Samuel Tick v. Minister of National Revenue, [1972] CTC 137, 72 DTC 6135

Heald, J:—This is an appeal from an income tax reassessment dated October 18, 1969 for the taxation year 1966.

Since the 1950’s the appellant, who lives in Don Mills, Ontario has carried. on the business of constructing, dealing in, managing and operating apartment and commercial buildings. In the 1950’s he concentrated on office buildings but shortly after 1960 he decided to concentrate on apartment buildings instead because, in his view, there was a slump in office buildings.

His method of operation was, first of all, to acquire suitable land for an apartment building. He would then approach a mortgage company, obtain a loan commitment from said mortgage company, which he would take to his bank. The bank would take an assignment from him of the loan commitment, and on his own personal promissory note would provide him with the necessary interim financing in order to commence construction. He says that, in most cases, the amount of the mortgage would be sufficient to complete the buildings but, in those cases where additional funds were required over and above the mortgage loan, he would use personal funds or he might obtain other loans on a short term basis at higher rates of interest.

He testified that all of these apartment transactions were handled through three Sam Tick personal accounts, one in the Bank of Commerce which was a personal current account No 1416, one in the Royal Bank of Canada and one in the Bank of Nova Scotia. The appellant described these three accounts as “Control Accounts”.

The issues in this appeal are concerned with five Ontario private companies, incorporated by the appellant and all beneficially owned entirely by the appellant.

The first corporation, 551 Eglinton Avenue East Limited, was incorporated in 1961 for the purpose of constructing a 52-suite apartment block at that address in Toronto. The appellant, in his personal capacity, was the builder and designer and contractor for this apartment block. The appellant personally paid all construction costs and then billed the company. A company was incorporated to own and operate the apartment block because this was the only way a 25-year mortgage could be obtained. If appellant had operated his apartment block as an individual, his evidence was that he would only have been able to obtain a 5-year mortgage loan.

Most of the transactions implicit in constructing this apartment block and the ones to follow were handled through Bank of Commerce current account No 1416, with only a few being handled through the other Sam Tick personal accounts in the Royal Bank and the Bank of Nova Scotia.

The appellant says that this apartment company and the subsequent Ones did not borrow from the bank, they had no overdrafts. If the companies needed money, the appellant would borrow it and then lend it to them. Appellant handled the rentals and he managed and operated the apartment blocks. The apartment block at 551 Eglinton Avenue East was sold in 1965 and appellant’s evidence was that there are still in that corporation undistributed profits of approximately $12,000 and that it is a dormant company.

Following the same pattern, appellant acquired land at 445 Eglinton Avenue East in 1962, incorporated a company known as 445 Eglinton Avenue East Limited on which the appellant personally constructed an apartment block for the company and managed said block for the company until it was sold in 1966 at a profit of about $80,000. This company is also dormant.

Again following the same pattern, appellant incorporated a company known as 411 Holdings Limited in 1964, constructed at 411 Eglinton Avenue East a 56-suite apartment block, managed said block for the company until 1967 when the block was sold. The company reported on its own corporate income tax return the rental income for the period between 1964 and 1967 when it owned the block. Appellant says that when he incorporated this particular company, he had it in the back of his mind to put all of his buildings in one company. This intention became a reality because, in 1966, 411 Holdings Limited did acquire two of the other blocks, one at 525 Eglinton Avenue East from 525 Holdings Limited and one from 2288 Holdings Limited located at 2288 Weston Road.

To summarize the factual situation, between 1961 and 1965 the appellant as an individual acquired land and built five different apartment blocks in Toronto which were owned by five Ontario corp- orations, all of which were beneficially owned entirely by the appellant. Between 1965 and 1971 all five of these apartment blocks were sold to third parties so that by 1971 the appellant and his five companies were out of the business of building and operating apartment blocks in the City of Toronto. Appellant says that all of said companies are now dormant companies.

Because of the method of financing used by the appellant whereby he did the interim financing for the apartment corporations on his own personal credit, he continued to use the three personal bank accounts earlier referred to (one in the Bank of Commerce, one in the Royal Bank and one in the Bank of Nova Scotia) and for convenience I will refer to them collectively as the “Samuel Tick Account”, Thus, said Samuel Tick Account was used as a bank account for each of the corporations. However, said Account was not used exclusively for said corporations. As will be seen later, it was used as appellant’s personal account as well.

