Wilbert E Muncaster v. Minister of National Revenue, [1984] CTC 3016, 84 DTC 1821

Tremblay, TCJ:—This appeal was heard in Sudbury, Ontario, on May 17, 1984.

1. The Point at Issue

The point at issue is whether the appellant, a shareholder of Steel City Motors Ltd, is correct in the computation of his income for the 1978 and 1980 taxation years, in not including $24,490.15 and $3,394.09 respectively.

The respondent included the said amounts on the basis that they were received by the appellant as loans from Steel City Motors Ltd and not repaid pursuant to subsection 15(2) of the Income Tax Act.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessments 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 MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessments, or reassessments, are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

5. In its reassessment the respondent made, among others, the following assumptions of fact:

(a) At all material times the appellant was president and shareholder of Steel City Motors Ltd, (Steel City) a body corporate which operates an automobile sales outlet, a confectionery store, and a golf course operation.

(b) Steel City had a fiscal year end of March 31.

(c) the appellant’s shareholder loan account with Steel City showed the following balances as of March 31 and December 31.

Year	March 31	December 31
1977	$17,018.97	$17,018.97
1978	$45,229.78	$45,229.78
1979	$50,742.42	$50,875.42
1980	$54,269.51	$55,711.81
1981	$33,529.88

(d) the appellant did not designate or allocate the repayment of $20,739.63 made in 1981 to any particular loan.

(e) the repayment aforementioned was to be applied to reduce the balances in the appellant’s shareholder loan account in 1977 by $17,018.97 and in 1978 by $3,720.66.

(f) that during his 1978 taxation year the appellant qua shareholder received from Steel City Motors Ltd a loan in the amount of $24,490.15, which loan was not repaid within the 1979 fiscal year of Steel City Motors Ltd.

(g) that during his 1980 taxation year the appellant qua shareholder received from Steel City Motors Ltd a loan in the amount of $3,394.09 which loan was not repaid within the 1981 fiscal year of Steel City Motors Ltd.

(h) that at the time the loans were made no bona fide arrangements were made for repayment of the loans.

2.03 Admission

At the beginning of the hearing, the appellant disagreed with the facts described in subparagraphs (f) and (g) quoted above but admitted to the other subparagraphs (TS pp 3 to 5).

3. The Facts

3.01 The appellant in his examination in chief filed the following documents:

(a) Exhibit A-l is a request signed by the appellant on May 12, 1982 prepared by a Mr Carboni, investigator of the respondent. It reads as follows:

“I request that my shareholder advances be treated under subsection 15(2) of the Income Tax Act.”

It seems the appellant signed it without knowing exactly what this meant;

(b) Exhibit A-2 is a worksheet paper of the investigator concerning the shareholder’s account of the appellant from 1977 through 1981.

As I see the figures, they are in substance the basis of subparagraph (c) of paragraph 5 of the reply to notice of appeal quoted above in paragraph 2.02. This subparagraph was admitted by the appellant;

(c) Exhibit A-3 represents the ledger sheets (pages 3 and 4) from the general ledger of Steel City Motors from 1975 to March 1982. It is almost unreadable. However it is possible to read:

“Account 2001 — Name: Due from H E Muncaster’’

The appellant’s representative explained that figures marked A, B, C, D can be found on Exhibit A-4;

(d) Exhibit A-4 is a financial worksheet prepared by Thorne Riddell Company, the previous firm of accountants of Steel City Motors. It is an analysis of mortgage payable to Traders Realty from October 1972 to January 1978. It was done in October 1978 to allocate what they thought was a correct breakdown between interest and principal between the company and the appellant personally. The document is difficult to understand. However, the capital payments totalled $52,500 and the conclusion is that they are apportioned personal: $33,659 (64%) — company: $18,840 (36%);

(e) Exhibit A-5 is a summary of A-4 concerning the appellant personally from 1975 to 1978. He paid $33,659.09 (principal) and $14,216.28 (interest) totalling $48,875.37.

