Date: 19971027
Dockets: 95-2093-IT-I; 95-2094-IT-I
BETWEEN:
MURIELLE DUCHESNEAU, DENIS DUCHESNEAU,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Teskey, J.T.C.C.
[1] The Appellants herein appeal their assessment of income tax for the year 1991. Both Appellants elected the informal procedure and both appeals were heard on common evidence.
Issue
[2] The two issues before me herein are:
1- Did either or both Appellants receive a benefit of $20,000 from a corporation, the shares of which were equally owned by the Appellants, contrary to subsection 15(1) of the Income Tax Act (the “Act”);
and, if so;
2- Are either or both Appellants liable for penalties assessed pursuant to subsection 163(2) of the Act and interest thereon.
Facts
[3] The parties agreed at the opening of the hearing to the following facts :
1) In 1988 Denis Duchesneau (“DD”) ostensibly purchased land and building known as the rabbitry (the “rabbitry”) for the sum of $30,150.00. Although title was registered in the name of DD personally he actually purchased the rabbitry in trust for 657461 Ontario Inc. (the “corporation”) a company the shares of which were owned 50:50 by DD and his wife Murielle Duchesneau (“MD”). The funds for the purchase came from the corporation.
2) During the years following the acquisition of the rabbitry the corporation reflected the rabbitry on its balance sheet. Capital Cost Allowance was claimed on the rabbitry in arriving at the taxable income of the Corporation.
3) On July 19th, 1991 the corporation disposed of a portion of the rabbitry building to MY-T Fresh Inc. an arm’s length corporation (the “purchaser”), for the sum of $55,000.00. The proceeds of disposition were $40,000.00 cash which was received on closing and a note payable December 20th, 1991 for $15,000.00. The purchaser physically removed a portion of the rabbitry building and transported it to another location thereby leaving the remaining part of the building and the land which, of course, continued to be owned by DD in trust for the corporation.
4) The $40,000.00 proceeds of disposition of the rabbitry were deposited on July 19th, 1991 by DD in Northern Credit Union account number 0025-173-(08) (“(08)”).
5) The purchaser defaulted on the terms of the agreement and the note was never paid and the corporation reclaimed and repaired what remained of the buildings.
6) The disposition of the rabbitry was not reported on the corporate tax return of the corporation for the year ending April 30th, 1992. The asset accounts of the corporation therefore continued to reflect the ownership of the rabbitry at its Undepreciated Capital Cost.
7) Revenue Canada audited the corporation and added to its income for the fiscal year ending April 30th, 1992 the unreported proceeds of disposition relating to the rabbitry. Revenue Canada also reassessed MD and DD pursuant to section 15(1) of the Income Tax Act of Canada on the basis that the deposit of the proceeds of disposition into (08) constituted receipt of a benefit by MD and DD from the corporation. Revenue Canada also assessed, pursuant to section 163(2) of the Income Tax Act, penalties on both MD and DD.
[4] Over and above these agreed facts, both Appellants gave evidence as well as their accountant, Brian Webb (“Webb”). From their testimony, I find the following as fact:
(a) DD has a grade 8 education;
(b) MD has a grade 7 education;
(c) DD is a hardworking hands on type of person working long days away from the home office in the bush, operating his logging business, who relied on MD to do all the bookkeeping and banking for the corporation, as well as his personal banking;
(d) MD keeps and maintains all the records of the corporation and the family’s personal finances and relies heavily on Webb;
(e) At the start of 1991, when G.S.T. came into effect, on the recommendation of Webb, a savings account ((07)) was opened and all G.S.T. payments received was paid into this account. This account only contained business money and no personal money;
(f) DD and MD also had a personal savings account ((08)), which held their own personal money;
(g) The $40,000 proceeds from the sale of the rabbitry building was received by DD in the form of a cheque payable to him personally;
(h) DD handed the cheque to MD;
(i) MD deposited the $40,000 cheque into the (08) account;
(j) Shortly thereafter, MD was advised by the Credit Union that the larger the amount on deposit, the larger the interest rate would be applied thereto. As a result, the (07) account was transferred into the (08) account;
(k) After the consolidation of the (07) account into the (08) account, the corporation required an injection of $20,000. A cheque was written on the (08) account and the deposit book for the corporation has the notation there as “loan”;
(l) DD relied upon his wife MD to handle all his and the corporation’s financial matters;
(m) MD relied on Webb to prepare all tax returns and keep everything in proper order;
(n) Webb, at the year-end, could not reconcile the money in the (08) account. On enquiry from MD, the accountant was advised that personal funds were in the (08) account;
(o) The accountant at the year-end was never advised of the sale of the rabbitry, nor of the receipt of the $40,000 by DD. The corporation continued to depreciate the rabbitry and the $40,000 was not dealt with in any way.
