Wawota Energy Products Ltd. v. R., [1997] 3 C.T.C. 2059

Beaubier T.C.J.:

1 These matters were heard together on common evidence by consent of the parties at Regina, Saskatchewan on March 21 and 22, 1997. Denis Lamontagne (“Denis”), the Appellant and president and majority voting shareholder of Wawota Energy Products Ltd. (“W.E.P.L.”); Roy Olsen, C.M.A., accountant for W.E.P.L.; and Victor Lamontagne (“Victor”), Denis' brother and a manager of Mammoth Canada Inc. (“M.C.I.”), testified on behalf of the Appellants. Denis is a farmer and Victor is a mechanical engineer. They both appear to be more than 50 years of age. Denis lives in the district of Wawota, Saskatchewan. Victor lives at Fort Qu'Appelle, Saskatchewan.

2 Phyllis Lukey, an auditor for Revenue Canada, testified for the Respondent.

3 W.E.P.L. appealed assessments for its 1991 and 1993 fiscal years ending January 31, disallowing expenses of $38,693 and $126,347 respectively. Denis appealed assessments for 1990, 1991 and 1992 pursuant to subsection 56(2) of the Income Tax Act which added to his income $24,952, $34,595 and $7,863 respectively on account of various forms of compensation allegedly paid to Victor and to Victor's wife, Lois Lamontagne (“Lois”).

4 M.C.I. was incorporated in Saskatchewan on February 1, 1990 under The Business Corporations Act and Lois was named its director that day. Lois was M.C.I.'s only director throughout its existence. It was initially a numbered corporation and changed its name to M.C.I. on August 1, 1990 (Exhibit A-1). On May 22, 1991 it filed for and on April 9, 1993 it became the owner of the trade mark “Mammoth Canada” (Exhibit A-4). M.C.I. was struck off the register of The Business Corporations Act of Saskatchewan on July 29, 1994. Victor and Lois' son, John, was its only shareholder.

5 W.E.P.L. was incorporated in Saskatchewan on April 27, 1990 under The Business Corporations Act. On January 25, 1991, W.E.P.L. was registered pursuant to the Saskatchewan Small Business Incentives Act. Denis testified that it then obtained the following investments from other individuals and municipalities in the Wawota area of Saskatchewan:

(a) from 29 individuals for Class I shares, all of which was invested by June 1, 1991—	$299,500.
(b) from four rural municipalities for Class E shares by October 31, 1991 —	$181,000.
(c) from one rural municipality as a loan —	$80,000.

6 Denis testified that he has invested $50,000 in W.E.P.L. He has 5001 Class A voting shares in W.E.P.L. Denis' wholly owned corporation, Lamontagne Farms Ltd., loaned W.E.P.L. $192,000. He stated that at times its loan has amounted to $400,000. In addition the Canadian government agency, Western Economic Diversification, committed itself to loan W.E.P.L. $342,298 in February, 1991, although not all of this was advanced (Exhibit A-9).

7 At all material times Denis was the president, the sole director and had voting control of W.E.P.L. He testified that he did not draw a salary from W.E.P.L.

8 W.E.P.L. banked at the Royal Bank of Canada, Wawota, and M.C.I. banked at The Toronto-Dominion Bank, Regina.

9 The purpose of all of this investment was so that W.E.P.L. would establish a heat pump manufacturing plant at Wawota and develop three new heat pump products targeted at greenhouses and swimming pools (Exhibit A-9). Denis described W.E.P.L.'s purposes differently. He said W.E.P.L. was to build geothermal equipment, dehumidification equipment and water source air conditioning equipment. Denis stated that M.C.I. had the technology and that W.E.P.L. and M.C.I. agreed that M.C.I. would do the research and development, refine the equipment and market the equipment. W.E.P.L. would be the manufacturer.

10 The “Mammoth” name is well known and highly regarded in the heating industry. It is a brand of industrial heating products manufactured in the USA. M.C.I. is said by Victor and Denis to have sold Mammoth products in Ontario and Quebec. They stated that Victor had a good relationship and so M.C.I. had good credit with “Mammoth Nortek”, the US company, while Mr. Ingalson was with Mammoth Nortek. But when Mr. Ingalson left Mammoth Nortek, M.C.I. had no credit. As a result, Denis said that W.E.P.L. supplied the money to M.C.I. to buy Mammoth Nortek products for the purpose of selling them in Canada. W.E.P.L. also obtained a line of credit at the Royal Bank of Canada that could be drawn upon by M.C.I. for purchases from Mammoth Nortek. Denis implied that W.E.P.L. would supply accessories to Mammoth Nortek installations but there is no evidence that this happened.

11 Until April 1992 M.C.I. and W.E.P.L. had no written agreement respecting all of this. The agreement itself (Exhibit A-11) is not witnessed. No one testified as to the date it was signed and the April 1992 date is after the events in question.

12 W.E.P.L. advanced money to M.C.I. M.C.I. never invoiced or billed W.E.P.L. Frequently Denis simply dropped some signed blank W.E.P.L. cheques off with Victor or Lois or M.C.I. and the amounts and the payee were filled in later. Denis was the sole signing officer of W.E.P.L. Lois and her son, John Lamontagne, were the signing officers of M.C.I. In July 1991, Lois went bankrupt. In January 1992, Victor went bankrupt. Victor stated that sometime in this general period, Saskatchewan Economic Development Corporation (“Sedco”) withdrew a $50,000 line of credit to M.C.I. or one of Victor's companies and seized everything at M.C.I.'s office in Regina. M.C.I. never filed an income tax return.

13 Roy Olsen was W.E.P.L.'s accountant. M.C.I. had another accountant. Roy prepared W.E.P.L.'s financial statements. There never were any invoices or bills from M.C.I. to W.E.P.L. He obtained the synoptic and books of both corporations. He had records of payments from W.E.P.L. to M.C.I. He matched those to expenditures by M.C.I. He combined the revenues and expenditures of both corporations into W.E.P.L.'s financial statements.

14 Victor testified that he was constantly travelling and presenting products to architects, engineers and potential customers. He says he bought meals and drinks for these people and for his travel and retained 70 or 80% of the receipts, but that they largely disappeared during the Sedco seizure. His credit card was frequently at the limit so he says that he often paid cash. There is no evidence that he or M.C.I. did any research and development or product refining for W.E.P.L. M.C.I. allegedly arranged for sales of Mammoth Nortek equipment which it purchased and then sold in Ontario and Quebec. However, a number of these customers did not pay. Victor testified that because of this he went bankrupt.

15 Victor testified that during the time in question Victor and Lois' only income was from M.C.I. M.C.I.'s T4's indicate the following income to them:

16 Phyllis Lukey, the auditor for Revenue Canada, testified respecting the sums in question for approximately three hours. The evidence is clear that Lois and Victor drew cash and transferred money from M.C.I. to themselves or for their benefit frequently. M.C.I. money was used to pay their vehicle bills and mortgage payments. It was used to pay a carpentry firm in Fort Qu'Appelle a number of substantial sums for unidentified purposes. These sums were totalled and the alleged salary portions of the T4's to Lois and Victor were subtracted. The results are reflected in the amounts assessed against Denis as benefits paid to Lois and Victor.

17 Victor's testimony was put forward to refute these figures. The Court does not believe Victor. In particular, the detail of the amounts accounted for and testified to by the auditor was such that, despite the alleged loss of records, Victor and Lois could have refuted the payment of car repairs, mortgage payments, possible insurance payments, carpentry payments and some or all of the cash withdrawals and bank transfers. This was not done. Lois never testified and she appears to have handled M.C.I.'s money. Payments to First Security Bank in the United States were never explained. W.E.P.L. entered these various amounts under a variety of headings such as “cash”, “cost of materials” and “travel expenses”. But there were no supporting documents or testimony except for Victor's broad statements.

18 Denis signed and left blank W.E.P.L. cheques with Lois, with Victor and with M.C.I. They filled them in and cashed them. Lois and Victor used money that M.C.I. received in this way from W.E.P.L. for their own benefit. Denis did not get any bills or invoices at any time. He simply gave cheques from W.E.P.L. which he had signed in blank.

19 Moreover, W.E.P.L. consolidated the M.C.I. financial affairs into its own financial statements and Denis was W.E.P.L.'s sole director and signing officer. In the circumstances the accounting procedure allowed W.E.P.L. to claim expenses for money it had spent by Denis' actions in dropping off W.E.P.L. cheques without receiving any bills or invoices.

20 The assessments appealed by W.E.P.L. for its 1991 and 1992 taxation years are based upon the premise that these alleged expenses were not incurred for the purposes of gaining or producing income and that some of the amounts were not substantiated by the Appellant. W.E.P.L. has failed to refute these assessments and the evidence of Phyllis Lukey is accepted in support of the assessments. There is no satisfactory evidence that the agreement, Exhibit A-11, ever constituted the terms adopted by M.C.I. and W.E.P.L. Victor's testimony is not credible and is not accepted. Denis' conduct in leaving signed blank cheques as he did before expenses were incurred or billed or invoiced shows a careless disregard for the money that was entrusted to him as a director of W.E.P.L. by others. At the very least, the evidence is that alleged expenses deducted by W.E.P.L. were not incurred for the purposes of gaining or producing income from business or property.

21 W.E.P.L.'s appeal is dismissed. The Respondent is awarded its party and party costs in respect to the appeal, except for the hearing itself, which costs will be dealt with in the portion of the decision determining Denis' appeal.

22 Denis' delivery of the blank cheques is not what anyone would do with a stranger. He did this with his relatives and with M.C.I., which they managed. Both Victor and Denis said that the after-the-fact written agreement, Exhibit A-11, states what the agreement between M.C.I. and W.E.P.L. was. However, subparagraphs 7.4(b) and (c) of it state:

(b) Mammoth shall not be entitled to any payment or commission, other than reimbursement of expenses as herein provided.

(c) Mammoth shall invoice Wawota for expenses payable by Wawota to Mammoth.

23 Subsection 56(2) of the Income Tax Act reads:

A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.

(underlining added)

24 Denis testified that he delivered signed W.E.P.L. cheques to Lois, to Victor and to M.C.I. in blank. He did not fill in the amount or the payee. He did not have any invoice or bill made out to W.E.P.L. to pay. By doing this Denis was delivering gifts. The donee was the person to whom he delivered possession of the cheques. That person could complete the cheques however he, she or it chose and use the money as he, she or it wished. Denis was conferring these benefits of his own free will since there were no bills or invoices to pay. There is no evidence that he did this for anyone else. From the evidence, Lois and Victor deposited some of the cheques into M.C.I.'s account and then took money for their own use and purposes. Both the Bills of Exchange Act and the common law indicate that by doing this Denis authorized Victor, Lois and M.C.I. to use the cheques in whatever manner they saw fit. Furthermore, Denis' total conduct in respect to the funds for which he personally is assessed indicates that he intended to benefit Lois and Victor. By not getting invoices or bills, he did just that. He testified that he occasionally checked M.C.I.'s records. If he had, then he would have seen from the cheques and bank statements and the synoptic that cash and cheques and transfers were going to or for the benefit of Lois and Victor frequently. If he had wanted to stop that he could have. But he did not.

25 As a result, Denis paid or transferred W.E.P.L.'s money to M.C.I. as a benefit that he desired to have conferred on Lois and Victor which would have been regarded as his income if it had been paid or transferred to him.

26 Denis' appeal is dismissed. The Respondent is awarded party and party costs throughout, including party and party costs for the hearing, against Denis Lamontagne.