Citation: 2008TCC648
Date: 20081127
Docket: 2007-2376(IT)G
BETWEEN:
BRIAN M. HILLIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The Appellant was reassessed
tax based on a determination that the accounting firm, Redmond and Hillier,
acting on behalf of Brian M. Hillier Inc. (“BMH Inc.”), had conferred a
benefit in the amount of $47,375 on the Appellant during his 2000 taxation year.
This assessment was issued after the normal reassessment period for that
taxation year had expired. As well, gross negligence penalties were assessed
pursuant to subsection 163 (2) of the Income Tax Act (“Act”).
[2]
Since the assessment of
the Appellant was issued after the expiration of the normal reassessment
period, the onus would be on the Respondent to establish that the Appellant had
made a misrepresentation that was attributable to neglect, carelessness or
wilful default or had committed fraud in filing his tax return or in supplying
information under the Act in relation to his 2000 taxation year (Mensah v.
The Queen 2008 TCC 378, 2008 DTC 4358). The alleged misrepresentation as
described in the Reply was the failure by the Appellant to include the amount
of $47,375 in his income as a benefit. It seems to me that the first issue that
needs to be decided is whether any benefit was conferred on the Appellant at
all in the year 2000 as a result of the transactions in issue. If a benefit was
conferred on the Appellant, then the next question will be whether this
misrepresentation would allow the Respondent to reassess the Appellant after
the expiration of the normal reassessment period. If no benefit was conferred
on the Appellant, then there is no need to address this question.
[3]
The Appellant is a
chartered accountant. In the year 2000 he owned shares of the capital stock of
BMH Inc., which was a partner in Redmond and Hillier. The Appellant owned a boat
but had some interest in acquiring a better boat. The Appellant was contacted
by a broker in the spring of 2000 about a boat that was for sale in Rhode Island. The Appellant and the broker travelled to Rhode Island to look at the boat and Appellant decided to submit a
bid for the boat. The boat was for sale as a result of foreclosure proceedings
by a bank. The Appellant’s bid was successful, and the Appellant then found
himself in a position in which he had to raise the capital required to pay the
purchase price, which was US$28,000 or approximately CAN$45,000. The Appellant
at the beginning of 2000 had not planned on buying another boat but since the
opportunity arose he decided to capitalize on the opportunity and purchase the
boat.
[4]
In looking for sources
of money, the Appellant reviewed the amounts that were payable to him
personally by Redmond and Hillier. These were amounts that the
Appellant had charged to his personal credit cards but that had been incurred
for the benefit of the partnership. The Appellant submitted a list of these
expenditures during the hearing. The Respondent did not dispute the fact that
these expenditures had been incurred for the benefit of the partnership.
[5]
The closing date for
the purchase of the boat was May 18, 2000. As of May 3, 2000 the amount
that was payable by the partnership to the Appellant personally, in relation to
the charges that the Appellant had incurred on his CIBC Aerogold credit
card, was $17,750. In addition to that amount, the Appellant also incurred
expenditures on his Scotiagold credit card. As of December 31, 1999, the amount
that was payable to the Appellant in relation to the charges incurred on this
credit card was $6,334. No payments had been made by the partnership to the
Appellant to reduce these balances before the closing of the purchase of the
boat.
[6]
These amounts were
payable by the partnership to the Appellant personally. These credit cards were
the Appellant’s personal credit cards. They were not credit cards issued to BMH
Inc. The payments on these credit cards were made from personal resources of
the Appellant and not from funds of BMH Inc.
[7]
These two amounts were
not sufficient to cover the cost of the boat. The Appellant also drew down a
cash advance against his CIBC Aerogold credit card in the amount of $12,000 on
May 16, 2000. This amount was paid to Redmond and Hillier.
In addition to these amounts, the Appellant also borrowed the sum of $15,000
from his sister. The Appellant’s sister testified and she confirmed that she advanced
this amount to the Appellant. This amount was repaid by the Appellant to his
sister following the sale by the Appellant of the boat that he owned before he
purchased the boat in 2000.
[8]
Following the payment
to the partnership of the $12,000 in cash that the Appellant had charged to his
personal credit card as a cash advance and the payment to the partnership of the
amount of $15,000 that Appellant had borrowed from his sister, the following was
the total amount that was then payable by the partnership to the Appellant:
|
Item
|
Amount
|
|
Amount payable for expenditures charged to the
Appellant’s Aerogold credit card
|
$17,750
|
|
Amount payable for expenditures charged to the
Appellant’s Scotiagold credit card
|
$ 6,334
|
|
Cash advance charged by the Appellant to his
Aerogold credit card
|
$12,000
|
|
Amount borrowed by the Appellant from his sister
|
$15,000
|
|
Total:
|
$51,084
|
[9]
In order to complete
the purchase of the boat, the Appellant needed a bank draft in US dollars. The
Appellant had done some work for a client who had surplus US cash that the
client wanted to convert to Canadian dollars. Therefore, the Appellant arranged
to have the funds transferred from the partnership to this client in exchange
for US dollars that were used to purchase a bank draft to buy the boat. The
boat was purchased and the Appellant is the owner of the boat.
