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Docket: 2001-3563(IT)G |
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BETWEEN: |
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WILLIAM G. PEDDLE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on January 15, 2004 at Fredericton, New Brunswick
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Before: The Honourable Justice Diane Campbell |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Marcel Prevost |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $7,000.00 not be included in the Appellant's income. In all other respects the appeal is dismissed, in accordance with the attached Reasons for Judgment. The Respondent shall have its costs.
Signed at Ottawa, Canada, this 19th day of March 2004.
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"Diane Campbell" |
Campbell, J.
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Citation: 2004TCC226 |
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Date:20040319 |
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Docket: 2001-3563(IT)G |
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BETWEEN: |
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WILLIAM G. PEDDLE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Campbell, J.
[1] This appeal is in respect to the Appellant's 1998 taxation year. The Appellant in 1998 reported a total income of $19,375.00. In reassessing the Appellant the Minister of National Revenue (the "Minister") included in his income an unreported shareholder benefit in the amount of $46,000.00 and unreported interest income of $3,600.00. Penalties of $5,805.25 were also assessed. The Minister relies on subsections 15(1), 56(2) and 163(2) and paragraph 12(1)(c) of the Income Tax Act (the "Act").
The Evidence:
[2] The Appellant was involved in several corporations and partnerships. He was a 50% shareholder, along with his brother-in-law Michael Hennick, in 058541 New Brunswick Ltd., which operated under the trade name Riverside Estates ("Riverside"). He testified that he was a major decision-maker in this company's affairs. This company was a general contracting company involved in road and residential construction. The Appellant's evidence was that he resigned from this company, and was no longer a part of it, as of January 19, 1998, due to a falling out with the other shareholder Michael Hennick. He produced (Exhibit A-3) a certified copy of a Notice of Change of Directors form which had been filed with Consumer and Corporate Affairs for the Province of New Brunswick on January 15, 1998. Although he testified that he intended to resign as shareholder, he produced no evidence, except for this resignation of directors form, to support this claim.
[3] The Appellant was involved at this time with another New Brunswick company, 504897 New Brunswick Ltd. He testified that he was a shareholder in this company along with his wife. He stated that Michael Hennick was "involved to a certain degree" with the company but that the Appellant himself was the sole decision-maker, as well as the individual authorized to sign cheques for this company. The company operated under two trade names, Brunswick Auto Mart ("Brunswick") and River Road Auto Sales ("River Road"). Brunswick was involved in commercial automobile sales. Again he testified that he had sole control of Brunswick.
[4] On September 15, 1997, Riverside purported to purchase an excavator from Big 'D' Farm Machinery ("Big D") for $310,000.00, with financing to be arranged and a certified cheque provided on delivery. The handwritten invoice (Tab 7 of Exhibit R-1) for the excavator was prepared by Dana Atkinson, an employee of Big D. The Appellant testified that Dana Atkinson also worked on a part-time basis for Brunswick selling automobiles on commission. This invoice listed the HST at $46,500.00 with a deposit being paid of $5,000.00 and then incorrectly quoted the balance due as $341,500.00, instead of the correct balance of $351,500.00. According to the Appellant, he was surprised by the discrepancy of $10,000.00 in the bottom figure amount and said that he had not seen this invoice before. It appeared that no one involved in this transaction had caught this error or if they had, they neglected to bring it to the Appellant's attention.
[5] The Appellant signed and filed the HST return for Riverside on October 1, 1997 claiming an input tax credit of $46,500.00 in respect of the purchase of this excavator.
[6] According to the evidence of the auditor his investigations disclosed that the excavator, which matched the serial number on the invoice, had been sold elsewhere in Massachusetts in October 1997.
[7] The Appellant did confirm that he was aware that Riverside had not purchased the excavator before January 1998 when he testified he had walked away from the company. He also confirmed that he had never arranged any financing for the purchase of this excavator.
[8] On January 2, 1998, pursuant to the HST return filed by Mr. Peddle on behalf of Riverside, the Government issued a refund cheque to 058541 N.B. Ltd. c/o William Peddle in the amount of $45,359.85. The difference in the amount claimed and refunded was due to prior payroll liabilities and tax owed by Riverside. This refund cheque was endorsed by the Appellant and deposited into the bank account of Riverside on January 12, 1998.
[9] According to the Appellant, as of January 19, 1998, he had parted ways with Riverside. He testified that he knew that Eagle Auto Sales ("Eagle"), a company that Brunswick did business with in respect to buying and selling vehicles, was interested in purchasing his shares. He decided to just pass his shares over to Eagle for no consideration at a time when Riverside owned three lots, an older excavator and now had the refund amount of $45,359.85 sitting in its account. He produced no corporate records or any other evidence to support that this share transfer actually occurred.
