Mogan,
T.C.J.:—In
1984,
1985
and
1986,
the
appellant
owned
all
of
the
issued
common
shares
of
W.
Austin
Poultry
Equipment
Ltd.
(the
"company")
and
his
wife
owned
some
of
the
issued
preference
shares.
The
company
carried
on
an
active
business
with
about
ten
employees.
Relying
on
subsection
80.4(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act"),
the
respondent
issued
reassessments
to
the
appellant
and
added
the
following
amounts
to
his
reported
income
for
the
respective
taxation
years:
1984
|
$15,622
|
1985
|
$
9,713
|
1986
|
$12,071
|
The
respondent
claims
that
the
above
amounts
are
benefits
deemed
to
have
been
received
by
the
appellant
under
subsection
80.4(2)
with
respect
to
loans
received
from
or
debts
incurred
to
the
company
by
virtue
of
his
shareholding
in
the
company.
The
appellant
claims
(i)
that
any
loans
or
debts
should
be
determined
only
at
the
end
of
the
company's
fiscal
period;
(ii)
that
any
deemed
benefit
should
be
reduced
to
the
extent
that
amounts
owing
to
the
appellant
by
the
company
could
be
set
off
against
his
debts
to
the
company;
and
(iii)
that
any
deemed
benefit
should
be
allocated
between
the
appellant
and
his
wife.
From
time
to
time,
the
company
would
advance
funds
to
the
appellant
or
to
his
wife
or
on
their
behalf..
The
amounts
so
advanced
were
entered
in
the
books
and
records
of
the
company
in
an
account
entitled
"shareholder
receivable".
That
account
normally
had
a
debit
balance
indicating
moneys
owing
by
the
appellant
to
the
company.
On
the
company's
year-end
balance
sheet,
under
“Current
assets",
there
is
a
heading
“Due
from
shareholders”
and
it
appears
that
the
debit
balance
in
the
shareholder
receivable
account
was
included
on
the
balance
sheet
under
that
heading.
In
December
1984
and
December
1985
the
company
paid
a
substantial
dividend
on
its
common
shares
and
the
dividend
amounts
were
credited
directly
to
the
shareholder
receivable
account.
The
computation
of
the
alleged
benefit
under
subsection
80.4(2)
has
not
been
challenged
in
this
case.
Therefore,
I
assume
that
if
the
assessments
under
appeal
were
based
on
the
debit
balance
from
time
to
time
in
the
shareholder
receivable
account,
then
the
appellant
was
given
the
benefit
of
any
reduction
in
those
debit
balances
resulting
from
the
payment
of
dividends
referred
to
above.
The
appellant
entered
in
evidence
as
Exhibit
A-1
certain
documents
including
copies
of
financial
statements
for
the
company's
fiscal
periods
ending
March
31,
1984
and
1986
(with
accountant's
comments)
and
copies
of
certain
accounts
and
summaries
of
accounts
from
the
books
and
records
of
the
company.
Those
documents
show
an
almost
continuous
debit
balance
in
the
shareholder
receivable
account
and
certain
management
bonuses
accrued
on
the
last
day
of
the
company's
fiscal
period
but
not
credited
to
the
shareholder
receivable
account.
Relying
on
those
documents,
I
have
no
hesitation
in
concluding
that
on
many
occasions
the
appellant,
by
virtue
of
being
a
shareholder
of
the
company,
received
a
loan
from
or
otherwise
incurred
a
debt
to
the
company
within
the
meaning
of
subsection
80.4(2)
of
the
Act
which
states
in
part:
80.4(2)
Where
a
person
was
(a)
a
shareholder
of
a
corporation,
(b)
.
.
.,
or
(c)
.
.
.
and
by
virtue
of
such
shareholding
that
person
received
a
loan
from,
or
otherwise
incurred
a
debt
to,
that
corporation,
the
person
shall
be
deemed
to
have
received
a
benefit.
.
.
The
appellant's
first
argument
is
that
the
words
in
subsection
80.4(2)
"received
a
loan"
and
"incurred
a
debt"
should
not
be
applied
in
the
middle
of
a
corporation's
fiscal
period
but
should
be
applied
only
at
the
end
of
the
fiscal
period.
