William Carrigan v. Minister of National Revenue, [1985] 1 CTC 2360, 85 DTC 336

Cardin, TCJ:— William Carrigan is appealing from reassessments by which the Minister of National Revenue added to the appellant’s 1977, 1978, 1979 and 1980 income, certain amounts paid by a company for the purchase of shares on the grounds that the appellant appropriated, as a shareholder of that company, funds for his benefit or that the corporation conferred a benefit on the appellant within the meaning of paragraphs 15(l)(b) and 15(l)(c) respectively, of the /n- come Tax Act, RSC 1952, c 148.

The appellant was the major shareholder of “Power Supply Sound Company Limited” (the “company”), incorporated on September 4, 1974). The appellant held 600 shares or 60 per cent of the company and Mr Michael Kojima held 400 shares. Disagreement between the shareholders led to the sale by Mr Kojima of his shares. For that purpose, Mr Bott, CA, the accountant of the company until 1979, met with the appellant and Mr Kojima on April 22, 1977, and made an evaluation of the shares which was accepted by the shareholders (Exhibit A-1).

The appellant had no money with which to purchase Mr Kojima’s shares and his alternatives were: either to liquidate the company; obtain shareholder’s loans; or have the company repurchase its own shares. None of these alternatives were in fact carried out during the taxation years under review. The evidence, though not clearly, indicates there was in 1975 some question as to whether the company had authority to repurchase its own shares. No action, however, was taken to verify whether the company did have such an authorization. The company’s Articles of Incorporation were so amended according to the Ontario Business Corporations Act on December 9, 1981, after the Department of National Revenue had audited the company’s records (Exhibit A-2). Mr Bott’s evidence was that the company was to pay for the shares until the appellant decided how he wished to proceed with the transaction. Mr Bott received no further instructions from the appellant in that respect.

As a result of a verbal agreement, the appellant purchased 300 of Mr Kojima’s shares for $26,142 on May 19, 1977, which was to be paid on instalments. The shares were to be held by Mr Doidge, the appellant’s solicitor, until they were fully paid. On May 20, 1977, Mr Kojima sold the balance of his shares in the company to two of its employees: 50 shares to Mr P Medvick and 50 shares to Mr R Santon (Exhibit R-l). In 1977, the company paid $2,621.17 to Mr Kojima for the shares.

Mr Kojima’s solicitor advised the appellant’s solicitor (Mr Doidge) that the terms of payment agreed upon with respect to the purchase of the shares had fallen into arrears and a new agreement was then proposed by which the arrears, the interest on the arrears, and the balance of the purchase price ($23,534) were to be paid in instalments of $167.30 per week (Exhibit R-ll). On February 21, 1978, an Hypothecation of Securities Agreement was signed by the appellant (Exhibits R-2, R-3 and R-4).

On April 15, 1980, the appellant received from his solicitor, Mr Doidge, 200 shares that had by then been paid: a certificate for 40 shares and a certificate for 160 shares. On April 16, 1980, 40 shares were sold by the appellant to Mr R Santon (Exhibit R-5).

By notice of reassessment dated December 14, 1981, the Minister of National Revenue added to the appellant’s income, under paragraphs 15(l)(b) and 15(l)(c), the amounts paid by the company for the purchase of Mr Kojima’s shares:

The appellant’s contention is twofold: First, that it was never his intention to acquire the shares personally and, secondly, that he, as a shareholder, received no advantage or benefit from the company in the share transaction. The appellant also suggested that instead of helping him out of a difficult situation and considering the transactions as loans to a shareholder, the Minister of National Revenue deliberately chose the most punitive of the alternatives by assessing him on the basis of appropriation of funds.

With respect to this last suggestion it is difficult, on the basis of the evidence and the appellant’s own testimony, to see how the Minister could have assessed the appellant on any other basis than he did. The audit of the company’s and of the appellant’s books and records, as a result of which the assessment was made, was the source of the documentary evidence filed as Exhibits R-l to R-ll. Nowhere in the said documents or indeed in the testimony of Mr Bott, the company’s accountant from 1975 to 1979, is there any mention of the company’s purchase of Mr Kojima’s shares or, indeed, any reference anywhere to the appellant obtaining shareholder’s loans from the company.

There is no dispute that the company paid the purchase price for Mr Kojima’s shares. However, all the documents, some of them signed by the appellant, refer to the appellant as the purchaser of the shares and it is he who was liable for the payments, eg Exhibit R-3 — the Hypothecation of Securities Agreement. The company’s Shareholder’s Register, the Transfer Register and the Shareholder’s Ledger (Exhibit R-9), as well as Shareholding’s Records (Exhibit R-10) all show that shares were issued in the appellant’s name, that 200 of Mr Kojima’s shares were transferred to the appellant. Mr Medvick’s and Mr Santon’s shares were also subsequently transferred to the appellant, with the result that on the 8th of April 1981 the appellant held in his name all the shares of the company (Exhibits R-10, R-7 and R-8).

The preponderance of the evidence does not support the appellant’s testimony that it was not his intention to acquire the shares personally. The fact is that he legally acquired all the shares over a period of six years and his statement that he had intended, from the beginning, that the company repurchase its shares is less than convincing since the resolution amending the Articles of the corporation so as to permit the company to repurchase its shares, was certified only on December 9, 1981 (Exhibit A-2).

With respect to the appellant’s contention that he received no advantage or benefit in acquiring the shares personally, the evidence is that the value of the shares had increased from 1975 to April 16, 1980, when the appellant was able to sell 40 shares to Mr R Santon at a profit. In examination-in-chief the appellant had stated that the proceeds of the sale of 40 shares to Santon had been paid to the company. In cross-examination it was found that, although the proceeds were in fact paid to the company, the appellant had to admit that the amount had been recorded as an advance by him to the company.

The appellant did not succeed in establishing that the Minister’s assessment was wrong in any respect and judgment will go dismissing the appeal.

The appeal is dismissed.

Appeal dismissed.