[10]
The position of the Respondent
is that the accounting records reflect that a benefit was conferred on the
Appellant by Redmond and Hillier on behalf of BMH Inc. In Trudel-Leblanc
v. The Queen, 2003 DTC 257, 2004 DTC 3188, [2005] 2 C.T.C. 2361, Justice
Tardif stated that:
27 I strongly doubt that the
accountants explained the consequences of incorporation. Too often, some
accounting and tax professionals have a tendency to assume that the facts
should be shaped by accounting entries whereas, in reality, the figures should
reflect the facts, not the contrary.
[11]
In VanNieuwkerk v.
The Queen, 2003 TCC 670, [2004] 1 C.T.C. 2577, Associate Chief Justice
Bowman (as he then was) stated that:
6 Part of the confusion stems from the
accounting records which show either no transfer, or a transfer on December 31,
1998 or January 1, 1998 depending on which version you look at. It has been
said on many occasions in this Court that accounting entries do not create
reality. They simply reflect reality. There must be an underlying reality that
exists independently of the accounting entries. I accept Mr. Goeres'
explanation that adjusting entries, such as entries reflecting the transaction
involved here or capital cost allowance, are all shown in the general ledger on
December 31. That may well be so, but it does underline how unreliable
accounting records are in determining when a transaction has taken place.
[12]
It is the underlying
reality that will determine whether a benefit was conferred on the Appellant
and not simply the accounting entries. In any event, the accounting records to
which the Respondent was referring relate to the statement of the partners
account activity for the period from February 1995 to August 2000. This record
shows, in part, that the following entries were included as part of the
drawings and contributions in relation to the partnership interest of BMH Inc.:
|
Item
|
|
Amount
|
|
Drawings
|
Boat (Comf. Numb.)
|
($47,375)
|
|
Contributions
|
BMH Inc.
|
$41,199
|
|
|
Aerogold
|
$16,407
|
|
|
Scotiagold
|
$ 8,725
|
[13]
The records for the
partnership capital account of BMH Inc. reflect a drawing for the boat of $47,375.
This amount exceeded the actual purchase price for the boat because additional
expenses had been incurred in relation to the acquisition of the boat. However,
the same record shows contributions as having been made by BMH Inc. in the
amount of $41,199 and also in relation to the Aerogold and Scotiagold credit
cards. The $41,199 in contributions by BMH Inc. included the $12,000 paid to
the partnership by the Appellant which was financed as a cash advance on his
credit card and the $15,000 that the Appellant borrowed from his sister. As
noted above, the Aerogold and Scotiagold credit cards were personal credit
cards of the Appellant. As a result the contributions listed in the capital
account for BMH Inc. included, based on the amounts shown above for Aerogold
and Scotiagold, $52,132 that was contributed personally by the Appellant. These
personal contributions exceeded the amount shown as a drawing for the boat.
[14]
These records in and of
themselves do not show any benefit that was conferred on the Appellant. These
records only reflect the capital account of the corporate partner. They do not
show any transfer of any assets of the partnership or BMH Inc. to the
Appellant. It would seem that to properly reflect the transactions in BMH Inc.
it would also be necessary to show the acquisition by BMH Inc. of the assets that
it would have used to make its contribution to the partnership. As noted above,
the sum of $52,132 of the amount of contributions shown to have been made by
BMH Inc. to the partnership was contributed personally by the Appellant. If the
contribution of this amount by the Appellant to BMH Inc. would have been
reflected in the accounting records of BMH Inc., those records would presumably
have shown an acquisition by BMH Inc. from the Appellant of the assets listed
above that comprise the amount of $52,132 and a corresponding amount payable
($52,132) by BMH Inc. to the Appellant. Therefore if the transfer of the boat is
reflected as a drawing from the partnership to BMH Inc. and then is recorded as
a transfer from BMH Inc. to the Appellant, it would simply be a repayment by
BMH Inc. to the Appellant of most of the amount payable by BMH Inc. to the
Appellant.
[15]
The Appellant stated
that the transactions related to the boat were not reflected in the accounting
records of BMH Inc. (including the contributions made by the Appellant financed
by a cash advance on his credit card, the contribution from the amount that the
Appellant borrowed from his sister, and the Aerogold and Scotiagold amounts)
because BMH Inc. was not involved with the acquisition of the boat. It seems to
me that if the transactions would have been reflected in the accounting records
of BMH Inc. then they would have been reflected as noted above and would have
shown that no benefit was conferred on the Appellant by BMH Inc.
[16]
It does not seem to me
that any benefit was conferred on the Appellant by the BMH Inc., or by the
partnership on behalf of BMH Inc. in relation to the acquisition by the
Appellant of the boat in 2000. It was the Appellant’s own personal assets that
were used to purchase the boat. A benefit cannot be confirmed by a corporation
on a shareholder if the shareholder’s own property (and not property of the
corporation) is used to purchase the asset that is alleged to form the basis of
the benefit.
[17] As a result, the appeal is allowed, with
costs, and the reassessment issued in relation to the Appellant’s 2000 taxation
year is vacated.
Signed at Vancouver, British Columbia, this 27th day of November 2008.
“Wyman W. Webb”
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