A W Prociuk (orally: October 22, 1974):
1 The appellant Simon DeWaal appeals from the respondent's notice of reassessment dated January 23, 1973 of his income for the taxation year 1968 wherein an additional sum of $14,998.59 was added to his income for that year. The said sum was itemized in the respondent's reply to the notice of appeal in paragraph 8 as follows:
Cancellation of indebtedness $10,000.00
Severance Pay 1,000.00
Income Tax and Canada Pension Plan paid on $10,000 3,000.00
Sundry 1968 advances 198.59
Salary paid through payroll 800.00
on the assumption that this sum was paid to the appellant by his former employer Mercury Tank Lines Limited. When the appellant filed his appeal, the respondent reassessed Mercury Tank Lines Limited with respect to the sum of $10,000 on the ground that it, being a subsisting loan, was not deductible from the income of the said company.2 Mercury Tank Lines Limited appealed from that assessment.
3 At the commencement of the hearing of this appeal it was agreed by all parties that the two appeals be heard on common evidence.
4 Learned counsel for the appellant DeWaal and learned counsel for the respondent stated that DeWaal was abandoning his appeal in respect of the $1,000 severance pay itemized above and the $198.59 in respect of sundry advances, and that a settlement had already been reached with regard to the items of $3,000 and $800 respectively.
5 The sole remaining issue, therefore, is whether or not the sum of $10,000 was a sum taxable in the hands of the appellant DeWaal as income. If not, then Mercury Tank Lines Limited could not deduct same from its income for the year under appeal.
6 DeWaal, prior to 1965, was an independent trucker. In 1965 he commenced employment as manager of Mercury Tank Lines Limited, hereinafter referred to as “Mercury”, a Calgary-based corporation and a wholly-owned subsidiary of Midwest Tankers Ltd, hereinafter referred to as “Midwest”, of Edmonton, Alberta. Mr D D R Hemsworth at all material times owned all the shares of Midwest which, in turn, owned all the shares of Mercury. Both companies were duly incorporated under the laws of the Province of Alberta.
7 In 1965 Midwest bought Mercury, and Mr Hemsworth was anxious to locate and employ a person knowledgeable in trucking to manage Mercury. He had heard of DeWaal and approached him with a view to employing him. DeWaal stated that he was offered the position of manager and vice-president at a starting salary of $467 per month, net. Some discussion took place about the future, DeWaal stated. He was interested in the proposition because it would bring him into the transport industry, and there was some discussion between the two about the possibility of his acquiring an interest in the company. The relationship between the two men was very good.
8 In 1967 discussions took place as to the purchase by DeWaal of all the common shares of Mercury. Midwest loaned DeWaal $20,000 to enable him to enter into an agreement to purchase all the stock in Mercury. DeWaal found a person, by the name of James Michael, with whom, in partnership, he attempted to raise the remainder of the money, some $180,000 more or less. Apparently DeWaal and Michael took an option to purchase Mercury, and DeWaal deposited $5,000 in accordance with a certain option agreement, which was not filed as an exhibit, the option being exercisable on or about February 22, 1968.
9 Problems arose between DeWaal and Michael and the option was not exercised. DeWaal telephoned Hemsworth, who was by now residing in Vancouver, to inform him that he would not be exercising the option, and apparently an argument ensued. This was around February 15, 1968. DeWaal stated that he was subsequently fired. He received $1,000 by wire from Hemsworth. Hemsworth states that he told DeWaal to take the $1,000 as a holiday advance and to take a holiday to reconsider his position. Hemsworth arrived in Calgary, placed another man in charge of Mercury, and he and DeWaal had a conference in one of the hotels in that City. Hemsworth said he told DeWaal that he would treat his $5,000 deposit on the option as part repayment of the loan, and asked for another $5,000, which he obtained from DeWaal that day. As to the remaining $10,000 of the loan, Hemsworth stated, he told DeWaal it would be his severance pay or bonus. He further stated that, as early as 1965, he had told DeWaal that, in the event that things went sour and DeWaal's services were terminated after the first year, he, DeWaal, would receive $10,000 as a bonus.
10 DeWaal stated that no such discussion took place, as at that point in time it was not even contemplated that things would go sour.
11 With regard to the remaining $10,000 of the loan, Mercury appears to have cancelled it by offsetting it against the severance pay of $10,000 which it deducted as a business expense from its income. The original records of Mercury were not produced at the hearing, but a summary of DeWaal's account was filed as Exhibit M-2.
12 Mr Mainman, the accountant for both companies at the material time, did not agree with the chronology of the items as listed there, but did agree with the substance contained in the said exhibit. He had not prepared the said summary. The company has since passed into other hands, Trimack, and M-2 was prepared by either Trimack, or somebody on their behalf, at the request of the Department of National Revenue.
13 In view of the evidence I cannot place much reliance on this document, M-2.
14 I might also add that the appellant Mercury ought to have produced the original records, as there was some indication that the same are still in existence. There appeared to be some considerable confusion in the minds of the directors of Mercury as to what position to take in relation to the outstanding sum of $10,000 owing to it by DeWaal. Mercury issued, or caused to be issued, three different T-4 slips to DeWaal, in respect of the year 1968 (see Exhibits A-1, A-2 and M-1). In its notice of appeal, under the heading “Statement of Facts and Reasons”, the appellant Mercury states as follows:
As at January 31, 1968 the bonus of $10,000 as severance pay was set up payable to Mr. Simon DeWaal, a former Vice-President of the Company. This severance bonus was set off as against the balance of a loan account outstanding for monies advanced to Mr. DeWaal by the Company which loan account had been reduced by two payments of Mr. DeWaal of $5,000 each to a balance outstanding of $10,000.
15 The date “As at January 31, 1968” apparently is not borne out by the evidence, and I would further say that much of the evidence which might have been of greater assistance to the Board was not produced; for instance, the original records of Mercury and Midwest.
16 Mr Hemsworth stated that after receiving the advice from the accountant that Mercury could not merely cancel the indebtedness by treating it as a bonus or severance pay but would have to forward some $3,000 in income tax payable on the said sum, it was necessary to authorize the payment of same, which Mercury did in fact pay. If, as DeWaal states, there was no discussion with Hemsworth as to severance pay and bonus on the last day of their meeting, that is, the last time they met in Calgary after his firing or after being relieved from office by cancellation of the said loan, it is odd indeed that Mercury would have paid out an additional sum of $3,000. Incidentally, in this connection, DeWaal does not expressly indicate how he received the $10,000 and for what purpose, nor does he treat it in his evidence as severance pay.
17 Viewing the evidence in its totality, I have concluded with some considerable hesitation but on the balance of probabilities that DeWaal did in fact receive the benefit of the $10,000 by way of cancellation of debt, the same being offset as severance pay or bonus. Accordingly the appeal of DeWaal is dismissed.
18 For the same reasons the appeal of Mercury Tank Lines Limited is allowed.
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