Each apartment corporation also had a bank account but said bank accounts were relatively inactive because, as it drew the funds from the mortgage proceeds, these were immediately transferred to the Samuel Tick Account to offset the building costs incurred by the appellant from the said Samuel Tick Account.

In carrying out his business, the appellant used the funds in the Samuel Tick Account for the particular projects in accordance with their respective needs. A system of accounting for the Samuel Tick Account was set up in which the transactions of each participant in the Account (the five companies and the appellant) was separately recorded against vouchers and invoices.

At the end of 1965 a summary of the accounts as between the appellant and his five apartment companies shows that four of the companies owed him money and he owed only one of the companies money. This situation had changed appreciably by December 31, 1966 because at that date appellant owed moneys to four of his apartment companies as follows:

This situation was reflected in the corporate income tax returns filed for 1966 by these companies in that their balance sheets show the above noted amounts as being receivable by the company from Samuel Tick. In the 1966 return filed by 445 Eglinton Avenue East Limited the entry is as follows:

Shareholder’s Account

S Tick — balance of current account $45,162.58

In the 1967 return filed by the same company, the entry was: (No change during year.)

In the appellant’s balance sheet, affixed to his personal 1966 income tax return, the said four items are recorded under the general heading “Current Liabilities” as follows:

Due to 445 Eglinton Avenue East Limited

Due to 525 Holdings Limited

Due to 551 Eglinton Avenue East Limited

Due to 2288 Holdings Limited.

The respondent in this case deemed that these advances to the appellant by the four corporations in question were received by him as dividends under subsection (2) of section 8 of the Income Tax Act.

Appellant, on the other hand, contends that none of the aforementioned four companies, in fact, loaned money to the appellant, nor was the appellant a debtor of any of said corporations. Appellant says the item shown on the balance sheets of these companies as “receivable from S Tick” was in fact a balancing entry in respect of the receipts and disbursements in the Samuel Tick Account used by the appellant in connection with all of his real estate properties and did not represent actual loans made by the said companies to the appellant.

Subsection (2) of section 8 of the Income Tax Act reads as follows:

8. (2) Where a corporation has, in a taxation year, made a loan to a shareholder, the amount thereof shall be deemed to have been received by the shareholder as a dividend in the year unless

(a) the loan was made

(i) in the ordinary course of its business and the lending of money was part of its ordinary business,

(ii). to an officer or servant of the corporation to enable or assist him to purchase or erect a dwelling house for his own occupation,

(iii) to an officer or servant of the corporation to enable or assist him to purchase from the corporation fully paid shares of the corporation to be held by him for his own benefit, or

(iv) to an officer or servant of the corporation to enable or assist him to purchase an automobile to be used by him in the performance of the duties of his office or employment,

and bo-na fide arrangements were made at the time the loan was made for repayment thereof within a reasonable time, or

(b) the loan was repaid within one year from the end of the taxation year of the corporation in which it was made and it is established, by subsequent events or otherwise, that the repayment was not made as part of a series of loans and repayments.

In this case, appellant has not claimed that he comes within any of the exceptions listed under paragraph (a) of subsection (2) nor does he plead repayment of the loan under paragraph (b) of subsection (2).

Appellant’s submission is that these transactions were not loans, that they simply represented the financial position as between each company and the Samuel Tick Account and that there was no lending in any formal sense, that the receipts and disbursements flowed through the Samuel Tick business account which was a control account or clearing account and that this account simply showed whether a particular company was in a debit or credit position at year end. At the end of 1966 appellant says four of the companies were in a credit position, that is, the control account owed them money whereas one company (411 Holdings Limited) owed the control account substantial moneys. Appellant’s submission is that, unfortunately for the appellant, his accountant of the day described these debit and credit entries as receivable from or payable to the appellant and that the respondent seized on these journal entries as being evidence of a loan and sought to tax appellant under subsection 8(2). Appellant’s submission is that there is no debtor-creditor relationship between appellant and subject companies, and therefore no loan but simply a balance. In support of this contention appellant filed a summary showing the intercorporate and control account position as of December 31, 1965, December 31, 1966 and December 31, 1967 (Exhibit A-6).

