Dorothy E Bacon, Clinton W Roenisch, Jr and Harold W Roenisch v. Minister of National Revenue, [1972] CTC 2530, 72 DTC 1440, [1972] DTC 1433

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.