Armand Boisvert v. Her Majesty the Queen (Informal Procedure), [1994] 2 CTC 2312

Watson D.J.T.C.C.:—This appeal was heard in Sherbrooke, Quebec, on January 10, 1994, pursuant to the informal procedure of this Court.

By notice of reassessment dated November 29, 1991, the Minister of National Revenue (the "Minister") added the amount of $20,000 to the appellant’s income for the 1988 taxation year.

The Minister relied on the following facts in order to make the reassessment:

(a) the appellant was a shareholder and employee of Marché Armand Boisvert Inc. (the "corporation") during the 1988 taxation year;

(b) the corporation received the amount of $20,000 under a “patronage agreement” in March 1988 from Epiciers Unis Métro-Richelieu ("Métro") in March 1988;

(c) this amount was received in the form of credits on grocery purchases based on Métro's billing;

(d) according to the corporation’s accounting records, the said amount of $20,000 was credited by a journal entry to the "Owed to Directors" account for the fiscal year of March 31, 1988;

(e) the corporation conferred the $20,000 benefit on the appellant as a shareholder during the period in question;

[Translation.]

At the hearing, the appellant admitted paragraphs (a) to (d) and denied paragraph (e).

The Minister relied on subsections 6(1) and 15(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), which read as follows:

6(1) There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:

15(1) Where, in a taxation year, a benefit has been conferred on a shareholder, or on a person in contemplation of his becoming a shareholder, by a corporation otherwise than

(a) the reduction of the paid-up capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or on the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,

(b) the payment of a dividend,

(c) conferring on all owners of common shares of the capital stock of the corporation a right to buy additional shares thereof, or

(d) an action described in paragraph 84(1)(c.1), (c.2) or (c.3),

the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of the shareholder for the year.

Three witnesses testified at the hearing. I am satisfied that they gave evidence in an open and honest fashion and I consider them entirely worthy of belief.

The appellant stated that he had been involved in the grocery business for 27 years. In 1988, he was president, director, shareholder and employee of the corporation. The appellant and the corporation entered into an agreement with Métro linking them for a period of five years. The agreement provided for a right of first refusal and a right to acquire the lease held by the corporation to Métro. In return, Métro gave the corporation a credit on purchase of groceries in an amount of $20,000.

The corporation operated its business from a building owned by the appellant and paid him a rental fee to cover his mortgage payments. The appellant insisted that ne was a poorly educated person and he had to rely on his bookkeeper and accountant when it came to the company's books and financial statements. He hired a part-time bookkeeper and used the chartered accountant firm of Forcier, Beaudry, Landry for his accounting needs and advice on financial matters.

In 1987, the appellant made major renovations to the building used by the corporation which resulted in the association with Métro the following year. The bookkeeper entered the $20,000 credit as part of the corporation sales, remitting [sic] in an increase of the corporation's income. One of the employees at Fortier, Beaudry, Landry made the entry in the corporation's books showing the $20,000 as an amount "Owed to Directors". According to the appellant, the $20,000 always stayed in the corporation and he was not aware of what had been done and he certainly had not directed nor authorized anyone to make the above entry. Since he relied entirely on the persons looking after the corporation’s books, he had no knowledge whatsoever of the above. As far as the appellant was concerned, the credit of $20,000 always stayed in the corporation’s books. He was not aware of any of the details related to the amounts owed to him personally by the corporation.

Mr. Denis Forcier stated that his firm had looked after the corporation's books and financial statements since 1983 and his employees prepared the statements under his general supervision. He recalls discussing the amount of $20,000 with the appellant and takes full responsibility for the enormous entries under the item "Owed to Directors” that was done without the appellant’s knowledge or specific authorization. He acknowledged that his firm has prepared the appellant's personal income tax return for 1988 and that the amount of $20,000 was not included in the appellant's income.

I have reviewed the case law provided to me by counsel for the appellant and counsel for the respondent. I am satisfied that the question of an advantage or benefit is a question of fact to be determined by the Court on the basis of the evidence before it. The appellant had the burden of establishing, on a balance of probabilities, that he did not receive an advantage or benefit of $20,000 in 1988.

Taking into consideration the evidence before me, the submissions and case law, although the matter is not free from doubt, I am satisfied that the better view is that the appellant has succeeded in his burden. Accordingly, the appeal is allowed and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant did not receive an advantage in the amount of $20,000 in the 1988 taxation year as a shareholder or employee.

Appeal allowed.