[10] On January 26, 1998, the Appellant issued a cheque for $46,000.00 from Riverside to Eagle Auto Sales, although according to his evidence he was no longer a shareholder of Riverside. He stated that he issued this cheque to Eagle because he neglected to have the Riverside corporate bank account transferred over to Eagle at the time of the sale of his shares.
[11] A subsequent transaction involving the Appellant occurred on this same day, January 26, 1998, when Eagle issued a cheque for $39,000.00 to Brunswick. It was then deposited to Brunwick's account on January 26, 1998. The Appellant entered an invoice (Exhibit A-5) dated January 26, 1998 from Brunswick to Eagle for the purchase of a 1990 Toyota vehicle, a boat, a hoist and tools in support of this transaction. The Respondent alleges that the difference of $7,000.00 between the $46,000.00 cheque issued by Riverside to Eagle and the $39,000.00 cheque issued by Eagle to Brunswick was retained by Eagle to satisfy an existing debt owed to Eagle by Brunswick on the purchase of a Ford Escort vehicle. The Appellant's evidence was that he did not know anything about that particular vehicle as Brunswick and Eagle were involved with many vehicle transactions.
[12] Following the transactions involving the cheques for $46,000.00 and $39,000.00, on the same day, January 26, 1998, Brunswick issued a cheque to the Appellant in the amount of $9,000.00. Brunswick issued additional cheques to the Appellant for $3,000.00 each on February 22, 1998 and March 22, 1998. Another cheque for $1,000.00 was issued on April 18, 1998. These four cheques were referred to as "for shareholder loan" in the working papers of Brunswick (Tab 4 of Exhibit R-1) which listed specifics of cheques issued to the Appellant in 1998. The other cheques on this list were not referenced as shareholder loans. The Appellant testified that he put money into Brunswick and most of these cheques on that list represented repayment of loans. He produced no evidence to support this claim except for his testimony.
[13] In 1998, Brunswick expensed $3,600.00 on account of interest in shareholder's loans. The corporate 1998 tax return expensed this amount as one of its operating expenses (Tab 14, Exhibit R-1). The Appellant did not report this interest income.
Issues:
[14] Following are the four issues which must be decided in this appeal:
(1) Whether the Appellant failed to report a benefit of $39,000.00 received from Riverside, and if so, whether subsection 15(1) applies to include this amount in the Appellant's income;
(2) Whether the Appellant failed to report a benefit of $7,000.00 conferred on Brunswick, and if so, whether it is to be included in his income pursuant to subsection 15(1), or if it cannot, whether it can be included pursuant to subsection 56(2);
(3) Whether the Appellant failed to report interest income of $3,600.00 and if he did, whether this amount should be included in his income pursuant to paragraph 12(1)(c);
(4) Whether penalties were properly assessed pursuant to subsection 163(2).
Analysis:
Issue No. 1
[15] Subsection 15(1) states:
15. (1) Where at any time in a taxation year a benefit is conferred on a shareholder, or on a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by
(a) the reduction of the paid-up capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or on the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,
(b) the payment of a dividend or a stock dividend,
(c) conferring, on all owners of common shares of the capital stock of the corporation at that time, a right in respect of each common share, that is identical to every other right conferred at that time in respect of each other such share, to acquire additional shares of the capital stock of the corporation, and, for the purpose of this paragraph,
(i) where
(A) the voting rights attached to a particular class of common shares of the capital stock of a corporation differ from the voting rights attached to another class of common shares of the capital stock of the corporation, and
(B) there are no other differences between the terms and conditions of the classes of shares that could cause the fair market value of a share of the particular class to differ materially from the fair market value of a share of the other class,
the shares of the particular class shall be deemed to be property that is identical to the share of the other class, and
(ii) rights are not considered identical if the cost of acquiring the rights differs, or
(d) an action described in paragraph 84(1)(c.1), (c.2) or (c.3),
the amount or value thereof shall, except to the extent that it is deemed by section 84 to be a dividend, be included in computing the income of the shareholder for the year.
[16] The Minister wants to use this subsection to include in the Appellant's income for the 1998 taxation year the $39,000.00 received by Brunswick from Eagle on January 26, 1998. None of the conditions or exceptions referred to in this subsection are applicable here.
