BETWEEN:
and
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Appeal heard on August 15, 2006 at Belleville, Ontario
Before: The Honourable Justice T. O'Connor
Appearances:
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JUDGMENT
The appeal from the reassessment made under the Income Tax Act ("Act") for the 2000 taxation year is allowed, with costs, if any, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 8th day of September, 2006.
BETWEEN:
ROBERT PRESTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] This appeal relates to the 2000 taxation year. In that year the Appellant ("Appellant") owned 50% of the shares of Heritage Craft Studio Inc., ("Heritage"). His ex-spouse, Susan ("ex-spouse") owned the other 50%.
[2] The Reply to the Notice of Appeal sets forth the basic facts alleged by the Respondent (the "Minister").
...
8. In confirming the reassessment for the 2000 taxation year, the Minister made the following assumptions of fact:
a) Heritage issued a T4 information slip to the Appellant in the amount on $12,343 for the 2000 taxation year;
b) the Appellant and his ex-spouse purchased Heritage in 1998;
c) the Appellant owned 50% of the shares and his ex-spouse owned the remaining 50%;
d) the acquisition of Heritage's shares was financed with a loan from the Royal Bank and a note payable to the seller;
e) the payments of the 2 loans were drawn from Heritage's bank account;
["2 loans" apparently means 1 loan to the Appellant and 1 loan to his ex-spouse]
f) the Appellant's share of the payments for the 2 loans is $12,343 for the 2000 taxation year; and
g) the Appellant was a shareholder of Heritage from the date of purchase in 1998 to July 31, 2001.
B. ISSUE TO BE DECIDED
9. The issue to be decided is whether Heritage conferred a benefit on the Appellant.
C. STATUTORY PROVISIONS, GROUND RELIED ON AND RELIEF SOUGHT
10. He relies on subsections 15(1) and 248(1) of the Income Tax Act (the "Act").
11. He submits that the payments of the 2 loans were paid by Heritage and therefore a benefit was conferred on the Appellant in the amount of $12,343 pursuant to subsection 15(1) of the Act.
12. He submits that the Appellant owned 50% of the shares of Heritage and the acquisition of the shares was financed with a loan from the Royal Bank and a note payable to the seller and the payments for those loans were paid by Heritage on behalf of the shareholders.
[3] It would appear that if the Appellant borrowed from the Royal Bank an amount which with interest totalled $12,343.00 and used that to acquire the 50 shares of Heritage and if Heritage in 2000 paid the $12,343.00 to satisfy the Appellant's borrowing from the Royal Bank, then a shareholder benefit was conferred and the amount of the benefit was correctly included by the Minister in the Appellant's income in 2000 under section 15(1) of the Act.
[4] The only person to give evidence was the Appellant. He stated categorically that he was not the borrower from the Royal Bank but rather the actual borrower was Heritage and that the Appellant and his ex-spouse were merely guarantors. This statement has not been contradicted.
[5] The Appellant asserts further that Heritage had no authority to discharge any of the Appellant's obligations, presumably either as a borrower or guarantor and that if Heritage purported to discharge any of the Appellant's obligations it acted illegally. He states that he as shareholder, director and the president of Heritage never approved any such action. He asserts further that the whole process was a contrivance by his ex-spouse and Heritage, which she controlled, so that Heritage would repay the loan to the Royal Bank, thus freeing herself and the Appellant of any obligations to the Bank.
[6] Counsel for the Minister, (no witnesses were brought forward by the Minister) produced Exhibit R-1. It is an Agreement evidencing the purchase by the Appellant and his ex-spouse from Nancy Shute, as vendor of all of the 100 common shares of Heritage. The Agreement is dated September 1, 1998 and the closing date was fixed for September 4, 1998.
[7] Exhibit R-2 issued under the Corporations Information Act confirms that the Appellant was a director and president of Heritage having been appointed September 4, 1998 and that his ex-spouse was a director and secretary of Heritage as of that date.
[8] Clauses 2.2 and 2.3 of the Share Purchase Agreement, Exhibit R-1, provide as follows, (the word "Purchaser" referring to both the Appellant and his ex-spouse):
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2.2 Purchase Price.
