Tremblay T.C.J.:
1 This appeal was heard at Québec, Quebec, on January 10, 1996, under the informal procedure. Furthermore, in response to a request by the respondent to reopen the hearing, a conference call was set for April 22, 1996, and the matter was heard on that date.
1. Point at Issue
2 According to the notice of appeal and the amended reply to the notice of appeal, the point at issue is whether the $31,000 borrowed by Société Pruneault Drolet c.a. in 1989 was borrowed from the joint-stock company André Pruneault Inc. (A.P.I.) or from André Pruneault personally. It must further be determined whether the interest incurred after April 30, 1990, and before a non-capital loss was applied was correctly computed.
3 Lastly, the appellant raised the point of an unclaimed reserve of $35,582 for work in progress for the 1989 taxation year.
2. Burden of Proof
4 2.01 The burden is on the appellant to show that the respondent's reassessment was incorrect. This burden of proof arises from a number of judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, 3 D.T.C. 1182, [1948] C.T.C. 195 (S.C.C.).
5 2.02 The facts assumed by the respondent in the instant case are described in subparagraphs (a) to (m) of paragraph 15 of the reply to the amended notice of appeal. They read as follows:
[Translation]
15. In making the “nil” reassessment dated November 9, 1994, for the 1989 taxation year, the Minister made the following assumptions of fact, inter alia:a. during the 1989 taxation year, the appellant was a shareholder of the joint-stock company André Pruneault Inc. (“API”); [ admitted]
b. the appellant lent Société Pruneault Drolet $31,000 through A P I; [ denied]
c. the $31,000 was not repaid by December 31, 1989; [ admitted]
d. when the notice of reassessment of October 23, 1992, was issued, the Minister therefore added $31,000 to the appellant's income for the 1989 taxation year, inter alia, as advances to a shareholder, and allowed a $3,302 loss carryback from the 1990 taxation year; [ admitted]
e. on July 9, 1993, by a notice of confirmation with the appellant's consent, the Minister and the appellant agreed to settle the point at issue; [ denied]
f. at the time, the appellant told an officer of the Minister that he agreed to the reassessment dated October 23, 1992, for the 1989 taxation year; [ denied]
g. the appellant subsequently showed that the $31,000 advance had been repaid in 1991 and that under paragraph 20(1)(j) there was loss in the 1989 taxation year; [ partially admitted because repaid in 1990 and 1991]
h. accordingly, on October 13, 1993, the Minister issued a notice of reassessment for the 1989 taxation year carrying back a loss of $20,406 requested by the appellant from 1991 to 1989; [ admitted]
i. on February 15, 1994, the Minister issued a notice of reassessment for the 1989 taxation year carrying back another loss of up to $18,908 requested by the appellant from 1992 to 1989, so as to reduce the taxable income to a minimum and ultimately, after deducting total non-refundable tax credits, to arrive at zero tax payable; [ admitted]
j. when the “nil” notices of reassessment of February 15, 1994, and November 9, 1994, were issued for the 1989 taxation year, the Minister considered that the appellant had to pay arrears interest even though his tax payable was nil for that year, since non-capital losses from other years had been considered in computing the appellant's taxable income; [ admitted]
k. the return of income had to be filed on April 30, 1990, for the 1989 taxation year; [ admitted]
l. the appellant's tax, before non-capital losses from other years, payable at April 30, 1990, and which was unpaid on that date, was $8,339.68 (the excess); [ has no knowledge]
m. the prescribed interest on the excess at April 30, 1990, on the date of the notice of reassessment for the 1989 taxation year amounted to $3,500.07. [ denied]
3. Facts in Evidence
6 3.01 The appellant became a member of the Association des comptables agréés in 1967. In 1986, he formed the joint-stock company André Pruneault et Associés Inc. (A.P.I), through which the appellant said he practised his profession as an accountant. He personally owned 80 per cent of the shares and a Ms. Cantin, his partner, owned 20 per cent.
