Wagar v. R., [1998] 4 CTC 2789, 99 DTC 25

Beaubier T.C.J.:

The Registrar: The next matter. Your Honour, is File Number 95- 3302(IT)G between Herbert Wagar and Her Majesty The Queen. No counsel present for the appellant and counsel for the respondent is Mr. Bouvier.

This appeal, pursuant to the general procedure, was heard at Regina, Saskatchewan, on August 26, 1998. The appellant: his wife. Gladys; and Wagar Farm Equipment Ltd. (WFEL’s) chartered accountant. Rick Kozachenko, all testified.

Paragraphs A, B, CI and C2 of the Notice of Appeal and paragraphs 1 and 4 of the Reply to the Notice of Appeal read:

À. The appellant, Herbert Wagar, resides at Box 400 Sturgis. Saskatchewan. SOA 4A0.

B. The assessments under appeal are dated October 24, 1994 and were confirmed by Notice of Confirmation dated June 26, 1995. The assessments are for the 1991 and 1992 taxation years.

C. Material Facts Relied Upon:

1. The appellant is the president and shareholder of Wagar Farm Equipment Ltd. and corporation that carried on a farm equipment dealership in the District of Sturgis, in the Province of Saskatchewan.

2. The Minister of National Revenue re-assessed the appellant by deeming that Wagar Farm Equipment Ltd. conferred benefits on him amounting to $29,922 in 1991 and $17,872 in 1992 and included those amounts in computing his income in accordance with the provisions of Section 15(1) of Income Tax Act.

1. The facts stated in paragraphs A. B. Cl, and C2 of the Notice of Appeal are admitted.

4. In so reassessing the appellant, the Minister made the following assumptions of fact:

(a) The facts above admitted.

(a) Wagar Farm Equipment Ltd. (the “Corporation”) conferred a benefit of $29,922 and $17,872 respectively during the 1991 and 1992 taxation years on the appellant in his capacity as shareholder.

(a) The corporate accountant balanced the books of the Corporation at year-end by way of a journal entry which included a credit to the appellant’s shareholder’s loan account.

(a) The fiscal year of the Corporation is October 31.

(a) The credits to the Appellant’s loan account were unsupported.

Mr. Wagar is 77 years old. He obtained a grade seven education, then worked on his sick father’s farm. He joined the Army and served from 1942 to 1946 in transportation and then demolition. Where his hearing became impaired. He married his wife. Gladys 52 years ago and on being demobilized, he began working as a mechanic in the GM dealership in Sturgis Saskatchewan, a town of about 800, 50 miles north of Yorkton. In 1956 He became a farm equipment and auto dealer as the sole proprietor in Sturgis. His wife, Gladys, kept the books. They still live in Sturgis.

In the fall of 1980, Mr. Wagar incorporated WFEL and rolled all, except the real property of his dealership, into it for a shareholder’s loan of $76,263 net. Mr. Wagar held 51 shares, Gladys nine shares and their two sons 20 shares each. Gladys continued to keep the books. They incorporated so that the business wouldn’t be “frozen” if Mr. Wagar died and so that the family would be in the business and there would be continuity.

About two years after incorporation, WFEL retained Bob Ribchester, a CA, of Parker Quine in Yorkton, as its chartered accountant. Mrs. Wagar recorded all the income and all the expenses in two separate columns and gave these books to Mr. Ribchester at the end of each year. He prepared statements, asked any questions he had of Mrs. Wagar, and did the financial statements and income tax returns. Mr. Wagar signed them and they were filed. This continued until 1990, two years after Mr. Ribchester retired as a partner in Parker Quine.

In 1991 Mr. Kozachenko did WFEL’s account for Parker Quine. He was admitted as a chartered accountant in 1987. He found some discrepancies in the accounts corrected them in both 1991 and 1992 as he found them, recorded the adjustments as a shareholder’s loan to Mr. Wagar, and prepared the financial statements and income tax returns of WFELaccordingly. He never spoke to the Wagars about them particularly. He testified that he may have mailed the returns out for their signature and filing. They were filed accordingly.

Mr. and Mrs. Wagar didn’t even know what happened until they were audited. They had filed their own income tax returns as always without any reference to the loan accounting entries and WFEL’s financial statements.

Once the audit began in 1994 people began to realize what had happened. WFEL paid the tax on its reassessments as an admission of increased earnings. It began double-entry accounting after 1992 so as to check possible errors. However, Mr. Wagar appealed his reassessments respecting the entry of the “shareholder’s loan” in WFEL’s statements.