Although
every
corporation
needs
a
financial
statement
at
year-end,
there
is
no
reason
why
one
cannot
look
at
the
corporate
books
and
records
at
any
time
during
a
fiscal
period
to
determine
if
a
shareholder
has
"received
a
loan
from"
or
“incurred
a
debt
to”
the
corporation
as
of
that
time.
The
appellant's
first
argument
is
undermined
by
the
following
words
in
paragraph
80.4(2)(d)".
.
.
each
such
loan
and
debt
for
the
period
in
the
year
during
which
it
was
outstanding.
.
.”.
Having
found
that
the
appellant
on
many
occasions
during
the
years
under
appeal
received
a
loan
from
or
incurred
a
debt
to
the
company,
I
turn
to
the
appellant’s
second
argument
that
any
amount
owing
to
the
appellant
by
the
company
should
be
set
off
against
his
debts
to
the
company.
In
the
books
and
records
of
the
company
for
the
years
under
appeal,
the
following
amounts
are
shown
as
liabilities
for
accrued
management
salaries
and
bonuses
payable
to
the
appellant
or
his
wife:
March
31,
1984
|
$
7,000
|
March
31,1985
|
$195,000
|
March
31,1986
|
$147,032
|
On
the
company's
balance
sheet
at
each
year
end,
the
above
amounts
are
not
shown
as
an
independent
item
but
they
are
included
as
part
of
"Accounts
payable
and
accrued
liabilities".
Mr.
E.T.
Carlson,
C.A.,
the
company's
outside
accountant
who
testified
as
a
witness
for
the
appellant,
confirmed
that
the
amounts
of
accrued
management
salaries
and
bonuses
(owing
by
the
company
to
the
appellant)
were
not
deducted
from
the
amounts
owing
by
the
appellant
to
the
company
in
the
shareholder
receivable
account.
In
keeping
with
a
common
practice,
the
management
bonuses
were
accrued
on
the
last
day
of
the
company's
fiscal
period
(March
31)
and
the
bonus
amounts
were
determined
to
reduce
the
company's
pre-tax
profit
either
to
nil
or
to
the"
business
limit”
in
section
125
of
the
Act.
Within
reasonable
limits,
these
are
prudent
objectives
for
a
Canadian-
controlled
private
corporation
carrying
on
an
active
business
in
Canada.
If
the
company
were
to
set
off
the
accrued
management
bonuses
against
the
shareholder
receivable
account
and
thereby
eliminate
the
accrued
liability
and
reduce
the
debit
balance
in
the
shareholder
receivable
account,
I
think
that
such
conduct
would,
for
both
accounting
and
income
tax
purposes,
have
the
effect
of
paying
the
bonuses
and
requiring
the
company
to
withhold
and
remit
the
appropriate
amount
of
income
tax
on
the
bonuses.
On
the
other
hand,
if
the
amounts
were
not
set
off
and
if
the
bonuses
were
only
accrued
and
not
paid,
then
the
obligation
to
remit
income
tax
on
the
bonuses
would
be
deferred
until
they
were
paid.
I
make
these
comments
only
to
indicate
that
the
appellant
and
the
company
achieve
a
reasonable
financial
advantage
(i.e.,
the
deferring
of
tax)
by
accruing
the
bonuses
but
not
paying
them
through
a
set-off
of
the
accrued
liability
against
the
shareholder
receivable
account.
If
that
financial
advantage
was
achieved,
then
the
accrued
bonuses
were
not
set
off
against
the
shareholder
receivable
account.
The
appellant's
position
on
the
issue
of
set-off
is
stated
in
the
notice
of
appeal
as
follows:
1.
The
assessment
contains
errors
in
that
the
whole
amount
has
been
charged
to
W.
Austin
and,
in
fact,
any
benefit
should
be
allocated
between
W.
Austin
and
his
wife
B.
Austin.
2.
There
were
other
liabilities
recorded
on
the
books
of
the
company
to
W.
Austin
and
his
wife
B.
Austin
that
have
been
disregarded.
The
appellant
is
correct
in
stating
that
other
liabilities
recorded
on
the
books
of
the
company
have
been
disregarded
in
the
assessments
under
appeal.
The
question
is
whether
the
respondent
should
have
set
off
any
amount
owing
to
the
appellant
by
the
company
against
his
debts
to
the
company.