7 3.02 When his partner left the firm in the fall of 1988, he entered into partnership with two other accountants, Gaston Drolet and André Bégin, to form the general partnership Pruneault et Drolet (hereinafter called the “partnership”). The appellant and Mr. Drolet each had a 40 per cent interest and Mr. Bégin had 20 per cent.
8 3.03 A.P.I. and the partnership had the same financial institution, the Royal Bank. One day in late December 1989, the credit manager at the bank, a Mr. Liberge, telephoned the appellant and informed him that the balance on the line of credit used by the partnership had become too large (on the order of $150,000) and that it would perhaps be a good idea to use A.P.I.'s line of credit to reduce the balance owed by the partnership. The appellant agreed that A.P.I. would write a cheque to the partnership for $31,000.
9 3.04 The following documents were filed jointly as Exhibit A-1:
(1) A.P.I.'s account statement of January 2, 1990, for account number 100-199-9, issued by the Royal Bank;
(2) a cheque for $31,000 dated December 27, 1989, made out to Pruneault et Drolet c.a. and drawn on the account of André Pruneault et Associés Inc. (A.P.I.), with a note on the cheque reading [TRANSLATION] “Loan to Pruneault & Drolet”; on the reverse, it reads: “For deposit only Pruneault & Drolet c.a. 1175900”; this cheque shows on the account statement as debited on December 27, 1989;
(3) another cheque for $10,000 dated December 4, 1989, to the order of Pruneault Drolet c.a., drawn on A.P.I.'s account and bearing the note [TRANSLATION] “Payment of Développement Gaudarville Enr. invoices 675 and 866”; a note on the reverse reads “For deposit only to credit of Pruneault Drolet 1175900”; it shows on the account statement as debited on December 5, 1989;
(4) Exhibit A-1 also includes eight stubs of cheques drawn on A.P.I.'s account from January 8 to May 11, 1990; the stub dated January 8, 1990, shows that a payment of $11,882.13 was made to Les Consultants Miville-Pruneault bearing the following note: [Translation] “Advances re: bank overdraft”.
10 3.05 A.P.I.'s financial statements for the period ending on December 31, 1989 (Exhibit A-2, tab 1), show $99,156 in the “accounts receivable” item on the balance sheet. Note 2 concerning the accounts receivable reads inter alia as follows:
[TRANSLATION]
| 1989 | 1988 |
|---|
| Advances to accounting firm | $31,000 | $19,557 |
11 According to the appellant, transfers were made fairly often to the partnership's account and the partnership subsequently repaid them as its revenues came in. Furthermore, at tab 6 of Exhibit A-2, it appears from A.P.I.'s Royal Bank account statement that, while $31,000 was debited from A.P.I.'s account on December 27, 1989, it was credited back for $5,000 and for another $25,000 on the same day. A.P.I.'s Royal Bank account no. 100-199-9 was also credited for $5,000 against the loan on December 29, 1989.
12 3.06 The partnership was apparently dissolved in February 1990 upon the departure of one partner, who subsequently went bankrupt. The other partner left in late 1990.
13 Around mid-1990, however, another partner by the name of Morin joined the appellant. In late 1991, another partner was added and the firm then took on the name Pruneault, Truchon et Associés, c.a.
14 3.07 In the meantime, however, the appellant changed banks. The Bank of Montreal granted a loan of $150,000 to repay the amounts owed to the previous financial institution, among other things.
15 3.08 Jacques Simard, an employee of the respondent, was the appeals officer who handled this case. He explained why the respondent had considered that the $31,000 loan was made personally by the appellant. Mr. Simard referred to the following exhibit, filed as Exhibit I-2. It is a document which he said came from a financial statement of the partnership Pruneault et Drolet c.a. for 1989. He said that this is what Jean-Luc Gagnon, the assessor, told him. The appellant, however, said it was an internal document prepared by a secretary:
[TRANSLATION]
| OWED TO THE ROYAL BANK |
| Preferred rate +2%, monthly | | |
| payment, principal only, $1,500 | $75,000.00 | |
| OWED TO FLYNN, RIVARD LAWYERS |
| Rate %, monthly payment, | | |
| principal and interest, $ | $45,091.43 | |
| OWED TO THE ROYAL BANK |
| Preferred rate + 2%, monthly | | |
| payment, principal only, $700 | $20,800.00 | |
| OWED TO AN INDIVIDUAL |
| No interest or specific | | |
| method of repayment | | |
| OWED TO ANDRÉ PRUNEAULT C.A. |
| Rate | $31,000.00 | |
| | | $171,891.43 |
| Less | | | |
| | | $171,891.43 |
16 According to Mr. Simard, this document clearly shows that it was the appellant, not A.P.I., who lent the $31,000 to the partnership.
