Stephen R Garness v. Minister of National Revenue, [1982] CTC 2647, 82 DTC 1663

John B Goetz:—This is an appeal by Stephen R Garness with respect to assessments for his 1977 and 1978 taxation years.

At the outset of the hearing, it was agreed by counsel for the appellant that all of the allegations in the Reply to Notice of Appeal were agreed upon. The appeal is disallowed to that degree. That leaves in issue the ownership or rollover, of three pieces of heavy equipment and whether the appellant would be entitled to capital cost allowance, and therefore all I have to deal with are Exhibits A-1, A-2, and A-4 filed by the appellant.

The appellant is a trucker and his busy time is in the winter months. There were a number of inconsistencies in his statement under oath that I feel were purely unintended; he was worried and emotionally upset in the witness box, however I must add that, in anything I say at this point where there is an inconsistency in his evidence, I am certainly not inpugning his integrity.

The appellant stated that the incorporation of Gaylon Trucking Ltd was advised by his accountant, because of the growth in the size of his business, which incorporation of course the accountant did through a lawyer. To the income tax return of Gaylon Trucking Ltd for the period of January 1, 1977 to January 1, 1978, was attached its financial statement which disclosed that the company was incorporated on December 29, 1976 and commenced active business on January 2, 1977.

One of the first inconsistencies is that the appellant said he was not aware of the company until April 1977, because he was very busy, and I can well understand that; and then he goes on to Say that “from April 1977, did bulk business in the name of the company” and in July or August, he opened a company account. All the logging contracts at this time were in the name of the company. Now, the account that he was talking about was a general chequing account, and he had been in the logging business, he said, “for at least 15 years, logging contractor”, and I do not think he appreciated the fact, though he may have used it, that this general chequing account was under the name of “Gaylon Trucking Ltd”.

The next inconsistency in his evidence came with respect to Exhibits A-1, A-2, A-3 and A-4. Exhibit A-1 dated November 20/76 was a rental agreement (with option to purchase) of a Caterpillar Model D7-F. Exhibit A-2 dated January 14/77 was the purchase agreement for a Caterpillar 966C Wheel Loader. Exhibit A-3 dated November 22/76 was a rental-purchase agreement for a 08H Caterpillar Tractor. Exhibit A-4 dated February 8/77 was a conditional sale contract to purchase a D8 Caterpillar Tractor. All agreements were in the name of the appellant but, as can be seen, they were entered in the books of the company which paid the finance charges with respect to the acquisitions and became the beneficial owner thereof. The vendor of the above-mentioned equipment was Finning Tractor & Equipment Company Limited. The appellant was the sole proprietor of the company Gaylon Trucking Ltd. He did not act or react in any different way than the way he had done for the past number of years. The appellant said: “I was aware of the company at this time,” and then his counsel stood up and the appellant then said: “No, I was only aware of it in April’. He really did not change his modus operandi at any time as a logging contractor because all the equipment, he stated, “was in his backyard”.

Counsel for the appellant stated that “there was no income from the company in 1978”, that after January 1 or 2, 1977, “proprietorship . . . that is the sole, single operation of the appellant that made the money”. He attempted to state that the company only started operation in July or August. He had a master agreement with the logging company which he, in fact, changed in July. Therefore, he suggests that the income between January and July was his own income — or January to May, actually.

In my opinion, the key Exhibit is Exhibit R-1 filed by the respondent, where it is very clearly stated in very large letters “Election in Respect of the Sale of Debts Receivable”, and then it goes on to say: “For use by the Vendor and the Purchaser of a business where the properties sold include debts receivable”, and the name of the Vendor was Stephen Garness and the name of the Purchaser was Gaylon Trucking Ltd. The nature of the work and the business were described as “TRUCKING AND EARTHMOVING”. The date of sale of debts receivable was January 1, 1977 and the certifying statement was duly signed by the appellant. From that document there can be no doubt in my mind that as of January 1, 1977, all of the assets of the appellant’s proprietorship were turned over to his company. Exhibits A-1, A-2 and A-4 describe certain equipment which became the property of the company.

Exhibit R-2 shows a financial statement attached to the income tax return of the company for its fiscal period ending January 1, 1978 which was, of course, then related to its 1977 operation. The attached financial statement was prepared by chartered accountants with whom the appellant had dealt and relied upon for a number of years.

The appellant obviously was a very hard-working person, and he relied on professional accounting and legal advice. Where he has penned himself in is in his objections to the assessment for the respective years involved. I will come back to that later in these reasons.

The appellant indicated that one of the suppliers of Caterpillar equipment, namely Finning, would not allow him to transfer the three units, which is the issue herein, ie the ownership of the units into a corporate name, although the financial statement indicates that two other units with Finning would obviously have been rolled over on January 1 or 2, 1977. When the appellant was faced with Exhibit R-1, he said he may have signed it in blank. I do not think that a reputable accountant or lawyer would have an individual sign such a very important document in blank. There was a revised income tax return with a revised financial statement for the period ending January 1, 1977, filed by Mr Ross Davidson (the appellant’s counsel) who is a certified general accountant, in an attempt to correct what was already a fait accompli. Mr Davidson was retained in 1979. The interesting fact of the financial statement was that the profit and loss statements in both the original and the amended return were identical. However, in the amended return the amortization of deferred charges of $67,541 was reduced to $43,812 which was an attempt to turn over to the appellant, in his personal capacity, the capital cost allowance on the three pieces of equipment.

