Lee v. R., [1999] 3 CTC 2204, 99 DTC 636

Teskey T . C.J.:

The Appellant appeals her reassessment of income tax for the years 1989 and 1990.

Issues

The issues are:

1 Whether benefits were conferred on the Appellant, Vivien Lee

(“Vivien”), in her capacity as a shareholder, by Man Ming Seafoods Ltd. (Canadian Corp.), within the provision of subsection 15(1) of the Income Tax Act (the “Act’);

and if a benefit was conferred

(2) The value of the benefit;

and

(3) Whether penalties were properly levied in accordance with subsection 163(2) of the Act.

Common Ground

It was common ground between the parties that shareholder benefit appeals are fact driven.

Facts

I am not going to review in detail all the evidence that was adduced, but only those facts that I find from the evidence, that appears pertinent to the first issue.

The testimony given by the Appellant and her brother, Thomas Lee (“Thomas”), was severely challenged by counsel for the Respondent, in particular upon facts in a memorandum of a meeting, entitled “CanCorp.”, with Revenue Canada auditors Dan McDonnell (“McDonnell”) and Jim Thatcher (“Thatcher”), held in Vancouver on August 14, 1991.

The Respondent did not call neither McDonnell nor Thatcher as witnesses.

The cross-examination of the Appellant, who testified through a canton- ese/english interpreter, was long and arduous. Although there were inconsistencies in both her and Thomas’s testimony, who also testified through a cantonese/english interpreter, I accept their testimony on the core facts to this appeal. The inconsistencies in the Appellant’s testimony, I credit to nervousness and probably poor interpretation. The second day of the hearing went appreciably smoother with a different interpreter. The Appellant’s sister, who was not a witness, blurted out during her sister’s cross-examination, “there is an interpreter problem”. I had strongly suspected this and had drawn that conclusion before the outburst.

The Appellant was born and raised in Hong Kong and has the equivalent education of high school.

She emigrated and became a resident of Canada in 1988, and was a resident of Canada in 1989 and 1990. She has returned to Hong Kong and is now a Hong Kong resident. She had to fly to Vancouver on the 13th of August in 1991, from Hong Kong, to attend the meeting at Revenue Canada, at the request of Thomas. I am satisfied that when she attended at Revenue Canada’s office, on August 14, 1991, she did not realize the seriousness of the situation or the importance of getting all the facts correct, and therefore did not insist upon an interpreter. She answered questions not fully understanding the questions asked of her in English.

Karl Ho (“Ho”) of Delta, British Columbia, provided bookkeeping services and prepared balance sheets for the Canadian Corp which operated out of Vancouver. He also was educated in Hong Kong and took electronics courses in college. He was in a Certified General Accounting course during 1988 to 1990 but never completed the course and has no accounting designation.

When Ho completed the general ledger (“Blue Book”), the only documents that he had were the monthly bank statements and the Blue Book.

When Ho took over the bookkeeping, the only entries in the Blue Book were the three columns entitled: “Debit”, “Credit” and “Balance”. Ho entered into the Blue Book entries for April 1989, under nine new columns entitled: “Purchases”, “Hydro”, “Flight”, “Sundry”, “Bank Charges”, “Sales”, “Vivien” “US/Ac.”, “Sundry”.

The communication between Ho and Thomas was minimal at best. The Blue Book demonstrates the total incompetence of Thomas and Ho’s lack of care and competence.

Thomas had a full-time job with B.C. Telephone and at the same time, he was running, as a one-man operation, the Canadian Corp. From the Canadian bank statements, he could not even tell the financial situation of the Canadian Corp, as it had a U.S. account, which was never reconciled into the Blue Book. Thus, the balances as shown in the Blue Book would not accurately demonstrate the true financial picture. Even after Ho entered nine additional columns and made entries thereunder, without the U.S. account entries being reconciled with the financial information, neither Thomas nor Ho would know the true economic picture. Also, the debits and credits were reversed throughout.

