Citation: 2011 TCC 194
Date: 20110331
Docket: 2010-2288(IT)I
BETWEEN:
GERALD HANSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
Gerald Hansen appeals
in respect of assessments made under the Income Tax Act for the 2006 and
2007 taxation years.
[2]
The appeal relates to
benefits allegedly conferred by a corporation related to the appellant, Oak
Farms Ltd. (“Oak Farms”). There are two types of benefits that were identified
in the notice of appeal.
[3]
An issue concerning personal
use of an automobile was resolved by the parties before the hearing. It is agreed
that the benefit should only be $2,000 in each of the 2006 and 2007 taxation
years. The formal judgment will reflect this agreement.
[4]
The other issue relates
to a series of expenditures made by Oak Farms for the benefit of the appellant.
These amounts were recorded in a corporate account identified as “Gerry’s
drawings.”
[5]
For purposes of the
assessments, the Minister considered that the expenditures recorded in this
account were interest-free loans from Oak Farms to the appellant. This gave
rise to benefits assessed pursuant to section 80.4 of the Act. The
amount included in income was derived from an interest rate prescribed for
purposes of the relevant legislation.
[6]
The relevant provision,
subsection 80.4(2) of the Act, reads:
80.4(2) 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) was
(a) a shareholder of a corporation,
(b) connected with a shareholder of a
corporation, or
(c) a member of a partnership, or a beneficiary
of a trust, that was a shareholder of a corporation,
and by virtue of that shareholding that person or partnership received
a loan from, or otherwise incurred a debt to, that corporation, any other
corporation related thereto or a partnership of which that corporation or any
corporation related thereto was a member, the person or partnership shall be
deemed to have received a benefit in a taxation year equal to the amount, if
any, by which
(d) all interest on all such loans and debts
computed at the prescribed rate on each such loan and debt for the period in
the year during which it was outstanding
exceeds
(e) the amount of interest for the year paid on
all such loans and debts not later than 30 days after the later of the end of
the year and December 31, 1982.
[Emphasis added]
[7]
The balance owing in
Gerry’s drawings’ account fluctuated from time to time as expenditures were
made by Oak Farms or as the appellant made payments to Oak Farms. At the
beginning of the assessment period, the opening balance was $146,009 owing by
the appellant to Oak Farms.
[8]
The amounts that were
included in income as a result of s. 80.4 were $5,981 and $7,147, for the 2006
and 2007 taxation years respectively.
[9]
The appellant submits
that the benefits under subsection 80.4(2) were not properly calculated by the
Minister because they failed to take into account an amount loaned by the
appellant to Oak Farms in 2004 in the amount of $471,667.
[10]
It is submitted that
the expenditures recorded in “Gerry’s drawings” account do not represent
indebtedness from Oak Farms to the appellant because these amounts are more
than offset by the loan made in 2004 from the appellant to Oak Farms.
[11]
For the reasons below, the
benefits assessed under s. 80.4 should be upheld in my view.
Discussion
[12]
Oak Farms operates a
greenhouse and retail flower shop in Leamington, Ontario. During the relevant period, it was
managed by the appellant who took over the operation from his father.
[13]
In 1994, the appellant
borrowed $975,000 from the Bank of Montreal (the “Bank”) in order to finance
the purchase of the business from his father.
[14]
In March 2004, at a
time when $488,333 was the balance outstanding on the loan, it was replaced by
new financing with the Bank totalling $960,000 (the “2004 loan”).
[15]
The 2004 loan involved
two parts. The first part replaced the balance owing by the appellant on the
1994 loan ($488,333). The second part ($471,667) consisted of funds used
entirely by Oak Farms. It was comprised of a fresh advance in the amount of
$240,000 and the balance was used to repay existing debt of Oak Farms.
[16]
The essential question
is whether the appellant was indebted to Oak Farms in the two taxation years at
issue.
[17]
The appellant submits
that he was not indebted to Oak Farms. He suggests that he advanced more money
to Oak Farms than Oak Farms advanced to him, and accordingly that he was not
indebted to Oak Farms.
