Bertrand D’astous, Estate of the Late Pierre D’astous v. Minister of National Revenue, [1985] 2 CTC 2086, 85 DTC 440

Cardin, TCJ [TRANSLATION]:—By notice of assessment dated August 17, 1979, the Minister of National Revenue added to Bertrand D'Astous's income the sum of $43,000 for the 1976 taxation year, with respect to an unpaid shareholder loan according to subsection 15(2) of the Income Tax Act, RSC 1952, c 148. This assessment was confirmed by the Minister on May 29, 1980, and the appellant appealed on July 17, 1980.

On August 6, 1981, the Minister of National Revenue, pursuant to section 174, asked, inter alia, that the late Pierre D'Astous (Estate of the late Pierre D'Astous) be joined to Bertrand D'Astous's appeal and that he be bound by the decision to be rendered by the Tax Review Board (now the Tax Court of Canada). The application was worded as follows:

INTRODUCTION

1. Mr. Bertrand D’Astous appealed to the Tax Review Board from an assessment for the 1976 taxation year, whereby the Minister of National Revenue added in the computation of his income the sum of $43,000 with respect to an unpaid shareholder loan according to s 15(2).

2. Mr Pierre D’Astous died on September 24, 1976.

3. Dame Rollande Boyer-D’Astous and Fernand D’Astous are executors of the estate of late Pierre D’Astous.

4. The Minister of National Revenue is of the opinion that the events as hereinafter described have given rise to a question of mixed law and fact which relates to assessments of the two taxpayers referred to in this application.

5. The Minister of National Revenue intends to issue a notice of reassessment for the 1976 taxation year to the late Pierre D’Astous and to add to his income the sum of $43,000 in respect of an unpaid shareholder loan according to s 15(2).

A. QUESTION IN RESPECT OF WHICH THE RESPONDENT REQUESTS A DETERMINATION

6. Did Châteauneuf Construction Ltée make a loan in the amount of $43,000 in 1976 to the appellant with the result that:

(i) that amount would constitute income which should be included in the computation of the appellant’s income for the 1976 taxation year with respect to an unpaid shareholder loan according to s 15(2);

(ii) that amount would not be included in the computation of the income of the late Pierre D’Astous for the 1976 taxation year.

Did Châteauneuf Ltée make a loan in the amount of $43,000 in 1976 to the late Pierre D’Astous with the result that:

(i) that amount would constitute income which should be included in the computation of the income of the late Pierre D’Astous for the 1976 taxation year with respect to an unpaid shareholder loan according to s 15(2);

(ii) that amount would not be included in the computation of the appellant’s income for the 1976 taxation year.

B. THE TAXPAYERS THAT THE RESPONDENT SEEKS TO HAVE BOUND BY THE DETERMINATION ON THIS QUESTION ARE THE FOLLOWING:

— Bertrand D’Astous

— the late Pierre D’Astous (Estate of the late Pierre D’Astous)

C. STATEMENT OF FACTS ON WHICH THE MINISTER BASED THE ASSESSMENT OF TAX PAYABLE BY THE APPELLANT:

7. During the 1976 taxation year, the appellant and his father Pierre D’Astous were shareholders of Chateauneuf Construction Ltée.

8. On February 10, 1976, Châteauneuf Construction Ltée made a shareholder loan to the appellant and issued a cheque for $43,000, payable to the appellant.

9. The appellant had not paid back the said loan to Châteauneuf Construction Ltée on August 17, 1979.

10. The balance sheet of Chateauneuf Construction Ltée at August 31, 1976 mentioned under the heading “investment”: note, Bertrand D’Astous for the sum of $43,000.

11. On August 23, 1976, the appellant acknowledged by notarized document that he owed $43,000 to the late Pierre D’Astous.

12. According to the information obtained, the circumstances in which the late Pierre D’Astous signed the above-mentioned document were such that he was not competent to sign such a document since he was not fully aware of his actions at the time because of his illness and the treatment he was undergoing.

