Sandhu v. R., [1998] 3 CTC 2828, 98 DTC 1889

Bell T.C.J.:

These three appeals were heard on common evidence.

Issues:

1. Whether a corporation, Bagel Farms Ltd. (“Bagel”) conferred a benefit of $44,200 on the three Appellants for the 1990 taxation year, within the meaning of subsection 15(1) of the Income Tax Act (“Act”), each of the three Appellants owning one-third of the issued and outstanding: shares of Bagel.

2. Whether each of the Appellants, Baljit K. Sandhu (“Baljit”) and Arwinder K. Sandhu (“Arwinder”) is entitled to deduct losses in respect of a farm lease and house rental in the following amounts:

1990 $4,713

1991 $6,486.57

Facts:

Although each of the three Appellants filed a Notice of Appeal for the 1990 and 1991 taxation years, there is no matter before the Court respecting Sukhbir Sandhu for her 1991 taxation year.

First Issue:

Appellants’ counsel submitted that there are two sub-issues in the first issue. He stated that assets were transferred to Bagel by the Appellants at fair market value and accordingly no benefit could arise. He also asserted that although the Appellants were assessed in 1990, the assets were transferred in 1989 and, accordingly, the appeal should be allowed.

Baljit testified that she signed a document reading as follows:

Enclosed are the list of equipment and vehicles owned by Sandhu family partner that were transferred to Bagel Farms Ltd. on 21st day of June 1989 at the fair market value.

A page attached to this document (having been entered in evidence) reads as follows:

This totals $44,200. She stated that her husband knew the values of the property and that he had prepared this document. She said that nothing was paid to the three Appellants because the company had nothing. She stated that the company had a promise written on the books. She testified that the accountant must have prepared the document. She said that the equipment described above was transferred from the Sandhu family to Bagel but could not say when it was so transferred. She was very vague and non-knowing about the reason for the partnership, what it did, and whether she had worked for it. She stated that the accountant said that they should have a company, that her husband and brothers decided with the accountant to form a company and “we agreed”. She said that the date of the document, namely June 21, 1989 was the date of transfer of equipment to Bagel and that the accountant was told about such transfer.

Sukhbit Sandhu (“Sukhbit”), husband of Baljit, testified that he helped his wife prepare the schedule of equipment and that he determined the values for it. He seemed quite knowledgeable about the machinery, its age, its new price and its value as used equipment. He stated that he had been a blueberry farmer for 13 or 14 years. He said that Bagel commenced the blueberry business in the summer of 1989. He stated that he had no documents respecting the value of the equipment and that there was no GST at the time of acquisition. He thereby seemed to be suggesting that there was no need to keep documentation. He stated that the Sandhu Family Partnership, from which Bagel purchased the equipment, ended when Bagel bought a farm in 1989.

Mr. Mervin Bolenback (“Bolenback”), an auditor with the Department of National Revenue said that he had dealt with the accountant. He said that although he had asked for information, he had not seen the document respecting acquisition of equipment. He said that the Sandhu Family Partnership had no assets listed on documents that he had seen. On his suggestion that there was no partnership, Appellants’ counsel referred to the paragraph in the Respondent’s Request to Admit, namely:

The Additions! [1] were acquired from the Sandhu Family Partners, a partnership made up of the three shareholders of the Corporation. [2]

In response to that Request, the Appellants admitted that fact. Appellants’ counsel stated that at this stage that a challenge by Respondent’s counsel of that admitted fact? [3] was prejudicial to the Appellants. Respondent’s counsel responded that Appellants’ counsel knew that the Respondent would be challenging the existence of a partnership by virtue of discussions which had been held in the previous week in relation to the settlement of four related appeals. In effect, the Respondent was seeking to amend the Reply to the Notice of Appeal. The Court decided to hear evidence from the Respondent’s witness with respect to this matter and stated that it would weigh that evidence carefully in its deliberations.

Bolenback referred to a photocopy of a page described as:

BAGEL FARMS LTD.

General Ledger Listing as of June 30, 1990

One of the items entered under the heading “Shareholders’ Advances” is the following:

12 2 Jun 30 90 TRS FROM SANDHU PARTNERS JE#10 44,200.00

He said that he had asked for documentation to support this entry and received none. He said further that he had requested the books and records of Sandhu Family Partners and had received a document, one page of which was entitled:

SANDHU FAMILY PARTNERS

GENERAL LEDGER LISTING AS OF JUNE 30, 1989

That showed, among other things, farm equipment but no other equipment. It was described as follows:

FARM EQUIPMENT

10 1 Jan 01 89 BYPASS CK351 2,137.00

This figure appeared under a column entitled “Debit”. No amount was shown for TRUCK and AUTOMOBILE. Bolenback said that he concluded that the only asset in the Sandhu Family Partners as at June 30, 1989 was the above farm equipment of $2,137.

Appellants’ counsel, on cross-examination, referred Bolenback to a memorandum he had prepared respecting BALJIT SANDHU and SHAREHOLDER BENEFITS. It was dated August 11, 1993 and set forth certain figures as benefits to Baljit in respect of 1989, 1990 and 1991. That document concluded with this statement:

Note that the 1989 amount is not being transferred to WP 100 as 1989 is statute- barred.

On another document prepared by Bolenback was the following notation:

Class 8 Addition

1990

This amount appears to be farm equipment that was transferred from the partnership of Sandhu Family Partners at the beginning of the 1990 fiscal year. However, as the addition amount of $28,000 per JE#10 does not equal the amount of the final Class 8 balance in Sandhu Family Partners, this addition amount is not considered to be a supportable addition and is therefore disallowed as an addition.

$28.000.00

There is a similar statement with respect to Class 10 addition of $16,200.

Class 10 Addition

1990

This amount appears to be farm equipment that was transferred from the partnership of Sandhu Family Partners at the beginning of the 1990 fiscal year. However, as the addition amount of $16,200 per JE#10 does not equal the amount of the final Class 8 balance in Sandhu Family Partners, this addition amount is not considered to be a supportable addition and is therefore disallowed as an addition.

$16.200.00

His reason for making this statement was that having looked at the records available to him the only evidence he had was the entry and the class. He further said that a lot of information he had requested was not given to him.

Facts Re: Issue No. 2:

By a Document entitled “Commercial Lease” shown as having been signed on December 1, 1989 by four persons, two of whom were Baljit and Arwinder, a farm property consisting of 17.8 acres in Surrey, British Columbia, containing a storage warehouse of approximately 4,000 square feet, was leased to Bagel for a period of ten years. The pertinent terms of that lease are:

Terms of the lease are lO(ten) years commencing on the 1st day of December, 1989 at $225.00 per acre per year for die first 5 years and $300.00 per acre per year for the next 5 years. Payment to be made at the 1 st day of December each year.

Lease charges for the first 5 years will be $4005.00 (four thousand five dollars exactly) per year and for the next 5 years will be $5340.00 (five thousand three hundred fourty dollars exactly) per year....

The tenants also have the option to renew the lease at a fair market rate for another 10(ten) years after the end of current term lease.

Evidence respecting the financing of the purchase followed as did evidence respecting the blueberry crop that was planted. That evidence indicated that there would be no full production until eight to ten years into the operation. The evidence also indicated that some production would commence in the fourth year but would be very small.

The assumptions upon which the Minister based his reassessment contained in the Reply to the Notice of Appeal set forth the computation of loss figures with respect to the farm lease and rental of house. They are as follows:

With respect to the 1991 taxation year the information is:

INCOME:

House Rental Income	10,800.00
Farm Lease	4,005.00
Total Rental Income	14,805.00
EXPENSES:
Property Taxes	1,224.00
Maintenance and Repairs	5,422.02
Interest	31,708.24
Insurance	2,322.00
Accounting	75.00
Total Expenses	40,751.26
NET INCOME (LOSS)	(25,946.26)
	Appellants Share (25	%) = $(6,-

Appellants’ Submissions:

Appellants’ counsel submitted that the transfer of equipment to Bagel took place in 1989, at the beginning of the 1990 taxation year of the company. He stated that this was consistent with the evidence of the Baljit and Sarbjit. He referred to Kennedy v. Minister of National Revenue (1973), 73 D.T.C. 5359 (Fed. C.A.) in which the then Chief Justice of the Federal Court of Appeal said, in respect of when a “benefit” had been “conferred”, within the meaning of those words in subsection 8(1), [4]

In my view, when a debt is created from a company to a shareholder for no consideration or inadequate consideration, a benefit is conferred.... I am, therefore, of the opinion that the $53,000 promissory note must be taken into account for the purposes of section 8(1) in the year in which it created an indebtedness from the company to the appellant, namely, 1965.

