Margeson J.T.C.C.: — It was agreed at the outset that evidence given in one would be considered in the other where applicable.
The Appellants appealed from an assesment for the 1991 taxation year, notice of which was dated January 18, 1994.
By that asssessment, the Minister assessed the Appellants in the amount of $30,980.66 under subsection 160(1) of the Income Tax Act, (the Act). The Minister concluded that Central Holdings Ltd., a body corporate, (the Company) in its 1991 taxation year, transferred certain real property to the Appellants at a time when its tax liability was $30,980.66, including interest.
The Appellants contended that at the time the assessment in question was raised, the Company was not liable to pay any amounts under the Act in respect of its 1991 or any preceding taxation year.
Counsel for the Respondent admitted the allegations of fact in paragraphs a)l; b)2; c)3, 4, 5, 6; 9 and 10 in the Notice of Appeal. The effect of those admissions and the evidence adduced at the time of the trial result in the following relevant factual situation having been established:
The Appellant Jillian Wright was the daughter of John F. Wright, the owner of all the issued shares of the Company and the Appellant Jeffrey Wright was her brother.
At all material times the fiscal period and taxation year of the Company was February 28.
On or about April 12, 1990, the Company transferred real property located at Burnaby in the Province of British Columbia (the Property) to the Appellants.
The Company was reassessed for its taxation years ended February 28, 1989 and February 28, 1990, on May 26, 1992 and the Company’s liability was set at $67,525.65 and $141,686.96, respectively. On or about July 3, 1992, the Company objected to the reassessments for 1989 and 1990 and on May 31, 1993, the Minister of National Revenue further reassessed the Company in respect of its 1989 and 1990 taxation years resulting in a credit for those years of $199,614.69. Further, as a result of the Minister’s reassessment of the Company dated May 31, 1993 the Company’s tax liability at the time of the transfer was $30,980.66.
In February of 1993, the Company filed its return for the taxation year ended February 28, 1992 and requested a $50,000.00 refund of tax for that year. At that time, the Company’s tax liabilities for the 1989 and 1990 taxation years were under objection. The Minister issued a refund cheque in the name of the Company on April 1, 1993 and mailed it to what he considered to be the Company’s authorized representatives for the 1992 taxation year, whose address was the same as that appearing on the Company’s tax returns. The refund cheque was held for some period of time and ultimately cashed on or about July 23, 1993 after having been seized by Active Bailiff Services Ltd.
By Notice of Assessment dated January 18, 1994, the Minister assessed the Appellants in the amount of $30,980.00 in respect of the transfer of the “Property” in accordance with section 160 of the Act.
Further evidence was given at the trial by Jillian Wright, one of the Appellants who testified that she was never a shareholder, director or officer of the Company. She knew very little about the nature of the transfer of the Property in question but there is no doubt that she knew that it was transferred to her and her brother as alleged. Subsequent to the transfer, she and her brother received municipal tax bills for the Property. She did not know if the Company received payment from the father for the Property. She knew nothing of the Company’s affairs.
In cross-examination she said that her father treated it as a gift to her and her brother. Further, he told them that “they had to face the music about the tax implications”. Jeffrey Wright, the other Appellant, testified that his father told him that he was transferring the house to them. He was told to sign some papers. He paid nothing for it. Likewise, he was never a shareholder, director or officer of the Company. He had been an employee one time but never did work for the Company. He had no knowledge of the Company’s affairs nor of its records.
His father told him that the tax problem was for him and his sister. He sold his interest in the Property for $190,000.00. He admitted to having received tax notices for the Property.
In cross-examination he said that he did not know when the transfer took place but he would have thought that his father would have paid the Company for it. Counsel for the Respondent called evidence but indicated that she was not conceding that any onus had shifted to the Respondent.
Mr. Ambrose Okoro was an Appeals Officer with Revenue Canada. He dealt with the objections filed by the Company for 1989 and 1990 and dealt with the present appeal.
He caused the May 31, 1993 reassessment to be done. He put a stall code on the file which was removed on August 19, 1993. He had contact with the Company’s accountant and lawyer. He was not told that he could not discuss the file with the accountant but later was told to discuss the matters with the lawyer. He told the lawyer that he had allowed the objections.