By looking at the position as at December 31, 1966 it will be seen that, while the appellant is in a debit position with respect to four of his companies, he is in a substantial credit position with respect to the fifth company (411 Holdings Limited) and that, when the total position is looked at, the sum of $113,045.18 more had been paid out to the five companies in 1966 by the appellant than they had paid out to him and from this appellant argues that because of the overall creditor position which appellant found himself in at the end of 1966, that, therefore, he cannot be deemed to be in a debit or “loan” position with respect to four of the companies.

I cannot agree with this submission. I have to look at the relationship between the appellant and each of the four corporations who, the respondent alleges, “loaned” money to him. I cannot look at a fifth corporation to whom he may have loaned money. Nor can I treat these transactions as only involving one company or “one pot” as the appellant seeks to do.

The facts, as established in evidence, are that at December 31, 1966 appellant owed the four corporations in question the above stated amounts.

It is not relevant here to consider what the relationship was between appellant and another company or what the position might have been if the appellant had had one apartment company instead of five. The fact of the matter is that he had five separate apartment corporations all involved in transactions with the appellant as an individual.

lt is thus necessary to look at these transactions carefully to ascertain their true nature and substance. Exhibit A-4, filed in evidence, purports to be a Summary of Control Account Banking Transactions for the year ending December 31, 1966, that is, a summary of all transactions passing through the above mentioned three Samuel Tick personal accounts. Mr Herbert R McGaffin, appellant’s present auditor, swore that Exhibit A-4 accurately reflects the payments in and out of these three bank accounts in 1966. Exhibit A-4 is as follows:

SUMMARY OF CONTROL ACCOUNT BANKING TRANSACTIONS

FOR YEAR ENDED 318T DECEMBER 1966

Balance 1st January 1966 — Commerce

per ledger (Account #1416) $(18,187.31)

— Royal 400.16

— Nova Scotia 3,185.18 $ 14,601.97)0.0.

Receipts:

Transfer from 2288 Holdings Bank Account 144,356.55

525 Holdings Bank Account 266,903.47 411 Holdings Bank Account 158,770.00 551 Holdings Bank Account 982.57

Proceeds from

sale of 445 Eglinton 97,650.63

Loan from Gottfried & Dennis 98,000.00

Loan from Prohold 60,000.00

Bank Loans — Proceeds 426,860.00

Sam Tick — Business

Sale of 104 Banff Road $ 8,937.69

Expense Recovery — Mann &

Martel 75.00

Rental Income re

255 Davenport 18,099.96

Rental Income 104 Banff Road 810.00 27,922.65

Sam Tick — Personal

Loan from Mr Abbott 7,000.00

Advances 46,129.89 53,129.89 1,334,575.76

$1,319,973.79

Disbursements:

Payments for 2288 Holdings	$210,409.03
525 Holdings	358,748.79
411 Holdings	4,189.54
551 Eglinton	20.00
445 Eglinton	12,353.55
Bank Loan Repayments	585,000.00
Repayments — Loan from Prohold	60,000.00
Bank Charges and Interest	9,723.76
Sam Tick — Business Properties	96,880.52
sam Tick — Personal Withdrawals	19,302.21	1,316,627.40
Balance 31st December 1966 per ledger
— Commerce	$1,407.40
— Royal	200.24
— Nova Scotia	1,738.75 $	3,346.39

A perusal of Exhibit A-4 clearly establishes that this so-called “Control” account or “Clearing” account was not just a clearing account or a balancing account used simply to show whether a particular company was in a debit or credit position at year end. Exhibit A-4 shows that the appellant did in fact use a substantial portion of the moneys in this account for his own personal use, moneys belonging to the four companies in question.

Under the “Receipts” heading on Exhibit A-4, an item is shown as follows:

In cross-examination he was asked for a breakdown of this figure. He said that out of this figure only $8,000 to $10,000 came from his own personal funds (proceeds of mining stocks sold by him), and that the balance was personal loans made by him from other parties, that is, about $38,000 of this total figure of $46,129.89 was really a loan figure and in the same category as the other loan items shown such as the “Loan from Prohold” item shown earlier.

Then, his attention was directed to two items under the “Disbursements” heading on Exhibit A-4. Those two items were:

Appellant admitted that the first of these two items were expenses incurred in his other business interests completely outside the five apartment corporations being considered here. Prior to going into the building business, appellant had been in the business of manufacturing bobby pins and this business had been operated from a building owned by appellant at 255 Davenport Road. Appellant was out of the business by now but he still owned the building and rented it out. He also owned property at 104 Banff Road. He had other business interests not specified in evidence. These business disbursements of $56,880.52 covered expenses incurred for the appellant in these businesses.