The history of WFEL’s shareholder’s loan account with Mr. Wagar is simple. It has been a bookkeeping entry and he has never got any money from it to this date. One increase in it was due to a cash sale of Mr. Wagar’s combine on WFEL’s lot by WFEL. He left the cash in WFEL so that the bank could use it as security. There was also a rental account used to pay off a bank loan to add to the premises leased by WFEL from Mr. Wagar, and a GMC truck adjustment. Contrary to the Note 6’s to the financial statements, no promissory notes were issued or signed respecting the shareholder’s loans. They were just book entries that didn’t mean anything to the Wagars.

They are believed completely. It is obvious that they operated WFEL on a cash basis for what it was, a little farm equipment implement business in a little farm town in rural Saskatchewan. To give an idea of the nature of the business, the following figures taken from Exhibit R-2 are quoted. And the first column of figures is 1992 and the second one is 1991.

Based on these figures, the chartered accountant entries of “shareholder’s loans” would be very significant if Mr. and Mrs. Wagar had participated in creating them in 1991 or 1992, or if they had known about them and understood them, or if Mr. Wagar had ever drawn any money out of his shareholder’s loan account, but that is not the case. The Court accepts the Wagars’ testimony that they didn’t see or recognize the entries for what they were or their true significance. Certainly, in relation to WFEL’s total wages of about $30,000 each year, the amounts appear large, but they are not large if they were never taken from WFEL and if Mr. and Mrs. Wagar never even recognized what they meant or realized what had occurred. Far more than in the Chopp v. R., [1995] 2 C.T.C. 2946 (T.C.C.), ignorance and innocence are the case here.

Here, nothing was taken or received by the shareholder. A reputable chartered accounting firm made the assessed entries without any participation from the Corporation’s employees or principals and without their knowledge. The shareholder’s loans just sat in the financial statements year after year untouched.

Subsection 15(1) reads in part, for 1991 and 1992:

15(a) Where at any time in a taxation year a benefit is conferred on a shareholder

... by a corporation ... the amount ... shall ... be included in computing the income of the shareholder for the year. Paragraphs 7 and 8 of

Denault, J.A.’s decision, in Chopp v. R. (1997), [1998] 1 C.T.C. 407 (Fed. C.A.) are quoted because their principle and in particular the quotation of Bowman, J.T.C.C., apply to this case:

As to Judge Mogan’s interpretation of subsection 15(1) of the Income Tax Act. we find no reason to intervene. He rightly referred to Simons v. Minister of National Revenue (1985) 85 D.T.C. 105 (T.C.C.) and Robinson v. Minister of National Revenue (1993). 93 D.T.C. 254 (T.C.C.) which relied on the decision in Minister of National Revenue v. Pillsbury Holdings Ltd. (1964), 64 D.T.C. 5184 (Can. Ex. Ct.) 64 where Cattanach, J. had this to say about the predecessor of subsection 15(1). That statement still applicable reads like this:

In applying paragraph (c), full weight must be given to all the words of the paragraph. There must be a “benefit or advantage” and that benefit or advantage must be “conferred” by a corporation on a “shareholder” The word “confer” means “grant” or “bestow.” Even where a corporation has resolved formally to give a special privilege or status to shareholders, it is a question of fact whether the corporation’s purpose was to confer a benefit or advantage on the shareholders or some purpose having to do with the corporation’s business such as including the shareholders to patronize the corporation. If this be so, it must equally be a question of fact in each case whether the Minister contends that what appears to be an ordinary business transaction between a corporation and a shareholder is not what it appears to be but is in reality a method. Arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder.”

The same reasoning led Bowman J.T.C.C. to a similar conclusion in a very recent case, Long v. R. (July 24, 1997), Document 96-4714(IT)I (T.C.C.). where the taxability asserted by the Minister was based upon an erroneous failure to adjust a loan account. Judge Bowman found that a simple error of this sort, readily susceptible of correction, does not create taxability. He further added: "... that a bookkeeping error of which the sole shareholder was not aware and which he did not sanction and that was not in accordance with the company’s established practices (does not) constitute in reality a method, arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder.

The appeal is allowed. The assessments are referred to the Minister of National Revenue for reconsideration and reassessment. Accordingly, the appellant is awarded his party and party costs.

Appeal allowed.