G D L Simons v. Minister of National Revenue, [1985] 1 CTC 2116, 85 DTC 105

Kempo, TCJ:—

Part I — Issue

The overriding issue in this appeal was whether or not the respondent, by notice of reassessment dated March 17, 1981, was correct in adding the amount of $29,383.43 to the appellant’s income on the basis that funds or property of a corporation which he controlled had been appropriated to or for his benefit as a shareholder in his 1977 taxation year arising out of a credit entry in the said amount into his shareholder’s loan account.

Part II — Decision

For the reasons given in Part III hereof the appeal is allowed and the matter is to be referred back to the respondent for reconsideration and reassessment on the basis that the sum of $29,383.43 is not to be included in the calculation of the appellant’s income for his 1977 taxation year.

Part III — Reasons for Decision

A. Facts

Counsel for both parties agreed that the following facts were admitted, proved or could be inferred from the evidence;

1. Mr G GDL L Simons is a businessman who owned and operated two service stations as proprietorships. In 1976 he transferred those proprietorships to a new company GDL L Simons Ltd.

2. G D L Simons Ltd then commenced carrying on the operation of two service stations as its business. The company’s first fiscal period ended in July 1977.

3. At the end of the 1976 calendar year the Appellant had a shareholder’s credit of $987.16. (See Exhibit R-1).

Net equity contribution from proprietorships	$1,587.16
Less share capital issued in company	100.00
Plus miscellaneous expenses paid on behalf of
company by shareholder	2,427.64
Less drawings in 1976	2,927.46
TOTAL	$ 987.16

4. In preparing the financial statements for the company’s 1977 taxation year the company’s accountant erred in calcuating corporate profit and mistakenly credited the shareholder’s account by an amount of $29,383.43. This error gave rise to the appearance that the company owed its shareholders (the Appellant owned 99 of the 100 issued shares) an amount of $23,298.23 which was derived as follows:

1976 credit balance	$	987.16
1977 drawings	10,349.58
Credit salary		3,277.04
Credit—July 31, 1977
accountant’s mistaken entry	29,383.43
TOTAL	$23,298.00

5. The Respondent’s counsel conceded in the face of testimony of Mr Robert Simons that the apparent company liability to its shareholder resulted from the accountant’s error. The Appellant testified that he was unaware of the error in 1977 and that he still does not understand the mechanics of what has happened.

6. The 1977 T2 tax return and financial statements were filed by the company on February 1, 1978 which was the date they were received by the Minister. (Stamp on Exhibit A-l and testimony of Andy Beckett.).

7. By Notice of Reassessment dated March 17, 1981 the Minister of National Revenue reassessed the Appellant’s 1977 taxation year by adding the amount of $29,383.43 to his income and levying penalties on the basis that there was an appropriation of funds from GDL Simons Ltd. The Appellant objected and the Minister again reassessed on February 21, 1983 to delete penalties which had previously been levied under subsection 163(2) of the Income Tax Act with respect to the alleged appropriation. He otherwise affirmed the reassessment.

In his amended reply to notice of appeal the Minister of Revenue stated:

A. STATEMENT OF FACTS

1. In reassessing the Appellant, the Respondent included into income an appropriation from GDL Simons Ltd, based on certain assumptions of fact, inter alia:

(a) In 1977 due to various accounting errors, purchases were overstated by approximately $40,000. 00.

(b) To correct this overstatement, the accountant credited $29,383.43 to the shareholder’s loan account.

B. THE STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

2. The Respondent relies, inter alia, upon subsection 15(1) of the Income Tax Act, c. 63, SC 1970-71-72 as amended.

3. The Respondent submits that funds or property of the corporation, G D L Simons Ltd have been appropriated to or for the benefit of the shareholder, Gordon Simons, in that he received a credit of $29,383.43 to his shareholder’s loan account during the relevant year.

The testimony of AJ Beckett, an appeals officer with Revenue Canada, was that he dealt with this file in the capacity of an appeals officer and that the assumptions that were made on reassessment were as stated in paragraph 2 of the respondent’s amended reply to notice of appeal, supra. He had looked at the working papers of the Department’s auditor which determined that a series of accounting errors resulted in an overstatement of the company’s gas purchases with the ultimate consequence that the company thereby understated its profit. However, and for the purpose of balancing the company’s balance sheet as at its fiscal year, July 31, 1977, the accountant made the credit entry into the appellant’s shareholders loan account. As has been conceded by counsel for the respondent, all of the aforementioned actions of the accountant were based on error. The evidence is clear that the actions of the accountant were done without the appellant’s advice, instruction, knowledge or approval.

Accordingly there is no doubt but that the $29,383.43 which the respondent seeks to include into the appellant’s income as an appropriation was an erroneous accounting entry and did not, as at 31 July 1977, represent any actual movement of the company’s funds or property to the appellant.

It was the opinion of the respondent’s witness, AJ Becket, that a benefit had been conferred by the company on the appellant by the making of the amount available to the appellant and the financial picture of the company was such that he could have drawn down on the loan account at any time.

There was no evidence of any conduct by the company which could be interpreted as a corporate act other than, at best and for what it is worth, the appel- lant’s certification in the prescribed and authorized form on the company’s tax return for its fiscal year ending July 31, 1977 (Exhibit A-1) as follows:

balance sheet and the profit and loss statement, bear the signature of the accountant responsible for the errors.