Concerning the year 1978, the total is $23,410. Capital: $17,980 and Interest: $5,430;

(f) concerning A-4 and A-5, it seems that the problem originates from 1972 which has given rise to the current dispute with the respondent. In 1972 Steel City Motors incurred a promissory note with Traders Realty Limited; (TS p 13)

(g) Exhibit A-6 is the said promissory note issued by Steel City Motors Ltd in September 1972 in favour of Traders Realty Limited for the sum of $40,000, payable $2,500 every six months, interest of 12 per cent being paid every month;

(h) Exhibit A-7 dated October 1972 is a ledger statement from the appellant’s lawyer and the company’s (Steel City) lawyer at the time of the note to show the disbursements of funds received from Traders Realty Limited (Industrial Acceptance Corporation $30,461 — Traders Group Limited $5,000).

The major concern, however, is whether the payments of those two amounts to Industrial Acceptance Corporation and Traders Group were debts of the appellant or debts of Steel City;

(i) Exhibit A-8 is a letter dated April 26, 1984 sent by Mr Lion, CGA, the appellant’s representative, to Thorne Riddell, Chartered Accountants. The main paragraph reads as follows:

In December 1967, Steel City Motors signed a note at I AC to cover wholesale conversion units sold by Steel City but not reimbursed to IAC. This note was paid out and refinanced in 1972 through Traders Realty Limited. Does your firm have any written confirmation during this period to indicate if the debt was that of Mr Muncaster or Steel City Motors Limited?

(j) Exhibit A-9 is the answer of Thorne Riddell dated May 1, 1984 saying:

... we don’t have any written information indicating the nature of the subject transaction . . .

3.02 The appellant explained that Steel City Motors made loans on each car it purchased. It was then like that in the auto industry. Traders Group or IAC made advances; it was a percentage of the worth of the automobile. It was used as working capital.When the car was sold, the lender paid the advance received on the said car. This was called “wholesale conversion” in the auto industry. In fact, however, the money was transferred directly from the lender car to Ford Company. Steel City did not touch the money. In the case of used cars, however, Steel City received the money from the lender IAC, Traders or Avco. (TS pp 19, 20, 21)

It happens that sometimes in order not to be obliged to pay right away on each car, the lender has an equity in the inventory. Then, however, a document is signed to this effect. (TS p 22)

The appellant’s contention is that the $30,461 and $5,000 paid to IAC and Traders Group in 1972 were debts related to wholesale conversion or advances. The accounting system of Steel City Motors was not appropriate in 1967, 1968 and after.

3.03 The appellant filed as Exhibit A-10 a letter dated March 24, 1983, by Traders Group Ltd. It reads as follows:

To the best of our recollection, the amount of $5,000.00 paid on October 19, 1972, from Steel City Motors Limited to Traders Group Limited was possibly to liquidate or payout new and used car purchases or new and used wholesale advances. To the best of our knowledge there was no personal loan transacted.

3.04 Exhibit A-ll is a letter dated November 15, 1982 issued by Continental Bank of Canada. It reads as follows:

In reply please refer to Account No. 043-997-7355 Steel City Motors Limited (IAC Limited)

Dear Mr. Muncaster:

Further to your request, we confirm that a cheque of $30,461.42 was applied to the above mentioned account October 23, 1972. This covered wholesale conversions dating back December 18, 1967. Cheque was applied $24,961.10 principal and $5,500.32 interest owing.

3.05 The appellant testified that since the very beginning when Steel City Motors was incorporated in 1947, he has been personally guaranteeing the loans.

3.06 In cross-examining the appellant, counsel for the respondent filed Exhibits R-l and R-2.

Exhibit R-l is the first page of the 1967 income tax return of Steel City Motors Ltd. including the balance sheet as at March 31, 1967. There is a note concerning contingent liabilities. One can read:

7. The company was contingently liable at March 31, 1967 as follows:

Customers notes under discount:

Industrial Acceptance Corporation Limited	$194,376.54
Canadian Imperial Bank of Commerce	13,896.24
Traders Group Limited	98,215.42
Avco-Delta Corporation Canada Limited	4,777.75
Guarantee of loan payable of W.E. Muncaster Limited and W.E.
Muncaster to Industrial Acceptance Corporation Limited	70,168.00
	$381,433.95

Exhibit R-2 is the first page of the 1968 income tax return of the same company, including the balance sheet as at March 31, 1968. The note concerning contingent liabilities reads as follows:

Guarantee of loan payable of W.E. Muncaster to Industrial Acceptance Corporation

— $37,294.10.

