Cedar Ridge Construction LTD v. Minister of National Revenue, [1983] CTC 2616, 83 DTC 551

M J Bonner [ORALLY]:—This is an appeal from an assessment of income tax for the 1976 taxation year. Although reference was made in the notice of appeal to the 1977 taxation year no tax was assessed for that year and no relief was sought. The purported 1977 appeal will therefore be dismissed.

The appellant in computing income for its 1976 taxation year, being the fiscal period ending June 30, sought to deduct $432,163 in respect of salaries and wages. That amount included $404,000 in accrued and unpaid salaries or bonuses to Mr and Mrs Peter Dyck who were the only officers, directors and shareholders of the appellant.

The respondent, on assessment, disallowed a deduction in respect of the $404,000. He advanced several arguments in support of the disallowance but it is necessary to deal with only one, that is to say, the argument that the deduction was prohibited by paragraph 18(1)(a) of the Income Tax Act because no “expense” was “incurred” within the meaning of that provision.

The evidence adduced at the hearing does not disclose the existence of any Obligation on the appellant on June 30, 1976, to pay to Mr and Mrs Dyck the $404,000 in question. It did disclose that Mr and Mrs Dyck gave some thought to drawing total salaries or bonuses which would be in approximately that amount and, further, that the matter was discussed with their accountant, Mr Eidsvik, but it revealed as well that such plans as were made changed.

According to the evidence what happened was that in December 1975 there were discussions regarding salaries at a Christmas party in Mr Eids- vik’s office between the latter and Mr Dyck. There were further discussions on the topic in January 1976. A draft form of minutes of a January 5, 1976, directors meeting was prepared on Mr Eidsvik’s stationery or letterhead, but those minutes were never signed. They are also quite inconclusive. They read:

Upon motion duly proposed and seconded it was unanimously resolved that as the Company has accumulated sufficient funds in its Bank Accounts, it is now proposed that the Company would provide for sufficient remuneration/bonuses for the Directors for their part (sic) and present services rendered. The salaries and bonuses to be provided for at the Company’s year end and to be paid out to the Directors in amounts that would not unduly restrict the operation of the company.

Mr Dyck stated that he did not see the minutes at the time.

In March 1976 Mr Dyck found a farm and decided to buy it. He testified that he wanted to draw about $400,000 from the appellant in order to buy the farm and build barns on it.

Mr Dyck testified in answer to a leading question that it was “intended” that the company would pay salaries to himself and his wife as “set up” on Exhibit A-5 by journal entries 24 and 25. I do not think that Mr Dyck, who was in my view an entirely forthright witness, meant what he said. Exhibit A-5 was a paper prepared by someone in Mr Eidsvik’s office. Mr Dyck said that he did not recall seeing Exhibit A-5 at any time in 1976, 1977 or 1978. Whether that paper was prepared on June 8, 1978, which is the date it bears, or whether it was prepared on June 8, 1976, it represents nothing more than the jottings of some unknown employee of Mr Eidsvik. It does not itself create any obligation to pay the amounts in question.

Although the balance sheet attached to the appellant’s 1976 return of income did show “Wages and Deductions payable” of $404,000, it was not shown that the financial statements were approved by the directors of the company, whether at year end or shortly thereafter or at any time for that matter.

Reverting to the intention about which Mr Dyck testified, I might say that I have no doubt that an intention existed, however, a distinction must be drawn between the formation of an intention to do a thing and the actual act of doing that thing. Furthermore, what Mr Dyck originally intended to do in order to enable him to buy the farm and what he subsequently in fact did were two different things. Instead of taking salaries and bonuses totalling about $400,000, Mr Dyck borrowed from the appellant the money which he needed to buy the farm. The company then acquired a part of the farm and itself spent the money necessary to build the barns. Mr Dyck’s evidence as to what ultimately happened demonstrates the futility of relying on the fleeting thoughts of a person who is a corporate officer as proof of an act of that corporation.

I propose to refer to a passage from the decision of the Chief Justice of the Federal Court of Canada in Amelia Rose v MNR, [1973] CTC 74; 73 DTC 5083. It is not dead on point, but I think it may be useful to remind the parties that not all the thoughts and acts of corporate officers are necessarily the thoughts and acts of the corporation. The observations of the Chief Justice are, I think, useful and I will quote them. They are to be found at page 5087. His Lordship said:

Furthermore, as it seems to me, there is a complete absence of any evidence that the partnership ever authorized the five directors to carry on the partnership business. There is nothing in the partnership articles as to how the partnership business is to be carried on. This is probably not necessary in the case of a partnership whose partners are individuals because it may well go without saying that the partners in such a case will themselves do what is necessary. In a case where the partners are corporations, however, I should have thought that, before individuals can carry on business on behalf of the partnership, they must have some authority from the corporate partners and that it would ordinarily be given by way of corporate resolutions. Even assuming corporate resolutions are unnecessary, at least the responsible officers of all the corporate partners should have given the necessary authority either in writing or verbally. There is no evidence of any such authority having been given in this case and, having regard to the way that the appellant’s case was presented, I have no doubt that, if any such authority had been given, it would have been proven.

His Lordship went on to say:

As I appreciate the evidence in this case, the five individuals in question, believing that a partnership agreement had been executed and knowing that there was intended to be a services agreement, decided in their own minds that they would act on behalf of the partnership in performing the services to be provided under that agreement. In my view, where corporations are involved and the existence of such relationship is important as against third persons such as the Revenue, this is not sufficient.

For the foregoing reasons I find that the appellant was, on June 30, 1976, under no obligation to pay additional salaries to its officers. The appeal from the assessment for 1976 will, therefore, also be dismissed.

Appeal dismissed.