The Executors of the Estate of the Late Richard W Nixon v. Minister of National Revenue, [1973] CTC 2256, 73 DTC 215

Roland St-Onge:—This appeal is from a reassessment which added to the appellants’ income two sums of money, one of $20,000 and another of $14,994 as being appropriations of a company’s funds effectuated in the taxation year 1967 by its main shareholder, the late Richard W Nixon.

At the hearing, counsel for the appellants made substantial amendments to their notice of appeal which now reads in part as follows, and i quote:

1. On the 20th day of October, 1966, the late Richard W Nixon (hereafter referred to as “Mr Nixon”) purchased all of the issued and outstanding shares in the capital stock of Lapp Photo Finishers Limited (hereafter referred to as “Lapp Photo’’).

2. On the 17th day of October, 1966, Stushu Photo Finishing Limited was incorporated and, on the 1st day of August, 1967, Lapp Photo and Stushu Photo Finishing Limited were amalgamated as one corporation under the name “Hamilton Snapshot Service Limited” (hereafter referred to as “Hamilton Snapshot”). Prior to the amalgamation, Stushu Photo Finishing Limited had not carried on any business.

3. At all relevant times subsequent to October 20th, 1966, Mr Nixon owned all of the issued and outstanding shares in the capital stock of Hamilton Snapshot and its predecessor corporations.

4. Mr Nixon died on the 1st day of June, 1968.

5. In March, 1967, Mr Nixon received the sum of $20,000 on behalf of Lapp Photo. He deposited the entire sum of $20,000 on March 21st, 1967 in the account of Lapp Photo at the Bank of Nova Scotia in Hamilton, Ontario.

6. Simultaneously with the deposit of the sum of $20,000 referred to in paragraph 5 above, Mr Nixon caused Lapp Photo to credit his loan account with the Sum of $20,000 and it was made to appear that he had loaned this amount to Lapp Photo.

7. On June 1st, 1967, Lapp Photo paid the sum of $2,600 to Mr Nixon and charged it against his loan account reducing the balance of $17,400. When Mr Nixon died on the 1st day of June, 1968, his loan account with Lapp Photo still showed a credit balance of $17,400.

8. On December 15th, 1967, Mr Nixon sold certain photographic equipment belonging to Hamilton Snapshot (the successor corporation following the amalgamation of Lapp Photo and Stushu Photo Finishing Limited) for the sum of $14,994. Mr Nixon deposited the proceeds from the sale of the corporation’s equipment in his personal bank account but immediately transferred $10,000 of such proceeds to Hamilton Snapshot as if it were a loan from him. In December, 1967, Mr Nixon had appropriated for his own use only the sum of $4,994 of such proceeds. Earlier in 1967, he had withdrawn funds from Hamilton Snapshot and charged such withdrawals against a general loan account to which was credited the remaining $10,000 from the sale of the photographic equipment.

9. With respect to the appropriation of $4,994 and the apparent “loan” in the amount of $10,000, Mr Nixon withdrew the aggregate amount of $8,001.25 in 1967; he withdrew the amount of $1,500 on March 5th, 1968; and there was an apparent balance of $5,492.75 in the “loan” account at the time of his death on the 1st day of June, 1968.

10. On June 3rd, 1969, the executors of Mr Nixon’s estate withdrew the remaining apparent “balance” of $5,492.75 in the honest belief that there had been a loan by Mr Nixon to the corporation on December 15th, 1967.

11. By Notice of Assessment dated July 2nd, 1971, the Respondent added to the income of Mr Nixon’s estate the following amounts with the corresponding descriptions on the assessment form:

Unaccounted for funds deposited by	$20,000
Lapp Photo Finishers Limited in the
Bank of Nova Scotia, Marcn 21, 1967,
and credited to R W Nixon loan
account
Benefit re sale proceeds of photographic	$14,994
equipment owned by Hamilton Snapshot
Service Limited and sold by R W Nixon
to Allied Colour Film Service Limited
and deposited in personal bank account
with the Toronto-Dominion Bank, King &
Bathurst, Toronto on December 18, 1967

In response to this, counsel for the respondent contended in his reply that, and I quote:

4. (b) on March 21, 1967, $20,000.00 was deposited by ‘“Lapp Photo” in its account with the Bank of Nova Scotia and on the same date, R W Nixon’s loan account was credited with $20,000.00 without having received any consideration therefor;

(c) on June 1, 1967, R W Nixon withdrew $2,600.00 from his loan account with “Lapp Photo” and for the remaining amount of $17,400.00 preference shares were issued to R W Nixon;

(d) on July 3, 1969, the appellants received $17,400.00 by cheque on account of the redemption of the above-mentioned shares;

On these grounds, the respondent concluded that:

5. . . . by crediting R W Nixon’s loan account with $20,000.00 without having received any consideration therefor, Lapp Photo Finishers Limited conferred a benefit or advantage on R W Nixon, its controlling shareholder, and accordingly the amount of the said benefit or advantage was properly included in the Appellant’s income for the taxation year 1967 within the meaning of section 8(1 )(c) of the Income Tax Act.