Tabs 48 to 60 of Exhibit A-2 are alternative photocopies of monthly entries in the Blue Book and the corresponding bank account statement. There are many problems with these documents. Tab 50 is a photocopy of part of a page representing May of 1989. Those columns to the right of the “Balance” column have different headings from the April page, Tab 48. Tab 52 is a photocopy of the page from the Blue Book for the month of July 1989, the columns right of the “Balance” column’s heading are changed again and is not a complete copy of the page. There is an entry dated July 21 of $3,593, called “Transfer” and placed under a heading called “Transfer”. On the same date, a deposit of $2,721.93 is shown. Neither item is shown on the bank statement. Tab 54 is a photocopy of what is purported to be the page from the Blue Book for September 1989. Again, it appears not to be complete and with different headings.

On September 19, the following notation is noted “US D $15,000 @ 1.1925”. Under “Credit”, the amount of $17,887.50 appears. This amount is shown on a column entitled “Bank Transfer”, presumably to the U.S. account. The bank statement for September, Tab 55, does not have this transfer.

Tab 56, which is only a partial photocopy of the page from the Blue Book for November 1989, is again only partially produced and the columns’ headings to the right of the “Balance” column, again, have different headings. An item for November 10, 1989, the second from the top, says “Deposit”. It is found in the “Debit” column and again under the heading “Sales”. The bank statement, Tab 57, shows a deposit of $10,000 in the “Credit” column and a cash withdrawal of $10,000, the same day.

It is this type of inconsistencies, as well as that the receipts are shown as debits and the payouts are shown as credits, that convinced me that neither Thomas or Ho had any knowledge of basic bookkeeping. The balance sheets prepared by Ho were full of errors. The entries in the Blue Book under the various columns to the right of the third column, i.e. the “Balance” column, could mean anything.

If Thomas in fact said to Ho, when questioned about the transfers from Man Ming Import and Export Ltd. (Hong Kong Corp.), “It’s Vivien”, I am satisfied that he was paying little attention to the money aspect of the business, that he, in fact, mistakenly made this comment. From this one comment, Ho then carried the mistake onward every time a transfer came in with her name on it.

Hong Kong Corp, is a company that Vivien had been a shareholder and employee of prior to emigrating to Canada. It is owned and controlled by another brother and was a customer of Canadian Corp. Hong Kong Corp. purchased seafood from several different sources.

lam satisfied that all the electronic transfers from Hong Kong Corp, to the Canadian Corp, were monies owed by Hong Kong Corp. for seafood purchases and that the entry of these transfers in the books, the way they were shown, was in error. They should have been shown as income from sales and had nothing to do with Vivien.

At no time did Vivien even attempt to withdraw one cent of these transfers or claim ownership of the money or ask or get any confirmation that these monies were owed to her. In fact, she did not even know about the transfers till the August 14th meeting.

I am satisfied and find that Vivien never saw the Blue Book and saw the financial statements for the first time the day before her meeting with the Revenue Canada auditors. No one looking at these statements could possibly determine that the Blue Book was in error and showed large amounts owing by way of shareholder advances to Vivien. These transfers from the Hong Kong Corp. to the Canadian Corp. that were entered in error, under the heading “Vivien” in the Blue Book, were as follows:

Vivien not only was not aware of these errors in the Blue Book, there was no way she could have known about them as she was never shown them. Although, on the balance sheet for the Canadian Corp. prepared by Ho for the year ending March 31, 1989, there was a line entitled “Shareholders Advances, unsecured, non-interest bearing and without specific repayment time”. For 1989, the amount stands at $241,923 and for 1988, the amount shown is $186,545, an increase of $55,378. The balance sheet does not identify which shareholder or shareholders made the loans for this additional amount of $55,378. Since the year-end is March 31, only the one transfer on February 28, 1989 falls within this fiscal year and that transfer was for $65,000.

