A
W
Prociuk
(orally:
April
6,
1978):—At
the
commencement
of
the
hearing,
by
consent
of
all
parties,
these
two
appeals
were
heard
on
common
evidence.
The
appellants,
Anne
E
Flintoft
and
William
J
Flintoft,
are
husband
and
wife,
and
are
the
sole
shareholders
of
Yule
Mortgage
Ltd,
a
company,
incorporated
pursuant
to
the
laws
of
the
province
of
British
Columbia
with
its
offices
at
Vancouver,
and
which
was
and
is
engaged
in
the
business
of
property
rentals
and
money
lending
since
1959.
Jack
Lee
is
the
son
of
the
appellant
Mrs
Anne
E
Flintoft,
by
her
first
marriage,
and
a
stepson
of
the
appellant
William
J
Flintoft.
Jack
Lee
Ltd
was
incorporated
in
1967,
pursuant
to
the
laws
of
the
province
of
British
Columbia,
to
be
engaged
in
public
relations
business.
Its
sole
shareholders,
on
a
50/50
basis,
were
and
are
the
said
Jack
Lee
and
the
appellant
William
J
Flintoft.
The
appellants
appeal
from
the
reassessment
of
their
personal
incomes
for
the
taxation
year
1971
by
notice
of
reassessment
dated
June
8th,
1976,
wherein
a
sum
of
$7,431.25
in
each
case
was
added
to
their
respective
incomes
on
the
premise
that
it
was
an
indirect
payment
received
from
Yule
Mortgage
Ltd,
within
the
meaning
of
subsections
8(1),
16(1)
and
137(2)
of
the
Income
Tax
Act,
RSC
1952,
c
148,
as
amended,
which
read
as
follows:
8.(1)
Where,
in
a
taxation
year,
(a)
a
payment
has
been
made
by
a
corporation
to
a
shareholder
otherwise
than
pursuant
to
a
bona
fide
business
transaction,
(b)
funds
or
property
of
a
corporation
have.
been
appropriated
in
any
manner
whatsoever
to,
or
for
the
benefit
of,
a
shareholder,
or
(c)
a
benefit
or
advantage
has
been
conferred
on
a
shareholder
by
a
corporation,
otherwise
than
(i)
on
the
reduction
of
capital,
the
redemption
of
shares
of
the
winding-up,
discontinuance
or
reorganization
of
its
business,
(ii)
by
payment
of
a
stock
dividend,
or
(iii)
by
conferring
on
all
holders
of
common
shares
in
the
capital
of
the
corporation
a
right
to
buy
additional
common
shares
therein,
the
amount
or
value
thereof
shall
be
included
in
computing
the
income
of
the
shareholder
for
the
year.
16.(1)
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
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.
137.(2)
Where
the
result
of
one
or
more
sales,
exchanges,
declarations
of
trust,
or
other
transactions
of
any
kind
whatsoever
is
that
a
person
confers
a
benefit
on
a
taxpayer,
that
person
shall
be
deemed
to
have
made
a
payment
to
the
taxpayer
equal
to
the
amount
of
the
benefit
conferred
notwithstanding
the
form
or
legal
effect
of
the
transactions
or
that
one
or
more
other
persons
were
also
parties
thereto;
and,
whether
or
not
there
was
an
intention
to
avoid
or
evade
taxes
under
this
Act,
the
payment
shall,
depending
upon
the
circumstances,
be
(a)
included
in
computing
the
taxpayer’s
income
for
the
purpose
of
Part
I,
(b)
deemed
to
be
a
payment
to
a
non-resident
person
to
which
Part
III
applies,
or
(c)
deemed
to
be
a
disposition
by
way
of
gift
to
which
Part
IV
applies.
The
facts
of
the
case
are
essentially
not
in
dispute
and
are
as
follows,
as
related
by
William
J
Flintoft,
who
appeared
on
behalf
of
both
appellants
at
the
hearing.
Jack
Lee
lived
with
the
appellants
for
a
while
after
they
became
married.
He
finished
his
schooling
and
went
to
work
for
the
Vancouver
Sun.
Later
he
went
into
public
relations
work,
mainly
with
PNE
on
a
salary
basis.
He
decided
to
establish
himself
as
an
independent
public
relations
entity
but
required
funds
to
achieve
this
objective.
He
approached
his
step-father,
the
appellant
herein,
and
requested
a
loan
of
$15,000
from
Yule
Mortgage
Ltd.
The
appellant
states
that,
in
his
view,
on
the
basis
of
what
he
had
heard
and
observed
of
Lee’s
endeavours
in
public
relations,
there
were
good
prospects
of
Lee
being
successful
as
an
independent
contractor.
However,
he
states
further
that
he
wanted
to
protect
the
loan
and
Jack
Lee
Ltd
was
incorporated
with
each
holding
a
50%
interest
without
right
of
disposing
of
the
shares
allotted
to
each,
unless
consented
to
in
writing
by
the
other
shareholder.
An
Agreement
dated
November
7th,
1967,
was
drawn
up
between
Jack
Lee
Ltd
and
Yule
Mortgage
Ltd,
including
Jack
Lee
and
the
appellant
William
J
Flintoft
personally,
in
their
personal
capacities.
The
said
agreement
was
filed
as
Exhibit
A-1
and
reads
as
follows:
THIS
AGREEMENT
dated
the
7th
day
of
November,
1967.
BETWEEN:
JACK
LEE
LTD,
a
company
duly
incorporated
under
the
laws
of
the
province
of
British
Columbia,
and
having
its
registered
office
at
201
-
535
Thurlow
Street,
in
the
city
of
Vancouver,
in
the
province
of
British
Columbia;
OF
THE
FIRST
PART
AND:
JACK
LEE,
public
relations
man,
of
4345
Baker
View
Street,
in
the
district
of
North
Vancouver,
in
the
province
of
British
Columbia;
OF
THE
SECOND
PART
AND:
YULE
MORTGAGE
LTD,
a
company
duly
incorporated
under
the
laws
of
the
province
of
British
Columbia,
and
having
its
place
of.
business
at
700
St
Andrews
Road,
in
the
municipality
of
West
Vancouver,
in
the
province
of
British
Columbia;
OF
THE
THIRD
PART
AND:
WILLIAM
JAMES
FLINTOFT,
businessman,
of
700
St
Andrews
Road,
in
the
municipality
of
West
Vancouver,
in
the
province
of
British
Columbia;
OF
THE
FOURTH
PART
WHEREAS
Yule
Mortgage
Ltd
(hereinafter
called
“Yule”)
has
agreed
to
lend
to
Jack
Lee
Ltd
(hereinafter
called
“the
company’’)
the
sum
of
$15,000;
AND
WHEREAS
Jack
Lee
has
agreed
to
personally
guarantee
the
repayment
of
the
said
loan
of
$15,000
to
Yule;
AND
WHEREAS
Jack
Lee
and
William
James
Flintoft
are
the
holders
of
50
shares
each
in
the
capital
stock
of
the
company;
AND
WHEREAS
the
financial
and
business
success
of
the
company
is
wholly
contingent
upon
the
continued
efforts
of
Jack
Lee
for
and
on
behalf
of
the
company;
NOW
THEREFORE
THIS
INDENTURE
WITNESSETH
that
in
consideration
of
the
mutual
covenants
and
agreements
herein
contained
the
parties
hereto
agree
each
with
the
other
as
follows:
1.
Yule
hereby
agrees
to
lend
the
company
the
sum
of
$15,000
bearing
interest
at
8%
per
annum
to
be
repaid
out
of
100%
of
net
profits
of
the
company
until
the
whole
of
the
said
sum
of
$15,000
plus
interest
is
fully
repaid
to
Yule,
such
payments
to
be
made
at
the
end
of
each
fiscal
period
of
the
company
and
shall
be
applied
firstly
in
payment
of
interest
and
secondly
in
reduction
of
the
principal
balance
then
remaining
unpaid.
2.
Jack
Lee
in
his
personal
capacity
hereby
covenants
and
agrees
with
the
company
and
with
William
James
Flintoft
and
Yule
that
in
the
event
that
the
company
is
unable,
for
any
reason
whatsoever,
to
repay
all
or
any
part
of
the
loan
referred
to
in
paragraph
1
hereof,
he
shall
and
does
hereby
personally
agree
and
undertake
to
repay
the
said
sum
of
$15,000,
or
any
part
thereof
from
time
to
time
remaining
unpaid,
and
interest
thereon
at
the
rate
of
8%
per
annum
to
the
date
of
such
payment.
Provided
however
that
in
the
event
that
Jack
Lee
shall
become
personally
liable
for
the
obligation
hereunder
he
shall,
within
60
days
after
becoming
personally
liable,
commence
payments
of
$250
per.
month
to
Yule,
and
such
payments
shall
be
applied
firstly
in
payment
of
interest
and
secondly
in
reduction
of
principal
until
the
whole
amount
of
the
obligation
assumed
is
paid.
3.
Until
the
loan
referred
to
in
paragraph
1
hereof
is
wholly
repaid
by
either
the
company
or
Jack
Lee,
as
the
case
may
be,
Jack
Lee
shall
devote
his
full
time,
energies
and
best
efforts
in
the
operation
and
administration
of
the
affairs
of
the
company.
4.
The
company
hereby
agrees
with
Yule
to
forthwith
apply
for
a
minimum
insurance
policy
of
$20,000
on
the
life
of
Jack
Lee
to
secure
the
loan
referred
to
in
paragraph
1
hereof.
5.
Jack
Lee
hereby
agrees
with
the
company
and
William
James
Flintoft
to
draw
a
maximum
salary
of
$900
per
month
and
no
more
than
$100
per
month
for
miscellaneous
expenses,
provided
however
that
this
term
may
be
varied
by
the
mutual
consent
of
Jack
Lee
and
William
James
Flintoft.
6.
It
is
agreed
between
the
parties
hereto
that
the
company
shall,
at
the
expense
of
the
company,
lease
a
car
for
the
use
and
benefit
of
both
the
company
and
Jack
Lee.
7.
Jack
Lee
and
William
James
Flintoft
shall
each
subscribe
and
pay
for
49
shares
of
the
capital
stock
of
the
company,
provided
however
and
it
is
understood
between
the
parties
that
until
the
loan
referred
to
in
paragraph
1
hereof
is
fully
repaid
there
will
be
no
division
of
earnings
in
any
form
whatsoever
notwithstanding
the
shareholders’
equity
in
the
company
and
thereafter
any
earnings
paid
or
dividends
declared
shall
be
in
accordance
with
the
shareholders’
respective
interests.
8.
Jack
Lee
and
William
James
Flintoft
hereby
covenant
and
agree
with
each
other
that
they
shall
not
transfer,
assign,
set
over
or
sell
all
or
any
part
of
their
interest
in
the
company
or
issue
any
further
shares
in
the
company
unless
mutually
agreed
in
writing
between
them.
9.
Time
shall
be
of
the
essence
of
this
agreement.
This
agreement
shall
enure
to
the
benefit
of
and
be
binding
upon
the
parties
hereto
and
their
respective
heirs,
successors,
administrators,
executors
and
assigns.
It
was
a
term
of
the
agreement
that
Jack
Lee
would
be
the
sole
manager,
worker
and
driving
force
of
Jack
Lee
Ltd.
Flintoft
states
that
he
merely
entered
the
picture
to
protect
the
loan
his
company
advanced.
Yule
Mortgage
Ltd
loaned
$15,000
to
Jack
Lee
Ltd,
which
the
latter
agreed
and
covenanted
to
repay
with
interest
at
8%
per
annum
out
of
its
annual
profits.
Jack
Lee
personally
guaranteed
the
repayment
of
the
loan
in
the
event
that
the
company
was
unable
to
do
so.
It
came
out
that
the
actual
amount
of
the
loan
was
$14,625
as
the
first
$375
were
used
up
in
establishing
the
company.
Flintoft
initially
assisted
Lee
in
setting
up
the
office
and
thereafter
played
no
part
in
the
company’s
operations.
Jack
Lee
Ltd,
through
the
efforts
of
Jack
Lee,
experienced
varying
degrees
of
success
and
failures.
The
appellant
William
J
Flintoft
states
that
while
he
was
after
Lee
on
numerous
occasions
to
commence
repayment
of
the
loan
pursuant
to
the
terms
of
the
agreement,
Lee
always
promised
to
do
so.
But
his
company,
that
is
Jack
Lee
Ltd,
never
appeared
to
make
sufficient
money
to
cover
his
company’s
operating
costs
and
have
a
surplus
to
apply
towards
the
discharge
of
the
loan.
Yule
Mortgage
Ltd,
at
all
times,
employed
a
firm
of
chartered
accountants
who
audited
and
prepared
its
financial
statements.
In
1971
Yule
Mortgage
Ltd,
on
the
advice
of
its
accountants,
wrote
off
some
$46,000
as
bad
debts,
including
the
loan
to
Jack
Lee
Ltd.
To
that
date
Yule
Mortgage
Ltd
had
not
received
any
repayment
from
Jack
Lee
Ltd
nor
from
Jack
Lee
personally.
The
appellant
nevertheless
continued
in
his
effort
to
obtain
repayment
of
the
loan.
In
September
of
1974
Jack
Lee
succeeded
in
obtaining,
what
then
appeared
to
be
a
financially
lucrative
position
with
an
eastern
firm
called
Analytical
Communications
Incorporated
(hereinafter
referred
to
as
“ACI”).
Jack
Lee
also
succeeded
in
obtaining
a
further
loan
of
$6,000
from
the
appellant
Flintoft
personally.
In
return
he
assigned
the
sum
of
$25,000
of
what
he
was
to
receive
from
ACI
and
directed
ACI
to
pay
the
said
sum
to
Yule
Mortgage
Ltd.
I
infer
from
the
evidence
that
$25,000
was
made
up
of
the
$15,000
with
interest
owing
to
Yule
Mortgage
Ltd
and
the
remainder
included
the
$6,000
which
Lee
borrowed
personally.
(See
page
2
of
Exhibit
A-3,
a
letter
dated
September
12th,
1974).
Lee
did
not
remain
with
ACI
long
enough
to
earn
the
said
assigned
sum
of
$25,000,
but
he
did
repay
the
$6,000.
The
original
loan
and
interest
thereon
owing
to
Yule
Mortgage
Ltd
still
remains
unpaid.
Mr
Flintoft
remains
firm
in
his
conviction
that
Lee
will
eventually
repay,
as
he
has
obtained
a
further
written
undertaking
from
Lee
dated
January
15,
1977,
to
that
effect
which
was
filed
as
Exhibit
A-2
and
which
reads
as
follows:
Mr
W
J
Flintoft,
Yule
Mortgage
Ltd
700
St
Andrews,
West
Vancouver,
BC
January
15,
1977
Dear
Jim:
This
letter
will
confirm
that
I
remain
indebted
to
your
company,
Yule
Mortgage
Ltd,
for
the
sums
of
money
that
Yule
Mortgage
Ltd
advanced
to
form
Jack
Lee
Limited
on
November
7,
1967.
As
you
know,
the
finances
of
Jack
Lee
Limited
were
never
sufficient
enough
for
the
company—or
me,
personally—to
effect
repayment
to
Yule
Mortgage
Ltd.
However,
even
though
the
debt
is
now
long
outstanding,
may
I
reiterate
my
intention
to
completely
repay
the
debt
when
possible.
Yours
truly,
(Signed)
Jack
Lee
Jack
Lee,
#2301,
1651
Harwood
St
Vancouver,
BC
Flintoft,
in
his
evidence,
also
stated
that
he
had
threatened
Lee,
presumably
with
civil
action,
for
the
recovery
of
the
account
but
he
has
entertained
substantial
doubts
whether
that
would
assist
in
collecting
the
amount
as
Lee
is
and
has
been
for
some
time
in
an
employee
Situation.
In
1976
the
respondent’s
local
district
office
conducted
an
audit
of
Yule
Mortgage
Ltd
as
well
as
Jack
Lee
Ltd.
It
was
noted
that
in
the
books
of
Jack
Lee
Ltd
the
shareholders’
account
of
Jack
Lee
was
credited
with
$14,862.50
and
loans
payable
were
debited
for
the
same
amount.
The
respondent
accordingly
assessed
both
appellants,
as
stated
earlier,
on
the
basis
of
indirect
payments
deemed
to
have
been
received
from
Yule
Mortgage
Ltd.
Jack
Lee
Ltd
has
been
inactive
since
1973
or
1974
and
Jack
Lee
has
since
then
become
an
employee
of
various
firms.
There
is
also
some
suggestion
that
Jack
Lee
Ltd
did
very
little
work
after
1971.
At
the
hearing
the
appellant
stated
that
at
no
time
had
his
company,
Yule
Mortgage
Ltd,
directly
or
indirectly
forgiven
the
indebtedness.
Mr
M
G
Aikman,
CA,
acting
on
behalf
of
the
appellants,
stated
that
he
checked
with
the
former
accountants
of
Jack
Lee
Ltd
with
reference
to
the
book
entry
referred
to
above,
and
was
informed
that
that
simply
meant
that
Jack
Lee
was
taking
personal
responsibility
for
repayment
of
the
loan
to
Yule
Mortgage
Ltd,
as
Jack
Lee
Ltd
was
inactive
at
that
time.
Counsel
for
the
respondent,
W
Mah,
Esq,
in
his
summation
stated
that
the
respondent
regarded
the
1967
transaction
as
bona
fide
and
legitimate.
However,
in
June
of
1976
the
respondent
took
the
position
that
when
Yule
Mortgage
Ltd
set
up
the
amount
of
the
loan
as
a
bad
debt
in
1971,
as
it
was
permitted
to
do,
the
Board
ought
to
interpret
this
as
in
effect
forgiveness
of
the
debt
and
accordingly
the
assessment
of
the
individual
shareholders
of
Yule
Mortgage
Ltd
ought
to
be
sustained.
With
every
deference
to
counsel
for
the
respondent,
I
am
constrained
to
say
that
in
the
light
of
the
totality
of
the
evidence
before
the
Board,
such
a
submission,
in
my
humble
opinion,
totally
defies
all
sense
of
logic,
and
the
proper
interpretation
of
the
relevant
sections
of
the
Act.
In
setting
up
a
bad
debt
in
1971,
which
Yule
Mortgage
Ltd
was
bound
by
law
to
do,
and
I
refer
to
paragraph
11
(1
)(f)
of
the
old
Act;
whence
it
determined
that
it
became
a
bad
debt
in
that
year
and
not
at
a
later
date.
If
recovered
at
a
subsequent
date
then,
of
course,
it
would
be
deemed
income.
The
respondent,
it
will
be
noted,
did
not
challenge
the
writing
off
of
this
item
at
any
time.
How
then
can
it
be
said
that
subsection
137(2),
for
instance,
applies
in
1971?
There
was
no
sale,
exchange,
declaration
of
trust
or
a
transaction
of
any
kind.
It
was
merely
a
proper
accounting
entry
reflecting
the
position
of
that
account.
As
to
subsection
8(1),
it
is
admitted
that
in
1967
it
was
a
bona
fide
transaction.
The
evidence
satisfies
me
that
Yule
Mortgage
Ltd
believed
that
it
would
collect
a
fair
market
interest
rate
on
the
loan
and
that
full
recovery
in
due
course
would
be
achieved.
Jack
Lee
Ltd
used
the
funds
in
an
attempt
to
generate
income
for
that
corporation
but
did
not
succeed.
It
is
difficult
to
see
how
in
1971
the
appellants,
or
either
of
them,
had
any
benefit
from
the
loan
made
to
Jack
Lee
Ltd
in
1967
and
which
loan
was
disbursed
as
operating
expenses
of
that
company.
Subsection
16(1)
refers
to
payment
or
transfer
of
property
made
pursuant
to
the
direction
of
or
with
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
upon
the
other
person.
This
could
only
have
happened
in
1967
at
the
time
the
loan
was
made
if
the
circumstances
had
been
different.
The
case
at
bar
differs
substantially
from
the
cases
cited
and
I
refer
especially
to
Estate
of
C
A
Pitt
v
MNR,
22
Tax
ABC
57;
59
DTC
275,
and
to
MNR
v
Allan
Bronfman,
[1965]
CTC
378;
65
DTC
5235,
where
in
one
case
there
was
an
actual
forgiveness
of
indebtedness,
and
in
the
latter
substantial
gifts
given
to
immediate
members
of
the
family.
In
conclusion,
I
hold
that
the
appellants
have:
been
successful
in
totally
demolishing
the
assumptions
of
fact
on
which
the
respondent
based
his
reassessment
and
are
entitled
to
succeed.
Accordingly,
the
appeal
in
each
case
is
allowed.
Appeal
allowed.
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