Frank Cusack v. Minister of National Revenue, [1981] CTC 2912, [1981] DTC 862

D E Taylor:—This is an appeal heard in Toronto, Ontario, on September 23, 1981, against an income tax assessment for the year 1976 in which the Minister of National Revenue included in the income of the appellant an amount of $24,851 as a benefit received from the corporation Garden City Press Limited. The respondent relied, inter alia, upon section 3, paragraph 15(1 )(c), subsections 56(2) and 248(1) of the Income Tax Act, SC 1970-71- 72, c 63, as amended.

Ventures Marketing Services (“VMS”) was a partnership in which the appellant was a partner with one George Anastas. In addition, the appellant was a shareholder, director and President of Garden City Press Limited (“GCP Ltd”). From 1972 to 1976, VMS and GCP Ltd had mutual business arrangements and shared certain expenses. In November 1976, all the outstanding common shares of GCP Ltd (seven in number, including one each held by the appellant and Anastas) were disposed of to outside purchasers. At the time of the said disposition VMS owed GCP Ltd $49.702.26, such amount being composed of:

Accounts payable from business transactions of VMS to GCP

Ltd

$30,148.00

Less:	Accounts receivable from business transactions of
	VMS from GCP Ltd
		990.70
		$29,158.26
Ada:	Rents and share of administrative expense owing
	to GCP Ltd from VMS	20,544.00
Total debt of VMS to GCP Ltd		$49,702.26

Prior to the said disposition, GCP Ltd assigned the debt to the mother of the appellant for nominal consideration. Subsequent to the above-described assignment, she assigned her right to the amount to the respective wives of the appellant and George Anastas, each wife taking a 50% share of the right to the total debt, and for which share only nominal consideration was paid in each case.

Contentions

For the appellant:

— All of the transactions are bona fide transactions and, as such, do not constitute an indirect or direct benefit to the taxpayer.

— In any event, if it were an indirect or direct benefit to the taxpayer, the taxpayer ought to be entitled to counter-account from that amount the sums actually due to the taxpayer from Garden City Press Limited, which exceeded the amount of the deemed benefit in any event.

For the respondent:

— GCP Ltd, in extinguishing the debt owed to it by VMS of $49,702.26 in the 1976 taxation year, conferred a benefit upon the appellant to the value of $24,851.13.

— In the alternative, the appellant, in causing GCP Ltd to assign the receivable of $49,702.26 due GCP Ltd from VMS to the mothers of the appellant and George Anastas for nominal consideration prior to the sale of GCP Ltd, effected a transfer of property for the appellant’s benefit, or, in the further alternative, for the appellant’s mother’s benefit, such benefit being desired by the appellant.

Evidence

According to the appellant, at the relevant time in 1976, both GCP Ltd and VMS were insolvent. The purchasers of GCP Ltd wished to acquire the accumulated tax loss, and the appellant had received some professional advice regarding possible tax consequences in arranging the affairs for the sale as they were done. During the period 1972 to 1976, the appellant had advanced to GCP Ltd substantial other sums of money and personally guaranteed some of that corporation’s obligations. He had acted as “agent” for the seven common shareholders in the sale, and accordingly, at the critical date of the sale, he had owned all seven shares. As one of the conditions of the sale, both he and Anastas had been required to guarantee the remaining accounts receivable of GCP Ltd (the accounts receivable of VMS had been excluded). A contract had been arranged between GCP Ltd and VMS at the date of sale and VMS continued to act as sales agent for GCP Ltd. VMS remained in business and, in 1978, a limited company was formed out of it. There was no evidence of payment by VMS to any of the assignees. It was the view of the appellant that neither his mother nor his wife would have entertained thoughts of collecting on the assigned receivable from VMS since that could have resulted in the bankruptcy of the partnership.

Mr Graham S Brown, CA, who had been the accountant for GCP Ltd for many years, described the troubled financial history of the company, and the efforts of his firm to stabilize the operations. In 1975, the accounts receivable at issue had been of doubtful collectibility and a reserve had been established, reducing it on the books of GCP Ltd to a net amount of $2,000. The appellant (even though president of GCP Ltd) had objected to this as a partner in VMS, becuase it might reflect adversely on the partnership — nevertheless, Mr Brown insisted upon it. At the date of sale, the amount in question in this appeal formed the majority of all the receivables of GCP Ltd before it was excluded. It was his (Mr Brown’s) view that assigning the debt away from GCP Ltd in view of the impending sale of the company, provided the appellant with additional security against collection proceedings in VMS since the assignees were aware that the debt itself was worthless. Both the company and the partnership were insolvent at the date of sale, as he recalled the financial situation, although neither declared bankruptcy.

A copy of the director’s minutes effecting the first assignment was entered as Exhibit A-1:

IN CONSIDERATION (sic) of certain valuable consideration and the sum of one dollar ($1) paid to us, we hereby assign to Mary Kathleen Cusack the account of Ventures Marketing owing to us in the amount of $44,667.77.

