Gerald D Segal v. Minister of National Revenue, [1978] CTC 2771, [1978] DTC 1573

Guy Tremblay:—This case was heard at Montreal, Quebec, on January 17, 1978.

1. Point at Issue

The point at issue is whether the loans made during the 1970 and 1971 taxation years by Secor Industries Limited (in which the appellant was the main shareholder) to the appellant and to Anndean Holdings Ltd (a personal corporation in which the appellant owns 50% of the shares) had been legally included in the income of the appellant.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R \N S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.1 The appellant is the financial consultant of a Canadian bank.

3.2 In 1969 the appellant founded Secor Industries Limited, in which he was the main shareholder of the common shares during the 1970 and 1971 taxation years. That company is a manufacturer of lawn furniture.

3.3 In that same year 1969 the appellant founded Anndean Holdings Ltd, in which he owned 50% of the common shares during the 1970 and 1971 taxation years, while his wife and his mother-in-law each owned 25%.

3.4 According to the financial statements of Anndean Holdings Ltd (Exhibits R-4 and R-5) that company bought 500 preferred shares of Secor Industries Limited at $100 per share. According to the appellant, however, Anndean Holdings Ltd did not buy shares, but made a loan to Secor Industries Limited of $50,000. The appellant produced as exhibit A-1 financial statements concerning the 1972, 1973 and 1974 taxation years in which the $50,000 appeared as an asset:

“Investment loan Secor Industries—$50,000’’.

3.5 The appellant was the president of the two companies.

3.6 During the taxation years in question the appellant borrowed from Secor Industries Limited and reimbursed the following monies:

These figures were admitted by the appellant.

3.7 During the taxation years in question, Anndean Holdings Ltd borrowed from Secor Industries Limited and reimbursed the following monies:

As the appellant owns 50% of the common shares of the company, the respondent included in his income $7,057.72 in the 1971 taxation year and $5,000 in the 1972 taxation year.

3.8 According to Mr Noël Frenette, witness for the respondent, those figures had not been disputed by the appellant before.

3.9 According to the appellant, however, the amounts not paid by Anndean Holdings Ltd must in fact be considered as reimbursements made by Secor Enterprises Limited to Anndean Holdings Ltd on the loan of $50,000 made by Anndean Holdings Ltd (see paragraph 3.4).

4. Law—Jurisprudence—Comments

4.1 Law

Subsection 8(2) of the Income Tax Act, RSC 1952, c 148, as amended, applies in this case. That subsection reads as follows:

8. (2) Loan to shareholder. Where a corporation has, in a taxation year, made a loan to a shareholder, the amount thereof shall be deemed to have been received by the shareholder as a dividend in the year unless

(a) the loan was made

(i) in the ordinary course of its business and the lending of money was part of its ordinary business,

(ii) to an officer or servant of the corporation to enable or assist him to purchase or erect a dwelling house for his own occupation,

(iii) to an officer or servant of the corporation to enable or assist him to purchase from the corporation fully paid shares of the corporation to be held by him for his own benefit, or

(iv) to an officer or servant of the corporation to enable or assist him to purchase an automobile to be used by him in the performance of the duties of his office or employment,

and bona fide arrangements were made at the time the loan was made for repayment thereof within a reasonable time, or

(b) the loan was repaid within one year from the end of the taxation year of the corporation in which it was made and it is established, by subsequent events or otherwise, that the repayment was not made as a part of a series of loans and repayments.

4.2 Jurisprudence

The following jurisprudence was cited by counsel for respondent.

A. Loans to shareholders

—Leonard Silver v MNR, [1976] CTC 2043; 76 DTC 1039;

—Jack Stupp v MNR, [1968] CTC 361 ; 68 DTC 5235;

—John Altenhof v MNR, [1973] CTC 2303; 73 DTC 239;

—David Milsom v MNR, 37 Tax ABC 228; 65 DTC 63;

—Timothy Bass v MNR, [1967] Tax ABC 9; 67 DTC 49;

—Roger Gauthier v MNR, 19 Tax ABC 442; 58 DTC 425;

—Estate of Thomas James Johnston v MNR, 35 Tax ABC 18: 64 DTC 204:

—Donald J. Cameron v MNR, [1969] Tax ABC 966; 69 DTC 667;

—Donald C Keddy v MNR, 28 Tax ABC 289; 62 DTC 62.

B. Signatures of Financial Statements

—Ross Gregory Trout v MNR, 7 Tax ABC 216; 52 DTC 388.

C. Personal Corporation

—Cecil V Lightheart v MNR, 38 Tax ABC 267; 65 DTC 376;

—William John Bell v MNR, 38 Tax ABC 270; 65 DTC 378;

—Pearl Ingre v MNR, 37 Tax ABC 273; 65 DTC 85.

4.3 Comments

Concerning the personal loans to the appellant by Secor Industries Limited, those figures are admitted. The evidence did not show that the requirements of subsection 8(3) [sic] of the Income Tax Act, RSC 1952, c 148, as amended, were met. As the burden of proof is on the shoulders of the appellant as explained above, the appeal must be dismissed on the point of the personal loans.

Concerning the loans made to Anndean Holdings Ltd.: first, the evidence was to the effect that it was a personal corporation; and secondly, the legal effect of section 67 of the old Income Tax Act (that the personal corporation is not taxed and that its income is taxable in the hands of the shareholders) was not disputed.

The facts given by the appellant, and explained in paragraph 3.9, are quite difficult to believe even if in his argument the appellant affirmed that it was an error of structure. It is clear in the “Assets” of the balance sheet attached to the 1970 and 1971 income tax returns of Anndean Holdings Ltd that the company owns 500 preferred shares of Secor Industries Limited at $100 a share. No loan of $50,000 appeared on the balance sheet and the returns were signed by the appellant.

No evidence (except the affirmation of the appellant that it was an error of structure) contradicted the written facts on the returns. The Board cannot take into consideration the financial statements for 1972, 1973 and 1974, produced as exhibit A-1 to contradict the filed returns for the 1970 and 1971 taxation years. According to the appellant, intention is more important than structure, but to prove the loan to Secor Industries Limited, he would have to produce a loan contract dated in 1968. He failed to do this. A company does not normally lend $50,000 without a contract.

The burden of proof was not reversed on that point. In a case of similar nature cited above, Ross Gregory Trout v MNR (supra), the Chairman of the former Income Tax Appeal Board, Fabio Monet, QC, dismissed that appeal.

Concerning the loans to Anndean Holdings Ltd, the appellant did not show that the requirements of subsection 8(2) of the old Act were met.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.