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Citation: 2006TCC126
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Date: 20060328
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Docket: 2005-3150(IT)I
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BETWEEN:
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ROGER BARBEAU,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Bédard J.
[1] These are appeals under the informal procedure from reassessments dated April 4, 2005, in which the Minister of National Revenue ("the Minister") added $24,857 to the Appellant's income as a shareholder loan and $1,487 to his income as a shareholder benefit for the 2000 taxation year. Under these reassessments, the Minister also limited, to $5,739, the deduction for the reimbursement of a part of the Appellant's debt to Les jardins beaux plants Inc. ("the Corporation") for the 2002 taxation year.
[2] Previously, by notice of reassessment dated December 15, 2003, the Minister had added $24,857 to the Appellant's income as a shareholder loan, $3,305 as a benefit for the 2000 taxation year and $3,349 as a benefit for the 2001 taxation year. The Minister had also granted the Appellant an additional deduction of $4,290 for the reimbursement of a part of the Appellant's debt to the Corporation. On or about March 17, 2004, the Appellant served the Minister with notices of objection against reassessments for the 2000, 2001 and 2002 taxation years. In response to the notices of objection of March 17, 2004, the Minister issued reassessments on April 4, 2005, by which he reduced the amount of the benefit by $2,108 for the 2000 taxation year and by $3,349 for the 2001 taxation year. The Minister also increased the deduction granted to the Appellant by $1,430 for the 2002 taxation year in connection with the Appellant's reimbursement of a part of its debt to the Corporation.
[3] In reassessing the Appellant for the 2000, 2001 and 2002 taxation years, the Minister relied on the following assumptions:
[TRANSLATION]
(a) The Appellant is the sole shareholder and director of Les jardins beaux plants Inc. ("the Corporation"); (denied as written)
(b) Over the course of the 1999 taxation year, the Appellant received a loan of $60,948 from the Corporation to renovate his personal residence. (denied)
(c) During the 2000 taxation year, the Appellant received another loan, in the amount of $24,857, from the corporation. (admitted)
(d) This residence, situated at 1787 Chemin de la Rivière in Sainte-Chlothilde-de-Châteauguay, has been the Appellant's residence since 1992. (admitted)
(e) The permit granted by the municipality for the work states that it is for an expansion. (denied)
(f) For the 2000 taxation year, the interest calculated at the prescribed rate on the borrowed money net of the benefit taxed in the Appellant's hands under the provisions of subsection 15(2) is $3,503. (admitted)
(g) During the 2000 taxation year, the Appellant paid $2,018 to the Corporation as interest on the loan. (admitted)
(h) For the 2001 taxation year, the Minister determined that the interest, at the prescribed rate, attributable to the loans received by the Appellant, was lower than the amount that the Appellant repaid to the Corporation. (admitted)
(i) For the 2002 taxation year, the Minister determined that the Appellant repaid $5,720 to the Corporation. (admitted)
[4] The only issue in the instant case is whether the Minister was justified in adding $24,857 to the Appellant's income under subsection 15(2) of the Income Tax Act ("the Act") as a loan conferred on a shareholder.
The Appellant's position
[5] In particular, the Appellant submits that the Minister wrongly added $24,857 to his income for the 2000 taxation year because the Corporation granted him the loan as an employee of the Corporation, not because he was a shareholder of the Corporation. He submitted that the purpose of the loan was to enable him to acquire a dwelling for his habitation. Lastly, he added that, at the time that the loan was made, bona fide arrangements had been made for the repayment of the loan within a reasonable time. In other words, the Appellant submits that the $24,857 loan meets the conditions in subsection 15(2.4) of the Act and, consequently, the Minister had no basis on which to add the amount in question to his income for the 2000 taxation year under subsection 15(2) of the Act.
The Respondent's position
[6] For his part, counsel for the Respondent submits that the loan granted to the Appellant by the Corporation does not meet any of the conditions in subsection 15(2.4) of the Act and that the amount of the loan had to be added to the Appellant's income for the 2000 taxation year under subsection 15(2) of the Act.
The Appellant's testimony
[7] The Appellant testified that, during the relevant period,
(i) he was an employee of the Corporation and its sole director;
(ii) he held the majority of the Corporation's voting shares; and
(iii) the Corporation operated a market garden the principal activity of which was related to greenhouse vegetable plant production.
