Fred Wiseman, Steve Wiseman v. Minister of National Revenue, [1982] CTC 2634, 82 DTC 1633

D E Taylor:—These are appeals heard on common evidence in Montreal, Quebec, on May 4, 1982 against income tax assessments for the year 1975 in which the Minister of National Revenue added to each of the taxable incomes of the appellants an amount of $24,746.33 described as “Loan received from Morris Bros Tire Distributors Ltd (Morris)”. The respondent relied, inter alia, upon section 3, subsections 15(2) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended. In so assessing, the Minister presented the following assumptions of fact.

— On May 20, 1975, the appellant shareholder(s) received a loan from Morris in the amount of $24,746.33;

— During his 1975 taxation year, the appellant was a shareholder of Morris by virtue of being the registered holder of one share;

— The purpose of the loan was to enable the appellant to purchase a building situated at 8215 Champ d’Eau in the City of St Leonard, District of Montreal;

— The lending of money did not form part of Morris’ ordinary business;

— On November 30, 1976, the said loan in the amount of $24,746.33 was repaid to the lending company, and on the same day, Morris reloaned the same amount of $24,746.33 guaranteed by a mortgage in favour of the lender, Morris.

The position as outlined by the appellants was:

— The taxpayer(s), in 1975, (each) owned 50 per cent of the issued and outstanding common shares of SERIT HOLDINGS LIMITED (“Serit”).

— Serit owned (and continues to own) 96 of the 100 issued and outstanding common shares of Morris. The minute book of Morris indicates that the remaining 4 common shares were held individually by Fred Wiseman, Morris Wiseman, the estate of Hyman Wiseman and Stephen Wiseman. The minute book and supporting declarations of trust show that the said 4 individuals held their shares as nominees of Serit.

— During Morris’ 1975 fiscal year, ending November 30th, 1975, the company loaned (each) taxpayer $24,746.33. Property was bought in the personal names of the taxpayers.

— During Morris’ 1976 fiscal year, the taxpayer(s) repaid the loan to Morris. Thereafter, in the same fiscal year, Morris reloaned the same amount to the taxpayer in return for a 5 year registered mortgage on the property referred to above, requiring the payment of interest at the rate of 10% per annum. The said interest has been paid by the taxpayer in the years subsequent to 1976.

Contentions

For the appellants:

— The taxpayer(s) was not a “Shareholder” of Morris. The taxpayer only held the one share as a nominee and has no beneficial interest in the said share pursuant to the declaration of trust.

For the respondent:

— The substitution of loans made by Morris to the appellant shareholders) on November 30, 1976 did not constitute a bona fide repayment of a loan . . .

— Alternatively, having converted a receivable loan into a receivable mortgage constitutes none other than a repayment as part of a series of loans and repayments.

Evidence

The documents (corporate minutes, resolutions, sale and mortgage agreements, etc) supporting the assertions made by the appellants (that they were not beneficial shareholders) were submitted to the Board. Exhibit A-7 in this documentation as it deals with this matter reads:

TO: MORRIS BROS TIRE DISTRIBUTORS LTD

and to the Directors thereof

Dear Sirs:

I hereby declare that the one (1) Common Share in the capital stock of your Company registered in my name is held by me as nominee of SERIT HOLDINGS LIMITED and not as beneficial owner and I hereby consent to the transfer of the said share at any time upon the direction of the said SERIT HOLDINGS LIMITED.

I hereby authorize and direct you to pay to or to the order of the said SERIT HOLDINGS LIMITED any dividends, including stock dividends, or other distributions, whether of capital or income, that may from time to time be payable on the said share.

DATED as of December 15, 1971.

(Sgd) Stephen Wiseman

Fred Wiseman

In the presence of:

? ? ?

An official of Revenue Canada, Mr Jean Michel Ste-Marie, testified that during his examination of the books and records, he had been unable to find evidence that any interest had been paid by the appellants to Morris during the year in question, or during any years relevant to the appeals.