6. ... by depositing the sale proceeds of photographic equipment owned by Hamilton Snapshot Service Limited in his personal bank account, R W Nixon appropriated the funds or property of Hamilton Snapshot Service Limited for his own benefit within the meaning of section 8(1 )(b) of the Income Tax Act; or in the alternative, the said company conferred a benefit or advantage on R W Nixon within the meaning of section 8(1)(c) of the Income Tax Act, and therefore the amount of $14,994.00 was properly included by the respondent in the appellant’s income for the 1967 taxation year.

Mr Nixon’s son, Peter Nixon, hereinafter called “Peter”, manager of Hamilton Snapshot after his father had acquired Lapp Photo in 1966, testified that his father was also the general manager of Allied Colour Film Service Limited (hereinafter called Allied) at Toronto. Since the said acquisition, Hamilton Snapshot became a competitor of Allied, whereupon Allied purchased the colour photo finish operation from Hamilton Snapshot whereas the latter operated the black and white photo finish. Hamilton Snapshot was still accepting colour work which was sent to Allied. Nixon senior used to visit Hamilton Snapshot only once a week while his son Peter was a full-time employee. An individual by the name of Bonn Lapp signed an employment contract of five years with Hamilton Snapshot but after two years he went on his* own. The $20,000 mentioned in the notice of appeal apparently came about as a result of the purchase of the Belltone business around March 1967 for a price of $95,000. Exhibit A-1 shows that an amount made up of two hundred $100 bills was deposited in the Bank of Nova Scotia but Peter testified that he did not know who deposited that money. Two balance sheets of Hamilton Snapshot which showed preferred shares in the amount of $17,400 were filed as Exhibit A-4 but Peter stated that, to the best of his knowledge, no preferred shares had ever been issued. Around July 1968, the executors of the estate withdrew the sum of $17,400. Following this withdrawal, officials from the Department of National Revenue came to see Peter and thereafter a series of meetings took place. In the course of those meetings, Peter realized that the $20,000 really belonged to the company and an amount of $17,400 was consquently repaid to Hamilton Snapshot by his mother as executrix.

With respect to the purchase of the black and white machines for processing films, temperature control, etc, sold by Lapp Photo to Allied, Peter testified that Belltone owned similar equipment which was moved from Gore Street to Main Street. He explained that two such sets were purchased, one from Lapp Photo and one from Belltone and, since only one was left, he assumed that the set belonging to Lapp Photo was sold in accordance with a deposit slip (filed as Exhibit A-6) dated December 15, 1967 for $14,994. The said slip bears his father’s signature. Thereupon Exhibit A-8 was filed to prove several withdrawals from the father’s loan account in the following amounts:

R W NIXON — LOAN ACCOUNT

	Withdrawal	Deposit	Balance
Sept 5/67	60.00
Sept 20/67	1,000.00
Oct 17/67	647.25
Nov 3/67	500.00
Nov 10/67	800.00
Dec 18/67		10,000	6,992.75
Mar 5/68	1,500.00		5,492.75
July 3/69	5,492.75		0
*R W N appropriated $4,994 upon sale of machinery Dec 15/67

It is to be noted that the first five withdrawals were effectuated in 1967, prior to the deposit of $10,000 into Mr R W Nixon’s loan account.

He swore that the books and records of Hamilton Snapshot showed that several amounts of money had been paid by cheques to his father and that a balance of $5,492.75 was still in his father’s account when he died. Thereafter, his mother took an active interest in the affairs of the company and believing that the money in her husband’s loan account was on account of genuine loans, Hamilton Snapshot paid, on July 3, 1969, the total amount of $22,892.75 to the estate, the said amount being made up of the amounts of $17,400 and $5,492.75 already mentioned. Later on, when the executors learned that the said money did not belong to Richard Nixon, it was repaid to the company.

According to the evidence adduced, it is well established: (1) that the two sums of money, ie $20,000 and $14,994 belonged to the company; (2) that the main shareholder, instead of debiting the company’s bank account with the $20,000 and crediting the accounts receivable or another appropriate asset account, caused the company to credit his personal loan account in the company’s books for that same amount of money; (3) that instead of depositing $14,994 into the company’s bank account in 1967 and crediting the appropriate asset and/or other accounts, he kept $4,994 and caused the company to credit his personal loan account with $10,000; (4) that, when he withdrew the various amounts from his loan account, he did not pay any tax thereon as if they were reimbursements of genuine loans.