D. STATUTORY PROVISIONS AND REASONS ON WHICH THE MINISTER OF NATIONAL REVENUE RELIES WITH RESPECT TO THE APPELLANT'S ASSESSMENT FOR THE 1976 TAXATION YEAR:

13. The respondent relies, inter alia, on ss 3, 15 and 152(7) of the Income Tax Act (SC 1970-71-72, c 63, as amended).

14. The respondent submits that he duly added to the appellant’s income the sum of $43,000 for the 1976 taxation year with respect to an unpaid shareholder loan according to s 15(2) of the Act.

E. CONCLUSION SOUGHT

CONSIDERING that a determination concerning the question set out previously will have an effect on assessments issued or to be issued with respect to the two above-mentioned taxpayers,

MAY IT PLEASE the Tax Review Board:

TO ALLOW this application;

TO MAKE an order joining the late Pierre D’Astous to the appeal of Bertrand D’Astous;

TO PROCEED to determine the question in such manner as it considers appropriate.

DONE AT MONTREAL, this 6th day of August 1981.

This application was heard by the Tax Review Board on February 17, 1983. At the hearing, Robert Dorion acted as counsel for appellant Bertrand D’Astous, Claude Desaulniers acted as counsel for the late Pierre D'Astous (Estate of the late Pierre D’Astous) and Michel Lecours acted as counsel for the Minister of National Revenue. Since Mr Dorion and Mr Desaulniers had no objection to joining the Estate of the late Pierre D’Astous to Bertrand D'Astous's appeal pursuant to section 174 and to its being bound by the decision to be rendered, the application was allowed and the evidence on the merits was heard.

Whether Chateauneuf Construction Ltée made a $43,000 loan in 1976 to Bertrand D'Astous or to his father Pierre D'Astous should be determined, in my opinion, by bearing in mind the father's intentions and the agreement between Bertrand (the son) and him at the time the loan was made. The matter is all the more complicated to determine not only because of the death of Pierre D'Astous in September 1976 but also because of the obvious fact, disclosed by the evidence, that at the time of the loan and subsequently, neither Pierre nor Bertrand appreciated the important legal distinction to be made and maintained between Pierre D'Astous, father of Bertrand, and Pierre D'Astous, president of Châteauneuf Construction Ltée.

There is absolutely no doubt that Pierre D'Astous wanted to lend $43,000 to Bertrand in 1976 for the purchase of land, and the latter accepted it. The question for determination is in what capacity Pierre D’Astous made the loan. Although the father probably could have made a personal loan, from his own bank account, to his son, he chose to lend the amount out of the funds of Châteauneuf Construction Ltée, of which he was the principal shareholder. It is highly possible that Pierre D’Astous considered himself as personally being the owner of the $43,000, drawn on the account of Châteauneuf Construction Ltée, which he loaned to Bertrand and which the latter cashed (exhibit S-1).

In the circumstances, a loan contract is not necessary between the company and Bertrand for the company to have legally made a loan to Bertrand. A cheque (dated February 10, 1976) signed by an authorized officer, in this case Pierre D’Astous, president and principal shareholder of the company, was sufficient to make the loan from the company to Bertrand D'Astous legal. This legal fact and the evidence that supports it cannot in my view, be changed subsequently for any reason whatsoever.

As for the acknowledgement of debt signed before notary Viau by Bertrand D'Astous and Pierre D'Astous on August 23, 1976 (exhibit A-1), it is immaterial who asked that the document be drawn up, and that cannot change the fact that the sum of $43,000, which Bertrand D'Astous received as a loan, came from the funds of Châteauneuf Construction Ltée and not the personal funds of Pierre D’Astous, as irrefutably proved, in my opinion, by the cheque (exhibit S-1) endorsed by Bertrand. Neither Pierre nor Bertrand D'Astous could change the names of the parties to the agreement six months after the transaction. The notarized acknowledgement of debt confirmed that Bertrand D'Astous had received a $43,000 loan. There was nothing in the evidence to indicate that he . had received a second loan of $43,000 from his father personally. The $43,000 referred to in the acknowledgement of debt was the one drawn from the funds of Châteauneuf Construction Ltée. In my opinion, the loan was definitely made by the company to Bertrand D’Astous.

