W
O
Davis:—This
appeal
was
heard
at
London,
Ontario
on
November
30,
1971
at
a
sitting
of
the
Tax
Appeal
Board
as
it
was
then
constituted.
The
appellant
has
appealed
from
assessments
to
income
tax
dated
August
11th,
1969
in
respect
of
its
fiscal
years
1963
and
1964
ended
June
30
respectively
wherein,
in
assessing
the
appellant
for
those
years,
the
Minister
added
to
reported
income
sums
of
$9,089.06
and
$10,696.13,
respectively,
and
levied
tax
thereon.
These
amounts
were
described
as
mortgage
interest
and
interest
paid
to
the
Royal
Bank
of
Canada,
Scotland,
Ontario
which
the
Minister
declined
to
allow
as
deductions
from
income.
The
appellant
company
was
incorporated
under
the
laws
of
the
Province
of
Ontario
and
operates
a
hotel
at
the
City
of
Chatham,
Ontario.
In
its
Notice
of
Objection
to
the
said
assessments
the
appellant
complained
that
the
reassessments
now
challenged
had
been
made
more
than
four
years
from
the
day
of
mailing
of
the
original
notices
of
assessment.
The
Minister
in
due
course
issued
his
notification
under
section
58
of
the
Income
Tax
Act,
whereby,
he
confirmed
his
said
reassessments
as
having
been
properly
made
in
accordance
with
the
provisions
of
paragraph
(a)
of
subsection
(4)
of
section
46
of
the
Act
which
reads:
46.
(4)
The
Minister
may
at
any
time
assess
tax,
interest
or
penalties
under
this
Part
or
notify
in
writing
any
person
by
whom
a
return
of
income
for
a
taxation
year
has
been
filed
that
no
tax
is
payable
for
the
taxation
year,
and
may
(a)
at
any
time,
if
the
taxpayer
or
person
filing
the
return
(i)
has
made
any
misrepresentation
or
committed
any
fraud
in
filing
the
return
or
in
supplying
any
information
under
this
Act,
or
(ii)
has
filed
with
the
Minister
a
waiver
in
prescribed
form
within
4
years
from
the
day
of
mailing
of
a
notice
of
an
orginal
assessment
or
of
a
notification
that
no
tax
is
payable
for
a
taxation
year,
re-assess
or
make
additional
assessments,
or
assess
tax,
interest
or
penalties
under
this
Part,
as
the
circumstances
require.
From
the
evidence
heard
it
appears
that
on
or
about
May
16,
1962
Jacob
Byke
and
his
wife
Mary,
together
with
their
son
Mitchell
Byke
and
his
wife
Stella,
as
purchasers,
entered
into
an
agreement
with
Joseph
and
Simica
Alaica
and
one
Nada
Milosevich,
as
vendors,
to
purchase
all
the
outstanding
shares
both
preferred
and
common
of
the
appellant
company
for
$210,000.
The
purchase
price
was
payable
as
follows:
the
sum
of
$5,000
as
a
deposit
upon
the
signing
of
the
agreement;
the
further
amount
of
$55,000
upon
closing
of
the
transaction;
and
a
mortgage
from
the
appellant
company
to
the
vendors
in
the
amount
of
$150,000.
The
cash
payment
on
closing
was
made
possible
by
the
purchasers
Jacob
Byke
and
Mitchell
Byke
borrowing
from
the
Royal
Bank
of
Canada,
Scotland,
Ontario
the
sum
of
$45,000
on
the
security
of
a
demand
promissory
note.
During
the
years
under
consideration
the
appellant
company
paid
on
behalf
of
the
said
purchasers,
the
principal
and
interest
which
fell
due
on
the
aforesaid
mortgage
and
the
bank
interest
on
the
bank
loan
as
it
accrued.
The
mortgage
transaction
was
set
up
in
the
books
of
the
appellant
by
journal
entries
showing
the
mortgage
payable
by
the
appellant
and
a
corresponding
Note
Receivable.
As
the
interest
was
paid
it
was
charged
to
Expense
by
the
appellant
and
as
payments
were
made
on
principal
there
was
an
equivalent
amount
of
dividend
charged
to
Surplus
Account
and
credited
to
Note
Receivable.
The
personal
bank
loan
was
not
set
up
on
the
books
of
the
appellant;
however,
the
appellant
did
pay
the
interest
on
the
whole
loan
as
it
became
due
and
charged
such
payments
to
Expense.
In
the
appellant’s
1965
taxation
year
the
appellant
paid
off
$3,700
of
principal
on
the
bank
loan
and
this
payment
was
charged
to
Surplus
Account
as
a
dividend.
The
remainder
of
the
principal
amount
of
the
bank
loan
outstanding
was
paid
off
by
the
purchasers
personally.
In
assessing
as
he
did
the
Minister
disallowed
as
a
deductible
expense
of
the
appellant
the
interest
payments
on
the
bank
loan
and
on
the
mortgage
on
the
basis
that
the
said
amounts
had
not
been
expended
by
the
appellant
for
the
purpose
of
gaining
or
producing
income
from
its
property
or
business
but
on
the
contrary
were
expended
for
the
purpose
of
paying
the
personal
loans
and
obligations
of
its
shareholders.
(See
paragraph
12(1)(a).)
The
Minister
further
based
his
assessments
on
the
principal
that
by
paying
the
interest
already
referred
to,
on
the
said
shareholders
bank
loan
and
on
the
said
mortgage
which
the
appellant
had
given
in
order
to
facilitate
the
purchase
by
the
said
shareholders
of
all
the
shares
of
the
appellant
company,
the
appellant
had
in
actual
fact
conferred
a
benefit
or
advantage
on
those
said
shareholders;
and
by
deducting
the
said
interest
payments
as
aforesaid
from
its
income
for
its
taxation
years
1963
and
1964
the
appellant
had
thereby
misrepresented
its
income.
The
principal
payments
made
by
the
appellant
on
the
mortgage
had
been
shown
as
dividends
paid
by
the
appellant
to
the
said
shareholders
and
had
been
reported
as
such
by
those
taxpayers.
It
is
perfectly
clear
that
the
interest
payments
were
the
personal
responsibility
and
obligation
of
the
shareholders
and
were
in
no
sense
a
deductible
item
of
expense
incurred
by
the
appellant
in
the
process
of
earning
its
income.
By
treating
these
interest
payments
as
deductible
business
expenses
the
appellant
had
materially
reduced
its
income
for
the
years
in
question.
It
is
sufficient
for
the
purposes
of
subsection
46(4)
of
the
Act
that
the
misrepresentation
be
innocent.
However,
I
must
hold
that
the
misrepresentation
was
beyond
innocent
misrepresentation
and
was
sufficient
to
satisfy
the
requirements
of
subsection
46(4)
and
to
permit
the
Minister
to
reassess
beyond
the
four
year
period.
For
the
above
reasons
the
appeal
must
be
dismissed
and
the
assessments
confirmed
as
made.
Appeal
dismissed.