B & D Insulation Limited v. Minister of National Revenue, [1980] CTC 2878, 80 DTC 1759

The Assistant Chairman:— By reassessment for the 1977 taxation year, the Minister of National Revenue (respondent) added to the income of B & D Insulation Limited (referred to herein as “B & D” or the “appellant”) the sum of $250,000 and, in addition to adding that amount to its income, levied penalties against the appellant pursuant to subsection 163(2) of the Income Tax Act after tax reform and section 17 of the Income Tax Act (Ontario). The appellant appealed to this Board contending that the sum of $250,000 was not income to it in 1977 and consequently not only should that amount be deleted but also, since there was no unreported income, the penalties should be removed.

When the appeal was called for hearing counsel for the appellant took the position that, because of my interpretation of section 163(3) of the Income Tax Act, SC 1970-71-72, c 63 as amended, as expressed in the reasons given in the appeal of Isadore Waxstein v MNR, [1980] CTC 2398; 80 DTC 1348, it was incumbent on the respondent to establish that he had the right to levy the penalties before there was any onus on the appellant with respect to the assessment. While counsel for the respondent did not say he agreed with my ruling in the Waxstein appeal, he accepted the ruling and proceeded to endeavour to prove that the Minister had the right, in the circumstances, to levy the penalties imposed.

At the termination of the hearing both parties agreed that, since the only two issues in the appeal were whether or not the $250,000 was income and whether or not the penalties were properly imposed, in the event I held the penalties were properly imposed, the appellant’s appeal was to be dismissed. However, in the circumstances of this case, if I held that the respondent improperly imposed the penalties then the appeal was to be allowed and the assessment referred back to the respondent for variation to delete the $250,000 from income and to cancel all penalties.

In 1975 the appellant and another company, known as Canadian Insulation Services Company Limited (hereinafter referred to as “Canisco”), caused a third company to be incorporated, namely, Canadian B & D Insulation Ltd (hereinafter referred to as “Canadian”). The appellant and Canisco each owned an equal number of shares in Canadian. Canadian was incorporated to perform an insulation contract on a project at Corunna, Ontario. The fiscal years of the two parent companies ended on December 31, while that of Canadian ended on June 30. The contract which Canadian worked on was finished on December 6, 1977. On December 7, 1977, the appellant received from Canadian $250,000. By invoice dated January 31,1978, the appellant invoiced Canadian for $297,000. The cheque for $250,000 was used by the president of the appellant to acquire treasury bills which were held to maturity on February 24, 1978. The proceeds on redemption were used to purchase government bonds, none of which were registered in the appellant’s name or anyone’s name.

Counsel for the appellant admitted paragraph 4(h) of the reply to notice of appeal, which paragraph reads as follows:

4. In assessing tax and penalties as aforesaid, the respondent found or assumed, inter alia, that:

(h) none of the cash receipts or investment acquisitions referred to in subparagraph 4(g) herein were recorded in the appellant’s books or accounting records, nor was there existence disclosed by the appellant until after officers of the respondent had commenced an audit of the income tax affairs of the appellant on September 25, 1978.

He continued however that the books of the appellant reflected the transaction, but only after the date of September 25, 1978. As counsel for the appellant put the matter, the issue is whether or not the sum of $250,000 is income in 1977 or a loan in that same year, which loan would become income in 1978. If it is a loan in 1977, the appeal should be allowed. If it is income in 1977, the appeal should be dismissed.

The joint venture agreement between the appellant, Canisco and Canadian concerning the contract contained many clauses, among which were clauses stipulating that the assets, profits and liabilities were to be shared equally between the two joint venturers. The records of the appellant and Canadian revealed that, from the beginning of the venture up to and including the month of November 1977, the appellant invoiced Canadian monthly for the various costs they had incurred plus 2% of the monthly sales of Canadian as a management fee. While there were no invoices from Canisco to Canadian in Canadian’s books, those two were doing the same as the appellant and Canadian, that is, Canisco was getting the same amount as a 2% management fee.

