Date: 20000110
Dockets: 1999-2511-IT-I; 1999-2512-EI; 1999-2513-CPP
BETWEEN:
THE GRAPHIC EDGE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
BETWEEN:
THE GRAPHIC EDGE INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Weisman, D.J.T.C.C.
[1] In August of 1997, Barry Benjamin and Chris Embree, the shareholders of the Alberta-based Appellant, agreed to sell 50% of their interest in the company to Jim Veldhuis, a trusted employee, and one Kurt Olsen, a friend of Veldhuis who was previously unknown to Benjamin and Embree. A brief agreement was drawn up without benefit of counsel as Benjamin was anxious to join Embree in a new business venture in Ontario.
[2] The agreement as executed by all four parties provides as follows:
"Chris Embree and Barry Benjamin agree to sell 50% shares and Equity of Graphic Edge Inc. to J. Velhuis and Kurt Olsen. In return J. Veldhuis and Kurt Olsen agree to purchase 50% shares and equity for the sum of $180,000 to be paid at a rate of $10,000 per month for 36 months. This sum includes bank loan. Affective [sic] as of September 1, 1997."
[3] Benjamin testified that there was a second oral agreement to the effect that Veldhuis and Olsen would provide the $10,000 per month required by the signed agreement by way of monthly withdrawals from the company's bank account in the amount of $3,000 for each of the four shareholders. Of this amount, $6,800 was to be used to retire the Appellant's outstanding bank loan and $3,200 was to be paid to Benjamin and Embree. The monthly withdrawals were not to be subject to deductions at source for Canada Pension Plan contributions, unemployment insurance premiums, or income taxes. At year's end the parties were to agree how to characterize these monies, whether as dividends, bonuses, shareholders' loans, or otherwise.
[4] It is common ground that no share certificates were ever issued, nor were the company's ledger of shareholders and register of directors amended to reflect the change in ownership. Veldhuis and Olsen were given signing authority on the Appellant's bank account.
[5] The bank loan was duly retired through pre-authorized monthly deductions from the said account. No payments were ever received by Benjamin and Embree, however. When Benjamin inquired approximately once every six weeks, he received assurances that all was well, and that the missing payments were attributable to temporary cash flow problems. He was not unduly concerned since he and Embree felt fully secured with all of the company's shares still registered in their names.
[6] The situation changed dramatically in March of 1998 when Benjamin was advised that Revenue Canada had attached the company's bank account and seized its accounts receivables for failure to remit Canada Pension Plan contributions, unemployment insurance premiums, and income taxes deducted at source. Benjamin returned to Edmonton to find the business closed and all the company's financial records, including its computers and software, missing. It was only with the threat of legal proceedings that he was eventually successful in having some records returned to him. Those records, and others obtained by means of Access to Information proceedings, form the documentation that has been placed before this Court. The records show that Veldhuis and Olsen each drew $3,300 plus $500 car allowance or "advance" in each of the months October, November, and December 1997, and January 1998. In February of 1998 Veldhuis drew his usual $3,300 whereas Olsen took a "final pay" of $2,475 being 75% of $3,300, plus 4% vacation pay in the amount of $938.20.
[7] The company now appeals the assessment by Revenue Canada for Canada Pension Plan contributions, unemployment insurance premiums, and income taxes deducted at source but not remitted, plus applicable penalties and interest for the year 1997.
[8] It is the Appellant's position that since Veldhuis and Olsen were shareholders, in accordance with the oral agreement the monies taken by them were shareholders' loans. The Minister of National Revenue replies that since no shares were ever issued, Veldhuis and Olsen were never shareholders but merely employees. The monies received by them were accordingly remuneration, from which source deductions should have been taken and duly remitted.
[9] I find that the agreement executed by the four parties was a valid and enforceable contract to transfer shares and that Veldhuis and Olsen were accordingly both shareholders as well as employees. The question is how to characterize the monies withdrawn by them from the Appellant company.
[10] The payroll deduction records of the company for the years 1997 and 1998 are somewhat unusual. The company's non-shareholder employees are listed and their monthly salaries and source deductions are recorded and duly totalled. The names Veldhuis and Olsen are entered in different script and while their $3,300 monthly draws are shown as remuneration, and the various deductions duly recorded, these are not entered into the totals otherwise obtained. These entries were apparently made after all the columns had been totalled, necessitating columnar corrections.
[11] It is the Appellant's theory that Veldhuis and Olsen conspired to bring the company down in order to appropriate its goodwill and list of client accounts without payment therefor. They accordingly recorded the shareholders' loans taken by them pursuant to the oral agreement into the company's payroll records ex post facto as remuneration, without remitting the required deductions at source. Revenue Canada was notified, the bank account seized, accounts receivable attached, and the company put out of business. Veldhuis and Olsen then went to work with another company, taking the Appellant's goodwill and customers with them.
[12] Benjamin contends that the monies taken must have been shareholders' loans because the oral agreement between the parties specified that the withdrawals were not to be subject to deductions at source. There is no reason to assume, however, that Veldhuis and Olsen chose to honour their agreements in this one respect while disregarding most others. It is mere conjecture on Benjamin's part how the monies withdrawn from the company were to be characterized.
[13] The only evidence before me in this regard is the Appellant's payroll records however unusual they may be. They record the monies withdrawn by Veldhuis and Olsen as remuneration complete with vacation pay, which necessarily attracts Canada Pension Plan contributions, unemployment insurance premiums, and income tax deductions. The Appellant has accordingly failed to discharge the onus in this matter.
[14] The appeals are dismissed.
Signed at Toronto, Ontario, this 10th day of January 2000.
"N. Weisman"
_________________
D.J.T.C.C.