Argument

Counsel for the applicants presented two bases upon which it could be contended the appellants were not shareholders: first, that they were never meant to be shareholders — the minute book which showed them as shareholders was in error and the correct interpretation of their status could be found in the mortgage and in Exhibit A-7 noted above; and second, that even if they were shareholders (technically according to company law), they were not shareholders under the Income Tax Act because Exhibit A-7 prohibited them from receiving dividends. Counsel extended the argument to indicate that if the Board rejected both of these above, a prerequisite condition in subsection 15(2) of the Act was not fulfilled, namely that the loan was not a “series” of loans, since only two loans were involved, and two did not constitute a series.

Counsel for the respondent argued that Reininger v MNR, 20 Tax ABC 242; 58 DTC 608, was specifically relevant to this matter and counsel quoted certain passages therefrom: “.. . one cannot be a shareholder for one purpose and not for another.. .”; and

. . . irrespective of the foregoing, Section 8(2) makes no reference to the ownership of shares, but only to the holding thereof. Consequently, if an individual is officially on record as being a shareholder, no further inquiry would seem to be necessary. (pp 245 and 610 respectively.)

With regard to the alleged repayment, counsel’s view was that the original loan was not repaid by the transaction which substituted the mortgage for the loan receivable and if that substitution counted for anything, it was just part of the series of transactions (including the repayment of the mortgage) which was under review by the Board.

Findings

There are two points which come into focus. First, if the appellants were not shareholders, then the appeals succeed. Second, even if they were shareholders but the mortgage was only a substitute for the loan, the appeals fail.

Dealing with the second point, counsel for the appellants attempted to separate the “series” aspect as only related to payments on the mortgage, and thereby make a distinction as at November 30, 1976 between the loan (at issue in the appeals), and the mortgage. Making such a technical distinction does not prove that the mortgage paid off the loan. As I see it, the mortgage was a substitute for the loan as contended by counsel for the respondent, and it was not a repayment. In this particulr case, the evidence of repayment (that is making the creditor financially whole) does not appear to arise out of a transaction which simply makes the creditor more secure. Further, since the transaction put forward as “repayment” is not repayment at all, in my view the subsidiary point raised by the appellants regarding the composition of a “series of loans and repayments” does not seem to me to be relevant. It is therefore very doubtful that the appellants could succeed in overcoming this hurdle.

Nevertheless, it is in the first point proposed that the major difficulty arises. Counsel would have the Board recognize retroactively some constructional or administrative error in corporate records which classified the appellants as shareholders, while in fact they were not such. While there is jurisprudence indicating that the Minister may set aside the “corporate veil” and look at the substance of a transaction, I am unaware of corresponding jurisprudence which would permit the registered shareholder of a corporation to virtually do the same thing for his own personal benefit in a review of financial affairs. The appellants in this matter may have been victims of corporate misunderstanding or misinterpretation, but legally they were shareholders at the times relevant to the appeals. Divesting themselves in favour of Serit Holdings (Exhibit A-7) of the rights and privileges normally perceived as belonging to shareholders does not, of itself, negate their position or role as shareholders. Such a direction (Exhibit A-7), while perhaps effective internally, can have no effect, as I see it, against the third party to these appeals — the Minister of National Revenue.

One subsidiary proposition implicit in these appeals is that the appellants could (and they say “did”) own all the shares in Serit, and direct its affairs: that they could have Serit own all the shares in Morris; that they could be Serit’s nominees in directing the affairs of Morris; and that then, as individuals, not shareholders, they could avail themselves of the funds of Morris without the application of section 15 of the Act. In effect, the appellants proposed that by removing themselves as individuals, by one step, from the shareholdings of Morris, they could nevertheless act as shareholders without incurring the liabilities or restraints imposed on shareholders under the Income Tax Act. The Board is not called upon to address that total situation since the fundamental premise in these appeals (that they were not shareholders of Morris) has not been demonstrated. However, it would appear to me that this subsidiary skein of logic itself would require considerably greater proof than that which can be gleaned from a perusal of the argument brought forward in these appeals.

Decision

The appeals are dismissed.

Appeals dismissed.