Date: 20000110
Dockets: 1999-2511-IT-I; 1999-2512-EI; 1999-2513-CPP
BETWEEN:
THE GRAPHIC EDGE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
BETWEEN:
THE GRAPHIC EDGE INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Weisman, D.J.T.C.C.
[1] In August of 1997, Barry Benjamin and Chris Embree, the
shareholders of the Alberta-based Appellant, agreed to sell 50%
of their interest in the company to Jim Veldhuis, a trusted
employee, and one Kurt Olsen, a friend of Veldhuis who was
previously unknown to Benjamin and Embree. A brief agreement was
drawn up without benefit of counsel as Benjamin was anxious to
join Embree in a new business venture in Ontario.
[2] The agreement as executed by all four parties provides as
follows:
"Chris Embree and Barry Benjamin agree to sell 50% shares
and Equity of Graphic Edge Inc. to J. Velhuis and Kurt Olsen. In
return J. Veldhuis and Kurt Olsen agree to purchase 50% shares
and equity for the sum of $180,000 to be paid at a rate of
$10,000 per month for 36 months. This sum includes bank loan.
Affective [sic] as of September 1, 1997."
[3] Benjamin testified that there was a second oral agreement
to the effect that Veldhuis and Olsen would provide the $10,000
per month required by the signed agreement by way of monthly
withdrawals from the company's bank account in the amount of
$3,000 for each of the four shareholders. Of this amount, $6,800
was to be used to retire the Appellant's outstanding bank
loan and $3,200 was to be paid to Benjamin and Embree. The
monthly withdrawals were not to be subject to deductions at
source for Canada Pension Plan contributions, unemployment
insurance premiums, or income taxes. At year's end the
parties were to agree how to characterize these monies, whether
as dividends, bonuses, shareholders' loans, or otherwise.
[4] It is common ground that no share certificates were ever
issued, nor were the company's ledger of shareholders and
register of directors amended to reflect the change in ownership.
Veldhuis and Olsen were given signing authority on the
Appellant's bank account.
[5] The bank loan was duly retired through pre-authorized
monthly deductions from the said account. No payments were ever
received by Benjamin and Embree, however. When Benjamin inquired
approximately once every six weeks, he received assurances that
all was well, and that the missing payments were attributable to
temporary cash flow problems. He was not unduly concerned since
he and Embree felt fully secured with all of the company's
shares still registered in their names.
[6] The situation changed dramatically in March of 1998 when
Benjamin was advised that Revenue Canada had attached the
company's bank account and seized its accounts receivables
for failure to remit Canada Pension Plan contributions,
unemployment insurance premiums, and income taxes deducted at
source. Benjamin returned to Edmonton to find the business closed
and all the company's financial records, including its
computers and software, missing. It was only with the threat of
legal proceedings that he was eventually successful in having
some records returned to him. Those records, and others obtained
by means of Access to Information proceedings, form the
documentation that has been placed before this Court. The records
show that Veldhuis and Olsen each drew $3,300 plus $500 car
allowance or "advance" in each of the months October,
November, and December 1997, and January 1998. In February of
1998 Veldhuis drew his usual $3,300 whereas Olsen took a
"final pay" of $2,475 being 75% of $3,300, plus 4%
vacation pay in the amount of $938.20.
[7] The company now appeals the assessment by Revenue Canada
for Canada Pension Plan contributions, unemployment insurance
premiums, and income taxes deducted at source but not remitted,
plus applicable penalties and interest for the year 1997.
[8] It is the Appellant's position that since Veldhuis and
Olsen were shareholders, in accordance with the oral agreement
the monies taken by them were shareholders' loans. The
Minister of National Revenue replies that since no shares were
ever issued, Veldhuis and Olsen were never shareholders but
merely employees. The monies received by them were accordingly
remuneration, from which source deductions should have been taken
and duly remitted.
[9] I find that the agreement executed by the four parties was
a valid and enforceable contract to transfer shares and that
Veldhuis and Olsen were accordingly both shareholders as well as
employees. The question is how to characterize the monies
withdrawn by them from the Appellant company.
[10] The payroll deduction records of the company for the
years 1997 and 1998 are somewhat unusual. The company's
non-shareholder employees are listed and their monthly salaries
and source deductions are recorded and duly totalled. The names
Veldhuis and Olsen are entered in different script and while
their $3,300 monthly draws are shown as remuneration, and the
various deductions duly recorded, these are not entered into the
totals otherwise obtained. These entries were apparently made
after all the columns had been totalled, necessitating columnar
corrections.
[11] It is the Appellant's theory that Veldhuis and Olsen
conspired to bring the company down in order to appropriate its
goodwill and list of client accounts without payment therefor.
They accordingly recorded the shareholders' loans taken by
them pursuant to the oral agreement into the company's
payroll records ex post facto as remuneration, without
remitting the required deductions at source. Revenue Canada was
notified, the bank account seized, accounts receivable attached,
and the company put out of business. Veldhuis and Olsen then went
to work with another company, taking the Appellant's goodwill
and customers with them.
[12] Benjamin contends that the monies taken must have been
shareholders' loans because the oral agreement between the
parties specified that the withdrawals were not to be subject to
deductions at source. There is no reason to assume, however, that
Veldhuis and Olsen chose to honour their agreements in this one
respect while disregarding most others. It is mere conjecture on
Benjamin's part how the monies withdrawn from the company
were to be characterized.
[13] The only evidence before me in this regard is the
Appellant's payroll records however unusual they may be. They
record the monies withdrawn by Veldhuis and Olsen as remuneration
complete with vacation pay, which necessarily attracts Canada
Pension Plan contributions, unemployment insurance premiums, and
income tax deductions. The Appellant has accordingly failed to
discharge the onus in this matter.
[14] The appeals are dismissed.
Signed at Toronto, Ontario, this 10th day of January 2000.
"N. Weisman"
_________________
D.J.T.C.C.
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