3.07 Concerning the note 8 of 1968, the appellant said:

I can’t explain it unless they wouldn’t give anymore to the company and they could give a personal loan to me guaranteed by the company, but the company would still get the money. I don’t recall this at all because it is too far back. (TS p 45)

3.08 Concerning note 7 of 1967, the appellant said:

I can only assume that maybe their head office didn’t want to lend the company anymore so that maybe they would put it through to me and the company would guarantee it. I am only assuming that money would still have to go into the company so I wouldn’t get the money. (TS p 46)

The appellant said he is not so surprised at that

because we had many difficult years to stay in business and it has never been any different really. Many other companies, automobile companies, had the same problems of financing and so on. (TS p 46)

3.09 The appellant, however, certified that

. . . the loan would stay in the company. Yes I am just assuming this because I don’t remember it any differently . . . (TS p 46)

Stayed in the company, yes that is the only explanation I have for it and vice versa. Whenever the company borrowed money from banks either I had to sign a personal guarantee. (TS pp 46, 47)

3.10 In re-examination, the appellant testified that the majority of car dealerships in Sault Ste Marie experienced financial difficulties and went out of business.

3.11 In re-examination, the appellant said that he changed accountants from Thorne Riddell

. . . I always watched very closely because I knew the regulations as far as owing your own company money, you had to pay taxes on it within one year and I always had a credit until this one year this large sum came up and I told Thorne Riddell. . . and they said “Someday you are going to be taxed on it”. I said I never got it and it is your job to find out where it went. (TS pp 49A, 50)

3.12 Mr Maurice Joseph Jolicoeur, an appeals officer with Revenue Canada testified that:

(a) The figures in Exhibit A-2 come from Steel City Motors Ltd’s general ledger. They are the same figures as those of paragraph 5(c) of the reply to notice of appeal. They were the appellant’s shareholder’s loan account balance; (TS p 52)

(b) Exhibit A-4 was sent to him by Mr Lion, the representative for the appellant, before he issued the notice of confirmation;

(c) the loan of $40,000, which appears on the first item of Exhibit A-4, was to refinance prior existing loans, especially one personal to the appellant from December 1963. Indeed one can read, relating to the $40,000 loan:

Oct. 19/72 Mtge. taken to refinance personal loans I AC, Traders, I AC Capital loan of $40,000 taken out August/63 — indicated as personal per W.E. M. in Dec/63 file $5000, Trader Group liability is unknown.

(d) the balance of $17,018.97 of the appellant’s shareholder’s loan in 1977

is partly made up of the interest and principal payments made from 1975 to 1977.

The figures shown on Exhibit A-4 as amounts being paid by the corporation were added to the shareholder’s loan account and therefore they are included in the figures in Exhibit A-2; (TS p 56)

(e) he received Exhibit A-12 from Mr Lion at the objection stage. He discarded it, however, because he did not know the origin of the initial loan of $26,000 which appears on the said Exhibit A-12 concerning the year 1968.

Moreover in the same exhibit under “Remark” the words “wholesale conversion” were struck out. Therefore it seems it is not a wholesale conversion;

(f) he does not think that the accountants Thorne Riddell made errors in doing Exhibit A-4 in 1978;

(g) basically he relied on the books of the company to issue the reassessments.

3.13 During cross-examination, the appellant’s agent made the following comments concerning the condition of the photocopy of Exhibit A-12 and the fact that the words “wholesale conversion” were struck out:

. . . I know what the photocopy came from, but if you look carefully on A-12, do you see this line across here?

A. Yes

Q. What do you think that might be, Scotch tape? On A-12 there is a very faint line across just where the balances start, the first one, a very faint line across. It looks like maybe somebody taped Scotch tape over something and photocopied it.