Accordingly, Appellant’s counsel submitted that any benefit should have been assessed in 1989. He also submitted that even if the assessment was appropriate for 1989 the amount of the benefit would be nil because the company received assets at fair market value and paid for them. He argued

that there was nothing to contradict the evidence of Sarbjit respecting valuation and that he, although not an expert, had, through experience, substantial knowledge respecting the value of farm machinery.

The Respondent took the position that the shareholders’ loan account was credited with $44,200 on June 30, 1990 and that that credit gave rise to a benefit to the shareholders. He referred to several cases in which this Court had found benefits to have been conferred in certain situations where shareholders’ loan accounts had been credited. He did not deal with the possibility of a transfer in 1989.

Analysis and Conclusion:

The evidence is confusing as to whether the Sandhu Family Partnership owned any machinery. I do not find the discussion that took place with respect to the Sandhu Family Partnership helpful. The fact of its existence was admitted as was the fact that the equipment was acquired from it. Bolenback’s evidence with respect to the financial statements does not establish that the partnership did not own such assets and did not transfer them to Bagel. If a transfer had taken place it would, according to the evidence adduced, have taken place in 1989. I am persuaded that more weight should be given to the Appellant’s evidence than to that of the Respondent. Appellant’s evidence deals with all relevant times requiring examination. I conclude, therefore, on the balance of probabilities, that the assets described above were transferred by the partnership to Bagel in 1989.

I also conclude, in the absence of any contradicting evidence on behalf of the Respondent, that the transferred assets had a value of $44,200 as stated. That ends the matter. However, in any event, I cannot conclude that a mere book entry can create an obligation of debt from a company to a shareholder. If, as the Respondent submits, no equipment was transferred by the Family Partnership to Bagel, there is no transaction giving rise to a legal obligation by Bagel to pay any amount. There is no evidence of the creation of such an obligation in 1990. I agree with Judge Bowman who, in Prosperous Investments Ltd. v. Minister of National Revenue (1992), 92 D.T.C. 1163 (T.C.C.), said:

In addition, the Minister sought to tax Mr. Sinclair on $50,750 credited to his loan account by Prosperous Investments. It would appear from paragraphs 6(p) and (q) of the Reply, which set out the Minister’s so-called “assumptions” that he assumed that the mere fact of crediting to a shareholder loan account gives rise to taxation in the hands of the principal shareholder, irrespective of whether the shareholder or employee has appropriated any funds from the account or whether the crediting of the account affects in any way the legal relationship with the corporation or indeed whether the shareholder has condoned or even knows of the bookkeeping entry. A mere bookkeeping entry in a loan account by itself does not constitute a taxable event unless there is something more, such as receipt. In Gresham Life Society Co. Ltd. v. Bishop, 1902 4 TCC 464 at 476, Lord Brampton said:

My Lords I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g. by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by business men. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the Statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.

With respect to the commercial lease. Appellant’s counsel advanced arguments based upon Auld v. Minister of National Revenue (1962), 62 D.T.C. 27 (Can. Tax App. Bd.). In that case the Appellant borrowed $7,500 from a bank and loaned it to his company which used the money in its business for the purpose of earning income. The Tax Appeal Board found the interest paid to the bank thereon to be deductible in that the money was borrowed to earn income from property - namely the company shares, the income being potential dividends. Counsel submitted that this case was an analogy in that the Appellants borrowed money by way of mortgage on the farmland and then leased the land to Bagel. He suggested that the Appellants could expect returns by way of dividend on the Bagel shares. There is no evidence to support the contention that this was part of the Appellants’ plan. Further, the testimony indicated that it would take about 10 years for the farm to become fully productive. The direct use of the funds in this case was to purchase the house and the property. The suggestion that the borrowed monies were used to produce income from shares of Bagel is simply too remote. It wasn’t. Bagel leased the property from the Appellants.

Accordingly, the appeals of all three Appellants respecting the benefit assessed by the Minister under subsection 15(1) of the Act are allowed for the 1990 taxation year.

The appeals of the Appellants, Baljit and Arwinder for the 1991 taxation year are dismissed for the reasons outlined.

The appeals of Sukhbir for the 1991 taxation year is dismissed, nothing having involved her affairs for that year.

Appeal allowed in part.