17 3.09 On May 12, 1993, Mr. Simard telephoned the appellant about the $31,000 loan. The appellant informed him that, as a result of Mr. Drolet's departure and bankruptcy in February 1990, the money had never been repaid by the partnership either to A.P.I. or to him.
18 3.10 In another call, on June 23, 1993, the appellant apparently told Mr. Simard that the amount was owed to him, not to A.P.I., but that the money was repaid at the end of 1990 or 1991.
19 3.11 On the same day, June 23, 1993, the appellant sent Mr. Simard a facsimile which reads as follows:
[TRANSLATION]
Attached is repayment of the cheque [ sic] and the bank statement proving that André Pruneault, C.A., repaid the amounts received from André Pruneault et Associés Inc., totalling $35,000, on September 27, 1991. (Exhibit I-1)
20 The cheque concerned was a certified cheque for $35,000 dated September 27, 1991, issued by the Caisse populaire Jacques-Cartier to the order of the Bank of Montreal and signed [TRANSLATION] “André Pruneault in trust”. A note on the front of the cheque reads as follows:
[TRANSLATION]
Payment André Pruneault et Associés Inc. loan and personal guarantee.
21 The reverse of the cheque reads as follows:
[TRANSLATION]
To pay down André Pruneault et Associés Inc. loans and personal guarantees.
22 The stamp of the Bank of Montreal and the notation “0184 - 1019-341 - Sept. 27, 1991” also appear on the back.
23 Exhibit I-1 also includes the Bank of Montreal account statement for the André Pruneault et Associés Inc. account, number 0184-1019-341, dated September 30, 1991, showing that $35,000 was deposited in account 0184-1019-341 on September 27, 1991, and also transferred on the same day to account 0184-6013-352. Another $35,000 was transferred to branch 0098 on September 30, 1991.
24 3.12 Upon receipt and examination of this document, Mr. Simard communicated with Mr. Pruneault again on July 5, 1993. He informed him that he was leaving the assessment as it was, to the effect that this was a personal loan, but that, in light of the payment made in 1991, it might be possible to apply paragraph 20(1)(j) of the Act. According to Mr. Simard, the appellant agreed with this procedure.
25 On the same day, July 5, 1993, the appellant sent a facsimile (Exhibit I-3) to Mr. Simard stipulating the following: [TRANSLATION] “This is to authorize you to carry back the 1991 loss to my 1989 tax return.”
26 3.13 On October 13, 1993, the respondent issued a reassessment (no. 6078316) in respect of 1989 after the carryback of the loss from 1991 to 1989 (Exhibit A-2, tab 7). The result of this reassessment was a credit of $4,827.82.
27 On the notice that he received, the appellant wrote:
[TRANSLATION]
| Balance already established in accordance with notice of objection | $49,902 |
| 1992 loss to be carried back according to fax to Simard [he meant to write 1991] | ($20,406) |
| Revised taxable income | $29,496 |
| What is happening with my $31,000 repayment? | |
28 3.14 The appellant contended that he filed an objection to this assessment, but he could not find it anywhere. On the other hand, in Exhibit A-2, tab 11, which is quoted below in paragraph 3.17, the appellant referred to the notice of objection dated December 17, 1993, in response to assessment no. 6078316, which is the one mentioned above in paragraph 3.13. This notice of objection might have been lost, but in fact it was entered.
29 3.15 A reassessment was issued for the 1989 taxation year (no. 6079621) dated February 15, 1994, after the carryback of an additional loss (Exhibit A-2, tab 8).
