Henry J Rempel v. Minister of National Revenue, [1980] CTC 2709, 80 DTC 1613

John B Goetz:—This is an appeal by the taxpayer against his reassessment for the 1972 taxation year.

Facts

The first witness on behalf of the appellant was one Peter Loewen, who is a chartered accountant in Vancouver and who had Rempel as a client since 1956. Rempel was in the construction business and in 1967 incorporated H & D Investment Limited. He and his wife were the sole shareholders. Around 1970, he entered into a joint venture with another company, Buchanan Investment Ltd, to buy a large piece of land. They could not get financing, the purchase was frustrated and a lawsuit was threatened but did not occur. Jardine Holdings Ltd (hereinafter referred to as “Jardine”) was incorporated in April 1971 with the object of engaging itself in the construction business. H & D debts at this time were paid by Rempel. When Jardine was set up, the shareholder loan account showed incorporation fee $750 and real property $20,000.

At this point I think it would be proper to detail certain statements made in the Reply to Notice of Appeal:

3. In reassessing the Appellant, as detailed in the Notice of Appeal, the Respondent assumed, inter alia, that:

(a) The Appellant controlled Jardine Holdings Ltd (hereinafter referred to as “Jardine”), a corporation having the calendar year as its fiscal year.

(b) At all times material, the Appellant maintained a shareholder’s loan account, an account which recorded balances of various loans made to the Appellant from Jardine.

(c) The recorded balances in the shareholder’s loan account were:

December 31, 1971	($4,605.72)
December 31, 1972	($7,052.00)
December 31, 1973	$63,972.00

(d) Prior to the end of 1972, the following entries were made in the records of Jardine:

DR Savings Account $60,000

CR Shareholder’s Loan Account—H J Rempel $60,000

(e) In early 1973, Adjusting Journal Entry No 1 was made in the records of Jardine as follows:

DR Shareholder’s Loan $60,000

CR Bank Savings $60,000

“To reverse 1972 J/E JE 43”

(f) No consideration was provided to the corporation for its apparent reduction of the Appellant’s indebtedness to it.

(g) To that extent, that is $60,000, the loan was not repaid, notwithstanding the facts that the Appellant through his control of Jardine caused the aforementioned entries to be made.

(h) On December 22, 1972 the Appellant obtained a bank loan for $60,000 and opened a savings account No 7801610 at the Canadian Imperial Bank of Commerce, Kingsway at Knight, Vancouver, British Columbia. The sequence of events was as follows:

December 22, 1972—
— Bank loan to taxpayer, H J Rempel	$60,000
—Savings account opened in name of taxpayer,
H J Rempel with deposits of	$60,100
—Withdrawal from savings account	$60,000
January 5, 1973—
— Deposit in savings account	$60,000
— Withdrawal from savings account	$60,000
— Repayment of bank loan	$60,000

(i) The securities on which the taxable capital gain was realized in 1972 were registered in the name of the Appellant, were purchased by the Appellant, were sold by the Appellant, and were beneficially owned by the Appellant.

The accountant states that he had a discussion prior to the year end of 1972, with the appellant, reviewing the appellant’s tax position at the end of the year. The accountant had two concerns: (1) the shareholder’s loan account; and (2) that Rempel was using corporate accounts for all his personal expenditures and was engaged possibly in ineligible investments. Jardine’s bookkeeper prepared handwritten statement entitled “Jardine Holdings Ltd, AJG, 31-8-73’’, at the bottom of which page it is written:

To write-off the special a/c set up for HR’s stock transaction a/c closed by HR.

The accountant told the appellant that he should deposit personal funds into the company to cover expenditures by the company on behalf of Rempel personally and for the sum of $20,000 covering the purchase of $20,000 in shares. As Rempel did not have the money, he went to the Cana- dian Imperial Bank of Commerce and on December 22, 1972, borrowed $60,000, and signed a note. On the same day this sum of money, $60,000 was withdrawn and transferred to a savings account in the name of Jardine. In the bank confirmation slip dated February 2, 1973, the $60,000 was shown as a deposit on a term savings account when the banker withdrew the $60,000 from Jardine’s account. This confirmation slip was sent to the appellant on February 2,1973, in blank and signed in blank by the appellant. The bank then entered the figures, signed on February 6, 1973, and returned it to Jardine.

