not disputed. The appellant together with his wife, Margaret A. Barnes, each own 50 per cent of the issued shares of a corporation called Bluewater Country Recreation Limited (hereinafter “Bluewater”). During 1979 cheques totalling $45,000 were issued by Bluewater to the order of Exact-A-Seal Limited (hereinafter “the Corporation”) a corporation owned by a friend of the appellant. In the books of Bluewater the amount of $45,000 was registered as “loan receivable” whereas it was shown on the Corporation's books as $45,000 share capital broken down as 1,000 common shares in the capital stock of the Corporation for $1,000 and 4,400 class B special shares for $44,000. All of the said shares were issued in the appellant’s name only. In January 1980 all shares were sold to an unrelated third party for a total consideration of $77,000 allocated $133,000 to the common shares and $44,000 to the class B special shares. The net proceeds ($76,800) were deposited in Bluewater's bank account, the accountant crediting $45,000 to “loan receivable” and the balance to “loan payable to shareholders” which account was paid equally to the appellant and his wife.

When the appellant filed his income tax return for 1980, he included into his income only half of the taxable capital gain, the other half being reported in his wife's return. He justified this allotment on the ground that he was acting as a trustee on behalf of himself and his wife when he bought the shares of the Corporation notwithstanding that the shares had been registered under his name only. The Minister refused the argument and reasssessed the appellant on the basis that since the shares were under his name then any gains therefrom had to be his. The appellant objected, resulting in the proceedings before this Court.

Analysis

The appellant has argued that he was acting as a trustee at the time of the transaction. This argument does not hold. For a trust to come into existence there must be three essential conditions: a certainty of intention, a certainty of subject matter and a certainty of object. In my view the appellant fails on the first one. Indeed, while the evidence has shown that his wife was somewhat involved in the discussions leading to the transaction, nothing indicates that she agreed to a trust relationship between her husband and herself with respect to her husband’s loan. Moreover the appellant testified that he invested in his friend's company not so much as an investment but to help that friend with his business. The intention of the appellant was to find money for a friend not to invest on behalf of himself and his wife. As a result neither party had the required intention necessary to create a trust. It is also clear that the appellant was not acting on behalf of Bluewater. All negotiations were done in his personal capacity and never involved investment by Bluewater.

The appellant also argued that the Court has to look at the legal effect of the transaction rather than its form. He submitted a number of cases where Courts have had to look beyond the appearance of a transaction to find its real legal implication: Pearson v. M.N.R., [1970] Tax ABC 401; 70 D.T.C. 1291, Byke v. M.N.R., [1972] C.T.C. 2332; 72 D.T.C. 1299, Dana/an Investment Ltd. v. M.N.R., [1973] C.T.C. 251; 73 D.T.C. 5209, and Nelson v. The Queen, [1974] C.T.C. 360; 74 D.T.C. 6266. In my view, those cases do not help the appellant. Indeed, in all of them the Court acted as it did because specific sections of the Income Tax Act allowed it to look beyond the appearance of the transaction. For instance in Pearson shares registered under the appellant's wife's name were deemed to generate income to the appellant be- cause of subsection 21(1) of the Income Tax Act. Mr. Fordham, Acting Chairman of the Tax Review Board said at 403 (D.T.C. 1293):

It is on these provisions that the respondent relies. On the evidence adduced I have no hesitation in finding that the shares which were received from Imler became and remained the property of the appellant and were never the property of Claudia Pearson.

Similarly in Byke and Danalan Investment the Court ruled beyond the appearance of the transaction because of subsections 16(1) and 8(1) of the Act in the first case (see p. 2335 (D.T.C. 1301)) and section 39 of the same Act in the second case (see p. 252 (D.T.C. 5210)). In Nelson the Court was asked to come to a similar conclusion under section 16 of the Act but it found that the provision did not apply. No similar provisions in the Act cover the case at bar.

For his part, the Minister argues mainly on the basis of the available documentary evidence. The thrust of the argument goes as follows: since the books of Bluewater do not give any precision as to whom the money was loaned, and since the money was used to buy shares registered under the appellant’s name alone, the conclusion can only be that he appropriated the money for himself and that the shares were his. It is true that documentary evidence is only a prima facie proof of its content (see Chrustie v. M.N.R., [1984] C.T.C. 2533 at 2540; 84 D.T.C. 1465 at 1470) and that the appellant may attempt to show that it is not reflective of the real situation but to do so the evidence submitted has to lead to that conclusion. In my view, the appellant has failed in this regard.

