Joachim Santarossa. Marino Santarossa and Joseph Santarossa v. Minister of National Revenue, [1978] CTC 2390, [1978] DTC 1294

Delmer E Taylor:—These appeals concern the 1973 taxation year and deal with two issues—the first is common to all three appellants, and the second applies only to Joseph Santarossa. On the first issue, the respondent has assessed to income tax in the year 1973 each of the appellants (covering two reassessments) on an amount of $21,249.11 as income resulting from the sale of a corporate investment, the proceeds from which were retained by the appellants. The second issue deals strictly with the property valuation of a parcel of corporate real estate sold to the appellant Joseph Santarossa, also in 1973. The appellant paid $12,000, the respondent claims $26,000 would have been correct. The respondent relied, inter alia, upon subsections 2(1), 15(1) and section 248 of the Income Tax Act, SC 1970-71-72, chapter 63 and amendments thereto.

Facts

There was little, if any, common ground on the facts of the first issue between the appellants and the respondent which could be observed in the notices of appeal and the replies to notices of appeal other than that Joseph and Marino are the sons of Joachim (first names only will be used for distinction) and, first in a partnership up until 1967, and subsequently in a company Santarossa & Sons Limited (hereinafter referred to as the “company”) operated a concrete business in and around Maidstone, Ontario. In 1961 the partnership invested in another local company, Erie Sand and Gravel Limited (hereinafter referred to as “Erie”), by way of one of the three issued common shares at a par value of $1 and a loan to Erie of $8,284. In 1968 the appellants incorporated the company, and the investment in Erie after that date was shown at $8,285 as a company asset. In 1973 the one share in Erie was sold to the other two shareholders of Erie for the sum of $101,177 which, after legal fees, provided each of the appellants a net cheque of $33,179.21 (a total of $99,537.64).

On the second issue, the company had acquired in 1966 a parcel of property at 543 Vanier Street, in the City of Windsor, which included a house moved on the lot. The total cost of this real estate, as shown on the company books in 1973, was $3,714.80, when it was sold for $12,000 to Joseph.

Contentions

The portions of the assessments in question which were significant to the first issue may be shown as:

J Santarossa & Sons Limited at less than fair market value $14,000.00

The position of the appellants on the first issue was as stated in the notices of appeal:

To the extent of $44,075.27 the funds received represents payment of monies owing to the Shareholders.

To the extent of $18,487.45 each sum represents advances to Shareholders by way of loans. The loans were fully repaid in the following year by the advance of $45,000.00 to the Company by the three Shareholders.

The $18,487.45 should not be treated as Income in either 1973 or 1974 but as a loan in 1973 repaid in 1974.

The 1967 transfer of an Asset worth approximately $80,000.00 between the partnership and the Corporation wholly owned and controlled by the partners is not an arms length transaction. The placing of this Asset on the opening Statement of the Santarossa Company at $8,285.00 representing a loan to the Erie Sand and Gravel Limited of that amount and a Share value of $1.00 should be permitted to be revised by an additional $71,715.00 which would then represent monies owing by J Santarossa & Sons Limited to the partners who sold the Asset to the Company.

By adjusting the 1967 valuation of Erie Sand and Gravel Limited investment the loan payable to Shareholders would be as follows:

Loans payable to Shareholders at June 30, 1973 as shown on the Balance Sheet (prior to entry charging $8,285.00 to this

account)		$ 52,900.27
Add: Additional amounts payable to Shareholders		71,715.00
		$124,615.27
Re: payments:
Entry on June 30, 1973	$ 8,285.00
Additional payments to Shareholders during 1973	99,299.97	107,584.97
Balance of Loans Payable to Shareholders		$ 17,030.30

Therefore no Income has been received by the Shareholders and the re-assessments should be disallowed.

The respondent asserted that:

—the $21,249.11 amount was not a loan by the corporation to the appellant in the 1973 taxation year;

—in the alternative, even if the amount of $21,249.11 was a loan of the corporation to the taxpayer in the 1973 taxation year—a fact which is not admitted but hereby specifically denied—the loan was«not repaid within one year from the end of the taxation year of the corporation in which it was made.

Evidence

By agreement between counsel, a dossier of relevant documents was admitted as Exhibit A-1, and consisted of:

Joseph Santarossa, Walter Kulyk, CA and Joachim Santarossa related for the Board their involvement with and recollection of the events leading up to the assessments. Joachim managed on behalf of the partnership, and subsequently the company, any matters dealing with Erie. The general advice provided to the appellants by the lawyer and the accountant for Erie, in addition to their own accountant (Mr Steve Miller) was that the proceeds of the sale of the shares belonged to them individually and should go into their own bank accounts. After changing accountants, they were advised by Mr Kulyk that, by his calculations, their shareholders’ accounts were overdrawn and they should put back $15,000 each into the company. He also prepared and filed amended corporation income tax returns for the year 1973. He had examined the books of Erie, and concluded that the share of Erie, when acquired by the company in 1967, would have been worth at that date approximately $80,000.

The assessor for Revenue Canada provided the Board with his view on the reason for the assessments in question on the first issue. It was that basically, since the funds from the sale of the Erie share had not gone through the books and bank records of the company but directly into the personal holdings of the appellants, there had been an appropriation.

On the house valuation issue, Joseph pointed out that he had done a great deal of work there himself and had paid rent all the time it was owned by the company. An appraiser for the respondent, Mr W Salzer, presented and explained an appraisal report of the property in question.

Argument

Counsel for the appellants on the first issue alleged that since Revenue Canada had taken into account the amount of $14,691.76 (supra) in the assessment as a loan payable, therefore the assessment by implication must be treated as one would view a loan payable balance under subsection 15(2) of the Act, not under 15(1) as an appropriation. He disagreed with the respondent on the amount of “loan payable” for which each appellant should be given credit (claiming the amount should be greater) and he disputed the second part of the assessment by which $2,761.66 had been added to the taxable income. On the second issue, counsel argued that even the evidence of the respondent’s appraiser supported a valuation lower than $26,000 and that, together with the information supplied to the Board by the appellant, indicated the $12,000 figure to have been quite reasonable. ;y: ..

Counsel for the respondent, while agreeing that the sale of the share to Erie also eliminated any obligation Erie had for the loan from the company, took the position that there was no debtor-creditor relationship at all in the transaction whereby the appellants retained the company funds derived from the sale to Erie, and that the fact the Minister had made some allowance in the assessments for the outstanding shareholders’ loan to the company ($14,691.76) could not be used to imply any such arrangement, or reach the conclusion argued by counsel for the appellants. In support of the Minister’s right to consider such offsetting amounts in the assessment, counsel made reference to Estate of William J Fraleigh v MNR, [1968] CTC 369; 68 DTC 5244. In refuting the appellants’ rights to, in effect, change their accounting at this time to reflect the transaction differently, particular note was made of cases No 326 v MNR, 14 Tax ABC 401; 56 DTC 139, and No 660 v MNR, 23 Tax ABC 129; 59 DTC 590. On the sale of real estate matter, counsel conceded that some moderation of the $26,000 might be warranted as a result of the information and explanations provided at the hearing, but there was no justification for the $12,000 estimate and stated that the appellant himself had not provided an appraisal or factual data regarding comparative value.

Findings

First, disposing of the second issue (that relating to the real estate valuation), there is no question in my mind that the amount of $12,000 was insufficient compensation for the property. At the same time, the general information does not lead to the conclusion that the sum of $26,000 is more appropriate. Taking all factors into account, including the fact that the appraiser, Mr Salzer, made a complete and detailed report, the Board would set the value of the property for purposes of determining the benefit which was conferred upon Joseph Santarossa by the Company at $22,000, thereby reducing the $14,000 amount added to his taxable income to an amount of $10,000.

On the major issue, it may be that more questions have been raised at the hearing than have been answered. For example:

—Should the appellants now be given credit for the estimated value of the share in 1967 ($80,000)?

—Should the cost of the share be shown at $1 or at $8,285?

—Should the shareholders’ account at June 30, 1973 have been $44,075.27 (original balance sheet) or $52,360.27 (now claimed by the new accountant)?

—Should the shareholders’ loan accounts be considered at all as a credit in making any assessment?