[8] The Appellant testified that, in 1991, he moved into a residence owned by the Corporation. This residence was adjacent to the Corporation's greenhouses and warehouses. He explained the reasons for his move in his Notice of Appeal, and these reasons were essentially reiterated in his testimony:
[TRANSLATION]
... Jardins Beaux Plants Inc. operates a farming business whose products are perishable and fragile. Decisions must be made quickly and on the premises of the business. The Appellant is responsible for his employer's production, purchases and sales.
The Appellant's new residence is adjacent to his employer's warehouses. His employer considers it important to have its key employee available and close to its facilities. . . .
[9] In 1996, the Appellant purchased, for the sum of $40,000, the residence in which he had dwelt since 1991 ("the former residence").
[10] In August 1996, the Appellant began constructing a new dwelling by personally erecting a shell (foundation and exterior walls) around the former residence, which he gradually demolished while completing the shell. He added that he lived on the premises throughout the construction of the new residence, which has taken several years and is still not completely finished.
[11] The Appellant testified that the Corporation lent him an amount not exceeding $100,000 in order to enable him to build a new residence. He added that under the terms of this loan, the Corporation disbursed $28,949 in 1999, $24,857 in 2000 and $32,000 in 2001, for a total disbursement of $85,806.
Analysis
The law
[12] The provisions of the Act that apply to the instant case during the relevant period read as follows:
15. (2) Shareholder debt. 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) is
(a) a shareholder of a particular corporation;
(b) connected with the shareholder of a particular corporation; or
(c) a member of a partnership, or a beneficiary of a trust, that is a shareholder of a particular corporation
and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, any other corporation related to the particular corporation or a partnership of which the particular corporation or a corporation related to the particular corporation is a member, the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership.
15. (2.4) When s. 15(2) not to apply - certain employees. Subsection 15(2) does not apply to a loan made or debt that arose
(a) in respect of an individual who is an employee of the lender or creditor but not a specified employee of the lender or creditor;
(b) in respect of an individual who is an employee of the lender or creditor or who is the spouse or common-law partner of an employee of the lender or creditor to enable or assist the individual to acquire a dwelling or a share of the capital stock of a cooperative housing corporation acquired for the sole purpose of acquiring the right to inhabit a dwelling owned by the corporation, where the dwelling is for the individual's habitation;
(c) where the lender or creditor is a particular corporation, in respect of an employee of the particular corporation or of another corporation that is related to the particular corporation, to enable or assist the employee to acquire from the particular corporation, or from another corporation related to the particular corporation, previously unissued fully paid shares of the capital stock of the particular corporation or the related corporation, as the case may be, to be held by the employee for the employee's own benefit, or
(d) in respect of an employee of the lender or creditor to enable or assist the employee to acquire a motor vehicle to be used by the employee in the performance of the duties of the employee's office or employment
where
(e)it is reasonable to conclude that the employee or the employee's spouse or common-law partner received the loan, or became indebted, because of the employee's employment and not because of any person's share-holdings, and
(f) at the time the loan was made or the debt was incurred, bona fide arrangements were made for repayment of the loan or debt within a reasonable time.
[13] The general rule expressed in subsection 15(2) of the Act is that a person who is the shareholder of a particular corporation and has, in a taxation year, received a loan from that corporation must include the amount of the loan in computing his or her income for the year. However, subsection 15(2.4) of the Act provides, among other things, that the general rule in subsection 15(2) of the Act does not apply where the loan was made to an individual who is an employee of the lender, in order to enable the employee to acquire a dwelling for his or her habitation, if it is reasonable to conclude that the individual received the loan because of the employment and not because of his or her share-holdings in the lender corporation. Lastly, subsection 15(2.4) of the Act says that, at the time that the loan is made, bona fide arrangements must have been made for repayment of the loan within a reasonable time. With regard to this last condition, which will be the subject of my analysis in this decision, I am of the opinion that the Appellant needed to satisfy me that:
(i) at the time that the Corporation lent him the money, that is to say, October 8, 1999, it was possible to determine with certainty, based on the bona fide arrangements between him and the Corporation, precisely when the loan was to be repaid; and
(ii) the time then fixed for the repayment of the loan was reasonable.