On the balance sheet for the Canadian Corp, prepared by Ho for the year ending March 31, 1990, an amount of $445,333 is shown on the “Shareholders Advances” line for the year 1990, and the comparison sum for 1989 is $241,923, an increase of $203,410. Again, the balance sheet does not identify who or whom loaned the Canadian Corp. money. Since I do not have as an exhibit all the bank statements from May 1st, 1989 to April 1st, 1990, I cannot tell if any shareholder loans were reduced in the fiscal year ending March 31, 1989. It is noted that during this fiscal year, Canadian Corp. received by electronic transfers with Vivien’s name on them from the Hong Kong Corp., the total sum of $475,109.30 (being the transfers from April 24, 1989 to and including January 16, 1990). Thus, if Ho had been consistent, the balance sheet should have shown an increase in the shareholders loan account of $475,109.30 and not the $203,410.

Vivien had loaned the Canadian Corp., prior to emigrating to Canada, $120,000. She was paid back on her loan a total of $80,000, namely $10,000 in 1989 and $70,000 in 1990.

Even assuming these amounts fall within the fiscal year 1990, the balance sheet is still some $120,000 in error.

As soon as Vivien understood the problem, Ho was dismissed and a chartered accountant was retained. All the transfers paid by the Hong Kong Corp. to the Canadian Corp. were taken into income for goods sold and delivered, as they should have been originally shown and removed from the shareholders advance column. Canadian Corp. refiled and was immediately reassessed and penalties levied on the previously unreported income. Canadian Corp. objected to the penalties and the Minister deleted them. Thus, Canadian Corp. has now been taxed on this previously undeclared income and paid the same.

I conclude that it was an error to show these amounts as Vivien’s advances to the Canadian Corp. and not as income. Presumably, the Minister accepted this when he waived the penalties on undeclared income of Canadian Corp.

Analysis

My colleague Bowman said at page 1169 in Prosperous Investments Ltd. v. Minister of National Revenue (1992), 92 D.T.C. 1163 (T.C.C.):

A mere bookkeeping entry in a loan account by itself does not constitute a taxable event unless there is something more, such as receipt....

He quoted therein Lord Brampton in Gresham Life Assurance Society Ltd. v. Bishop (1901), 4 T.C. 464 (U.K. H.L.), at 476:

My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. 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, and 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.

It is acknowledged by the Respondent that the only evidence of the alleged increase in Vivien’s shareholder’s account is the entries in the Blue Book. There is no other documentation of anything.

Previously to the Prosperous Investments Ltd. decision of my colleague Bowman, my former colleague Kempo, in 1994, in Berube v. R., [1994] 1 C.T.C. 2655 (T.C.C.) said at 2659:

accounting entries reflect rather than create reality, and that a mere bookkeeping entry in a shareholder loan account does not in and of itself constitute a taxable benefit without something more....

Kempo, J. also said in an earlier decision of Simons v. Minister of National Revenue, [1985] 1 C.T.C. 2116 (T.C.C.), in allowing an appeal from a reassessment, claiming a shareholder benefit that:

here was no probative evidence tendered to show that the appellant acted upon or received any measureable benefit from this erroneous balancing entry...

The Respondent produced on discovery Abe Frisz as its representative. Question 22 and his answer were read in as part of the Appellant’s evidence. He said, when questioned on the basis of the assessment: “1 would have said that the taxpayer received an increase in the shareholder assets, which is a benefit she derived. And that is the basis of our assessment to the taxpayer.” This is contrary to both the Prosperous Investments Ltd. and the Berube decisions of this Court, which I agree with and follow.

Associate Chief Justice Jerome, as he then was, of the Federal Court (Trial Division), said in Hrga v. R., [1997] 2 C.T.C. 172 (Fed. T.D.), at 175:

It is clear that section 15 requires two things: a benefit to the taxpayer and an intentional taking....