[17] The taxability asserted by the Minister is based upon a chain of events which has its origin in the purported purchase of an excavator by Riverside. I accept as a fact that Riverside never purchased this excavator. The auditor's inquiries revealed that it had been sold in the United States and not in Canada. The Appellant himself testified that the excavator had not been purchased by Riverside as late as January 1998. Because no excavator was purchased, Riverside never became liable to pay the tax pursuant to Part IX of the Excise Tax Act. Therefore it was never entitled to claim the input tax credit of $46,000.00 which it claimed in October 1997 and received in January 1998. The Appellant's only explanation of why, on October 1, 1998 he filed a return claiming this input tax credit for an excavator that had not been purchased was that he thought that was usual and good practice to file for it before the tax was paid.
[18] The Appellant was a 50% shareholder of Riverside and testified he was involved 100% in all decision-making in that company. Several weeks after this amount was received from the Government and deposited to Riverside's corporate account, the Appellant, on January 26, 1998, directed and authorized the issuance of, and signed a cheque in the amount of $46,000.00 from Riverside to Eagle.
[19] There were no documents or any other type of evidence produced during the hearing which would connect the issuance of this cheque to a business transaction or any type of transaction between these corporate entities, other than the Appellant's vague, unacceptable and unsubstantiated claims of the sale of his shares to Eagle.
[20] His evidence was that he had divorced himself from Riverside about mid-January 1998 and that the only reason he was able to sign this cheque was because the corporate account had not been signed over to Eagle, which had supposedly purchased his shares. According to the Appellant, by writing this cheque he was merely emptying the account and providing the money in the corporate account to the new owner, Eagle. However I simply cannot accept his evidence. He brought nothing to Court to substantiate this claim other than a Notice of Change of Director form which says nothing about his status as a shareholder in Riverside in January 1998. I did provide him with an opportunity to seek additional documentary evidence during the hearing, but he produced nothing further. It strikes me as a very odd sort of way to do business even if one is conducting one's business affairs informally.
[21] After Eagle received the $46,000.00, it immediately, on the very same day, issued a cheque for $39,000.00 to Brunswick, another corporate entity for which by his own admission, he was the directing mind and sole decision-maker. Brunswick credited this amount to the Appellant as a loan payable. Subsequently, commencing again on the same day, January 26, 1998, cheques began issuing to the Appellant, as referenced in the working papers "for shareholder loan".
[22] There is no evidence before me to support any of the Appellant's claims. The handwritten invoice produced by the Appellant (Exhibit A-5), to substantiate the exchange of the $39,000.00 between Eagle and Brunswick, listed the items sold by Brunswick to Eagle in a very different and unique manner, unlike that which normal business practice would dictate; for example the least expensive item (the Toyota vehicle) worth $9,000.00 was listed beside "total sale price", with the remaining items (hoist, tools and boat) valued at $30,000.00 listed in a box on the invoice entitled "remarks". This alone is not sufficient to invalidate this invoice but according to the auditor's evidence, which I accept, a search of Eagle's corporate records disclosed no such purchases. The Appellant's corporate records were never made available either to the auditor or the Court for review. There was no other documentation except this invoice produced by the Appellant to suggest that Eagle had actually purchased these items and, according to the auditor, Eagle's books contained no such reference.
[23] Once the $39,000.00 had been transferred by Eagle to Brunswick, four cheques totalling $16,000.00 and referenced as shareholder's loans were issued by Brunswick to the Appellant between January 29, 1998 and April 18, 1998. The working paper lists other cheques which were issued to the Appellant in 1998 for various amounts but they were not referenced as shareholder loans and the evidence was unclear as to what these cheques were for. If all of the cheques issued to Bill Peddle in this time period were in respect to the repayment of shareholder loans as he contends, then they should have all been so referenced.
[24] There is no doubt that the $16,000.00 which the Appellant received from Brunswick via four cheques is taxable to him as a benefit conferred pursuant to subsection 15(1). Regardless of how this scheme evolved, the $39,000.00 clearly found its way into the corporate account of Brunswick and as a result is a shareholder benefit to the Appellant. Without supporting documentation from the Appellant, I accept the Minister's assumptions that the funds are traceable back to Riverside. Although there is no clear evidence of the additional $23,000.00 being paid by Brunswick to the Appellant, it is clearly a debt created by the company to the Appellant for no consideration and therefore subsection 15(1) is engaged and the benefit is considered conferred.
[25] The Minister's assessment of the shareholder benefit under subsection 15(1) is based on the premise that the Appellant set up a scheme whereby an input tax credit based on a false claim filed by Riverside was transferred from Riverside to Brunswick through Eagle and eventually dispersed to the Appellant via payment of shareholder loans. I think it makes very little difference where this $46,000.00 originated, although all of the evidence points to it arising from the input tax credit claimed by Riverside. I think it is sufficient here that the funds left Riverside and, with totally inadequate or absolutely no supporting records and documents, flowed into Eagle and from Eagle found its way into Brunswick's account and eventually, some or all of it, to the Appellant.
