Citation: 2014TCC182
Date: 20140530
Docket: 2012-1401(IT)G
BETWEEN:
REGINALD F. WALKER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bocock J.
I. Legal Issue before the
Court
[1]
If a person irrevocably advances a
sum to an officer, employee or shareholder, the Income Tax Act (the “Act”)
deems the conferral of a taxable shareholder (subsection 15(1)) or employee benefit
(paragraph 6(1)(a)) upon the recipient. Additionally, if a person
irrevocably advances a sum to a non-arm’s length taxpayer, the Act deems
the conferral of a taxable benefit (subsection 246(1)) on that recipient.
[2]
Generally, where a creditor shareholder
or related party loan account exists, such a benefit may be set-off against
that recipient’s existing loan account. Such a set-off is subject to the certain
factual and legal requirements, including, inter alia: (i) the existence
of a debt; (ii) a repayment on account of the debt; (iii) sufficient evidence
of an intention to so deduct the sum re-paid against the sum owed; and, (iv)a
record of some fashion of the set-off transaction. The present appeal concerns
the sufficiency of evidence necessary to support the Appellant’s assertion that
such a set-off occurred with respect to certain payments and nullified the
Minister’s deemed taxable benefit on the conferee Appellant.
II. Facts
[3]
The Appellant, Mr. Walker, is the
ultimate owner and sole officer of a group of companies (the “Walker Group”). He
is not, however, the direct shareholder of all of those companies. Like any
number of other “owners” of closely held “owner operated” businesses, Mr.
Walker injected capital and frequently received moneys or moneys’ worth as
repayment. Usually, the ebb and flow of such advances and repayments are reflected
in shareholder loan account ledgers with corresponding adjustments to certain
line items on annual balance sheets: “due to or from shareholder”, “due to or
from officers”, “due to or from related party” and the like.
[4]
It is not contested by Mr. Walker,
and it was plainly evident before the Court, that he was, at material times, a
shareholder, employee and/or non-arm’s length party in respect of the Walker
Group. It was also clear before the Court that Mr. Walker established a
frequently changing corporate structure of which he was generally aware, but
with which he was not specifically mindful or engaged.
[5]
In March of 2002, Consbec Inc. (“Opco”),
the Walker Group’s main operating company, directly paid certain sums for the
benefit of Mr. Walker to a pension plan trustee and a registered retirement
savings plan trustee: $12,750.00 and $25,500, respectively. Mr. Walker was not
a direct shareholder of Opco, but of its parent which during that time was re-named
3953793 Canada Inc. (“Holdco”). In 2002, Mr. Walker’s shareholder or related
party loans to Holdco were well in excess of $400,000 (the “Advance(s)”).
Holdco, in turn, had loaned similar sums “down to” Opco. In May, 2002, Opco
and Holdco amalgamated. As part of that transaction, Holdco assigned the
Advances owed to Mr. Walker to another personal holding company (“Walker Co”)
and the obligations related to the Advances were assumed by Walker Co. In
March 2003, Opco contributed another $12,750 on behalf of Mr. Walker to his
RRSP trustee.
[6]
After a CRA audit, the Minister
reassessed Mr. Walker for the payments made on his behalf by Opco and conferred
upon Mr. Walker taxable benefits (the “Benefits”) reflected by the total payments
of $50,500 (the “Payments”). For 2002, the Minister submits that when Mr.
Walker was not a direct shareholder of Opco, subsection 246(1) confers the Benefit
as a taxable shareholder benefit under subsection 15(1) or, in the
alternative, as a taxable employee benefit under paragraph 6(1)(a). The
Minister further states that in 2003, when Mr. Walker was a direct shareholder
of Opco, subsection 246(1) is superfluous; the Benefit is either directly conferred
as a taxable shareholder benefit under subsection 15(1) or as a taxable
employee benefit under paragraph 6(1)(a). The Appellant neither contests
the Payments were made nor that a Benefit was initially conferred from the Payments.
He argues that such Benefits received were offset against the Advances owed to
him, represented a repayment of capital and therefore do not confer a taxable
Benefit for the taxation years 2002 and 2003.