He said that the most recent address for a taxpayer is used unless there is a notification to change that address and this did not happen here.
He confirmed that a dividend refund was granted for the 1992 taxation year in March of 1993. The practice was not to withhold refunds in subsequent periods for taxes owing in an earlier period if the amounts were in dispute.
He traced the course of his dealings with the Company lawyer and the negotiated settlement of the objections. He had nothing to do with processing the refund.
In re-direct examination he confirmed that the signing page of the return seemed to have the same signature for the 1987 through and including 1992 taxation years and that this was the address of Moris Jones of Jones Richards & Co., the Company’s accountants. He also indicated that Moris Jones had been representing himself as a signing authority for the Company.
James Peter Mise was an Appeals Officer with Revenue Canada. He dealt with the assessment in question here. He knew that the years 1989 and 1990 were under appeal but had no consent to withhold the refund cheque. He determined that the Company had tax liability for the year in issue in the amount of $30,980.66. He said that they could not proceed to collect it due to the “stall code”. He saw no document which asked Revenue Canada to hold on to the refund cheque. On May 31, 1993 the claimed balance was due.
In cross-examination, he traced his involvement with the file and identified Exhibit A-l which was the hard copy of the computer print-out of the Company’s account with Revenue Canada that he had prepared.
In re-direct examination he said that there was nothing in Exhibit A-l that would lead him to conclude that the Minister was wrong in assessing the Company for the tax liability outstanding as set out in the assessment, Notice of which was dated January 18, 1994. The liability still outstanding at that time was no less than the amount assessed.
Argument of the Appellants
Counsel for the Appellants admitted that as of of the date of trial the amount in issue is still outstanding but that was because of the cheque manipulation instituted by the accountant for the Company. The accountant had held the cheque for almost four months during which he brought a creditor’s claim and had the cheque for $50,000.00 seized and negotiated.
Counsel argued that the Respondent is required to apply all credits and allowances that the taxpayer Company was entitled to before enforcing a section 160 assessment. He took the position that before that time the amount owing by the Company had been reduced to nil and indeed there was a credit balance as a result of the dividend credit assigned to the Company. That occurred on March 22, 1993.
Counsel argued that the Minister did not have to make a tax refund under subsection 129(2) but could have applied it to the outstanding balance and that is exactly what he did as shown by Exhibit A-1, page 6, where the figure is set out as $176,248.34 shown as the revised balance. This figure included amounts which were subsequently reversed by the reassessmentssment. When these credits are taken into account the balance is in the credit position of roughly $20,000.00.
On March 22, 1993, the Minister’s own records show that the account had been reduced by $50,000.00 when the refund was applied to the account. The Minister did not have to issue the refund cheque. If he had not given it out, it would have been applied to the account and there would be no liability.
Counsel also implied that the cheque may have been issued to the accountant of the Company without authority but could produce no evidence to that effect. Simply put, counsel argued that the issue boils down to whether the Minister applied the credit of $50,000.00 to the benefit of the Company so as to remove the liability.
Counsel further argued that the filing of the computer print- out by the Respondent was sufficient to dislodge the presumption that the assessment was correct and the burden then shifted to the Respondent.
Counsel further referred to the matter of consideration and the Appellant’s evidence that it was a gift from their father but produced no evidence on behalf of the Company except the statements by the Appellants that that was their belief.
Counsel asked that the appeals be allowed.
Argument of the Respondent
Counsel argued that there was no merit in the argument that the burden had shifted on the basis of the information contained on page 6 of Exhibit A-1, elicited on cross-examination without explanation nor on the basis of his interpretation of the entries in Exhibit A-1.
If the suggestion was that enough doubt was cast on the meaning of the entries to shift the burden of proof then that argument was inadequate. There were a number of entries on March 22 and the balance, o/s is shown as $226,248.34 which is the same amount shown on the previous page. This does not support the contention that the $50,000.00 was credited to the 1989 and 1990 balances. This had to be established by counsel for the Appellants through the witnesses and this he did not do. The $50,000.00 item as shown at page 6 of Exhibit A-1 was merely an in and out entry on the same day and the balance remains the same.