Counsel for the appellants referred the Board to the following cases: Nelson T Adair v MNR, 29 Tax ABC 324; 62 DTC 356: Herbert Wallace Losey v MNR, [1957] CTC 146; 57 DTC 1098; George Willoughby Turner v MNR, [1969] Tax ABC 180; 69 DTC 168.

Upon reading the above jurisprudence, one realizes that it involved transfer of either physical assets or goodwill, the value of which appeared to be in dispute. The case at bar is quite different because there is no such dispute at all. The value of the alleged appropriation is well established, being two sums of money which should have been paid to the company.

In the judgments above mentioned, the companies did not receive any consideration for the money paid because the assets transferred in a non-arm’s length transaction by the shareholder were overevaluated.

The present appeal is quite different. What really happened in this case is that Mr Richard Nixon disposed of assets belonging to his company and instead of crediting his company’s asset account and debiting the proceeds to the company’s bank account, caused the company to credit Mr Nixon’s personal loan account in the company’s books as if the money originated from his personal funds. He did this on two different occasions. How well he had planned and executed this is shown by the fact that he did not pay any tax on the $2,600 he withdrew from his “loan” account in 1967 as if it had been a reimbursement of a real loan previously made to the company.

For these reasons, the appeal is dismissed.

Appeal dismissed.

professors with full-time contracts, those on part-time basis are not provided with offices at the institution where they teach. Both appellants claim that it is an unwritten understanding that an office shall be situated in the residence of each part-time professor for the preparation of courses and lectures, the correction of essays and examinations and often to receive students for counselling and extra tutoring for which no compensation is given.

On the basis that professional people must incur expenses in earning their income and that travelling expenses and maintenance of an office at home are among such expenses, Mr Gross claimed as deductible expenses from his 1971 income an amount of $1,312.04 made up of $836 for office use, $145 for meals and $330.30 for travelling expenses which were refused by the Minister.

On the same basis, Mr Skinner claimed ‘as deductible expenses from his 1970 income an amount of $1,332.24 made up of $989.99 as expenses for use of an office and capital cost allowance for furniture, $50.65 for meals and $296.60 for travelling expenses which were also refused by the Minister.

Although the question was raised by the appellants as to whether part-time teachers are independent agents or employees of the institution where they teach, the point was not argued and the appellants stated that for the purposes of this appeal they considered they were employees of Loyola College. Furthermore, the appellants dropped from their appeals their claim for the deductibility of their travelling expenses and their meals so that the only remaining issue is whether the appellants as part-time teachers and employees of Loyola College were allowed by the law to deduct expenses for maintaining an office in their home.

The pertinent section of the Income Tax Act is paragraph 11(10)(b) which reads:

(b) office rent, or salary to an assistant or substitute, the payment of which by the officer or employee was required by the contract of employment,

The paragraph states clearly that the rent paid must be as a result of a requirement of the contract of employment. The absence of such a contract or the absence of such a requirement in the contract will, in my view, preclude the deduction of rental expenses.

Both Mr Gross and Mr Skinner had signed contracts as part-time members of the faculty of Loyola College in the years pertinent to their respective appeals. However, nowhere in the terms of any of the contracts is there a requirement for the appellants to maintain an Office.

At the request of the appellants, Mr D J Potvin, Director of the Evening Division at Loyola College, wrote a letter to each appellant (Exhibits A7 and A8) in which it was confirmed that the contracts with Loyola did not provide the appellants with an office on or off campus.

In Mr Potvin’s letter to Mr Gross he added—“It therefore necessitated that at times you maintained an office at your residence”-

In a letter to Mr Skinner, Mr Potvin says—“For this reason, even though it was not mentioned in your contract, you were required, through necessity, to maintain an office at your place of residence or at a place so designated by yourself”.

These two sentences do not contribute significantly toward the solution of the problem because it is evident that the very nature of the occupation of professors or lecturers would normally require them to do a considerable amount of preparatory work in a place other than in the classroom where they lecture. The Board understands this, but neither Mr Potvin’s opinion expressed in letters to the appellants concerning the necessity of maintaining an office nor the Board’s understanding of that necessity, can be considered as part of the employment contract with Loyola College signed by the appellants nor, in my opinion, can such a requirement be considered as implicit in the contract because paragraph 11(10)(b) is an exception to the general rule of taxation and as such must be interpreted and applied strictly. In so doing, the Board being bound by the Act as written must find that the appellants do not fall within the requirements of paragraph 11 (10)(b) of the Income Tax Act.

The obvious solution to the problem, of course, is for the part-time teachers to have specified in the terms of their employment contract that they are required to maintain an office off campus for the preparation of lectures and the correction of essays and examinations.

The employment contracts of the appellants do not contain such a requirement and the exception to paragraph 11 (10)(b) cannot be made to apply to the appellants.

The appeals are therefore dismissed.

Appeals dismissed.