[26] Before I deal with the next issue, I believe a few comments are necessary in respect to two of the Respondent's assumptions. These assumptions at paragraph 8(m) and (n) state:
8. In so reassessing the Appellant, the Minister relied on, inter alia, the following assumptions:
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(m) Dana Atkinson received a cheque issued by Riverside and signed by the Appellant, dated September 30, 1997, in the amount of $5,000.00 purportedly as a deposit for the excavator;
(n) Dana Atkinson issued a cheque dated September 27, 1997 payable to the Appellant and Brunswick in the amount of $4,400.00 as reimbursement of the deposit amount on the excavator;
[27] These assumptions were demolished at the hearing by the Respondent's own exhibits. The cheque referred to in assumption (m) was actually issued by River Road Auto (Tab 9, Exhibit R-1) and not by Riverside. The cheque referred to in assumption (n) was made payable to the Appellant and River Road Auto (Tab 8, Exhibit R-1) and not to the Appellant and Brunswick. These assumptions were meant to implicate Dana Atkinson in the preparation of the false excavator invoice between Riverside and Big D Machinery. Although these two specific assumptions failed, I do not view that failure as fatal to the Minister's remaining assumptions. Even if Dana Atkinson had never been involved and the $39,000.00 had flowed into Brunswick's coffers by more legitimate avenues than utilized here, the Appellant in accessing the monies would have run afoul of subsection 15(1).
[28] The appeal will be dismissed as it relates to this first issue.
Issue No. 2
[29] This issue arises when Riverside's cheque for $46,000.00 is deposited to Eagle's account and Eagle uses some of these funds to satisfy a debt of $7,000.00 owed to it by Brunswick in respect to a Ford Escort vehicle. The Minister submitted that pursuant to the Appellant's direction, Riverside paid $46,000.00 to Eagle and from this amount further directed Eagle to deduct the balance Brunswick owed Eagle respecting the purchase of a Ford Escort and to pay the remaining $39,000.00 to Brunswick. In satisfying Brunswick's indebtedness to Eagle, the Respondent argued that subsection 15(1) applied to properly include the $7,000.00 in his income.
[30] Subsection 15(1) does not apply here. I conclude that it was not a shareholder benefit because Brunswick received the benefit, not the Appellant and Brunswick was not a shareholder of Riverside.
[31] In the alternative the Respondent argued that subsection 56(2) applied to catch this $7,000.00, which required the Appellant to include it in his income.
[32] Subsection 56(2) states:
56. (2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person (other than by an assignment of any portion of a retirement pension pursuant to section 65.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in section 3 of that Act or of a prescribed provincial pension plan) shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to the taxpayer.
The Department of Finance Technical Note to this subsection makes it clear that it was not intended to make an amount taxable that might not otherwise be so. It reads:
1987 TN: Subsection 56(2) provides that where a taxpayer directs or concurs in the payment of an amount to another person, that amount shall be included in the taxpayer's income where, if it had been paid to him, it would have be so included. ...
In other words, subsection 56(2) is meant to operate in the circumstances where a taxpayer attempts to avoid paying tax on an amount that would otherwise be taxable to him under one of the other provisions of the Act, by directing that the amount be paid to another taxpayer instead. Where a taxpayer directs an amount taxable to him to another person, he cannot escape taxability on that amount because this subsection will come into play. However, the amount so directed must have been taxable under one of the other provisions of the Act before subsection 56(2) will apply.
[33] Cattanach, J. in Fraser Companies Ltd. v. The Queen, 81 DTC 5051 set out the following four preconditions that must be satisfied in order for subsection 56(2) to apply:
1. There must be a payment or transfer or property to a person other than the taxpayer.
2. The payment or transfer is pursuant to or with the concurrence of the taxpayer.
3. The payment or transfer must be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer desired to have the benefit conferred.
4. The payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person.
[34] All four criteria are satisfied in the present case because:
(1) Property was transferred from Riverside to Brunswick through Eagle Auto Sales.
(2) The payment was made pursuant to or with the concurrence of the Appellant.
(3) The payment was made for the benefit of Brunswick.
(4) The payment would have been taxable to the Appellant if it had been received by him.
[35] However since there is no requirement that a taxpayer actually receive or be entitled to the payment in order to be held liable under subsection 56(2), the Federal Court of Appeal added a fifth element to the test in order to prevent the Minister from using it to tax the same amount twice. [M.N.R. v. Bronfman, [1965] C.T.C. 378, at paragraph 15.] In Smith v. Canada, [1993] F.C.J. No. 740 at paragraph 22 Mahoney, J. quoted with approval the following comments of Marceau, J. in Winter v. R.:
. . . the validity of an assessment under subsection 56(2) of the Act when the taxpayer had himself no entitlement to the payment made or the property transferred is subject to an implied condition, namely that the payee not be subject to tax on the benefit he received.