In the case of Phillips v. R., (sub nom. Phillips v. Canada) [1994] 2 C.T.C. 2416, 95 D.T.C. 194 (T.C.C.), it was held that a mere bookkeeping entry moving the amount of a bonus owing to the Appellant from “bonus payable” to “due to shareholder” did not warrant the inference that there had been an actual payment to the Appellant, followed by a re-loaning to the Company. Accounting entries are supposed to reflect reality, not create it.
In Berube v. R., (sub nom. Berube v. Canada) [1994] 1 C.T.C. 2655 (T.C.C.), a similar decision was reached.
It is not enough to look only at that part of the Exhibit referred to by counsel for the Appellants alone, but you must look at the bottom line after the credit was received.
But in any event, the viva voce evidence of Mr. Mise was that after all was said and done, the liability of the corporation with respect to its 1990 taxation year was as pleaded by the Respondent. A cheque was issued, that accounting entry was reversed the same day and we are back to square one. The liability did not disappear and then come back into existence by virtue of the computer entry. The liability exists. Payment could not be required until after the Notice of Reassessment was issued after May 31, 1993.
There is no doubt that the corporation was liable as pleaded by the Respondent. Just because the taxpayer did not have a liability for tax assessed to it on the date of the transfer does not mean that it did not have a liability in the amount assessed on May 31, 1993. It is the earning of the income that creates a liability and not the Notice of Reassessment.
Counsel was prepared to concede that the Appellants could be successful if the cheque for the refund had been issued without the ostensible authority of Jones, Richards & Company to receive it and without the ostensible authority of the bailiffs to negotiate it. The real issue is the $50,000.00 cheque. There is no evidence to support the position that the cheque was issued or cashed without ostensible authority of the accountant for the Company.
On the main issue of the effects of the book entries, counsel referred to Samra v. Minister of National Revenue, [1991] 2 C.T.C. 3653, 92 D.T.C. 1008 (T.C.C.) for the proposition that it would be improper to base a shareholder appropriation on a mere book entry. The Court quoted from Gresham Life Assurance Society v. Bishop (1902), 4 T.C. 464, at page 476.
... But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter...
In this case, that something must be a sum of money. A mere entry in an account which does not represent such a transaction, does not prove any receipt, whatever else it may be worth.
Counsel argued that under the Act, section 225.1, the Minister could not have taken any collection action until August 31, 1993 with respect to the 1989 and 1990 taxation years. This section is mandatory.
Section 224.1 of the Act does not require the retention of the refund. If the Minister erred here on the side of caution in giving the cheque out, the only recourse a taxpayer could have would be an action for recovery in the Federal Court, Trial Division.
The Minister did not give a credit for the $50,000 for the 1989 and 1990 taxation years and therefore did not reduce the debt by $50,000.00. But if he did, he then gave a cheque for $50,000.00 and thus he gave double entitlement to the taxpayer and this is not reasonable.
The appeal should be dismissed.
Rebuttal
In rebuttal, counsel for the Appellants referred to Acton v. R., 95 D.T.C. 107 (T.C.C.), at page 108 where Bowman J.T.C.C. in referring to an earlier decision, said:
Where section 160 of the Income Tax Act is invoked by the Minister the joint and several liability of the transferee is a secondary or derivative one. An assessment under section 160 may be challenged on a number of grounds, including the following:
(a) that the transferee gave consideration equal to the fair market value of the property transferred;
(b) that the liability of the transferor at the date of transfer was less than that assumed by the Minister. It is of course open to the transferee to challenge the correctness of the assessment against the transferor even if the transferor has failed to do so, or is, as is the case here, precluded from doing so: Thorsteinson v. Minister of National Revenue, [1980] C.T.C. 2415, 80 D.T.C. 1369; Ramey v. R., [1993] 2 C.T.C. 2119, 93 D.T.C. 791;
(c) that the person who transferred the property was not the taxpayer having the primary liability for tax;
(d) that the liability of the transferor has been reduced or extinguished at any time following the transfer;
Counsel’s point was that even a loss, though it be determined subsequent to the transfer, should be applied to reduce a liability. Likewise in the case at bar any amount credited to the account after the transfer must be applied to the account regardless of the assessment.