A. I would just be guessing.

Q. Basically, that is what happened. The clerk who maintains these cards was evidently very lazy and when they went off wholesale conversions to the note we are arguing about rather than type up a new card, all they simply did was rip the top off of a new card and tape it on an old card and she didn’t have to type out the top. Unfortunately, if I had known this would have been a point in the case, I would have brought the actual cards down but I didn’t think counsel would be looking at that. That is probably the reason why wholesale conversions is cancelled out because they were wholesale conversions but they evolved into a note payable to IAC. (TS pp. 68-69)

4. Law — Analysis

4.01 Law

The main provision of the Income Tax Act is paragraph 15(2)(b). It stipulates the requirement involved here — that a shareholder loan need not be included in the shareholder’s income.

4.02 Analysis

4.02.1 In fact, even if the requirement arising from paragraph 15(2)(b) is the basis of the reassessments, it is not the crux of the matter. The crux of the matter is whether Steel City did, or did not, make a loan to the appellant shareholder. Or better, on another aspect, whether or not Steel City for one of the appellant’s personal debts, [sic] Such a payment, therefore, became a loan to the appellant. It was supposed to be reimbursed to the company within the provisions of paragraph 15(2)(b).

4.02.2 The appellant argues that the money considered by the respondent as a personal loan of the appellant is, in fact, a loan of the company pursuant to what is called, in the auto industry, wholesale conversion (para 3.02).

Moreover, the appellant had been personally guaranteeing the company’s loans (para 3.05) and because once the lender ‘‘would not give anymore to the company . . . and he could give a personal loan to me, guaranteed by the company . . .”. However, according to him, in such a case the company received and used the money (paras 3.07 and 3.09). In those years it was a difficult time for automobile companies (paras 3.08 and 3.10).

To the respondent’s argument that the reassessments are based on figures taken from the company’s books and documents transferred by the appellant to the respondent, the appellant answers first that the books were very weak and second, that due to inadequate confirmation or verification methods of the previous accountants, the nature of the loan in dispute here can not now be clearly determined.

4.02.3 The appellant had a heavy burden of proof. Indeed, as argued by the respondent, all company documents transferred to him are to the effect that the appellant had a personal loan:

(1) The shareholder loan account (para 2.02):

5(c) based on Exhibit A-2, (paras 3.01(b) and 3.12(a));

(2) The general ledger (Exhibit A-3 — para 3.01(c));

(3) A financial worksheet prepared by the previous accountants (Exhibit A-4 — see paras 3.01(d) and 3.12(c) and (d)).

It is not only by saying that the company’s books were weak and that the previous accountants were negligent that the burden of proof can be reversed. It must be confirmed by something else.

4.02.4 In fact, at first glance the strongest evidence in favour of the appellant’s thesis are Exhibits A-11 and A-12 (see paras 3.04 and 3.12(e)).

The letter of Continental Bank (Exhibit A-ll) is confirmed by Exhibit A-12. The best evidence, however, rather than a letter and a photocopy in bad condition (3.12(e) and 3.13) would have been the appropriate employee of the Bank appearing with the original documents.

However, the Court is surprised that financial statements file [sic] with the company’s income tax returns do not refer to the debt which was incurred in December 1967.

It is difficult to understand indeed that in the balance sheet of Steel City ending March 31, 1968 (Exhibit R-2), there is nothing in the long-term debt concerning the debt due to Continental Bank of $26,101.10 (in January 1968) and of $25,961.10 (in March 1968). There is nothing either in the “Explanatory Notes to Financial Statements’’ concerning the same debt. Is it because it was not a debt of Steel City? In the ordinary way of reasoning, if it is not a debt of the company, one must not necessarily conclude that it is a debt of the shareholder. However, let us not forget that here the main point is whether this debt is the one of Steel City or that of Mr Muncaster. May it be said it was still the negligence of the previous accountants? One thing is sure — the presence of the appropriate employee of Continental Bank and the original card would have helped the appellant to reverse the burden of proof if his thesis is correct.

4.02.5 From the evidence adduced, the Court may not conclude that the appellant reversed the burden of proof. The reassessments are based on too many documents issued by Steel City. Once again the appellant had a heavy burden.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.