Madam Justice L’heureux-Dubé, in her reasons in Hickman Motors Ltd. v. R. (1997), [1998] I C.T.C. 213 (S.C.C.), said at page 245:

... The law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions: Vander Nurseries Ltd. v. R. (1994), 94 D.T.C. 91 (T.C.C.); Mountwest Steel Ltd. v. R., [1994] G.S.T.C. 71 (T.C.C.); Uphill Holdings Ltd. v. Minister of National Revenue (1992), 93 D.T.C. 148 (T.C.C.); Minister of National Revenue v. Wardean Drilling Ltd. (1969), 69 D.T.C. 5194 (Can. Ex. Ct.); ...

and at page 246:

... The Minister, in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v. Minister of National Revenue (1959), 59 D.T.C. 1098 (Can. Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. Minister of National Revenue, [1948] S.C.R. 486 (S.C.C.); Kennedy v. Minister of National Revenue (1973), 73 D.T.C. 5359 (Fed. C.A.), at p. 5361). The initial burden is only to “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. R. (1990), 90 D.T.C. 6337 (Fed. T.D.), at p. 6340.

This initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least a prima facie case: Katnin v. Minister of National Revenue (1992), 93 D.T.C. 62 (T.C.C.); Goodwin v. Minister of National Revenue (1982), 82 D.T.C. 1679 (T.R.B.). In the case at bar, the appellant adduced evidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, the appellant “demolished” the following assumptions as follows: (a) the assumption of “two businesses”, by adducing clear evidence of only one business; (b) the assumption of “no income”, by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions: see for example Maclsaac v. Minister of National Revenue (1974), 74 D.T.C. 6380 (Fed. C.A.), at p. 6381; Zink v. Minister of National Revenue (1987), 87 D.T.C. 652 (T.C.C.). As stated above, all of the appellant’s evidence in the case at bar remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions of “two businesses” and “no income” have been “demolished” by the appellant.

Where the Minister’s assumptions have been “demolished” by the appellant, “the onus shifts to the Minister to rebut the prima facie case” made out by the appellant and to prove the assumptions: Magilb Development Corp. v. Minister of National Revenue (1986), 87 D.T.C. 5012 (Fed. T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are “two businesses” and “no income”.

The last word on this subject from the Federal Court of Appeal is Chopp v. À. (1997), [1998] 1 C.T.C. 407 (Fed. C.A.), a decision given from the bench, which upheld my colleague Mogan’s trial decision and said, at page 409:

As to Judge Mogan’s interpretation of subsection 15(1) of the Act, we find no reason to intervene.

Mogan, J.T.C.C., in the Chopp decision, had said in his reasons, found at [Chopp v. /?.] [1995] 2 C.T.C. 2946 (T.C.C.), at page 2952:

I cannot accept the Respondent’s argument so broadly stated that a bookkeeping error which benefits a shareholder to the disadvantage of his corporation is a benefit within subsection 15(1) even if the error was not intended and was not known to the shareholder. In my opinion, if the value of a benefit is to be included in computing a shareholder’s income under subsection 15(1), the benefit must be conferred with the knowledge or consent of the shareholder; or alternatively, in circumstances where it is reasonable to conclude that the shareholder ought to have known that the benefit was conferred. I am supported in this view by the decisions of this Court in Simons v. M.N.R., [1985] 1 C.T.C. 2116, 85 D.T.C. 105 (T.C.C.) and Robinson v. M.N.R., [1993] 1 C.T.C. 2406, 93 D.T.C. 254.

Based on this jurisprudence and coming to the conclusion that Vivien did not know of the entries, which entries were made in error, and that there was no way that she ought to have known of the erroneous entries, and furthermore, having never received anything from the corporation, the appeal arising from the erroneous entries is allowed with costs.

Having reached the above conclusion, I do not have to deal with the value of the alleged benefit nor the penalties levied thereon.

The assessments are referred back to the Minister for reconsideration and reassessment on the basis that the Appellant did not receive a share- holder benefit in the amount of $498,119.79 in 1989 and the amount of $41,989.51 in 1990.

Appeal allowed.