And that:
. . . when the doctrine of constructive receipt is not clearly involved, because the taxpayer had no entitlement to the payment being made or the property being transferred, it is fair to infer that subsection 56(2) may receive application only if the benefit conferred is not directly taxable in the hands of the transferee. Indeed, as I see it, a tax-avoidance provision is subsidiary in nature; it exists to prevent the avoidance of a tax payable on a particular transaction, not simply to double the tax normally due nor to give the taxing authorities an administrative discretion to choose between possible taxpayers. [Outerbridge Estate v. Canada (subnom Winter v. R.), [1991] C.T.C. 113 at 117-118.]
[36] In other words, subsection 56(2) should not apply where it results in double taxation. The applicability of this so-called fifth condition was confirmed in both the Supreme Court decision of Neuman v. The Queen, 98 DTC 6297 (S.C.C.) and the Federal Court decision of The Queen v. Ferrel, 99 DTC 5111 (F.C.A.).
[37] There was no evidence before me which would indicate whether or not Brunswick paid income tax on the $7,000.00 benefit which it received when its debt to Eagle was paid for nil consideration. It is unlikely Brunswick paid tax. But if it paid tax, the application of subsection 56(2) would result in the inappropriate double taxation which the Federal Court spoke of.
[38] I would allow the appeal in respect to this issue as the Respondent simply failed to address let alone prove all necessary preconditions to the application of subsection 56(2).
Issue No. 3
[39] The Minister alleges that Brunswick paid $3,600.00 to the Appellant as interest on a shareholder loan and that the Appellant failed to report this amount in computing his income.
[40] Paragraph 12(1)(c) states:
12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:
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(c) Interest - subject to subsections (3) and (4.1), any amount received or receivable by the taxpayer in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income) as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer's income for a preceding taxation year;
[41] At page 3 of Tab 14 of Exhibit R-1, the income tax return for 504897 New Brunswick Ltd., Brunswick expensed $3,600.00 as interest on a shareholder loan. The Appellant argued that although this amount did appear on his books as an interest expense payable to him it was an accounting error and was therefore never paid to him.
[42] The onus is on the Appellant to overcome the assumptions and he did not do so here. Mere allegations without appropriate records and books to substantiate his claim cannot be accepted in circumstances and facts such as these which were set in motion to deceive.
[43] Since he has not discharged the onus which is upon him the appeal as it relates to this issue will be dismissed.
Issue No. 4:
[44] The Minister imposed penalties here because through a series of events the Appellant knowingly or under circumstances amounting to gross negligence appropriated funds from Riverside to his own use and to the use of Brunswick, which he controlled.
[45] The onus here shifts and is clearly upon the shoulders of the Respondent.
[46] Subsection 163(2) states:
163. (2) Every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return"), filed or made in respect of a taxation year for the purposes of this Act, is liable to a penalty . . .
[47] The false statement made in respect of the purchase of the excavator was for the purpose of obtaining an input tax credit under the Excise Tax Act, and is therefore not relevant to the assessment of penalties under subsection 163(2) of the Income Tax Act. However, the Appellant has also clearly and knowingly participated in, assented to and acquiesced in the making of other false statements in respect of amounts appropriated from Riverside and diverted to his own use and the use of Brunswick. Depending on how the Appellant directed Brunswick to treat the $7,000.00 amount referred to in issue 3, he may have also participated in a false statement in this respect. There is simply no evidence in this regard.
[48] The Appellant's actions here go far beyond a mere oversight or the failure to use reasonable care. The Appellant was involved in a number of companies and businesses. He produced no reasonable documentation to support his claims. There is much more than mere inadvertence here. The Appellant's conduct is both reckless and wilful. The Minister was justified in assessing the penalties pursuant to subsection 163(2) for the 1998 taxation year.
Signed at Ottawa, Canada, this 19th day of March 2004.
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"Diane Campbell" |
Campbell, J.
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CITATION: |
2004TCC226 |
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COURT FILE NO.: |
2001-3563(IT)G |
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STYLE OF CAUSE: |
William G. Peddle and Her Majesty the Queen |
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PLACE OF HEARING: |
Fredericton, New Brunswick |
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DATE OF HEARING: |
January 15, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Diane Campbell |
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DATE OF JUDGMENT: |
March 19, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Marcel Prevost |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |