David N. Smith v. Her Majesty the Queen, [1986] 1 CTC 418, 86 DTC 6196

Addy, J.:—This is an appeal from a decision of the Tax Court of Canada pertaining to the reassessment of the plaintiff for income tax purposes for the 1980 taxation year.

The plaintiff was the vice-president and secretary treasurer of Holiday Ford Sales (1977) Inc., an Ontario corporation, referred to hereafter as Holiday 77, which carried on a Ford products franchise, sold and serviced Ford cars, trucks and products, furnished general repair services and leased automobiles to the public. He held 49 per cent of the issued shares of the company. The other 51 per cent was owned by his partner, one Mr. MacGirr. Each partner had invested $100,000 in the corporation.

In 1980 the plaintiff took part in the incorporation of a new Ontario company, namely Holiday Ford Sales (1980) Ltd., hereinafter referred to as Holiday 80. He became, immediately following incorporation, a 20 per cent shareholder as well as the president and the general manager of the new company. The other 80 per cent of the voting shares was held by the Ford Motor Company of Canada Limited.

The two corporations entered into an agreement which took effect from July 13, 1980 but which was actually closed on July 24, 1980, pursuant to which Holiday 77 sold to Holiday 80 all of its assets and undertakings with the exception of certain accounts receivable and its portfolio of leased automobiles. The 11 days between the 13th and the 24th of July were required in order to finalize all the details of the transaction and to allow a full inventory of all parts to be compiled while the business was continuing. On July 24, the plaintiff loaned the sum of $49,000 to Holiday 77 in order to satisfy the claims of certain creditors who would not sign waivers under the Bulk Sales Act. The loan permitted the above-mentioned assets to be transferred from Holiday 77 to Holiday 80. In the evening of the same day Ford Credit Canada Ltd. (hereinafter referred to as Ford Credit) entered the business premises of Holiday 77 and from then until August 12, 1980 collected all cheques and moneys payable to Holiday 77.

From the effective date of the agreement, namely July 13, Holiday 77 ceased leasing cars and merely carried on with collecting the accounts receivable and the rentals of the cars which were leased out at the time. It, of course, remained responsible for the payment to Ford Credit of the balance of the purchase price on the leased cars. As it was no longer an active business as such, whenever a car was turned in, it was received by Holiday 80 and the latter would sell it and from the proceeds would pay off Ford Credit what was owed. If the selling price exceeded the amount due, the balance would constitute a credit to Holiday 77.

On August 11, 1980 Ford Credit appointed a company as receiver and manager of the assets and undertakings of Holiday 77.

On August 5, the plaintiff was relieved of his duties as general manager of Holiday 1980 and could no longer thereafter sign cheques on behalf of the company. On August 14, he was dismissed from his position both as president and as general manager Holiday 80.

By notice of reassessment, the Minister of National Revenue reassessed the plaintiff for 1980 by including in income the sum of $54,659 as a shareholders' appropriation from Holiday 80 pursuant to subsection 15(1) of the Income Tax Act. Several sums in dispute have been resolved and at present the parties remain divided on a total sum of $38,358.99 made up of five specific items which will be dealt with separately.

The relevant portions of section 15 and 56 of the Income Tax Act read as follows:

15. (1) Where in a taxation year

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or . . .

56. (2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

With regard to the object and purpose of subsection 56(2) Cattanach, J. in the case of Fraser Companies Limited v. The Queen, [1981] C.T.C. 61; 81 D.T.C. 5051 stated at 70 (D.T.C. 5058):

The object and purpose of subsection 56(2) and its predecessor 16(1) is clear. It is to cover cases where the taxpayer seeks to avoid what would be income in his hands to have that amount received by another person when he wishes to benefit or for his own benefit.

Hence the marginal note “Indirect Payments”. That is what the subsection is designed to prevent.

In analyzing the essential ingredients of subsection 56(2) he had this to say, again at 71 (D.T.C. 5058) of the report:

These ingredients are fourfold:

(1) there must be a payment or transfer of property to a person other than the taxpayer;

(2) the payment or transfer is pursuant to or with the concurrence of the taxpayer;

(3) the payment or transfer must be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer desired to have the benefit conferred, and

(4) the payment or transfer would have been included in computing the taxpayer's

income if it had been received by him instead of the other person.

I fully agree with Cattanach, J.’s analysis of that subsection.

The concurrence or participation of the taxpayer to the conferring of the benefit need not be active. It may well be passive or implicit and can be inferred from all the circumstances, not the least of which being the degree of control which the taxpayer is entitled to exercise over the firm or corporation conferring the benefit (see M.N.R. v. Alan Bronfman, [1965] C.T.C. 378; 1965 D.T.C. 5235).

The extinguishment of a debt can constitute the conferring of a benefit pursuant to subsection 56(2) (See Charles Perrault v. The Queen, [1978] C.T.C. 395; 78 D.T.C. 6272 (F.C.A.)).

Each of the five amounts will be considered separately in the light of the above statements.

1. A sum of $3,063.33 was paid by cheque of Holiday 80 dated July 28, 1980 to Ford Credit. This cheque was signed by the plaintiff who was the signing officer as well as president and general manager of Holiday 80 at the time. It appears that this cheque was to cover a liability of Holiday 77 and there is no evidence that it was to cover a liability of Holiday 80. The plaintiff admitted that there was a cheque register but could not identify the purpose of the cheque. The person who would have had control of the cheque register was not called to give evidence. Assumption of fact 9(i) in the defendant's statement of defence, in my view, completely covers the situation and the plaintiff has failed to discharge the onus cast upon him to disprove the assumption of the Minister.