The question to be asked, according to counsel, was: “Did the Minister apply a $50,000.00 credit to the benefit of the taxpayer? If he did, then the liability has been satisfied.
The accounting records show quite clearly that the Minister applied the $50,000.00 credit against the account and reduced the balance owing by that amount. Then he issued a cheque that restored the debit thus creating a new liability. His only recourse at this point is to recover the issued cheque from the Company like any other debt and not pursue the extraordinary remedy as he has done here in assessing the Appellants.
Analysis and Decision
Counsel for the Respondent has raised the issue that the Minister may have issued the refund cheque to the accountant without authority. However, there was no evidence given that could lead to such a conclusion. Indeed no one appeared on behalf of the Company to raise any question as to the validity of the assessment in issue nor the lack of authority on behalf of the accountants to receive the cheque or of the Minister to issue it to the accountants on behalf of the Company.
There was nothing to preclude the Minister from issuing the cheque and delivering it to the Company’s accountants. There was no evidence to suggest that there was any fraudulent use of the cheque.
The Minister may not have been required to issue the refund cheque and if he had not then the question in issue would never have arisen. However, the Minister cannot be faulted for issuing the cheque and the cashing of it as was occasioned here does not afford any relief to the Appellant.
Similarly, counsel for the Appellants final argument that the Minister should proceed against the Company in the Federal Court as he would to recover any other debt and not proceed against the Appellants has no merit.
Whatever rights the Minister or the other parties have, those rights do not establish the validity of the assessment in question nor invalidate it.
On the issue of the burden of proof, the Court is satisfied that there has been no evidence presented which would have the effect of shifting the burden of proof to the Respondent. The Appellants had the burden of showing that the reassessment was incorrect.
The Appellants can only be successful if they can show that the amounts in question were not owing by the Company in respect of its 1991 or any preceding taxation year at the time the assessment was raised.
The Court accepts the position of counsel for the Appellants that any amount properly credited to the account after the transfer must be applied to the account regardless of the assessment.
Counsel for the Appellants argued that the real issue was whether the Minister applied a credit to the account of the taxpayer in the amount of $50,000.00 on March 22, 1993. But the Court believes that the real issue is not whether the Minister applied such a credit, but was the taxpayer entitled to have a credit of $50,000.00 applied to its account on that date. Surely if the Minister incorrectly applied a credit to the taxpayer’s account there would be nothing wrong with making a correction to it whether it be done the same day, the next day or later. The debt would not be extin- guished nor reduced.
It is clear from all the evidence that the Company was entitled to a refund of tax in the amount of $50,000.00. That refund was given by way of issuing a refund cheque to the Company’s authorized agents. The Company was not entitled to the refund cheque and then to have a credit of $50,000.00 applied to its account because the refund cheque and the credit represent one and the same thing.
It is true that page 6 of Exhibit A-l appears to represent a credit of $50,000.00 to the account on March 22, 1993 but on the same day the same amount was debited and the account showed an outstanding balance of $226,248.34. This is consistent with the previous page. But in any event, the taxpayer was not entitled to such a credit because the refund for the same amount was sent to the Company on April 1, 1993.
One cannot look at one isolated part of the exhibit account as suggested without due regard to the remainder of the taxpayer’s account.
The evidence of Mr. Mise was that after all the credits, payments and refunds were taken into account, after all the reassessments were made, the bottom line was that the Company owed at least the amount as claimed in the assessement in issue at the time the assessment in issue was raised.
The Court is satisfied on the facts that the Minister did not give a credit of $50,000.00 thus reducing the Company’s debt in 1990 and 1991 to zero and he did not intend to. In the event that the entry represented a credit to the account on that date it was an error and was subsequently reversed.
The Court rejects the argument of counsel for the Appellants that when the Minister issued the cheque, he created a new liability. He was merely sending out a refund cheque that had been requested and which as of that date could rightly have been issued as it was.
The Court is satisfied that the Minister’s assessment was correct. The appeals are dismissed and the assessments confirmed. The Respondent has not asked for costs so the Court will not address this issue unless requested to do so.
Appeal dismissed.
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