Mr Loewen also stated that all the shares and securities were considered to belong to the company and were recorded as assets of the corporation as security for the company bank loans of $20,040. However, Rempel registered shares in his own name because he treated the company funds as his own and registration was simply a formality. (I am paraphrasing the accountant’s evidence at this point.)

In October 1973 Rempel needed more working capital and the bank required additional security for borrowing by Jardine. To get this extra capital, the bank repaid first and second mortgages on the property owned by the appellant. Relating to land, the appellant says it is worth $200,000. The bank retained the duplicate certificate of title which was returned to Rempel in 1979.

In cross-examination, the appellant admitted that Journal entry # 43 related to the allegations of paragraph 3(h) of the Reply to Notice of Appeal.

The bank loan was made in the name of Rempel, in the amount of $60,000, which in turn was deposited in the savings account of the company, thereby allowing Rempel to repay his bank loan. There was no authorization for this transaction. At this point in cross-examination, counsel for the respondent introduced Exhibit R-1, which is entitled Jardine Holdings Ltd; Henry Rempel account: 31-12-73. This was prepared by the accountant and the first entry under the word “Adjustments” was:

Re—1972 y/e JE 43 reversed E-1 60,000—.

The amount of $60,000 was shown as the reversed adjustment. The appellant says that the original journal entry in 31-8-73 was probably done by the company’s bookkeeper. Journal entry # 43 represented transactions by Rempel in December 1973.

Neither Mr Loewen nor Mr Rempel was able to give a satisfactory explanation for the allegations made in paragraph 3(h) of the Reply to Notice of Appeal. Rempel, when giving evidence, indicated that he borrowed the $60,000, deposited it to his savings account and then, the same day, turned Same over to Jardine Holdings. He left the bank and then the bank transferred, shortly thereafter, moneys from the company Jardine back to his account to pay his loan. He could not answer how much of the $60,000 was for stock and he also stated that he never discussed when the money would be repaid with the bank, although he signed a demand note. He expected that it would be called in a year or two whereas it was recalled within two weeks; also, he had no idea of the duration of the loan.

The appellant admitted that he was a controlling shareholder of the following companies:

H J Rempel Industries Inc

H & D Investment Ltd

Jardine Holdings Inc

1971 Oakdale Holdings Inc

1972 Eldo Industries Ltd.

The appellant filed Exhibit A-4 showing the security portfolio, all registered in the name of Rempel and, although Rempel indicated that he had bought these, they were bought by the company and belonged to the company, and he could not say which shares listed in the security portfolio were owned by him.

The relevant section of the Income Tax Act, SC 1970-71-72, c 63, as amended, is paragraph 15(2)(b) which reads as follows:

15.(2) Where a corporation has in a taxation year made a loan to a shareholder, the amount thereof shall be included in computing the income of the shareholder for the year unless

(b) the loan was repaid within one year from the end of the taxation year of the corporation in which it was made and it is established, by subsequent events or otherwise, that the repayment was not made as a part of a series of loans and repayments, ts,

and, where the shareholder is a corporation, the amount so included in computing its income for the year shall be deemed to have been received by it as a dividend. (Italics mine.)

The appellant in his argument admitted that the key to the decision in this case is whether it can be established “by subsequent events or otherwise’’ that the various loan transactions were a part of a series of loans and repayments. The appellant’s counsel stated:

I think, with all due respect, the evidence is clear that at least $60,000 was, at the end of 1972, repaid. So perhaps then if that’s so the only question is what the effect, if any, of the $60,000 coming back again in January to Jardine’s Account, to Mr Rempel’s account, and the bank taking it to pay off the loan. Is that a part of a series of payments and repayments, to paraphrase paragraph D (sic).