Relevant Law
[5] The relevant portion of subsection 15(1) of the Act reads as follows:
Where in a taxation year, a benefit has been conferred on a shareholder ... by a corporation otherwise than by
(a) not applicable
(b) not applicable
(c) not applicable
(d) not applicable
the amount or value thereof shall, ... be included in computing the income of the shareholder for the year.
[6] Rowe, D.J.T.C.C. in Robinson v. M.N.R., 93 DTC 254, said at page 257:
Subsection 15(1) contemplates an appropriation for the benefit of a shareholder and/or a benefit or advantage conferred on a shareholder by a corporation. The Appellant was the sole shareholder of the corporation and must either be responsible for taking unto himself or setting aside for a special purpose something of value from the corporation or, as the directing mind of the corporation, be responsible for the bestowing or granting of a benefit, and at the same time in his personal capacity agree to accept it and adapt it for his own use. Although it is the same mind operating in both instances, the Appellant while wearing his shareholder's hat did nothing consistent with taking, or appropriating a benefit, and, as Director and President, when exercising control over the corporation, did not intend to have conferred anything on himself, and as a putative recipient, he was an unwilling and uninformed beneficiary. The accountants, in erroneously recording a transaction, were not acting pursuant to any direction to achieve such an end on behalf of either the corporation or the Appellant as a shareholder. Clearly, the record keeping was not in accord with the facts and ran counter to the intent of the Appellant at the outset when he undertook to correct an error by depositing into the corporate bank account funds which truly belonged to it. He was discharging his duty as trustee made necessary by the inadvertent act of the payor in making him the payee of the cheque. In M.N.R. v. Pillsbury Holdings Limited, 64 DTC 5184, Cattanach, J. of the Exchequer Court of Canada (as it then was) considered the application of subsection 8(1) of the Act, which for the purposes of the case at bar, is identical to the current subsection 15(1) of the Act. At page 5187, Cattanach, J. stated:
In applying paragraph (c) full weight must be given to all the words of the paragraph. There must be a "benefit or advantage" and that benefit or advantage must be "conferred" by a corporation on a "shareholder". The word "confer" means "grant" or "bestow".
In order for there to have been an appropriation, the Appellant must have "appropriated". Black's Law Dictionary, Sixth Edition, defines "appropriate" as:
To make a thing one's own; to make a thing the subject of property; to exercise dominion over an object to the extent, and for the purpose, of making it subserve one's own proper use or pleasure.
It is apparent that the words used in subsection 15(1) refer to some form of action with a strong component of intent and certainly cannot be seen to embrace an event that is the result of mutual mistake between the parties, that is, the shareholder and the corporation, when the mistake is the result of an act or omission of a third party operating in good faith but on a faulty premise.
The question of benefit or advantage or no benefit or advantage is a question of fact to be dealt with in light of the success or otherwise of the Appellant having been able to discharge the assumed facts upon which the assessment rests. (See Kennedy v. M.N.R., 73 DTC 5359 at 5361.)
[7] My colleague Mogan, T.C.C.J., in Chopp v. The Queen, 95 DTC 527, when dealing with the Robinson decision, said at page 532:
I would not go as far as Judge Rowe in stating that the words used in subsection 15(1) refer to some form of action with a strong component of intent. I think a benefit may be conferred within the meaning of subsection 15(1) without any intent or actual knowledge on the part of the shareholder or the corporation if the circumstances are such that the shareholder or corporation ought to have known that a benefit was conferred and did nothing to reverse the benefit if it was not intended. ...
[8] My colleague McArthur, J.T.C.C., in Smith v. The Queen, 96 DTC 1638, after reviewing the Robinson decision and quoting Mogan, J.T.C.C., in Chopp, said at page 1640, wherein he agreed with Mogan, T.C.C.J.:
I agree with this reasoning and apply it to the present case. I find that there was not a genuine bookkeeping error. The company records were not kept to an acceptable level. Surely, the taxpayer has to be held responsible for his own actions. ...
