Jacob Byke, Mitchell Byke and Stella Byke v. Minister of National Revenue, [1972] CTC 2332, 72 DTC 1299

W O Davis:—These appeals were heard at London, Ontario on November 30, 1971 by the Tax Appeal Board as it was then constituted.

On May 16, 1962 the appellants Jacob Byke, his wife Mary Byke together with their son Mitchell Byke and his wife Stella Byke, entered into an agreement with Joseph Alaica, Simica Alaica and Nada Milos- evich as vendors to purchase all the outstanding shares, both preferred and common, of the Tecumseh Hotel (Chatham) Limited for the sum of $210,000 payable $5,000 as a deposit upon the signing of the agreement; $55,000 on closing and subject to adjustment, and the balance by way of a mortgage for $150,000 to be given by Tecumseh Hotel (Chatham) Limited to the vendors to be collaterally secured by a chattel mortgage on all the chattel assets of the hotel company. The mortgage was to bear interest at 6% per annum and to run for a period of 25 years. The offer was accepted by the vendors on May 22, 1962, and was to be completed on or before July 1, 1962.

The balance sheet of the hotel company as of June 30, 1962 records 150 preferred shares and 20,003 common shares as outstanding.

In due course the transaction was completed and adjustments were made as of July 30, 1962; the balance paid on closing being $57,065.12. Upon closing the vendors transferred all of the issued and outstanding preferred and common shares of the hotel company to the purchasers as follows:

In order to provide the necessary funds for closing Mitchell Byke and Jacob Byke borrowed from the Royal Bank of Canada at Scotland, Ontario the sum of $45,000 giving, as security, a promissory note dated July 19, 1962 payable on demand and bearing interest at 6% payable monthly.

To provide for the balance of $150,000 which was not being paid in cash by the appellants personally the appellants herein and the other purchaser Mary Byke caused the corporate entity Tecumseh Hotel (Chatham) Limited to give to the said vendors a first mortgage on the hotel premises in the amount of $150,000 bearing interest from and after July 30, 1962 at the rate of 6% per annum payable monthly. The principal sum was due and payable on July 30, 1987, with monthly payments of $400 on account of principal until July 30, 1987.

The mortgage obligation was recorded in the financial records of the hotel company by journal entries showing the mortgage as payable by the hotel company and a corresponding note receivable.

The hotel company paid the principal and interest payments on the mortgage as they fell due and also paid the interest on the aforementioned bank loan on behalf of the purchasers. As interest was paid it was charged to Operating Expense by the hotel and as payments of principal were made an equivalent amount, as a dividend, was charged to the Earned Surplus account and credited to the Note Receivable.

The personal bank loan from the Royal Bank of Canada was not set up in the books of the hotel company but the company, nevertheless, paid the interest on the whole loan as it became due and charged such payments as an item of expense of the hotel in its taxation years. The hotel also paid off $3,700 on account of principal on the loan and charged the payment to its Earned Surplus account as a dividend. The balance of the loan outstanding was paid off by the appellants personally.

In assessing the appellant Jacob Byke for the year 1963 the Minister added to reported income the taxpayer’s proportionate share of interest payments and the dividend payments during the year which had not been reported by the appellants and imposed tax on the same.

Following the filing of an amended return by Jacob Byke for the year 1964 the Minister added $1,776.08 for dividends and $2,766 for mortgage interest and taxed the same. The T5 information memos issued by Tecumseh Hotel for the year 1964 reported $888.04 for dividends as having been paid to Jacob Byke and an equal amount as having been paid to his wife Mary Byke.

In assessing the appellant Stella Byke in respect of the year 1964 the Minister added to the appellant’s reported income the sum of $2,516.32 as her proportionate share of bank and mortgage interest paid by the hotel company during the year 1964 on her behalf.

Similarly, for the year 1965 an item of $2,033.95 was added as the appellant Stella Byke’s proportionate share of bank and mortgage interest and $888.05 as the share of unreported dividend being her share of a $3,700 payment on the bank loan.

For the year 1966 mortgage interest of $1,924.19 was added and taxed together with an unreported amount of $161.52 as mortgage interest received by the taxpayers and not in issue herein.

In the assessment for the year 1967 the sum of $1,847.52 was added as the taxpayers proportionate share of mortgage interest which had been paid by Tecumseh Hotel and an amount of $1,152.05 in respect of unreported dividend payment from the hotel.

In respect of Jacob Byke’s assessments under appeal herein, it is of importance to bear in mind that his wife Mary Byke had never filed an income tax return showing any income received by her. Until the year 1967 the appellant Jacob Byke always claimed full exemption in respect of his wife. In 1967 Jacob Byke claimed an exemption in the amount of $713.05 in respect of his dependent wife whose income for that year was represented to be $536.95.

Upon a consideration of the évidence as a whole, I am satisfied that Mary Byke had no funds of her own with which to invest in the purchase of shares of the Tecumseh Hotel and, therefore, the shares transferred to and registered in her name were in fact beneficially owned by her husband Jacob Byke. Any income arising in respect thereof must be regarded as income of her husband, Jacob Byke, by virtue of the provisions of subsection (1) of section 16 and subsection (1) of section 8 of the Income Tax Act, RSC 1952, c 148 and amendments thereto.

It is well established that the payments of interest by the hotel in respect of the bank loan and the said mortgage were not expended by the hotel for the purpose of gaining or producing income from the property or business of the hotel but were expended for the purpose of paying the personal obligations of its shareholders.

It follows, therefore, that in making the interest payments as aforesaid on the bank loan and on the mortgage which the corporate entity had granted in order to facilitate the purchase by the. four shareholders of the shares of the hotel company, the hotel conferred a benefit or advantage on the shareholders. The amount of principal paid by the hotel was shown as a dividend paid by the hotel. For the reasons already given the portion of the interest payments and dividends were assessed and taxed as income of the appellants. I am in complete agreement with the course followed by the Minister in this regard.

I am satisfied that the Minister proceeded on proper principles when he included as a part of the appellant Jacob Byke’s income the benefits conferred upon his wife Mary Byke in the years 1963 to 1967 inclusive.

It is to be observed that in the years 1964, 1965 and 1966, the hotel filed with the Minister a TS return reporting as a dividend the principal payments made on the said mortgage. These dividend payments were reported by the shareholders in their income tax returns for those years. However, in the years 1963 and 1967 the hotel company did not file a T5 return and the said shareholders did not report the said dividends in their income tax returns even though the principal payments made by the hotel had been charged to Earned Surplus as dividends as had been done in the other years.

I accept the Minister’s submission that by not declaring as dividends the amount of the principal payments charged to Earned Surplus account as a dividend paid out by the hotel in 1963, the appellants made a misrepresentation in supplying information regarding their income for the year as required by the provision of the Act and accordingly it was open to the Minister to reassess the appellants for the 1963 taxation year notwithstanding that more than four years had passed following the day of mailing the respective notices of original assessments for the 1963 taxation year.

All in all I find the Minister’s assessments under review herein to have been properly made in all respects, in full compliance with all the relevant provisions of the Act, and should not be disturbed. These appeals are, therefore, dismissed.

Appeals dismissed.