The
legal
concept
of
set-off
is
described
in
The
Canadian
Encyclopedic
Digest
(Ontario),
Volume
18,
3rd
ed.,
at
page
231:
374.
In
an
action
for
payment
of
a
debt,
the
defendant
may,
by
way
of
defence,
claim
the
right
to
set
off
against
the
plaintiff's
claim
a
debt
owed
by
the
plaintiff
to
the
defendant.
Mutual
debts
may
be
set
off
against
each
other,
notwithstanding
that
they
are
of
a
different
nature
or
that
one
debt
is
owed
to
or
by
a
person
in
a
personal
capacity
and
the
other
debt
is
owed
by
or
to
the
person
in
a
capacity
other
than
personal.
Where,
on
a
defence
of
set
off,
a
larger
sum
is
found
to
be
due
from
the
plaintiff
to
the
defendant
than
is
found
to
be
due
from
the
defendant
to
the
plaintiff,
the
defendant
is
entitled
to
judgment
for
the
balance.
375.
The
right
was
introduced
to
prevent
multiplicity
of
actions.
Before
a
plea
of
set-off
can
be
allowed
the
debts
must
be
mutual
and
in
the
same
right,
and
a
joint
debt
by
plaintiff
and
another
cannot
be
set
off
against
a
debt
due
from
defendant
to
plaintiff
solely.
If
no
action
is
commenced
for
the
payment
of
a
debt,
there
is
nothing
in
law
to
prevent
the
coexistence
of
mutual
debts.
In
other
words,
if
A
owes
B
$1,000
and
B
later
becomes
indebted
to
A
in
the
amount
of
$1,400,
the
debt
from
A
to
B
is
not
extinguished.
If
A
or
B
should
commence
an
action
on
one
debt,
the
defendant
would
claim
the
right
to
set
off
the
other
debt
by
way
of
defence.
Even
if
no
action
were
commenced,
A
and
B
could
agree
that
their
mutual
debts
be
set
off
leaving
B
owing
A
only
$400.
There
would,
however,
have
to
be
real
evidence
of
such
agreement.
In
the
circumstances
of
this
appeal,
one
must
ask
if
there
was
any
evidence
of
an
agreement
between
the
appellant
and
the
company
that
the
accrued
bonuses
were
to
be
set
off
against
the
shareholder
receivable
account.
There
was
no
evidence
of
a
journal
entry
linking
the
balance
in
one
account
with
the
balance
in
the
other
account.
There
was
no
evidence
of
a
long
established
practice
setting
off
these
respective
accounts
within
each
fiscal
period.
There
was
no
evidence
as
to
the
manner
in
which
the
company
recorded
in
its
books
and
records
the
payment
of
the
accrued
bonuses
when
they
were
actually
paid
to
satisfy
the
time
limit
in
section
78
of
the
Act.
In
summary,
there
was
no
evidence
of
any
agreement
between
the
appellant
and
the
company
to
set
off
these
two
accounts.
In
this
appeal,
there
appear
to
be
conflicting
income
tax
objectives.
In
order
to
defer
the
payment
of
tax,
the
company
accrues
significant
management
bonuses
at
year-end
but
does
not
pay
them
through
a
set-off
against
the
shareholder
receivable
account.
In
order
to
avoid
a
deemed
benefit
under
subsection
80.4(2),
the
appellant
asks
the
Court
to
regard
the
accrued
bonuses
as
having
been
set
off
against
the
shareholder
receivable
account.
The
accrued
bonuses
either
were
set
off
or
they
were
not
and,
on
the
evidence,
I
am
satisfied
that
they
were
not.
The
appellant
relied
on
the
decision
of
this
Court
in
Kates
v.
M.N.R.,
[1984]
C.T.C.
2681
;
84
D.T.C.
1605,
a
case
concerning
a
series
of
loans
and
repayments
within
the
meaning
of
subsection
15(2)
of
the
Act.
As
I
read
that
case,
Tremblay,
T.C.J.
found
as
a
fact
that
the
loans
receivable
by
the
corporation
from
Mr.
Kates
at
the
end
of
the
corporation's
1975
and
1976
fiscal
periods
were
paid
within
the
following
year
out
of
bonuses
in
the
amounts
of
$23,800
and
$145,000
respectively.
