Donald E Keller v. Minister of National Revenue, [1978] CTC 2870, [1978] DTC 1621

Guy Tremblay:—This case was heard at Belleville, Ontario, on April 17, 1978.

1.: Point at Issue

The point at issue is whether the amount of $1,572 paid as interest during the 1971, 1972 and 1973 taxation years by Donald E Keller Limited in respect of a mortgage secured by the appellant’s personal residence must be included in the appellant’s income for the taxation years in question.

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 de- cisions, including the judgment delivered by the Supreme Court of Canada in R IV S Johnston v MNR, [1948] CTC 195; 3 DTC 1182. /*

3. The Facts

3.1 The appellant was at all material times the principal shareholder of Donald E Keller Limited since May 1, 1970.

3.2 Donald E Keller Limited made payments to Victoria and Grey Trust Company in the amount of $1,572 of interest in each of the appellant’s 1971, 1972 and 1973 taxation years, in respect of a mortgage secured by the appellant’s personal residence. This point Is not in dispute.

3.3 According to an agreement (Exhibit A- 2), the appellant, on May 1, 1970, transferred his construction business known as “Don Keller Construction” to “Donald E Keller Limited’. Assets valued at over $260,905.64 (including $85,537.90 of fixed equipment) were transferred at the depreciated book value to the company. It was proven to the satisfaction of the Board that the fixed assets (value by agreement being, of $85,537.90) had a fair market value of $136,483.05 (excavating equipment alone being valued at $92,300).

3.4 The company assumed certain liabilities of the appellant totalling $260,902 (Exhibit A-2). Included in the liabilities transferred was a liability to Victoria and Grey Trust Company in the amount of $14,517.79, which was secured by a mortgage on the appellant’s home (Exhibit A-4).

money

3.5 This money, according to the appellant, originated with money borrowed for use in the appellant’s business before the incorporation and as such the interest thereon was deductible as being laid out to earn income.

3.6 In 1959, the appellant borrowed $7,000 ($2,079 for his personal use and $4,921 for his business, both amounts secured [by] his home). This home had been bought in 1953 for $3,500. Other loans were made in the following years until the incorporation, as it appears in Exhibit A-1 :

3.7 On March 5, 1968, an indenture in pursuance of the Short Form of Mortgages Act, between the mortgagor (the appellant and his wife, Joyce Keller, joint tenants) and the mortgagee (Victoria and Grey Trust Company) was signed concerning an amount of $15,000 (Exhibit R-1).

3.8 The different loans were made to buy equipment. At the transfer of the equipment of Donald Keller Construction to the company in 1970, no specified assets in general and equipment in particular were identified as corresponding to the amount of $14,519.77 of liabilities due to Victoria and Grey Trust Company.

3.9 During the period January 1 to December 31, 1969, the gross income (construction of homes) was $667,329.43.

3.10 The company, since its incorporation, employed 10 to 20 persons.

3.11 No witness testified for the respondent.

3.12 For the years 1971, 1972 and 1973, by reassessment dated April 14, 1976, the respondent included in the revenue of the appellant the amount of $1,572 as interest, as explained in paragraph 3.2.

3.13 Following the notice of objection by the appellant dated July 12, 1976, the respondent confirmed his position by his notification dated January 19, 1977.

3.14 On April 18, 1977, a notice of appeal was lodged before the Tax Review Board concerning the amount of interest of $1,572 of each of the years involved.

4. Law — Jurisprudence — Comments

4.1 The most important subsection of the new Act concerning the case at bar is 15(1) (subsection 8(1) of the old Act). Subsection 15(1) reads as follows:

15. Appropriation of property to shareholder.

(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 whatever 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

(d) on the reduction of capital, the redemption of shares or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 84, 88 or Part II applies,

(e) by the payment of a dividend, or

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

4.2 The jurisprudence cited by the appellant and by the respondent is as follows:

1. Wolfgang Schubert v MNR, [1978] CTC 2033; 78 DTC 1039;

2. Her Majesty the Queen v William G Phillips, [1975] CTC 250; 75 DTC 5188;

3. Her Majesty the Queen v Frank Leslie, [1975] CTC 155; 75 DTC 5086;

4. Her Majesty the Queen v Peter Neudorf, [1975] CTC 192; 75 DTC 5213;

5. James F Kennedy v MNR, [1972] CTC 429; 72 DTC 6357; [1973] CTC 437; 73 DTC 5359 ;

6. Lucien R LeDa/re v MNR, [1977] CTC 2539; 77 DTC 391;

7 Taras T Hnatiuk v Her Majesty the Queen, [1976] CTC 632; 76 DTC 6376.

4.3 Comments

The main argument of the respondent is that, at the date of the transfer in 1970, the liability of $14,517.79 had no corresponding assets, the assets being insufficient. The agreement (Exhibit A-2) is a blanket agreement.

The Board must underline that this problem is connected with the problem of the goodwill sold in 1970 with the other assets. That problem was alleged in the notice of appeal, but was denied by the respondent in his reply. However, no evidence was given concerning that point and the Board must ignore it. Many cases cited by the parties concerned goodwill and the insufficiency of the assets.

Concerning the corresponding assets of the liability of $14,517.79, the Board is satisfied with the appellant’s affirmation that the loans appearing in Exhibit A-1 (see paragraph 3.6 of the facts) were used for the purpose of gaining or producing income of his business. The Board also takes into consideration the difficulty of giving a detailed evidence for the appellant. The reassessment was made in April 1976. The appellant must prove the use of the loans made in 1959, 1963 and 1968. The fair market value of the equipment in 1970 was $136,483.05 and it was transferred at the depreciated book value of $85,537.90.

Moreover, the fact that the appellant’s residence guaranteed the debt, is not an evidence per se that the money loaned was used for his personal needs and not for his business.

The Board has no reason not to believe the non-contradicted affirmation of the appellant contained in his testimony, especially in paragraphs 3.5, 3.6, 3.7 and 3.8 of the facts: In the Board’s opinion, the appellant has reversed the burden of proof.

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.