The appellant submits that he had no control over the inscription in the Corporation's books. That is only partly true. The appellant, on receipt of the shares, was made a director of the Corporation which means that he had access to the different books, including the shareholder's record. Had he wanted to verify the registration, supposing he did not know, he would have had the opportunity. The one thing that is certain is that the fact that the shares were shown to belong to the appellant alone leads to the conclusion that, in the Corporation's view, the transaction was made on behalf of the appellant alone and the appellant did not try to dispel that view.

Moreover the appellant had other opportunities to clarify the situation. When he received the payment after the sale of the shares the cheque was made to his order. He did not, then, complain or ask the buyer to change it to indicate his wife’s involvement. Also, he himself instructed his accountant to fill out Bluewater's book with respect to the loan. The entry that resulted read simply “loan receivable". This seems rather non-committal when it would have been easy to write it down as "loan to shareholders" or "investment by Bluewater". Once again, then, the appellant failed to correct the discrepancies between the documentation available and his version of the facts.

As was pointed out by the Minister’s counsel, it seems that the appellant simply loaned himself Bluewater’s money. Indeed there is no documentation as to when or to whom Bluewater loaned the money which, by the way, disregards completely the corporate entity. A company usually acts by resolution of its directors and one should never confuse his assets with those of the company. In this case, precise records might have given credence to the appellant’s position but they are not available to the Court. The only inference, then, that can be drawn is that the money was simply loaned to and used by the appellant. Nothing other than his ex post facto oral evidence seems to indicate that he intended to involve his wife in the above purchase and sale.

It follows that the evidence is not conclusive to reverse the presumption drawn from the documentary evidence. Therefore, in my view, the Court has no right to review the transaction as it was done. There is a well recognized principle in tax law that when there exist several ways of completing a transaction, a taxpayer is free to choose the one that will minimize his tax burden and the Minister would have no right to force the taxpayer to proceed by another method. The corollary of that principle is that when the taxpayer could have chosen another way than the one he decided upon that would have reduced his tax liability he cannot claim before the Court the benefit of the other method. As was set out in Lakeview Gardens Corporation v. M.N.R., [1973] C.T.C. 586; 73 D.T.C. 5437 (F.C.T.D.) by Walsh, J. at 591 (D.T.C. 5440):

However, as has been frequently pointed out, it is not what the taxpayer might have done to minimize taxation that determines the issue but the taxpayer must abide by the position which it has taken.

In the present case the Court recognizes that had the appellant acted on behalf of Bluewater then any income distributed, by way of dividends or otherwise, would have been divided equally between his wife and himself. As a matter of fact, if the loan had been clearly taken on behalf of both shareholders then the proceeds would also have been allocated to both equally. But such is not the case. The only available records indicate that the appellant borrowed the money himself, bought shares that were registered in his name and sold them on his sole accord. In such cases the Court can only recognize what did happen and not what could or should have been.

If the Corporation had complied with the provisions of section 230 of the Act and had properly recorded the details of the transaction at the time the money was borrowed then perhaps no problem would have existed.

I would like to underline before I conclude that even if the book entries had indicated a transaction on behalf of both shareholders, it might not have been sufficient to rule in favour of the appellant. The evidence shows that the entries were made some time after the transaction was completed. A question could then have been raised, under this hypothesis, as to whether they would have pictured accurately the intention of the parties at the time of the transaction. The role of the Court is to base its judgment on the transaction as it occurred and not on what the taxpayer chose to report a few months after everything was completed. In the case at bar this question is not raised in view of the conclusion that I have already reached but I would not like to leave the impression that the Court condones situations where documents relating to a transaction, especially in cases where a corporate entity is involved, are filled out much after the pertinent events.

The wife of the appellant has already filed and paid tax on one half of the capital gain and in view of this decision the Minister should consider an amendment to the assessment of Margaret A. Barnes for her 1980 taxation year.

For all the above reasons I dismiss the appeal.

Appeal dismissed.