III. The Appellant’s Characterization of the Payments
[7]
Mr. Walker, representing himself,
and through testimony of one Mr. Snowden, Opco’s Chief Financial Officer,
submitted the following in respect of the Payments:
a)
internal accounting staff erred
when they deducted the Payments as expenses of Opco (this was also the subject
of separate reassessment) instead of following the overall intention of the
Walker Group which was to credit the Payments as a partial repayment of the Advances
to Opco, Holdco and/or Walker Co, as the case may be;
b)
Holdco should be ignored: the
Walker Group was an interwoven enterprise principally undertaken by Opco.
Every employee, all arm’s length parties and Mr. Walker invariably dealt with
the Walker Group and Opco as one single integrated business of which Mr. Walker
was the ultimate owner, operator and controlling mind;
c)
it is unrealistic to expect
owner/operated businesses to adhere to an intensive “paper trail” standard in
order to reflect every advance and repayment with written documents and
receipts;
d)
the relevant shareholder or
officer loan ledgers, annual balance sheets and related documents did not previously
and do not presently reflect the repayment of the Advances to the extent of the
Payments because Mr. Walker is awaiting the outcome of this appeal in order to
properly reflect same;
e)
written agreements evidencing the
advance and repayment of shareholder or related party debt do not exist for
practical reasons in the small business world; and,
f)
the interest charged in respect of
the reassessments is unfair, in light of the length of time between the
Appellant’s Notice of Objection and the Minister’s Notice of Confirmation.
IV. Analysis of
Appellant’s Submissions
[8]
The Court recognizes that,
retrospectively, the allocation of the Payments as a repayment of Mr. Walker’s
Advances rather than as an expense of Opco is certainly a latterly expressed
intention by the Appellant. However, there is insufficient evidence before the
Court to support the foregoing arguments tendered by the Appellant that an
intention existed to do so at the time the Payments were made. Accordingly,
the appeal is dismissed of the following reasons:
a)
Simple Mistake
[9]
Factually, the evidence of a
simple mistake does not exist: the Payments were contributed for two years
consecutively, 2002 and 2003. Additionally, the Payments were made in respect
of two different types of payments: both a Registered Pension Plan and Registered
Retirement Saving Plan. Further, it was not one mistake in each year, but two.
Firstly, the Payments were claimed as an expense in two distinct years.
Secondly, the Payments were not deducted against accounts reflecting Advances,
even against those of a wrong entity in either year. Further, the payor, Opco,
did not owe money to Mr. Walker, but to Holdco. Neither Opco nor Holdco’s
debts were or have been reduced in either year; nor has any correcting entry,
document, rectification order or other indication of the intention to correct
the alleged error been adduced before the Court. No mind was directed towards
these multiple and multi-year errors until after reassessment.
[10]
Even the most sympathetic of
treatment requires the alleged “slip up” to be a simple error of an obscure
practice easily remedied in order not to ascribe a Benefit: Chopp v. Canada,
98 DTC 6014 at paragraph 8, in turn citing as support Justice Bowman, as he
then was, in Long v. R Doc. 96-474 (IT)I (TCC) when he described
the simplistic quality such a bookkeeping mistake must embody in order to
afford the conferee’s disavowal of a Benefit. In the present case, the actual
steps taken or omitted, giving rise to the “error”, are manifest. Moreover, the
result arising from the alleged omission carries no obvious signs of absurdity
or apparent error. The present result appears logical: the Advances remain
unaltered and unreduced by the amount of the Benefits, future repayment may
flow to Mr. Walker as and when appropriate in repayment of such Advances and
there is no unrecoverable loss of the debt represented by the Advances.
b) Ignore Holdco and Walker Co
[11]
There was no debt owing to Mr.