The
learned
judge
also
concluded
that
the
loans
in
question
were
not
part
of
a
series
of
loans
and
repayments.
The
years
under
appeal
in
Kates
were
1975
and
1976,
prior
to
the
enactment
of
section
80.4,
and
the
issue
in
that
case
was
not
a
question
of
set-off.
The
appellant
also
relied
on
the
decision
of
the
Federal
Court
of
Appeal
in
Massey-Ferguson
Ltd.
v.
The
Queen,
[1977]
C.T.C.
6;
77
D.T.C.
5013
but
I
find
nothing
in
that
decision
which
applies
to
this
appeal.
The
conclusion
which
I
have
reached
on
the
issue
of
set-off
is
supported
by
the
decision
of
this
Court
in
Gannon
v.
M.N.R.,
[1988]
1
C.T.C.
2422;
88
D.T.C.
1282
in
which
Bonner,
T.C.J.
stated
at
2425
(D.T.C.
1284):
Nothing
in
the
evidence
in
the
present
case
suggests
the
existence
of
any
agreement
or
contract
calling
for
the
liquidation
of
the
indebtedness
on
the
note
by
means
of
the
payments
made
to
the
appellant.
An
agreement
between
a
company
and
its
shareholder
is
not
formed
by
a
mere
fleeting
thought
in
the
mind
of
the
individual
who
controls
it.
The
accounts
in
question
here
are
not
connected
in
any
way.
This
is
simply
a
case
in
which
the
company
and
the
appellant
each
owe
the
other
money.
There
is
no
authority
for
the
proposition
advanced
by
the
appellant
which
is,
in
effect,
that
mutual
debts
cannot
coexist
and
that
in
all
cases
where
they
might
arise
a
set-off
is
automatically
effected.
In
Docherty
v.
M.N.R.,
[1991]
1
C.T.C.
2409,
Brulé,
T.C.J.
allowed
an
appeal
from
an
assessment
issued
under
subsection
80.4(2)
of
the
Act
because
he
was
able
to
conclude
that
the
accountant's
working
papers
showed
an
intention
to
set
off
certain
mutual
debts.
The
amounts
paid
by
Mr.
Docherty
to
his
corporation
through
his
ownership
of
certain
apartment
projects
far
exceeded
the
amounts
claimed
in
the
notices
of
reassessment
to
be
owing
by
Mr.
Docherty
to
his
corporation.
Although
the
financial
statements
did
not
reveal
any
of
the
transactions
of
lending
and
repayment
of
loans
involving
Mr.
Docherty,
Judge
Brulé
concluded
that"
the
mere
fact
that
the
financial
statements
did
not
reflect
the
set-off
is
not
sufficient
to
disallow
the
appeal".
The
decision
in
Docherty
raises
an
interesting
question
in
evidence
as
to
whether
a
corporation's
financial
statements
are
of
equal
value
to
its
accountant's
working
papers
and
which
should
prevail
in
the
event
of
a
conflict.
The
appellant's
third
argument
is
that
any
deemed
benefit
under
section
80.4
should
be
allocated
between
the
appellant
and
his
wife.
The
appellant
owned
all
of
the
company's
issued
common
shares.
The
substantial
dividends
paid
by
the
company
on
its
common
shares
in
December
1984
and
December
1985
were
credited
directly
to
the
shareholder
receivable
account.
That
fact
is
a
strong
indication
that
the
shareholder
receivable
account
is
intended
primarily
to
reflect
transactions
between
the
appellant
and
the
company.
Some
of
the
documents
in
Exhibit
A-1
show
how
certain
corporate
disbursements
may
be
allocated
to
the
appellant
and
his
wife
but
I
assume
that,
as
owner
of
all
the
issued
common
shares,
the
appellant
had
sole
control
of
the
company.
I
therefore
assume
that
any
disbursement
from
the
company
to
the
appellant's
wife
was
made
at
his
direction.
The
onus
was
on
the
appellant
to
prove
that
any
particular
loan
or
debt
reflected
in
the
shareholder
receivable
account
was
received
or
incurred
by
his
wife.
That
onus
was
not
discharged.
The
appeal
is
dismissed.
Appeal
dismissed.