The purchase price (the "Purchase Price") payable by the Purchaser to the Vendor for the Purchased Shares shall be the sum of TWENTY-ONE THOUSAND DOLLARS ($21,000.00) plus the value of (1) prepaid show space relating to an exhibit in London, Ontario from November 6, 1998, through to November 8, 1998, in the total amount of $1,039.50, which includes advertising space; and (2) book inventory of the Corporation at the time of closing based on the Corporation's cost with allowance for damaged or unusable inventory. The parties acknowledge and agree that the calculation of the Purchase Price is based on the value of those assets which are to be owned by the Corporation at the time of closing and listed in Schedule B attached hereto.
2.3 Payment of Purchase Price.
The Purchase Price will be paid and satisfied as follows:
(a) An unsecured promissory note in the principal amount of $20,000.00, together with interest at the rate of eight (8) per cent per annum and repayable in equal quarterly principal payments of $1,000.00, plus accrued interest, commencing four months following the date of closing. The outstanding principal balance, together with accrued interest, may be paid at any time without notice or bonus.
(b) At the Closing Time, the Purchaser will pay to the Vendor, by certified cheque or bank draft, the balance of the Purchase Price, including adjustments.
[9] The Promissory Note and Schedule "B" read as follows:
PROMISSORY NOTE
Cdn. $20,000.00 September 4, 1998
FOR VALUE RECEIVED, the undersigned hereby acknowledge themselves indebted to and hereby promise to pay to Nancy Shute at the Village of Greenwood, in the Province of Ontario, the sum of $20,000.00, bearing interest at the rate of 8 percent per annum, payable in equal quarterly instalments of $1,000.00 commencing four months following the date of this Promissory Note, together with accrued interest, and thereafter quarterly until the principal balance together with accrued interest is paid in full.
The outstanding principal balance, together with accrued interest, may be prepaid at any time without notice or bonus.
IN WITNESS WHEREOF the undersigned have executed this Promissory Note this 4th day of September, 1998.
Robert Preston
Sue Preston
SCHEDULE "B"
List of Assets
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Description of Asset |
Value |
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Equipment .......................................................... |
$1,000.00 |
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Inventory ............................................................ |
approx. 68,000 - $75,000 |
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Prepaid Expenses - (exhibition space) .......................... |
1,039.50 |
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Intangibles (goodwill, customer lists, telephone number) .... |
20,000.00 |
[10] As part of the settlement of the divorce proceedings between the Appellant and his ex-spouse the Appellant's 50 shares of Heritage were transferred to the ex-spouse as a result of an Order of the Ontario Superior Court of Justice, Family Court, made by the Honourable Madam Justice C. J. Robertson on July 30, 2001 (Exhibit R-2). Also to be transferred by the Appellant to his ex-spouse pursuant to that Order was the interest of the Appellant in a partnership named SaggiTaurus. As result of the transfers the Appellant was given a credit in the sum of $33,727.50 against the Judgment and Orders for costs and interest owing by the Appellant to his ex-spouse in the divorce proceedings.
[11] The calculation of the $12,343 according to counsel for the Minister is explained as follows:
Exhibit R-3 contains a document entitled "Promissory Note to Nancyfor Heritage" and 4 statements of the Royal Bank addressed to Heritage Craft Studio Inc. The Promissory Note identifies four dates of January, April, July and October, 2000 with respective amounts besides these dates of $1,320.00, $1,300.00, $1,280.00, $1,260.00 - (total $5,160). Someone has added handwritten notes that these amounts were cashed by Nancy Shute, the Vendor of the shares.
Exhibit R-7 contains 11 statements of the Royal Bank addressed to Heritage Craft Studio Inc., showing with respect to loan number 77069029, 12 payments of $1,250 each in 2000 - (total $15,000) and 12 interest payments totalling $4,526.28. [Exhibit R-7 is missing the last (December) payment of $1,250 plus interest but it appears it was paid]. If we total the principle amount $15,000 plus the interest payments of $4,526.28 plus the $5,160 mentioned above the total is $24,686.28 one-half of which is $12,343.14.