30 The final result shows a credit of $3,467.19 and indicates arrears interest of $3,357.51.
31 The following information, as stated by the respondent, appears on the notice of reassessment:
[TRANSLATION]
We have calculated arrears interest on the balance payable before the carryback credit(s) were applied for 1990, 1991 and 1992.
We will apply your refund to your unpaid balance.
We have amended your return to allow you a carryback of an additional non-capital loss of $18,908.00, the maximum allowable.
32 The appellant added the following explanation:
[TRANSLATION]
| Balance originally assessed (notice of objection) | 49,902 |
| Non-capital loss | (20,406) |
| Additional | (18,908) |
| 10,588 |
33 3.16 On February 25, 1994, the appellant then filed a notice of objection (Exhibit A-2, tab 4) referring to the notice of objection dated November 24, 1992, in response to the notice of assessment dated October 23, 1992, concerning the 1989 taxation year (no. 6008155). It reads as follows:
[TRANSLATION]
| OBJECTOR: | Andre Pruneault |
| SIN: *** *** *** |
STATEMENT OF FACTS AND REASONS FOR OBJECTION TO THE 1988 AND 1989 INCOME TAX ASSESSMENTS DATED OCTOBER 23, 1992
Facts
The company André Pruneault & Associés Inc. does consulting work in the purchase and sale of businesses and manages investments. It is thus a business closely related to the accounting firm Pruneault Drolet c.a. The inter-fund receivable and payable account is a current account which varies on a monthly basis with the receipts and disbursements of each of the entities. [Emphasis mine.]
The department is assessing André Pruneault on the balance of the inter-fund advances between the two entities at December 31, 1989, in the amount of $31,000. The advances to the accounting firm Pruneault Drolet c.a. to that date were used by all the partners, whose interests, according to the partnership agreement, were as follows:
| Gaston Drolet | 40% |
| André Pruneault | 40% |
| Paul-André Bégin | 20% |
| 100% |
Reasons
It is our view that the advances must be considered to be a current account which varies monthly and must be divided between the operating entities. As Mr. Pruneault owns only 40 per cent of the partnership Pruneault Drolet c.a., this $31,000 representing personal advances should be eliminated.
Other Deductions
The Pruneault Drolet c.a. financial statements dated January 31, 1989, show work in progress worth $66,496 against which no reserve has been claimed. Having regard to these assessments, I therefore reserve the right to claim a reserve, depending on the outcome of the resolution of these objections.
34 3.17 On November 9, 1994, a notice of reassessment was issued (revised balance: $26.73 credit and $3,500.07 interest claimed).
35 A new notice of objection (Exhibit A-2, tab 11) was filed on December 1, 1994. It reads as follows:
[TRANSLATION]
| OBJECTOR: | André Pruneault |
| SIN: *** *** *** |
Statement of Facts and Reasons for Objection
On November 24, 1992, I filed an objection to assessments no. 6008155 for 1989 and no. 6008156 for 1988 in accordance with the reasons already given. At that time, I filed all the necessary documents in support of my objection.
On December 17, 1993, I filed a new objection in response to assessment no. 6078316, which merely carried back a loss from 1992 without any correction being made to the original assessment, no. 6008155.
On February 25, 1994, I filed another objection to assessment no. 6079621, which carried back an additional loss without resolving the first assessment. On March 17, the Department acknowledged receipt of that objection.
On November 8, 1994, the Department issued notice of reassessment no. 6108426, without correcting the first assessment.
On November 25 last, I received a bill for $3,378.13 for 1989.
I therefore request a full review of all these assessments on the basis of the information which you already have. If additional information is necessary, I will be pleased to meet with you.
4. Act-Analysis
36 4.01 The provisions of the Income Tax Act that apply in the instant appeal are paragraphs 15(2)(b), 20(1)(j) and 111(1)(a), which read as follows:
15(2)Shareholder debt. Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation or is a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, to any other corporation related thereto or to a partnership of which the particular corporation or a corporation related thereto is a member, the amount of the loan or indebtedness shall be included in computing the income for the year of the persons or partnership, unless
(b) the loan or indebtedness was repaid within one year from the end of the taxation year of the lender or creditor in which it was made or incurred and it is established, by subsequent events or otherwise, that the repayment was not made as part of a series of loans or other transactions and repayments.
20(1)Deductions permitted in computing income from business or property.
(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:(f) Repayment of loan by shareholder.— such part of any loan or indebtedness repaid by the taxpayer in the year as was by virtue of subsection 15(2) included in computing his income for a preceding taxation year (except to the extent that the amount of the loan or indebtedness was deductible from the taxpayer's income for the purpose of computing his taxable income for that preceding taxation year), if it is established by subsequent events or otherwise that the repayment was not made as part of a series of loans or other transactions and repayments;
111. Losses deductible.
(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as he may claim of
4.02 Analysis
37 4.02.1 In his notice of appeal, the appellant refers to an unclaimed reserve of $35,582 for work in progress for 1989, according to the accounting firm's financial statements at December 31, 1989.
38 The Court notes that the appellant took quite a while to become concerned about this work in progress. The first time that he raised the matter of a reserve for work in progress, which at that time he said amounted to $66,496, was on February 25, 1994 (3.16 - notice of objection: other deductions). In his notice of appeal dated February 25, 1995, the work in progress had dropped to $35,582. The Court understands that the $66,495 figure related to work in progress at the start of 1989 and the $35,582 figure to work in progress at the end of that year (Exhibit A-2, tab 5).
39 During the hearing, there were no documents filed on this point showing particulars of the work in progress.
40 The appeal is therefore dismissed on this point.
41 4.02.2 With respect to the $31,000 loan, the first point is whether it was made by A.P.I. or by the appellant personally.
42 Before drawing my conclusions on the evidence adduced on this point, I will make the following comment: if the respondent was right in contending that the appellant lent the $31,000 to the partnership, then the appeal must be allowed.
43 How then could the respondent assess the appellant under subsection 15(2) of the Act? This provision can apply only where a loan has been made by a company (joint-stock company) to a shareholder that is an individual or a partnership. It does not apply where a shareholder makes a loan to a company or a partnership. However, this is precisely what the appellant did if he personally lent money to the partnership. Subsection 15(2) of the Act therefore cannot apply and the original assessment would not stand.
44 4.02.3 Let us now consider the evidence adduced before this Court as to the real lender. The evidence of the original transaction (Exhibit A-1) seems to be quite clear and to support the appellant's case. The money came from A.P.I.'s account. The cheque was cashed by the partnership. It was also used by it to pay down its debt to the bank (3.04(2)).
45 4.02.4 The appellant stated that this transfer was not an isolated case (3.05 and 3.15, Notice of Objection dated 23/10/92). It appears from Exhibit A-1 that a cheque for $10,000 dated December 4, 1989, was used to pay the partnership's outstanding bills (3.04(3)). Furthermore, the same bank account was used to cover the bank overdraft for Les Consultants Miville-Pruneault (3.04(4)), another business of the appellant's (3.15, Notice of Objection dated 23/10/92).
46 It appears from A.P.I.'s statement of profit and loss (Exhibit A-2, tab 5) that A.P.I. had an account receivable of $31,000 in 1988 and $19,557 in 1988 (3.05). It must therefore be deduced, first, that A.P.I. took into account the account receivable of $31,000, and second, that the account receivable of $19,557 at the end of 1988 was paid during 1989 and received by A.P.I.
47 These facts confirm what the appellant said with respect to the many transfers of money from A.P.I. to the partnership and the repayment to A.P.I. by the partnership.
48 4.02.5 What are the facts that the respondent relied on that would allow the Court to disregard this evidence?
49 4.02.5(1) Was it Exhibit 1-2 (3.08)? The respondent said that this was part of the partnership's financial statements. When the hearing reopened, it was established that these financial statements had been provided to the respondent by the appellant himself. Moreover, the appellant contended that these internal financial statements had been prepared by the bookkeeping clerk and were not audited or examined, and the terms used in them were not always accurate.
50 From this point of view alone, the Court is strongly inclined to believe the appellant's version, but let us continue examining the evidence.
51 4.02.5(2) Was it Exhibit I-1 (3.11)? While the facsimile is dated June 23, 1993, the appended cheque is dated September 27, 1991, more than a year and a half after the partnership was dissolved in February 1990 (3.06).
52 Thus the $35,000 did not come from the partnership. Did it come from the new firm? The firm did not take the name Pruneault, Truchon et Associés, c.a. until the end of 1991. In the meantime, it appears that it was called André Pruneault c.a. The appellant stated in the facsimile that the repayment was made by André Pruneault c.a.
53 In any case, the respondent did not dispute that the $35,000 was actually repaid to A.P.I. (2.02: subparagraph 15(g) of the reply to the notice of appeal).
54 4.02.5(3) Was it the admission the appellant apparently made to Mr. Simard that the $31,000 was owed to him, not to A.P.I.?
55 The appellant denied this. The first notice of assessment, dated November 24, 1992 (3.15), and the many others that followed (3.16), confirm the position consistently maintained by the appellant, that it was A.P.I. that lent the $31,000 to the partnership.
56 4.03 Considering the clear evidence in Exhibit A-1, confirming the appellant's testimony, and also concerning the numerous transfers from one account to another, and considering the weakness of the evidence in support of the respondent's allegations, I have come to the conclusion that the preponderance of the evidence favours the appellant's argument that the loan was made by A.P.I.
57 4.04 The appellant contended that he had only a 40 per cent interest in Pruneault, Drolet (3.02). By the nature of this general partnership, each partner was jointly and severally liable for the obligations of the partnership (art. 1865 C.C.L.C.). Moreover, [TRANSLATION] “this liability continues even after the dissolution, liquidation or bankruptcy of the partnership”.
58 As there was joint and several obligation within the partnership, the appellant was liable for the amount borrowed from A.P.I. by the partnership.
59 As the $31,000 lent on December 27, 1989, was not repaid “within one year from the end of the taxation year of the lender or creditor in which it was made”, in accordance with paragraph 15(2)(b) of the Act, the deadline expired on December 31, 1990. The evidence is that the appellant repaid the money on September 27, 1991 (3.11).
60 4.The appellant wondered what had become of his $31,000 repayment (last point in 3.13). According to the respondent's witness, Mr. Simard, the appellant consented to the $31,000 being applied to 1989 under the provisions of paragraph 20(1)(j) of the Act. Loss carrybacks from 1990, 1991 and 1992 were applied against 1989 income (3.15: notes on the notice of assessment issued on February 15, 1994).
61 The $31,000 repayment made on September 27, 1991, was not directly applied against 1989 income, as the appellant believed, but against 1991 income, under paragraph 20(1)(j) of the Act, thus creating a loss of $20,406 for 1991. However, that loss was applicable against 1989 income under paragraph 111(1)(a).
62 This procedure is described in subparagraphs 15(g) and (h) of the reply to the notice of appeal set out above (2.02), which moreover were admitted by the respondent.
63 4.06 The question now is whether the respondent was correct in computing interest on the taxes owing for 1989 from May 1, 1990, until the liability was fully discharged.
64 Subsection 161(1) and subparagraph 161(7)(a)(iv) of the Act read as follows:
161. General.
(1) Where at any time after the day on or before which a taxpayer is required to pay the remainder of his tax payable under this Part for a taxation year,
161(7)Effect of carryback of loss, etc. For the purpose of computing interest under subsection (1) or (2) on tax or a part of an installment of tax for a taxation year,
- (a) the tax payable by the taxpayer under this Part for the year shall be deemed to be the amount that it would have been if none of the following amounts, namely,
were so excluded or deducted for the year, as the case may be;...
65 Thus the interest ran from May 1, 1990, until the principal amount of the liability was repaid and the interest is still owing.
5. Conclusion
66 The appeal is dismissed.
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