—Should the $8,285 (considered to be the cost of the share) have been charged to the company surplus rather than to the shareholders’ accounts?

—Should the appellants have returned to the company the $15,000 each, or any other amount?

—Should the company gain (if any) be considered as only the increase in value between 1967 and 1973?

However, the Board has been asked in effect to determine only one question and that is—was there an appropriation of company funds or property by the appellants in the year 1973? In my view, there is one particularly significant document and I quote the Appendix of Document No 10 of Exhibit A-1 :

KNOW ALL MEN BY THESE PRESENTS THAT WE, JOACHIM SANTAROSSA, MARINO SANTAROSSA and JOSEPH SANTAROSSA, all of the City of Windsor in the County of Essex and Province of Ontario, Contractors, hereby acknowledge and confirm that we hold certificate number 7 representing one common share of capital stock of Erie Sand and Gravel Limited in trust for J Santarossa & Sons Limited, a company incorporated under the laws of the Province of Ontario with head office at the City of Windsor in the County of Essex and Province of Ontario; the said share was acquired by the said company, J Santarossa & Sons Limited; that all dividends, profits and advantages accruing thereon or arising therefrom, are and shall be held by us and the survivors or survivor of us for the use, benefit and advantage of the said J Santarossa & Sons Limited.

On demand we agree to transfer the said share or any part or parts thereof to the said J Santarossa & Sons Limited or its nominee or nominees and to account to the said Company for all dividends, profits and advantages received by us from the said shares.

IN WITNESS WHEREOF we have hereunto set our hands and seals this twenty-seventh day of July, 1968.

SIGNED, SEALED AND DELIVERED )

) (Sgd)

in the presence of:

	)	Joachim Santarossa
	I	(Sgd)
(Sgd) Steve A Miller	j	Marino Santarossa
(Sgd) Steve A Miller
	j	(Sgd)
	)	Joseph Santarossa

Another very important fact is that the Income Tax Act does not provide a definition of “appropriation” as it is used in paragraph 15(1)(b). I emphasize “(b)” since I fail to see how the transaction in question here could possibly be included for taxation under either

(a) or (c) of that subsection. In effect, the appellants in this matter are asked to prove there was no “appropriation” without being aware of the parameters within which such an event might occur. This is an appropriation from the Revenue Canada assessor’s viewpoint because the funds did not go through the company bank account. I believe the issue goes much deeper than that. In passing, I merely note for the record that although the point made by counsel for the respondent from the Fraleigh case (supra) (that the Minister thereby has the right to “contra-account” shareholders’ loans against appropriation) is unconvincing, it does not appear to me to be significant to this decision.

For lack of any better definition, the Board makes reference to the definition of “appropriation” to be found in the Random House Dictionary of the English Language—“to take without consent”. It seems evident to me that according to the Appendix (Document 10, Exhibit A-1) quoted earlier, the company put no restraint whatsoever upon the capacity of the appellants in their roles as trustees to do with the funds as they saw fit. Their only responsibility was: “On demand we agree to transfer the said share . . . and to account to the said Company for all dividends, profits and advantages received by us from the said shares.” I cannot conclude from the evidence before me that the appellants took without consent, and it is a matter of record that they accounted for the funds (over and above any owing to them at the time by the company) by the deposit to the company bank account of $15,000 each, when called upon to do so by the new auditor of the company. There was no suggestion made by the respondent of sinister motives or of intentional diversion of company funds, and indeed such a consideration might have required action by the taxing authorities under an entirely different section of the Act. Whether the retention of the funds by the appellants should be termed by loan, by contra-account against existing balances, by dividends or by whatever form; and whether they would be taxable under some other format is not for the Board to decide based upon the specific assessments in question. The only decision necessary at this time is that such receipt and retention was not an appropriation.

Decision

The portion of the appeal against the taxation of the amount of $33,179.21 received as an appropriation by each appellant from the sale of one share in Erie Sand and Gravel is allowed in full. The portion of the appeal against the taxation as a benefit to Joseph Santarossa of the amount of $14,000 from the purchase of Company real estate is allowed in part so that the benefit received will be reduced to $10,000. The matter is referred back to the Minister of National Revenue for reassessment accordingly.

Appeals allowed in part.