The Queen v. Ans, 83 DTC 5038, [1983] CTC 8 (FCTD)

Collier, J:—The only remaining issue in this litigation is whether a company bonus, allegedly paid to and received by the defendant Ans, was properly included in his 1973 income.

By assessments and reassessments, the Minister of National Revenue added into the defendant’s 1973 income, the bonus referred to, as well as an amount of $12,499.80. The Minister took the view the latter amount was caught by the provisions of subsection 15(2) of the Income Tax Act, SC 1970-71-72, c 63 as amended.

The taxpayer appealed the assessments to the Tax Review Board. The Board upheld the Minister’s treatment of the amount of $12,499.80. But it ruled the $16,500 bonus should not have been included in income for the taxpayer’s 1973 taxation year.

Both parties appealed that decision to this court. At trial, the taxpayer’s counterclaim in respect of the $12,499.80 was abandoned. It was agreed there should be an order dismissing the counterclaim.

In 1972 the defendant, and a Stewart Duncalfe, held shares in a private company, Continental Bedding and Furniture Co Ltd (“Continental). As a part of a larger transaction, Ans agreed to buy Duncalfe’s shares for $50,000. The transaction was carried out in 1973. The defendant became the owner, for practical purposes, of all the shares in Continental.

At first, it was arranged the defendant would borrow the $50,000 from a bank. For tax and other reasons, it was decided Continental would borrow the money, and in turn loan it to the defendant. That was done. The bank loan was repaid by the company at the rate of $1,000 per month. The terms of the loan agreement between Continental and the defendant were not put in evidence. The defendant had not repaid, at relevant times his loan from the company. Nor had he repaid it at $1,000 per month. The balance owing at the end of 1973 involved the $12,499.80 earlier referred to.

In 1973, the defendant was actively managing and running his small company (Continental). He also had an interest in a partnership known as Saskatoon Frame Company. He was paid income from that business. Other than the disputed bonus, Ans drew, in 1973, no salary from Continental. The financial advisor to the defendant, and Continental, was Touche, Ross & Co, a firm of chartered accountants. Gordon C Birney, a partner in that firm, was in charge of providing accounting services, and any necessary financial advice, to Ans and Continental.

In 1973, it was agreed between Birney and the defendant that a bonus of $16,500 should be declared by Continental to Ans. This was for Ans’ management services. It may well be this figure was arrived at solely on calculations and considerations made by Birney. All these matters took place a long time ago. The memories of Birney and Ans are, understandably, unclear as to details, and as to whether oral discussions took place, and, if so, as to what exactly was discussed or decided.

Birney testified it was agreed or understood that the bonus would not be paid in cash, but would be credited against the balance outstanding on the loan by Continental to Ans. Ans, in his evidence, confirmed it had been decided to declare a $16,500 bonus in his favour. But according to Ans, this was to be paid to him at some time when the cash was available; the company did not have sufficient funds to pay the bonus in 1973. Ans went on to say the crediting of the bonus to the loan account was not discussed with him; if it had been, he would not have agreed to it.

It may well be the disposition of the bonus was not discussed in any, or great, detail between Birney and Ans. The time lapse since then is almost 10 years. Memories do fade. Recall, over time, becomes cloudy.

Birney testified it was his practice, in respect of a transaction of this kind, involving a shareholder’s loan account or similar matters, to write a letter explaining the matter. He could not, at trial, recall actually sending such a letter, or assuming he did so, exactly what was said in it. It was not possible to trace this letter, if it existed; Continental went into bankruptcy in 1975. Nevertheless, I accept Birney’s evidence on this point. He was a candid witness.

There is some documentary evidence which supports the recollection of Birney and the position taken by the Minister. In Continental’s journal, the bonus of $16,500 is debited to salaries and credited to Ans’ shareholder’s loan account. The financial statements and income tax return of Continental for 1973 were prepared under the direction of Birney. In note 6 to the financial statements, the details of the defendant’s loan account are set out, including the allocating to the account of the 1973 bonus. Ans, as president of the company, signed Continental’s tax return on January 31, 1974. Attached to the return were the financial statements.

It may be the defendant did not read the financial statements, and the note regarding the disposition of the bonus. The means of knowledge was, however, there.

It is probable a T-4 slip for the $16,500 was not issued by Continental to Ans. The defendant’s personal income tax return was prepared by someone in Touche, Ross & Co. The $16,500 was not included in income. Birney testified the person in his firm who made up Ans’ return probably had no knowledge of the Continental financial statements and what they showed, and had no reason to go to the corporate financial statements. I think that is a likely explanation. But all that, in my view, does not assist the defendant’s legal position.

I have sympathy for the defendant. These matters occurred a long time ago. The defendant had little or no accounting, or financial management, experience. Undoubtedly he was more concerned with running this small company than with consideration of financial statements, shareholders’ loan transactions, or tax implications.

I have, nevertheless, concluded that the balance of probabilities is that the defendant, perhaps without realizing the implications, authorized and approved the allocation of the 1973 bonus payable, to his loan account with the company. On that basis the bonus was received by the defendant in the 1973 taxation year and was properly brought into income by the Minister.

The member of the Tax Review Board who heard this appeal in the first instance came to a different conclusion. But Birney was not called as a witness at that hearing. The member did not have, as I did, the benefit of Birney’s testimony.

In the result, therefore, the decision of the Tax Review Board setting aside that part of the assessment relating to the $16,500, is reversed. The appeal of the plaintiff on that aspect of the matter is allowed. The counterclaim of the defendant, as I earlier stated is, by consent, dismissed.

The parties agreed that the defendant, regardless of the outcome of the hearing in the trial division of this court, would recover costs fixed at $1,000, plus disbursements.