The submissions of the appellant were as follows:

SUBMISSIONS

The case law is clear that the onus is upon the Appellant to show the assessment appealed from is wrong. To do this he can:

(a) challenge the Minister’s allegations that he did assume the facts he says he did,

(b) assume the onus of showing that one or more of the assumptions was wrong, or

(c) contend that, even if the assumptions were justified, they do not themselves support the assessment. Johnston v MNR 1948 SCR 486, Rand, J (Supreme Court of Canada)

In his Amended Reply to Notice of Appeal the Minister states that he assumed the following facts:

(a) In 1977 due to various accounting errors, purchases were overstated by approximately $40,000.

(b) To correct this overstatement the accountant credited $29,383.43 to the shareholders loan account.

The Appellant does not challenge that the Minister assumed those facts nor does he contend that the assumptions are wrong. He does however assert that the assessment cannot be supported on the basis of those facts.

The Appellant has four submissions. He says:

1. That the Minister has failed to allege as a fact that funds or property of the corporation were appropriated to or for the benefit of the Appellant as a shareholder or that a benefit or advantage has been conferred by the corporation on the Appellant as a shareholder.

2. That an erroneous accounting entry in the financial statement of the corporation, whereby a liability appears to be created between the company and its shareholder, does not constitute an appropriation of property or result in a benefit or advantage being conferred upon a shareholder.

3. That in the alternative, if this Court concludes that such an erroneous accounting entry results in an appropriation or in a benefit or advantage being conferred upon the shareholder, then the value of such benefit or advantage is nominal. Until the amount is drawn upon it should be viewed as similar to a line of credit at a bank.

4. That in the further alternative, if this Court concludes that the property was appropriated or a benefit or advantage was conferred upon the shareholder, then, it did not happen until the 1978 taxation year of the Appellant and the Minister was wrong in assessing the amount in 1977.

B. Analysis

The relevant statutory provision of the Income Tax Act (the “Act”) follows:

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, or

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

The classic analysis of the meaning of this provision is found in MNR v Pillsbury Holdings Ltd.* [1] The applicability of these provisions is not confined to funds or property of a company or a benefit or advantage that could otherwise reach a shareholder only by one of the orthodox dividend routes. “Any appropriation of resources for one purpose obviously restricts or eliminates their availability for some other purpose depending on the nature of the appropriation.” [Emphasis mine]

On the authorities the question of whether or not funds or property of the company were appropriated to or for the benefit of the appellant as a shareholder, or that a benefit or advantage had been conferred by the company on the appellant as a shareholder, is primarily a question of fact} [2] rather than a conclusion of law as had been advanced by counsel for the respondent.

As to the Minister’s pleadings in reply to a taxpayer’s appeal from an assessment, judicial reservation has already been expressed as to whether the factual assumptions which the Minister alleges he made and relied on therein could properly be read in conjunction with his allegations and assertions of law such that the latter may be interpreted (depending on the wording) so as to constitute an alternate factual assumption. J [3]

In the case at bar the allegations as pleaded in Part A and Part B of the respondent’s amended reply to the notice of appeal, supra, cannot be interpreted as alternate factual assumptions. The second part of paragraph 4 of Part B of the amended reply is simply a repetition, using different phraseology, of those factual assumptions as set out in paragraph 2 of Part A of the amended reply upon which the Minister did rely. The first part of paragraph 4 of Part B of the amended reply is an assertion of mixed fact and law which, if the onus to disprove same was clearly to be on the appellant, should have been asserted as an assumption of fact upon which the Minister relied in making the reassessment.

Accordingly it may well be that the appellant could succeed in his appeal on the basis that the assessment is not supportable on the assumption of facts as are recited in the amended reply. In other words there was no assumption that was not disproved by the evidence that could support the assessment.

However, and notwithstanding that the Minister’s allegations in the first part of paragraph 4 of Part B of the amended reply recites the very issue that the Court is ultimately called upon to decide, it nonetheless, at best, would constitute a submission or assertion of mixed fact and law such that the onus of proving the factual portion, at least, would be on the Minister.

In either case the totality of the evidence must be examined.

On the facts of this case the effect* [4] of the accounting entry did not create a debt or liability of the company to the appellant qua shareholder as the same was unquestionably an erroneous balancing entry to correct an erroneous overstatement of corporate purchases. It did not arise through any mutual dealings or transactions of any kind between the company and the appellant. It was made without corporate or shareholder knowledge, authorization or intent and without passage of even a scintilla of consideration.

No movements of funds or property of the company to or on behalf of the appellant by way of appropriation or otherwise had occurred as at 31 July 1977 or during the appellant’s 1977 taxation year. I would agree with the appellant’s submission that it is difficult to conceive of a liability as being funds or property that were appropriated.

On analysis of the basic substantive reality, neither party was the richer or the poorer either immediately before or after the event.f [5] On the facts of this case the error was an error and remained so for the appellant’s 1977 taxation year.

For identical reasons as just recited, this erroneous balancing entry does not amount to or result in a benefit or advantage being conferred on the appellant by the company as at 31 July 1977, or during his 1977 taxation year for that matter.

In either case there was no probative evidence tendered to show that the appellant acted upon or received any measureable benefit from this erroneous balancing entry during his 1977 taxation year which is the taxation year to which this appeal is confined.

All of the above disposes of the first, second and fourth submissions of the appellant, supra. In view of my decision I do not propose to deal with the appellant’s third submission which arose only by way of cursory argument.

Appeal allowed.