Walker from Opco in 2002 or 2003. A simple bookkeeping entry could not have
reflected this in the first place. Partial repayment of the Advance minimally required
a cheque from Opco to Holdco, in 2002, or Walker Co, in 2003, followed ideally by
a subsequent advance, from Holdco or Walker Co, to Mr. Walker and then payment
by him to his RPP and RRSP trustee. Even a direct payment by Holdco or Walker
Co to the trustee would have arguably provided sufficient evidence. Utilizing these
corporate entities for their beneficial business purposes requires greater diligence,
not only to garner the benefits from their use, but to avoid the pitfalls from
their misuse. In the absence of some objective evidence of intention, one
cannot disclaim, inconsistently or when inconvenient, the very structure one
has otherwise authorized, overseen and utilized: Kosmopoulos v. Constitution
Inc. Co. of Canada, 1 SCR 2 at paragraph 13.
c) The
Standard is Too High
[12]
Aside from the absence of
documentary evidence which the Appellant suggests is too onerous, if there were
some evidence of a then current intention to reduce the Advances, the Court might
countenance the argument of too high a standard. As well, there is no evidence before
the Court that in previous periods similar payments to either plan had been deducted
from the Advances either contemporaneously or post facto: no retroactive
adjustments; no cancelled cheques evidencing the purpose of such previous payments
and no inter-company adjustments. In short, there is no evidence to support
the contention that the normal course was to set-off the Payments or similar
ones previously against the Advances. A post facto assertion alone
cannot defeat the burden posed by the prima facie facts before the
Court: Adams v. MNR [1985] 2 CTC 2383 at paragraph 13.
[13]
If the sole evidence a taxpayer
wishes to rely upon to disprove the conferral of a taxable Benefit is the intended
reduction of a shareholder or related party advance, then the party or his
delegate must at least ensure that one of the following steps is ultimately
undertaken: the payment makes reference to the debt; the payor/debtor makes
payment for the beneficiary/creditor and/or that the accounts are at some point
reconciled. If the shareholder chooses not to use precisely and accurately at
least one aspect of this form of short hand as a rebuttal, and afterwards a Benefit
is otherwise plainly allocable, then more prolific and burdensome evidence is
required to disprove the taxable conferral by the taxing authority. In this
appeal, there is a clear, ascribable taxable benefit, but no countervailing,
factual or objective evidence of an intention to set-off the benefit from the
Advances: Smith v. R, [1999] FCJ no. 1605 FCA at paragraph 5.
d) Awaiting the
Outcome of the Appeal to Reflect the Change
[14]
It may well be that Mr. Walker and
his advisers have refrained from attempting to amend the relevant ledgers and
financial statements pending the outcome of this appeal. However his election to
delay does not allow those same unaltered documents to be offered as factual
evidence of an intention not to confer a taxable Benefit upon the Appellant.
e) Written
Agreement Unnecessary
[15]
While a formal written agreement
is not always necessary to reflect the intention and custom of setting off Benefits
against Advances, once corporate structures reach a certain level of
complexity, the evidentiary hurdle to be surmounted by an alleged unwritten
arrangement or intention is raised. Where there is no direct debt owing to the
payor, as is the case with Opco, some further evidence of unfulfilled intention
is required. Where the direct debt is subsequently assigned to and assumed by
yet another debtor, additional evidence of intention is required. Taxpayers may
eschew formal written agreements and attempt instead to rely upon then current adjusting
entries in ledger accounts and year-end balance sheets to dispel the conferral
of alleged taxable Benefits. However, when suggesting at the same time that
such entries were omitted in error, the simple use of rudimentary documents may
also be a sufficient alternative to formal written loan agreements. At the very
least the use of cheques, receipts, directions or correcting entries are
necessary where mistakes are made and third party taxing authorities are
required to determine the objective reality of a transaction involving multiple
layers and entities: R v. Neudorf, 75 DTC 5213 at paragraph 10. Such alternatively
simple documents were not adduced in this case.
f) Interest
Unfair
[16]
Regarding the request for relief
from accrued interest on the basis of unfairness, this Court has no statutory
authority to direct that any amount of properly calculated accrued interest be
waived or forgiven in the absence of a correlative reduction by this Court of
the underlying liability for tax (re)assessed by the Minister.
[17]
For these reasons, the appeal is
dismissed. Costs are awarded to the Respondent in accordance with the
applicable section of the Tariff for Costs. If the Respondent seeks costs
beyond the Tariff, additional submissions shall be required.
Signed at Ottawa, Ontario, this 30th day of May
2014.
“R.S. Bocock”
Email this Content