[14] In this regard, the evidence disclosed that
(i) there was no written agreement concerning the loan;
(ii) a resolution of the Corporation's director, which was passed on October 8, 1999, and reads as follows, laconically established the loan and the terms and conditions of its repayment:
[TRANSLATION]
WHEREAS the business requires constant supervision;
. . .
WHEREAS Roger Barbeau needs funds to complete the construction of his residence;
AND WHEREAS his residence is adjacent to the business;
BE IT RESOLVED that up to $100,000 shall be advanced to Roger Barbeau at the prescribed rate over a period of 15 years.
(iii) the note in the financial statements of the Corporation for its fiscal year ending December 31, 2000 (Exhibit I-3, note 3, at page 6) reflected the resolution dated October 8, 1999, as follows:
[TRANSLATION]
INVESTMENTS
2000 1999
Loan to a director, 5%, due in 2015 $53,806 $28,949
(iv) the Corporation disbursed $28,949 in 1999, $24,857 in 2000 and $32,000 in 2001 under the terms of this loan, for a total expenditure of $85,806;
(v) a resolution of the Corporation's director, passed on June 6, 2002 (Exhibit I-5) established new terms and conditions for the repayment of the $85,806 loan; the resolution reads:
[TRANSLATION]
Be it resolved that the sum of eighty-five thousand eight hundred and six dollars ($85,806) shall be lent to Mr. Barbeau. This amount shall bear interest at a rate of 5% and shall be repayable at a rate of five thousand seven hundred and twenty dollars ($5,720) per annum effective December 31, 2002, and until December 31, 2006.
[15] In my opinion, the Appellant has not discharged his burden of proof in the case at bar because he has failed to show (i) that at the time that the Corporation granted him the loan, that is to say, on October 8, 1999, it was possible, based on the bona fide arrangements between him and the Corporation, to ascertain when the $28,949 loan was to be repaid; and (ii) that the time for repaying the loan was reasonable. Indeed, the resolution of October 8, 1999, is the only documentary evidence, along with the note in the financial statements, which determines the terms and conditions of repayment of the $28,949 loan which the Corporation granted the Appellant in 1999. In my opinion, it is not possible, based on this documentary evidence, to ascertain the time at which the $28,857 loan made in 1999 is to be repaid. In my opinion, this documentary evidence raises more questions than it answers. For example, was the $28,857 loan repayable no later than January 1, 2015, December 31, 2015 or October 8, 1999? The Appellant's testimony regarding the terms and conditions of repayment were no more informative. Among other things, he said that he intended to repay the loan to the Corporation as soon as he had the means to do so.
[16] I note that in the Corporation's resolution of June 6, 2002, new terms and conditions of repayment were established for the loan, making it possible to determine with much greater certainty the time for repaying the loan, and that, in fact, the Appellant complied with these terms and conditions, at least in 2002. Such terms and conditions of repayment, or at least similar terms and conditions, should have been established at the time that the Corporation made the $28,857 loan to the Appellant, that is to say, on October 8, 1999.
[17] The Appellant has not satisfied me that, at the time the loan was made by the Corporation, it was possible, based on the arrangements with the Corporation, to ascertain the time at which the loan was to be repaid, nor has the Appellant satisfied me that the time for repaying the loan was reasonable. In my opinion, to determine whether the time was reasonable, one must examine usual commercial practices with residential loans. Under general commercial practices, the borrower agrees to repay the amount of the loan in fixed periodic payments (monthly, quarterly or annual) which include principal and interest, and the balance of the loan, assuming there is any, must be repaid on the due date of the loan. The terms and conditions of repayment are usually based on a five to 40-year amortization period. Lastly, the borrower must repay any balance of the loan in the event of a default in payment or if the residence is sold. No such provision was made at the time that the Corporation made the loan to the Appellant. Indeed, the documentary evidence provided, at the very most, that the $28,949 loan was to be repaid by 2014 or 2015, which I find clearly unreasonable.
[18] I find that the Appellant has not satisfactorily discharged his burden of proving that the requirements in subsection 15(2.4) of the Act were complied with. In light of my findings, I do not believe it necessary to analyze the other requirements set out in paragraphs 15(2.4)(b) and (e) of the Act.
Signed at Ottawa, Canada, this 28th day of March 2006.
Bédard J.
Translation certified true
on this 14th day of November 2006.
Monica F. Chamberlain, Reviser
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