Michel Lord v. Minister of National Revenue, [1981] CTC 2513, 81 DTC 445

The Chairman [TRANSLATION],:—The appeal of Mr Michel Lord against a tax assessment for the taxation year 1977 was heard at Ottawa on October 8, 1980.

The matter at issue is an amount of $18,731 which the appellant included in his tax return as income for 1977. The appellant deducted the sum of $18,731 from his tax payable as tax deducted at source. In his assessment, the Minister disallowed the sum of $18,731 as income for the appellant and refused to deduct the amount, which the appellant claims was deducted at source, from the tax payable.

Summary of Facts

The appellant was the sole owner of Lord Equipment Corporation Ltd (Lord Equipment), a company whose business was the leasing of construction equipment.

On November 24, 1976, the appellant sold all his shares in Lord Equipment to Mr Robert B Keefler for the sum of $350,000 (Exhibit A-2). From this sale, the appellant realized a taxable capital gain of $28,437 (Exhibit A-3). In clause 3(b) of the agreement in question, the buyer acknowledged that Lord Equipment owed the sum of $53,388 which was to be paid on May 1, 1977, the said sum being remuneration owing and payable as indicated in the company’s balance sheet on May 31, 1976 (Exhibit A-1).

According to clause 4(9) of the agreement (Exhibit A-2), the company was to withhold at source the taxes payable on the salary.

The appellant stated that he received from the buyer Mr Keefler two cheques totalling $31,157.20 and dated May 26, 1977 (Exhibit A-4); the bank refused to cash these cheques, as Lord Equipment did not have sufficient funds to cover them.

In his tax return for the taxation year 1977, the appellant reported as remuneration an income of $55,388; he deducted from his income the sum of $18,730.80 as tax deducted at source, and also deducted the sum of $34,657 as unpaid salary.

Submissions

The appellant, who represented himself, maintained in his notice of appeal and at the hearing that the computation of his income for 1977 was accurate since it was admitted that Lord Equipment owed him remuneration of $53,388; that he received as payment one cheque for $25,657.20 and another for $5,500, both of which were not covered by sufficient funds; that there remained an unpaid balance of the remuneration amounting to $3,500, and that the balance of $18,731 was tax deducted at source. The appellant concluded that the respondent erred in disallowing the deduction of $18,731 from his income. The appellant argued that if the Board rejected the first point in his appeal, it might, as an alternative, take the view that the loss of the $53,388 was for him a capital loss since payment of this salary was one of the conditions stipulated in the sale contract.

For his part, the respondent stated in his reply to the notice of appeal that:

14. The respondent submits that the remuneration owed the appellant was never paid and that, consequently, it was not subject to deduction at source, pursuant to s 153(1) of the Act;

15. The respondent submits that he properly excluded the sum of $18,731.00 from the computation of the appellant’s income and that, consequently, he properly refused to consider the same amount a deduction of tax at source, pursuant to ss 5 and 153(3) of the Act;

16. The respondent submits that the appellant did not sustain a deductible capital loss within the meaning of ss 50 and 40(2)(g)(ii) of the Act;

If it were only a question of determining the accuracy of the mathematical computation contained in the notice of appeal, the appellant would inevitably win his case. For income tax purposes, however, that is not the point at issue; the point is rather to determine whether the appellant received a legal payment in the amount of $31,157.20 and whether an amount of $18,731 in taxes was in fact withheld at source.

The evidence showed that on May 4, 1977 the appellant served notice on the buyer Mr Keefler, that the payment of the remuneration of $53,388 provided for in the agreement was past due and he called on him to pay it.

In his testimony the buyer, Mr Keefler — and the appellant’s witness — stated that he had explained to the appellant that the company did not have the funds and that the bank’s reply to a loan application was pending. Mr Keefler stated that the issuance of cheques payable to the appellant in the amounts of $25,657.20 and $5,500 (Exhibit A-4) was done at the urging of the appellant at a time when the appellant was aware that the company did not have sufficient funds to cover the issued cheques. In his letter of June 7, 1976 Mr Keefler, while recognizing that Lord Equipment did owe the amount requested by the appellant, emphasized in writing that the company did not have the funds and that these cheques had been issued on the understanding that they would not be presented for payment before the bank had granted the loan requested by Lord Equipment (Exhibit A-6 reads as follows:)

LORD EQUIPMENT CORPORATION LTD.

LTEE

Tuesday, June 7th, 1977.

M. Michel Lord,

c/o Selinger and Dengvari,

Suite 2707,

1 Place Ville Marie,

Montreal, P.O.

Dear Michel,

Further to our recent discussion I enclose two Lord Equipment Corporation Limited cheques for $25,657.20 and $5,500, these being the balance due to you, under clause (3.b) of our agreement of sale and purchase, less the $18,730.80 withholding tax.

As you are fully aware Lord Equipment Corporation does not at present have funds to cover either of these two cheques and they were issued to you on the understanding they would not be presented for payment at this time.

I am meeting with the Company bankers to arrange additional financing as I agreed and I will be in touch with you as soon as I have had these discussions.

If there is anything else I can do to help put your fears to rest, please let me know.

Yours very truly,

LORD EQUIPMENT CORPORATION

LIMITED

(Signed Robert B. Keefler)

RBK;jik

141 DE LA BARRE, BOUCHERVILLE, QUE. (514) 655-4333

The evidence indicates that the bank refused to grant the loan requested; Lord Equipment went bankrupt and, according to Mr Keefler, all the company’s assets and its books were seized.

It was not until April 12, 1978 that the appellant acknowledged receipt of Mr Keefler’s letter of June 7, 1977 and that, more specifically, he referred to the amount of $18,730, alleging that this amount had been withheld by Lord Equipment as tax deducted at source.

In support of his allegations, the appellant called as a witness Miss Monique Courchesne who stated that, as a secretary at Lord Equipment, she had made out the said cheques of $25,657.20 and $5,500 payable to the appellant. Moreover, contrary to what Mr Keefler had stated, she affirmed that tax in the amount of $18,730 had been withheld at source; that she had even made out the cheque; and that the payment had been entered in the company’s payroll.

When she was cross-examined, however, Miss Courchesne’s credibility was seriously undermined. In the course of a lengthy cross-examination, it appeared to me that the witness’s objectivity was questionable and she was forced to admit that she had made out the cheque for the tax withheld at source in blank and that she had turned it over to Mr Keefler. In his notice of appeal the appellant admitted that Lord Equipment did not issue him with a T4 slip, and Mr Keefler testified that he had not sent the cheque as he did not have sufficient funds in the bank to cover it — any more than he had sufficient funds to cover the cheques for $25,657.20 and $5,500 that he had issued at the appellant’s request.

On the basis of the evidence submitted, I must conclude that the appellant received no payments of $15,657.20 and $5,500 from Lrod Equipment in 1977, and that Lord Equipment was not liable for, and did not deduct from, the amount of $53,388 owed to the appellant the sum of $18,732 as tax withheld at source for the year 1977.

The respondent did not err in his assessment by excluding from the computation of the appellant’s income the sums of $25,657.20 and $5,500, since he never received these sums within the meaning of subsection 153(1) of the Act.

For the same reasons, the respondent did not err by excluding the amount of $18,731 from the computation of the appellant’s income and by refusing to consider this amount a deduction of tax at source.

According to the actual terms of the agreement of sale for Lord Equipment (Exhibit A-2) and the appellant’s own admission, the amount of $53,388 represents remuneration due to the appellant for management services. Even if the amount is specified in the agreement of sale for Lord Equipment, it does not on that account change from a payment to a capital asset.

The appeal is dismissed.

Appeal dismissed.