Said counsel indicated that after “the dust had settled” it would appear that the substance of what happened in 1973 is that the bank took the $60,000 back which meant that Mr Rempel was again indebted to Jardine for $50,000. In argument, Mr Sturrock stated:

Now, with respect to the problem, if any, on Mr Rempel’s shareholder’s loan account and the fact, and we make no bones about it, he did use his shareholder’s loan account or he used an account with his company to pay both business expenses and to pay personal bills. I don’t know, but for example, maybe he paid his property taxes with it or something. It really matters not, but it was used for a dual purpose.

Counsel for the appellant admitted that it was not correct, on the purchase of shares and securities, for Rempel to have them all in his own name, and that they should have been split between the companies which would have to pay the capital gain thereon. He cited the case of J W Ramsay v MNR, 26 Tax ABC 193; 61 DTC 191.1 do not feel that this case is of much assistance to me.

Counsel for the respondent indicated that the evidence supports the contention to say that the onus in this case is perhaps a little more heavy than in the usual case because of the particular section involved. The burden was very heavy upon the appellant to show that the loan is included in his income unless he can establish by subsequent events that repayment was not made as a part of a series of loans or payments. The key words in this section are: “unless it is established”. The respondent contended that the statement that the affairs of Rempel were “a dog’s breakfast”, should not sit lightly with the Board because it should be taken altogether that the appellant was a controlling shareholder in five companies and was an experienced businessman. The respondent’s counsel did not accept the explanation of “dog’s breakfast” and stated that “the implication in that it is well, whether or not the shares are registered in my name or company ‘A’ or company ‘B’ is, are really all just our business and the Minister of National Revenue and for that matter no outside person dealing with these companies had a need to know and that is certainly contrary to the basis of the reason we have companies in business”.

I think it is relevant to cite verbatim, the contentions of the respondent:

It is again, not surprisingly, our submission that the repayment was made as part of a series and in support of that submission we would direct the Board’s attention to firstly, the wording on Exhibit R-1 in which the repayment, again, the second repayment, we’re dealing here with the company paying to Mr Rempel or on behalf of Mr Rempel and resulting in a shareholder’s loan account balance of $60,000, certain items including share purchases. So the company has paid to Mr Rempel those certain amounts. Then Mr Rempel paid back the company in December of ’72, then in January of ’73 the company again loans Mr Rempel funds.

Now, we would say that the loaning of the company the funds in 1973, January, takes this repayment out of a single incident and makes it into a series.

It was contended that a series is a loan, a payment, and another loan that makes it a series and that three or more is a Series. In this case we have three situations. To emphasize this point, counsel for the respondent alluded to the reverse journal entry #43 in 1972, indicating that there was a series.

Findings

Clearly, the two journal entries were related or the accountants would not have described them as one reversing the other. I feel that the appellant has not discharged the onus upon him with respect to the loan transactions specifically referred to in paragraph 3(h) of the Reply to Notice of Appeal and I hold that there was a series of loans and repayments bringing the appellant directly under paragraph 15(1)(b). The loan from the bank was made as a term deposit and was for a set term. In two weeks the term deposit was cashed and the loan was paid back. Then, the loan was only obtained for two weeks and the money was only paid back in two weeks. The two weeks happen to coincide with the year-end of the company and that was the reason for the loan, the reason for the repayment and the set of circumstances surrounding it.

With regard to the shares, Rempel acknowledged that he did not know who owned the shares as listed in his securities portfolio. He indicated that he disposed of the shares if the companies needed the money. This was done because the shares, in his words, were “ripe for sale”. As the appellant is unable to say which, if any, of the shares are owned by anyone other than beneficially by him, I think the Minister was correct in assessing him personally on any gain derived from any sale of such shares and the gain should be taxed in his hands personally in that they were all registered in his name. When he sold them, he must have been the beneficial owner.

I paid close attention to the submissions made by the appellant and the respondent, and of course to all of the evidence adduced, and as a result thereof, I find that I must dismiss the appeal.

Appeal dismissed.