[18]
The first question is
whether the appellant advanced any money to Oak Farms at all.
[19]
The appellant submits
that he did advance money to Oak Farms when he borrowed $960,000 from the Bank
in 2004 and re-lent $471,667 of this amount to Oak Farms.
[20]
The problem with this
submission is an evidentiary one. No loan documentation was introduced into evidence
which clearly established that the Bank lent the appellant $960,000.
[21]
The respondent submits
that the Oak Farms’ portion of the loan ($471,667) was lent directly by the
Bank to Oak Farms. In other words, the respondent submits that the Bank lent
funds to both the appellant and to Oak Farms in 2004. The appellant submits
that he was the only borrower.
[22]
Both parties introduced
evidence in support of their position. None of the evidence is definitive and
it is conflicting.
[23]
In favour of the
respondent’s position is a letter from the Bank to the solicitors for Oak Farms
that was sent in preparation for the closing of the loan transaction in March
2004. This letter suggests that there was more than one borrower. An excerpt of
this letter dated February 24, 2004 (Ex. A-3) is reproduced below:
Since the funds are to be advanced through your office, we require a
Letter of Direction, duly signed, sealed/and appropriately witnessed as
applicable, by the borrowers.
[24]
This instruction was
followed by a document signed by Oak Farms which directed to the Bank that a
cheque be made in favour of Oak Farms’ solicitors (Ex. R-4).
[25]
Other evidence is
supportive of the appellant’s position. In particular, an accountant at Collins
Barrow who was the appellant’s tax adviser, Jeff Kelly, testified that someone
at the Bank told him that the appellant was the only borrower. This was confirmed
in writing to the accountants in a form prepared for this purpose (Ex. A-7).
[26]
It was on the basis of
this information that Collins Barrow prepared financial statements which
reflected that the appellant borrowed $960,000 from the Bank and re-lent
$471,667 to Oak Farms. The books and records also reflected that the loan from
the appellant to Oak Farms ($471,667) bore interest at the same rate as that
charged by the Bank on the loan to the appellant. Oak Farms paid this interest
to the Bank and deducted it for income tax purposes. (Oak Farms actually paid
all principal and interest on the $960,000 loan but the appellant’s portion was
reflected in Gerry’s drawings’ account.)
[27]
Mr. Kelly testified
that he later tried to confirm with the Bank who the borrower was but the Bank
did not cooperate in providing this information because the appellant no longer
had a relationship with the Bank.
[28]
Other documents were
introduced into evidence, but the documents above illustrate that there is
uncertainty as to whether there was one borrower or two.
[29]
In light of the
conflicting evidence, I have concluded that the appellant has not satisfied the
burden of proof. It appears that the appellant has not kept the necessary
documentation. In light of the conflicting evidence, steps should have been
taken to have someone from the Bank testify to clear up the confusion. This was
not done.
[30]
Moreover, even if I
were to accept that the appellant had lent $471,667 to Oak Farms, this would
not be sufficient for the appellant to succeed in this appeal. It does not
necessarily follow that the indebtedness represented by the account named “Gerry’s
drawings” is no longer outstanding. A set off of the two debts would be
required in order to avoid the application of section 80.4.
[31]
In this case, it is
clear from the evidence that no set off was intended. The entire $471,667
remained outstanding as a liability of Oak Farms, subject to ordinary
repayments of principal to the Bank. This is clear because Oak Farms paid
interest on this indebtedness and deducted it for tax purposes. This leads to
the inescapable conclusion that a set off of Gerry’s drawings’ account against
this indebtedness was never intended. This is fatal to the appellant’s case.
[32]
In conclusion, the
assessments will be upheld with respect to the account known as Gerry’s
drawings. The only relief that will be granted will be with respect to the
agreement of the parties concerning automobile benefits.
[33]
In light of the mixed
success, each party shall bear their own costs.
Signed at Ottawa,
Canada this 31st day of March 2011.
“J. M. Woods”
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