The second item in the sum of $19,304.21 was his personal living expenses which, he admitted, came out of this account. Appellant said “I treated this account as my own”. These three accounts were not trust accounts, they were the appellant’s accounts and he treated them as such. If he purchased a car, he would pay for it out of this account. If he took a trip to Florida, his expenses would come out of this account.

Thus, in 1966, the appellant removed from this account over $76,000 for expenses entirely unrelated to the apartment corporations’ business. In 1966 appellant only deposited into the same account approximately $38,000, being receipts entirely unrelated to the apartment corporations’ business. Thus, on a net basis, during 1966 the appellant drew out approximately $38,000 of moneys belonging to the apartment corporations. I have the firm opinion that this circumstance is corroborative of the respondent’s contention that these moneys were loans by the companies to the appellant.

The circumstances in this case are quite similar to those considered in the case of Ross Gregory Trout v MNR, 7 Tax ABC 216; 52 DTC 388, where the appellant, a director and shareholder of a company signed a financial statement which showed that he was indebted to the company for $642.58. The Minister added this amount to the appellant’s income on the ground that it was taxable as a dividend. The appellant submitted that he never borrowed any money from the company, that he did not owe the company any money and that the entry on the financial statement was purely a bookkeeping entry, or even that it was a fictitious entry. The Tax Appeal Board dismissed the appeal. Chairman Monet said at page 219 [390]:

. . . The appellant, apparently a successful businessman with certain experience, has taken the responsibility, as a Director of the Company, of Signing a financial statement with the full knowledge that, according to that statement, he was indebted to the Company for the amount of $642.58.

It is a well-known principle that an assessment to income tax is valid until the taxpayer, and the onus is upon him to do so, has proven that it is not. . . .

I think Chairman Monet’s comments in the Trout case (supra) apply with equal force to the circumstances here.

The appellant was the sole beneficial owner and president of all five apartment companies. As president and a director he signed their income tax returns to which were attached financial statements. Appellant signed the certification on these income tax returns that they were ‘true, correct and complete” returns. These returns clearly indicated that the moneys in question were shareholder’s loans. Likewise, appellant signed the certification that his own personal income tax returns were true, correct and complete. Those returns showed that the appellant was indebted at the end of 1966 to the four apartment corporations in question.

Thus, appellant starts with the onus of showing that, contrary to the above certifications, the sums in question are not loans. In my opinion, the evidence adduced to discharge this onus at the trial corroborate and confirm a loan position, rather than establishing otherwise.

Learned counsel for the appellant relied on the case of Joseph Zatz- man v MNR, 23 Tax ABC 193; 59 DTC 635. In that case the appellant was the president and principal shareholder of a private company dealing in scrap metal. He needed money to buy certain real estate and his company was in no position to lend him the amount required but he arranged to borrow $12,000 from a friend. This loan was put through his company for accounting reasons. Appellant’s submission was, that his company was used as a mere conduit pipe for the loan he needed and that the relationship between him and his company was not that of borrower and lender but that of principal and agent.

The Tax Appeal Board agreed with appellant’s submission on the facts of that situation. However, the facts in the case at bar are quite different. In the Zatzman case (supra) appellant’s friend endorsed the note which was then discounted at the bank by appellant’s company which turned the money over to appellant. In that case the evidence was that the bank was repaid by appellant’s company with funds supplied by appellant out of personal income derived from some other source. Thus, appellant’s company served merely as a conduit pipe through which the appellant chose to receive the bank’s advance — none of the repayment to the bank came from appellant’s company, it came from the appellant himself. — thus, in Zatzman (supra) no company funds were involved.

That is a far cry from the facts in the instant case. In this case, as I said earlier, appellant withdrew in 1966 substantial sums belonging to the apartment corporations, he used the apartment corporations’ money for personal purposes entirely unrelated to their business. Surely, this is a loan from these corporations.

I have accordingly reached the conclusion that in the taxation year 1966 the four apartment companies in question loaned to the appellant the total sum of $52,971.81 and that, under the provisions of subsection 8(2) of the Income Tax Act, the respondent quite properly deemed said advances to be dividends and taxable as such. The evidence clearly establishes a debtor-creditor relationship and a loan position as between the parties.

The appeal is therefore dismissed with costs.