[9] My colleague Bowman, T.C.C.J., in Long v. The Queen, released July 24, 1997, said:
In M.N.R. v. Pillsbury Holdings Ltd., 64 DTC 5184 Cattanach J. in dealing with the predecessor to subsection 15(1), said at p. 5187:
In applying paragraph (c) full weight must be given to all the words of the paragraph. There must be a “benefit or advantage” and that benefit or advantage must be “conferred” by a corporation on a “shareholder”. The word “confer” means “grant” or “bestow”. Even where a corporation has resolved formally to give a special privilege or status to shareholders, it is a question of fact whether the corporation’s purpose was to confer a benefit or advantage on the shareholders or some purpose having to do with the corporation’s business such as inducing the shareholders to patronize the corporation. If this be so, it must equally be a question of fact in each case where the Minister contends that what appears to be an ordinary business transaction between a corporation and a shareholder is not what it appears to be but is in reality a method, arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder.
I do not see how it can be said that a bookkeeping error of which the sole shareholder was not aware and which he did not sanction and that was not in accordance with the company’s established practices constitutes “in reality a method, arrangement or device for conferring a benefit or advantage on the shareholder qua shareholder”.
Ms. Levesque, counsel for the respondent, very fairly referred me to a number of decisions of this court, in particular Robinson v. M.N.R., 93 DTC 254, Simons v. M.N.R., 85 DTC 105, and Chopp v. The Queen, 95 DTC 527 where erroneous bookkeeping entries were held not to be an appropriate basis for taxation. I understand that the Robinson and Chopp cases have been appealed to the Federal Court. Broadly speaking these cases support the conclusion I have reached and I think that as a matter of policy the judges of this court should strive, to the extent possible, to achieve consistency. Each case under subsection 15(1), however, as stated in Pillsbury, turns on its own facts and I find as a fact that no benefit was conferred on the appellant qua shareholder within the meaning of subsection 15(1) of the Income Tax Act.
Analysis
[10] A taxpayer who mixes business money with personal money does so at his or her own risk. The $40,000 cheque was deposited into a personal account, namely the (08) account, when they had the (07) account, which was exclusively the corporation’s money, even though the (07) account was in DD’s and MD’s personal names. I am satisfied that this act alone acts as an appropriation of the $40,000 from the corporation to DD and MD. However, herein there is the further evidence of appropriation by DD and MD that when the $20,000 cheque was made to the corporation, MD wrote on the deposit slip “loan” and “not” some notation, such as “transfer of corporate funds”.
[11] The taxpayers herein must take responsibility for their actions. DD relied upon MD and therefore is responsible for what MD did. MD may rely heavily on Webb, but at the end of the day, the onus is on her to fully inform Webb, either orally or by proper bookkeeping records. Obviously, enough bookkeeping was being performed by MD to allow Webb to prepare financial statements and prepare tax returns for all concerned and to properly process the G.S.T. and their returns. MD made no attempt to leave a paper trail for the accountant to deal properly with the $40,000 cheque. I find that the $40,000 cheque was deliberately deposited into a joint savings account, which at the time, contained only personal funds.
[12] I am thus satisfied that both DD and MD each received a benefit from the corporation in the 1991 taxation year of $20,000 and in this regard, the appeal is unsuccessful.
[13] The second issue before me is the penalties assessed pursuant to subsection 163(2) of the Act.
[14] In order for penalties to be assessed pursuant to subsection 163(2), the taxpayer must either:
(i) knowingly, or
(ii) under circumstances amounting to gross negligence;
make a false statement or omission in their return;
[15] The relevant portion of subsection 163(2) of the Act reads:
Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, 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 as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50% of the total of
(a) the amount, if any, by which ...
[16] With MD and DD living a long distance away from Webb, I am not satisfied on the evidence before me that MD or DD knowingly made a false statement or omission on their tax returns.
[17] There is no question that DD, MD and their accountant were all negligent. Their actions herein do not amount to gross negligence.
[18] The appeals are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that all penalties and the interest thereon are to be deleted.
"Gordon Teskey"
J.T.C.C.