Even though, when he signed the acknowledgement of debt, Pierre D’As- tous may have been somewhat confused because of his illness on the eve of a serious Operation and could not recall whether it was he personally or the company that had made the loan to Bertrand, and even though in February 1976 Pierre D’Astous had intended to personally lend the $43,000 to his son, that is not what happened either in fact or in law, and the acknowlegement of debt signed subsequently cannot change anything. It is possible that Pierre D’Astous made no distinction between his personal funds and those of his company, but just as ignorance of the law cannot be accepted as a valid excuse when the law is broken, neither can separate legal entities be interchanged at will in business transactions.

At the beginning of his testimony, Bertrand D’Astous implied that he was not a shareholder of Châteauneuf Construction Ltée; however, in cross- examination, Bertrand D’Astous admitted that in 1976 and previously, he had been a shareholder of the company even though he held only one share. Moreover, on June 18, 1982, through his accountant Claude Lemire, CA, Bertrand D’Astous, as shareholder and director, asked Chateauneuf Construction Ltée to obtain financial statements for the year ending August 31, 1979, as well as the minute book of Châteauneuf Construction Ltée (exhibit 1-1). It is difficult not to conclude from the evidence that the company, under the authority of its president Pierre D’Astous, loaned Bertrand D’Astous, as a shareholder and director, the sum of $43,000 (exhibit S-1 and I-1).

Moreover, that transaction was shown in the financial statements of Châteauneuf Construction Ltée for 1976 where it appeared under the heading "investment” as "note — Bertrand D’Astous” in the amount of $43,000 (exhibit A-3), and it also appeared in the "Accounts-Exenditures” book (exhibit S-4). It is generally accepted that accounting entries merely reflect various transactions, supported by vouchers, but the entries themselves cannot create or change the rights and obligations of the contracting parties.

In his testimony, the accountant of Châteauneuf Construction Ltée, Jacques Bourgeois, CA, stated that considering the cheque (exhibit S-1), there was no doubt that the company had made a $43,000 loan to Bertrand D’Astous in 1976. He further stated that no $43,000 loan had been made to Pierre D’Astous in 1976, and he therefore made the accounting entries accordingly.

After examining the acknowledgement of debt, Mr Bourgeois thought that in 1977 he had to change the identity of the company’s debtor from Bertrand D’Astous to the Estate of Pierre D’Astous, despite the fact that no repayment had been made to the company and no document indicated that Pierre D’Astous was in fact or in law the company’s debtor. That change in accounting entries, or any other subsequent change, which Mr Bourgeois might have made in the company’s financial statements, cannot in any way affect the nature and legality of the transaction or the identity of the parties to the loan made by the company to Bertrand D’Astous on February 10, 1976.

It is unfortunate, but obvious, that there was confusion in the appellant’s mind as to the actual and legal source of the $43,000 loan which, according to the evidence, led to problems and even legal proceedings. However, the reply to the question posed by the Minister under section 174 covers a much narrower point than the civil disputes which may exist between the appellant and the Estate of Pierre D’Astous and which, in my opinion, are irrelevant in determining the point of law raised for income tax purposes.

I therefore conclude that Châteauneuf Construction Ltée made a $43,000 loan in 1976 to the appellant, with the result that that sum constitutes income that must be included in the computation of the appellant’s income for the 1976 taxation year with respect to an unpaid shareholder loan according to subsection 15(2) of the Act, and that that sum should not be included in the computation of the income of the late Piere D’Astous for the 1976 taxation year.

Since the only point in issue in Bertrand D’Astous’s appeal from a reassessment for the 1976 taxation year (to which the Estate of the late Pierre D’Astous was joined under section 174) is the same as the one on which the Court ruled in its reply to the Minister’s application, Bertrand D’Astous’s appeal for the 1976 taxation year must be dismissed.

Accordingly, the appeal is dismissed.

Appeal dismissed.