While there was evidence suggesting that Canadian had loaned $250,000 to the appellant in 1977, I cannot find that money was “loaned” to the appellant. Regardless of what the transaction was I cannot hold that it was a loan. There is no objective evidence confirming a loan. There was no agreement in writing, no interest was called for and, while the “loan” supposedly was made a few weeks before the appellant’s 1977 year-end, the treasury bills (or the government bonds) not only were not shown as an asset on the appellant’s balance sheet but no loan payable was shown as a liability on the same balance sheet. It would have to be reasonably objective evidence to establish that the payment was a loan. It is to be noted that the financial statements of the appellant, filed with the Board as required by the Income Tax Act, are on printed stationery showing the printed name of a chartered accountant who also wrote to the respondent on this topic in December 1978 on behalf of the appellant. In part, this letter read: “In December, 1977, Canadian B & D had excess funds on hand and advances of $250,000 were made to each of the owner companies, these being treated as loans.” Later this letter in part continues: “At Dec 31, 1977, this $250,000 was still considered to be a loan . .

On March 22, 1978, a letter was written “To Whom It May Concern” and signed by an officer of Canadian saying that the sum of $250,000 was an advance to Canisco at no interest and repayable at their discretion. It was Stated that the arrangement was the same with the appellant. If it were a “loan”, one would think that this letter would have used that word. However, an endeavour was made to explain the use of the word “advance” by stating that the mother tongue of the author of the letter is French and this word in French could include “loan” in English. That officer also gave oral evidence to the same effect. On cross-examination he admitted thta the French word “prêt” is the more usual word for “loan”. There were two further letters on the subject: one dated December 5,1978, from Canisco to the appellant “To Whom It May Concern” confirming that it was a loan of $250,000, and one from the appellant to Canisco dated December 6, 1978, acknowledging that fact. The appellant’s corporate tax return for 1977 is dated April 4, 1978, and the certification box uses the name of the person who signed the acknowledgment letter. Because of these various inconsistencies, I have no hesitation in holding that there was no loan of $250,000 by Canadian to the appellant in December 1977.

This finding however does not determine the issue. Merely because I have held that the $250,000 has not been shown to be a loan does not mean therefore that it is income. The appellant, through its president, received the $250,000 in 1977, however it must be determined whether or not that was an income receipt. There is no dispute that the appellant, through its president, received $250,000 in 1977. What happened to the money? It was used to purchase treasury bills and, when they matured, the proceeds were used to buy bearer coupon bonds. The evidence was that the appellant had never purchased any bonds which were not registered. The bonds remained in a safety deposit box until the assessor’s audit in September 1978 and, shortly after the audit, were deposited in the company’s account. As the letter of March 22, 1978, stated: “it is reimbursable at their (Canisco’s) discretion’’ (there was the same arrangement with the appellant) and, apparently in that discretion, it was never repaid to Canadian by the appellant. Does it take an invoice to cause that amount to become income? The appellant admitted it was income in 1978, but no invoice was shown for $250,000 in that year. The agreement at clause 15, provides:

15. The interests of CANADIAN (herein Canisco) and of B & D in and to this contract, and in and to any and all property and equipment acquired in connection with this performance, together with all benefits and profits and liabilities derived from or resulting therefrom, shall be shared between CANADIAN (herein Canisco) and B & D on equal basis.

(The words in parenthesis are mine.)

It would appear that, at the time Canisco received a loan from Canadian, the appellant shared an equal amount but not as a loan, rather as profit on the venture.

As I view the matter, the $250,000 the appellant received in December 1977 was its share of Canadian’s profit and so that sum is income to the appellant. I am also of the view that the appellant deliberately left that sum off its financial statements for that year when it was reporting its net profit and so on, in the words of subsection 163(2) of the Income Tax Act, it

knowingly, or under circumstances amounting to gross negligence . . . has made or has participated in, assented to or acquiesced in the making of, a statement or omission (in this section referred to as a “false statement’’) in a return . . . made . . . as required by . . . this Act .. .

with the result that the penalties assessed by the assessment in question were properly levied.

Judgment will go dismissing the appeal.

Appeal dismissed.