Counsel for the plaintiff argued that the party receiving the actual payment had to be the same person as the person on whom the taxpayer desired to confer the benefit.

It is quite true that taxing statutes must be strictly interpreted against the Crown and in favour of the taxpayer and if subsection 56(2) only referred to a “payment made” etc. the plaintiff would have more convincing argument, but it also refers to “a transfer of property made”. Holiday 77 re- ceived a benefit and a transfer of property in the amount concerned actually took place. The wording of subsection 56(2), even strictly interpreted, in my view, covers the eventuality of a debt of the party benefiting being paid off as well as the case of a payment being made directly to the party benefiting.

The sum of $3,063.33 may therefore be properly assessed against the plaintiff.

2. The sum of $9,000 in respect of a Ford Bronco sold to one Edith Dunk on July 22, 1980 was received by Holiday 77. The car had been sold by that company to Holiday 80 and the plaintiff admitted that Holiday 80 had paid for it. Schedule F of the agreement between Holiday 77 and Holiday 80 clearly states that the car had been sold to Holiday 80.

It therefore appears that Holiday 77 did receive a benefit in that amount. The sale was made during the interim period between July 13 and July 24 when the plaintiff was still responsible for the effective control of both companies. He seeks to avoid liability on the grounds that he, personally, did not actually record the sale in the journal, prepare the actual deposit slip or actually deposit the money in the bank. This, of course, does not satisfy the obligation of establishing that the sale was not made with his concurrence. The actual deposits and other bookkeeping entries are normally made by employees. There is no evidence that the money was not actually received and appropriated by Holiday 77. The assumptions of fact 9(g) and (k), when read together, sufficiently cover the situation. The plaintiff has failed to disprove the assumptions or any essential part thereof.

The sum of $9,000 may therefore be properly assessed as a benefit received by Holiday 77 with the concurrence of the plaintiff.

3. A used Corvette was, on July 21, 1980, sold for $14,000 by Holiday 77 to a wholesale dealer, one Mr. Lawson who had originally leased the car.

When cars were under lease, they remained the property of Ford Credit who financed the original purchase price of each car. There is no actual evidence that the liability for the car to Ford Credit was paid by Holiday 77 but common sense would appear to indicate that it was paid by Holiday 80. There is no evidence either way. The Minister assumed that the $14,000 was paid by Holiday Ford 1980 and covered the situation by assumptions 9(m), 9(g) and 9(b). He, in effect, assumed that the total sum of $14,000 was in fact received by Holiday 77 to its benefit. That company was obviously not entitled to the moneys. The plaintiff failed to establish that it did not, in effect, receive a $14,000 benefit arising from that sale. The amount is therefore assessable.

4. An amount of $4,735.54 was received by Holiday 77 from Pilot Insurance Company, being the amount paid for the repairs of a car, owned by an insured person, which had been damaged in an accident. The work order had been dated July 12, 1980. The amount was paid by cheque dated July 30, 1980 and was deposited to the account of Holiday 77.

The evidence is clear that, as previously stated, on July 24 Ford Credit had completely taken over the operation of Holiday 77 and was collecting all moneys and depositing them to its account.

Not only was the cheque received after Ford Credit had taken over the operations of Holiday 77 but from the stamp on the back of the cheque it appears that it was actually deposited to the account on August 14, the date when a receiver had been formally appointed. The plaintiff testified that he had nothing whatsoever to do with Holiday 77 from July 24 when Ford Credit took over. This evidence is uncontradicted. It has therefore been established to my satisfaction that whatever benefit was conferred on Holiday 77, if any, was done without either the authorization or the concurrence of the plaintiff. Ford Credit simply took the money and deposited it to the account. The amount will therefore not be assessed against the plaintiff.

5. An amount of $7,650.12 was paid by Holiday 80 to Ford Credit in satisfaction of the balance apparently due by the latter to Holiday 77 with regard to a new Ford Fairmount sold to one Mr. Wildman.

The evidence established that the vehicle was purchased from Holiday 77 for $8,080 on July 9, that is, before the effective date of the transfer of assets from Holiday 77 to Holiday 80. Any balance owing Ford Credit on the automobile would therefore be owed by Holiday 77. On July 25, that is after the transfers had been completely consummated, a cheque for $22,843.43 was issued by Holiday 80 to Ford Credit. The cheque covered five separate amounts detailed on the back of the cheque. Among those amounts one finds the sum of $7,560.12 besides which one also finds the notation “old company”. The amount also corresponds to the amount shown on the above-mentioned contract of sale when one deducts the sales tax of $525 which of course woud not be payable to Ford Credit.

The Minister assumed these facts and quite correctly, in my view, in paragraphs 9(p) and 9(q) of the statement of defence.

The evidence clearly indicates that the above-mentioned sum was in fact due by Holiday 77 to Ford Credit but was paid by Holiday 80. There is no evidence that Holiday 80 was reimbursed.

The amount may therefore be properly assessed against the plaintiff.

For the above reasons the assessment of the plaintiff for the year 1980 will be referred back to the Minister for reassessment on the basis that the sole amounts which are to be considered a benefit to Holiday 77 taxable against the plaintiff pursuant to subsection 56(2) of the Income Tax Act are those mentioned in sections numbered 1, 2, 3, and 5 of these reasons.

In view of the divided success, there will be no costs.

Appeal allowed in part.