Dated at Toronto this 4th day of November, 1976.

GARDEN CITY PRESS LIMITED

(Sgd) F Cusack

Per:

(Secretary)

No explanation was provided to the Board to reconcile the $44,667.77 above, and the total amount which appears to be at issue here — $49,702.26. However, that lack of detail does not appear to me to be critical to the determination of the basic question before the Board.

Argument

It was the position of counsel for the appellant that the Minister could not rely upon section 80 of the Act (the “forgiveness” section) since the debt in fact had not been forgiven or extinguished — it remained legally possible for the holder to take action for collection. In any event, the Minister had not used that section of the Act in assessing. As regards the assessment, no benefit accrued to the appellant at all. The debt was worthless, so no value could be attached to it, and in any event GCP Ltd, because of certain other advances and guarantees, owed the appellant an amount greater than that at issue. Counsel did not stress the “bona tides” of the transactions, but rather dealt with the fact that there was no benefit to the appellant from the transactions.

For the Minister, counsel noted that the transactions all appeared to be non-arm’s length; that it could be argued the appellant controlled GCP Ltd; that it had not been established the account receivable was worthless; and that therefore the assignment had conferred a benefit on the appellant. Counsel did not actively pursue the provisions of section 80 of the Act which deal with extinguishing a debt. However, it was pointed out by counsel that if the corporation had eliminated any right to attempt collection instead of just writing off the debt in the books of GCP Ltd, then the debt could have been caught by the provisions of section 80 of the Act and assessable against the appellant, according to those terms. However, that would not have produced any beneficial tax planning results which might have been sought by the appellant.

Findings

I am satisfied from the testimony of both the appellant and Mr Brown that the major purpose of Exhibit A-1 (assigning the debt in question to Mary Kathleen Cusack) was to protect the appellant against collection action being taken by the corporation after the sale. I am also satisfied that the effect of Exhibit A-1, as far as GCP Ltd was concerned, was to eliminate the accounts receivable from consideration in its records for purposes of the sale. The purchaser therefore acquired GCP Ltd with its assets reduced by this amount, whether by direct total write-off or by the reserve against it. There is no evidence that the account payable was taken out of the books of the partnership as a liability. The immediate tax consequences of eliminating it as a liability of the partnership were known to the appellant. I would make reference to a recent decision of this Board (Arcade Construction Ltd v MNR, [1981] CTC 2845) in which the interpretation of section 80 is examined. That is not the crux of the matter, however, since the Minister did not assess or plead under that section of the Act.

It was noted by counsel for the appellant in argument that while the amount in question had no economic value (due to the alleged impossibility of collection), nevertheless he also stressed that the assignment document remained as a viable instrument upon which legal action for collection could be taken by the assignee. It appears to me that it is precisely in this argument (that the assignee retained the right to collect) that the appellant finds himself in a quandary. The important benefit which accrued to the appellant by virtue of the non-arm’s length assignment was precisely that right to collect (or not collect) which rested under his control. While GCP Ltd may have considered the debt and consequently the right to collect as of no value, the appellant himself viewed those factors in a somewhat different light. He objected to the corporation even reserving against the debt in 1975, let alone writing it off in 1976. Nevertheless, he was unwilling to personally guarantee its payment to the purchasers of the corporation. He was fully aware that the account could not be collected by the corporation — to do so would put the partnership into bankruptcy. While the partnership was insolvent in 1976, it apparently avoided declaring bankruptcy, and the degree to which the control by the appellant of this right to legal action on the debt permitted the continuation, survival and expansion of the business operation of the partnership, can only be surmised.

It is not necessary for the Board to determine whether the transaction is caught by paragraph 15(1 )(c) or subsection 56(2) of the Act since the circumstances could lend themselves to application under either section. It could be argued that “a benefit or advantage” in the form of the right to collect the debt had been conferred on the appellant as a shareholder paragraph 15(1)(c)); or a “transfer of property”, with the same characteristics, was made with his concurrence as a taxpayer (subsection 56(2)). In either event, there was some value to be attributed to this right for the appellant, and his efforts to control it for his advantage are evident. There is no reason for the Board to conclude that it was “nil”, as argued on the appellant’s behalf. Any question as to the actual value of the right to collect might only be determined by a review of the subsequent eventual disposition of the debt in the records of the partnership or its successor limited company, a matter not before the Board in this appeal. While not necessary for a determination of this appeal, the “sales contract” between VMS and GCP Ltd, negotiated at the time of the sale of GCP Ltd, also may have exhibited the same characteristics of a “benefit”.

A benefit to the appellant was involved in the transactions described to the Board, and the appellant has not shown it to be of less value than that for which he was assessed.

Appeal dismissed.