Exhibit R-8 is a form for an Election on Disposition of Property by a Taxpayer to a Canadian Corporation, which was filed in April 1980 and prepared by Mr Davidson on behalf of his client, in which the capital cost allowance purported to be attributed to the appellant in his personal capacity was disallowed. It is interesting to note that from January 1, 1977 on, the corporation paid all of the finance charges on equipment acquired in the appellant’s name.

Consequently, it would appear that the income during that period of operation (1977-1978) was that of the company. I cannot accept the appellant’s evidence with respect to Finning who had a Caterpillar franchise.

The notice of objection of the appellant, as pointed out by Mrs Lloyd (counsel for the respondent) shows that from January 1, 1977 the income, in dealing with paragraph 20(1 )(a) of the Act, namely the capital cost allowance could only apply to the business or property as it was wholly applicable to the source and the only business that was operating from January 1, 1977 on, was that of the incorporated company. In the appellant’s objection, which he duly signed, he states:

On December 26, 1978 a corporation, Gaylon Trucking Ltd, was incorporated under the laws of British Columbia.

The third paragraph of that objection states:

The proprietor filed a 1977 T-1 for the period ended January 1, 1977 reflecting CCA for this period. In addition the proprietor filed a T2057 electing under Sec 85 to roll over all all assets of the proprietorship on hand at that date . ..

The election was dated January 1, 1977. It appeared that the main thrust of his evidence was directed to the basis of his objection to the assessment and in the fifth paragraph of his objection he states:

Upon subsequent audit the CCA for the year ended May 31, 1977 was disallowed. The view of the auditor was that the assets were beneficially owned by Gaylon Trucking Ltd noting that all revenue and expenses pertaining to these units were recorded in the company.

The appellant had suggested that the three units had not earned income but in his objection, he says:

. . . The fact that there (sic) particular machines (Exhibits A-1, A-2 and A-4) did not earn income for the proprietorship is not relevant. The taxpayer also notes that the units in question also earned little or no income for anybody in this period as it was spring break-up when they were acquired.

The above statements, again, bely earlier evidence. The appellant was sadly mistaken about his business affairs. In the last paragraph of the objection, he states that:

The auditor argues that the intention of the taxpayer was to wind-up the proprietorship and all assets were disposed of at January 1,1977 per the original election.

The incorporation plan was drawn up by a firm of chartered accountants with whom the appellant had discussed it and he had obviously forgotten (I give him the benefit of that position) the meeting with his chartered accountants, who gave him advice that it would be to his benefit, taxwise and otherwise, to roll over his proprietorship assets as of January 1, 1977.

Mrs Lloyd argued that it was irrelevant whether or not the appellant knew the date the company was incorporated, and then she repeated the contention of the appellant that Finning would not allow him to take the benefit of any payments he had made on account of the units that ultimately came into the company at the time of the rollover.

I cannot accept as evidence that the equipment sold by Finning had to be in the appellant’s own name, because it was working in the business of the company that was incorporated in late December 1976. The actual fact of not changing the name of the bank account until July, again I find is not relevant; he merely changed the name of an existing account that had been operating for a number of years into that of Gayion Trucking Ltd.

The amended financial statement that was filed by the appellant’s new accountant excluded the three pieces of equipment (referred to in Exhibits A-1, A-2 and A-4) for the purpose of capital cost allowance, but significantly, all the finance charges were paid by the company and not by the proprietorship, which the appellant admitted in cross-examination. The charges for the three units were assumed by the company and not by the proprietorship, and so the company became the beneficial owner thereof.

As I mentioned earlier, there two further pieces of equipment of Finning Equipment which, on the appellant’s long-term liability, were included in his financial statement along with the equipment mentioned in Exhibits A-1, A-2 and A-4. Consequently, anything that was paid after January 1, 1977, was paid by the company and this satisfies me that all assets owned by the appellant were rolled over as of January 1, 1977.

Counsel for the appellant referred me to the case of MNR v Wardean Drilling Limited, [1969] CTC 265; 69 DTC 5194, and I am quite familiar with that case. The appellant contends that he had the use, possession and risk of the three units, which are involved in the sole issue in this appeal. The only business that they could be used by was that of the company which was incorporated in December 1976, according to the appellant’s own notice of objection. Admittedly, the equipment referred to in Exhibits A-1, A-2 and A-4 was in the name of Mr Garness, but I find that he was merely a nominee and agent for the company of which he was the sole owner, and who conducted its entire business. Mrs Lloyd, counsel for the respondent, argued, and I agree with her, that the Minister of National Revenue considered that the company acquired and used in its business the three pieces of equipment referred to in Exhibits A-1, A-2 and A-4 and, although the units were in the personal name of the appellant, the first financial statement filed for the period ending January 1, 1978 showed the liability of the company and it related to five units purchased from Finning Equipment, and obviously, then, it would appear that the company had assumed all liability, which indeed it had, for all of this equipment. The payments came out of the company account and whether it was Gayion Trucking or Gaylon Trucking Ltd, to me, is irrelevant. The appellant, Mr Garness, carried on his business exactly as he had since he started in the logging business.

Again, I wish to repeat, I do not consider that the appellant was prevaricating; he was just mistaken.

An amended return (Exhibit R-7) for the period we have just talked about was prepared by Mr Davidson. The interesting thing about this return was that the gross income was identical to the first financial statement filed by the appellant’s original accountants, and the Minister of National Revenue did not accept the amended return.

The respondent has allowed a capaital cost allowance to the company for the period in question and from the documentation that has been filed before me, I can come to no other conclusion than that there was a rollover of all equipment to the company and therefore the whole appeal is dismissed.

Appeal dismissed.