Exhibit R-4 is a copy of the T4 statement issued by Heritage to the Appellant for the 2000 taxation year showing "employment income" of $12,343.14. Attached to Exhibit R-4 is a calculation, apparently prepared by an accountant, which shows the calculation of the said above mentioned figures totalling $12,343.14.
Exhibit R-5 is a letter of the Royal Bank addressed to a Mr. William Carruthers, Area Regional Manager, Legal Aid, Ontario, confirming among other things that the balances are as indicated below:
• $61,352 in the name of Robert and Susan Preston
• $25,000 in the name of Heritage Craft Studios
Exhibit R-6 is a letter of the Royal Bank dated July 26, 2001 addressed "TO WHOM IT MAY CONCERN" referring to Robert and Susan Preston - loan 77069029 and confirming its' outstanding principal balance of the loan at caption was $33,750.00.
[12] Counsel for the Minister submitted all of these exhibits in an effort to prove that the allegations in the Reply giving rise to the taxable benefits are as stated in the Reply.
[13] For the record the Appellant and his ex-spouse were separated February 20, 1999 and were divorced subsequent to a divorce action on May 26, 1999.
[14] Exhibit A-2 being a letter from W. Paul Tierney, CGA, Teirney, Simpson and Prytula Certified General Accountants, shows the fair market value as of November 30, 1998 of the 100 shares of Heritage at between $67,455 to $85,000.
[15] There remains little doubt that the separation and divorce proceedings between the Appellant and his ex-spouse were acrimonious. It appears further that the ex-spouse was represented by competent counsel whereas the Appellant was represented by Legal Aid. It also appears that the Appellant, at a point in time was under restraint orders and had no access to the matrimonial property where the business of Heritage was carried on. Further, he had nothing to do with Heritage. His ex-spouse ran the business and presumably dealt with the Royal Bank and the accountants.
[16] There are certainly indications that monies flowed from the Royal Bank and/or Heritage which may have discharged the obligations of the Appellant and his ex-spouse but there is no solid evidence of any actual loan by the Royal Bank to the Appellant. There is no promissory note, nor loan agreement, nor pledge of shares between the Royal Bank and the Appellant, i.e. no normal bank documents. The only documents produced are as described above and consist mainly of the Royal Bank's unilateral statements attributing loan payments. They do not prove that the Appellant was a borrower. Further, the Appellant states that Heritage was the borrower and he was merely a guarantor. The arrangement was not clear. By far the main component of the price for the business was the inventory (see Schedule "B" above). What appears to have happened is that it was actually Heritage that purchased the inventory from Nancy Shute and borrowed from the Royal Bank for that purpose. In any event the Appellant was not the borrower.
[17] I conclude that the Appellant was not the borrower for the following reasons. The basic loan documents either do not exist or were not produced. The documents that were produced do not prove a loan to the Appellant. The T-4 statement issued by Heritage is not in itself proof of a loan repayment nor a benefit, especially when it was issued by Heritage at a time when Heritage was controlled by the Appellant's ex-spouse. In short the proof is missing that the Royal Bank loaned to the Appellant and that Heritage paid off that loan. The only person to testify was the Appellant and he says there was no loan to him. I have no reason to doubt the credibility of the Appellant. No direct loan relationship between the Bank and the Appellant has been proved and no direct relationship by alleged payments by the Bank or by Heritage has been established as discharging any possible loan of the Appellant. A subsidiary argument advanced by the Appellant is that if Heritage can be considered as having paid the Appellant's debt, which the Appellant denies, Heritage had no authority to do so with the result the act was illegal and nul.
[18] On balance and considering all of the evidence I find that there was no benefit conferred by Heritage on the Appellant and thus there is no taxable benefit under section 15(1) of the Act.
[19] Consequently the appeal is allowed with costs, if any.
Signed at Ottawa, Canada, this 8th day of September, 2006.
"T. O'Connor"
O'Connor, J.
STYLE OF CAUSE: ROBERT PRESTON AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Belleville, Ontario
DATE OF HEARING: August 15, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice T. O'Connor
DATE OF JUDGMENT: September 8, 2006
APPEARANCES:
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Gatien Fournier |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada