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Docket: 2002-3018(IT)G |
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BETWEEN: |
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JOSEPH A. WILLIAMS, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on November 23, 2004 at Toronto, Ontario
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Before: The Honourable Justice T. E. Margeson |
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Appearances: |
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Counsel the Appellant: |
Louise R. Summerhill and Kay W. Leung |
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Counsel for the Respondent: |
Carol Calabrese |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are allowed and the assessments of the Minister are vacated.
The Appellant is entitled to costs to be taxed on a party and party basis.
The Appellant is entitled to no other relief.
Signed at Ottawa, Canada, this 21st day of December 2004.
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"T. E. Margeson" |
Margeson J.
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Citation: 2004TCC838 |
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Date: 20041221 |
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Docket: 2002-3018(IT)G |
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BETWEEN: |
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JOSEPH A. WILLIAMS, |
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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
Margeson J.
[1] The parties agreed upon a Partial Agreed Statement of Facts as follows:
A. CORPORATE STRUCTURE OF THE GROUP
1. The Appellant operated a group of companies that were in the business of manufacturing rolled metal products. The group included Metal Shapes Manufacturing Inc. ("MSMI"), Metal Shapes Inc. ("MSI"), 1058522 Ontario Ltd. ("105"), 657708 Ontario Ltd. ("657") and Proma International Inc. ("Proma International") (collectively, the "Metal Shapes Group").
2. MSMI was in the business of producing rolled metal products.
3. MSI owned and managed the real property on which MSMI carried on its business.
4. 657 was a holding company, and owned shares of MSI and MSMI.
5. On February 14, 1994, 105 was incorporated in order to facilitate the crystallization of the Appellant's capital gains exemption. Pursuant to an internal reorganization, the Appellant transferred shares of 657 to 105 under subsection 85(1) of the Income Tax Act (the "Act") and elected proceeds of disposition in an amount to allow the capital gains exemption to be crystallized.
6. On or around February 17, 1994, 105 redeemed its shares of 657.
7. On February 21, 1994, the Appellant exchanged 9,650 common shares of 657 for 500,000 Class B special shares, 5,580 Class A special shares, and 1,000 new common shares of 657.
8. Subsequent to the 1994 reorganization, the Appellant believed that he owned the shares of 105 which in turn owned the shares of 657. Attached as Schedule "A" is a diagram of the Appellant's understanding of the corporate structure of the Metal Shapes Group.
9. In or about 1999, the Respondent undertook an audit of the Appellant. In the course of the audit, the Respondent took the position that the corporate structure of the Metal Shapes Group was as set out in Schedule "B".
10. As a regular practice, the various companies in the Metal Shapes Group made advances to facilitate the business operations of the Group as a whole.
B. PROMA INTERNATIONAL
11. In March 1994, Proma Inc., a supplier to the Metal Shapes Group, contacted the Appellant and offered to sell the assets of Proma Inc. (the "Proma Assets").
12. On March 25, 1994, MSI purchased the Proma Assets from Skovsbo Holdings Inc., a secured creditor of Proma Inc.
13. The Appellant caused Proma International to be incorporated to operate the newly-acquired business, which leased the Proma Assets from MSI.
14. No shares of Proma International were issued on incorporation as the accountants for the Metal Shapes Group wished to consider where the shareholding should properly be placed. Litigation ensued shortly after incorporation, and, as a consequence, no shares of Proma International were ever issued.
15. Various companies in the Metal Shapes Group, including 105, advanced funds to Proma International in order to facilitate its day-to-day operations.
16. As well, the CIBC advanced funds to Proma International, which advances were guaranteed by 105. The Appellant did not personally guarantee any such advances, nor was he asked to provide any guarantees. The CIBC released 105 from its guarantee obligations on March 8, 1996.
17. The general ledgers of 105 for the year ending March 31, 1996 show that there was a loan from 105 to Proma International in the amount of $156,008.48.
18. The general ledgers of 105 for the year ending March 31, 1997 show that there was a loan from 105 to Proma International in the amount of $119,197.43.
19. The Minister reassessed the Appellant on the basis that he received benefits relating to the inter-company advances of the Metal Shapes Group.
20. On November 3, 2004, the Minister conceded that the Appellant did not receive a benefit in respect of inter-company advances by MSI and MSMI.
[2] The parties also agreed that the only issues remaining before the Court
were as follows:
A. Was a benefit conferred on the Appellant in the 1996 taxation year under subsection 56(2) of the Income Tax Act ("Act") year in the amount $155,008.48? and
B. Was a benefit conferred on the Appellant in the 1997 taxation year under subsection 56(2) of the Act in the amount $119,197.43?
[3] In addition to the Partial Agreed Statement of Facts the Appellant testified before the Court. He said that he was a mechanical engineer and was familiar with the issues presented before the Court. A group of companies with which he was involved was in the business of producing rolled metal products. He bought Metal Shapes as an existing company. This company had been in existence since the 1950's. He agreed with the facts set out in the Partial Agreed Statement of Facts.
[4] The Canadian Imperial Bank of Commerce ("CIBC") was the financial body that provided all of the principal financing to the metal groups. The bank always wanted cross guarantees from all of the companies whenever they were created. It also required, as further security, a general assignment of all receivables and inventory. He identified the document in Exhibit A-1 at Tab 7 as a typical Guarantee and Postponement of Claim which was put in place by CIBC. It also proposed the corporate structure for 1058522 Ontario Ltd. ("105") He did not give any personal guarantees for the groups' indebtedness.
[5] The various companies in the group made inter-company loans on different occasions. Some of the companies had no American dollar bank account and might be required to pay for stock in the United States. Therefore all of the United States accounts were handled through Metal Shapes International Inc. A flow of funds between the various corporate entities took place. Metal Shapes International Inc. would be paid by United States' customers then it would be invoiced for the work done by the other companies and these companies would be reimbursed.
[6] Loans made between the different companies were set up and reflected in the books of various companies. These were reflected in the daily and general ledgers. They were inputted into the general ledger at the end of the year.
[7] This witness might have had some monies outstanding in his name for his expenses incurred but he never loaned any money to any of the companies. He took no loans from the company except some years ago for a car loan and it had to be repaid within several years. He took no other loans. He received no other funds from any of the companies except for salary or bonuses.
[8] No dividends were ever declared by any of the companies. In particular, no shares of Proma International Inc. ("Proma") were ever issued. He explained that the accountant at the time was not sure how to handle this matter and it was put on hold and nothing was ever done about it.
[9] Proma was offered to the group and they bought the assets. It would market the group internationally and would do the work of the group. The Proma assets were purchased by Metal Shapes Incorporated i.e. equipment from the secured creditor. These assets were then released to Proma.
[10] He referred to the Asset Purchase Agreement found in Exhibit A-2 at Tab 6. The company paid one dollar for the assets and assumed all of the liabilities. They made arrangements for financing for the purchase. The bank requested the cross guarantees. This was only normal practice. No personal guarantees were ever asked for nor given.
[11] Proma was profitable before the first year but in the middle of the second year one of the largest companies involved with it cancelled a major order, another employee of Proma was marketing the same product and using the drawings of Proma and taking over some of the customers and a large user of Proma's equipment decided not to take the equipment which it had ordered. These three events used up all of the capital of Proma.
[12] Skovsbo Holdings Inc. was a secured creditor of Metal Shapes Inc. ("MSI") and it took back the assets in October 1995 and the bank called their loans. The group attempted to sell the assets of Proma and attempted to find investors but these actions did not come to fruition. A possible deal to sell some of the assets to the employees did not come to fruition either.
[13] The CIBC called the loan on all of the companies for $155,008 and decided how the debt was to be repaid. MSI was the owner of the building and it was required to remortgage it and pay the money to the bank as part of the indebtedness. Once the debt was paid off Proma and all of the companies were released from any liability to the bank. The amount of $119,197 in issue was an entry in the general ledger of 105.
[14] At that time Proma was in limbo. This amount was set up as a loan to Proma but it repaid no amount of the loan. 105 was considered to be head of the group of companies or the tip of the pyramid and it made more sense to set up the loan from the bank through this corporate entity. 105 also loaned money to other companies in the Metal Group as can be seen from the document in Exhibit A-1 at Tab 12. He explained the figure in this summary amounting to $156,008.48 as being the amount of $155,008 in dispute together with another $1,000 advanced by 105 to Proma which can be seen in the BDO Summary, Exhibit A-1 at Tab 12. He was asked why 105 would loan money to the other companies in the group. He said that that would be reasonable in the event that it had money and the other companies needed it to carry on. If 105 had not made the loans in question he would not have made them personally. He never did. If this money had not been loaned by 105 to Proma the money would have been left in the account of 105 until it was required to assist the other companies in the group to cover their day-to-day business expenses.
[15] The group wanted to "grow the companies". Therefore, they left the funds in the group instead of borrowing money to finance purchases.
[16] In cross-examination, he said that 105 was incorporated 1984. In 1996 and 1997 he was the sole shareholder, director and president. He made all decisions. He operated the other companies as well. 657708 Ontario Ltd., ("657") was the holding company for the shares of all other companies.
[17] He did not agree with the Respondent's understanding of Metal Shapes Group set out in Schedule "B" of the Partial Agreed Statement of Facts. His understanding was as set out in Schedule "A" of that agreement. This was the same structure as set out in the document created by BDO Dunwoody, Chartered Accountants dated September 14, 1998 and found in the Exhibit A-1,Tab 9.
[18] He took the position that he did not own 100 percent of the shares of 657, but that 105 did. He was aware that the Minister's position was different. He took the position that he did because he would discuss the shareholdings with their accountant and they would make decisions based upon the structure. The actual structure was important to him and the bank.
[19] The bank felt that 657 was at the top of the pyramid and it would have made this entity the principal borrower. In March of 1994 Proma received a line of credit. This witness requested it. It was secured by 105 and all of the other companies. This can be seen from the letter from the CIBC dated March 8, 1996 as set out in Exhibit A-1, Tab 7.
[20] He admitted that he had made the decision to have 105 give the guarantee. No monies flowed to this operation from Proma. Other companies, including 105 may have advanced funds to Proma during its existence. Proma's financial difficulties started in August or September of 1995. This was a cash flow problem. By October 1995 it stopped operating. There was no chance that it could carry on business. He tried to sell it. By the end of 1995 these attempts had fallen through. CIBC demanded payment immediately from Proma and then from 105 and the other companies in the group and they made the payments. After the payments were made CIBC released Proma from all obligations contained in the guarantee bond dated March 4, 1994 which had been signed by 105. When Proma went out of business the Appellant did not pay any of the money it owned. CIBC suggested the way that the monies were to be gathered up and paid. He had nothing to do with it. Mr. Tonn was their accountant and did all of the groups financial transactions and the year-end returns.
[21] At the time that Proma went out of business things were quite hectic during the last number of days, consequently much of the information was lost. In March of 1996 the loans were "booked" to Proma from 105 and payments were made on behalf of Proma. The amounts were paid out to other entities such as the bonding company and other creditors after Proma had ceased operations.
[22] In redirect he referred to the $155,008 paid by 105 on behalf of Proma which was seen in a bank reconciliation statement for the month of March 1996 for 105. This amount reflected those amounts taken out by CIBC under the guarantee signed by 105.
[23] His position was that he could not see where he received any benefit whatsoever from these transactions. He saw no funds and he received no relief from any debt that he might have owed.
[24] In response to a question from the Court, he said that the bank never asked him for any personal guarantee, this was not a condition that they set. It appeared to be satisfied with the financial situation of the group of companies
[25] Monty Smith was a Chartered Accountant. He was partner in a firm of chartered accountants for 25 years He was familiar with the Appellant's finances and those of the Metal Group of companies over the last three and a half years. He referred to the document in the Exhibit A-1, Tab 10 which was referred to as the Metal Shapes Group-Adjusting Journal Entries dated the 28th day of September 1995. This was referable to the crystallization process which took place in 1994. These were records of various inter-company loans and transfers. He referred to Tab 11, the figure $119,197.43 and said that that was a loan booked to 105, which was made earlier.
[26] Various companies in the group advanced funds to the other companies and these were repaid in some cases. He was familiar with these. The amounts in issue in the present case were with respect to loans received from Proma that were written-off as they could not be repaid.
[27] He confirmed that the Appellant had never taken a shareholder's loan from any of the companies or received any dividends from any of the companies. 105 is basically a holding company created as part of the crystallization process in 1994.
[28] In cross-examination he was referred to Exhibit A-1, Tab 11. He said that he was responsible for making these journal entries but they were done at the time of the crystallization. As far as he knew, 657 did not hold the shares.
Argument on behalf of the Appellant
[29] In oral argument counsel for the Appellant said that clearly the factual situation in this case does not satisfy the purposes for which subsection 56(2) was created. She referred to Neuman v M.N.R.[1] and McClurg v. Canada.[2] These cases make it clear that subsection 56(2) is dealing with the diversion of income and the factual situation here does not bring that section into play. She admitted that had the factual situation been different, then the section might have some applicability.
[30] She asked the question "Was there a loan"? She answered "yes"! If the amounts in question were not loans then what were they? They were considered to be loans by the Appellant. They were booked by the accountants as loans and they were listed in the company's books for accounting purposes as loans. Therefore, subsection 56(2) does not apply.
[31] She also referred to Fraser Companies Limited v. The Queen[3]. In accordance with that case, when one asks the man in the street to categorize the transactions involving the payment of the funds here, he would unhesitatingly describe them as "loans" and not as "payments" or "transfers".
[32] As in that case, money was made available by the companies to Proma but this money was expected to be repaid. These are the attributes of a "loan". There is borrower and a lender. Further, she quoted from the same case at page 5059 where the trial Judge said:
In my view, the loan from Companies to Paper, admitted to be such, is a contract between two separate entities in the course of business and is accordingly a business contract. As Thurlow, C.J. has indicated a commercial transaction is not the conference of a benefit by Companies on Paper in the sense of subsection 16(1) or its successor, subsection 56(2). I refer to the loan of $20 million dollars in the singular for convenience in this context although it was made in two stages.
This was the factual situation in the present case.
[33] On the second issue, if they were not a loan as argued by the Respondent, then there has to be a benefit in order for the Respondent to be successful here. What was the benefit? Where was the intent to create a benefit? The only argument was that Respondent could have is to say that the Appellant benefited from this transaction because he did not have to guarantee the loans. However, it is not that simple. The Appellant never financed these ventures, he never gave a personal guarantee, he was never ask and to do so. These transactions that give rise to loans were part of the normal business of the group. At the end of the day the Bank took the money under the guarantee. The Appellant did not direct that this would be done. No benefit was created in favour of the Appellant because of the transfer of the funds.
[34] There was no evidence that the Appellant negotiated his way out of a guarantee with the bank because the group of companies guaranteed the indebtedness. Further, there was never any real benefit to Proma. Proma merely received the proceeds of a loan. This loan is still outstanding and could be still collected. The funds that were in the hands 105 could stay in its account forever.
[35] The issue is not what the Appellant might have done, but whether or not he received a benefit. He did not! The real question to be answered is what happened on the facts of this case?
[36] The transaction clearly indicate that loans were made. There was a consistent pattern existent in the company's finances. These loans were part of that consistent pattern. There was no attempt at anytime to recategorize the transfers into loans from something that they were initially intended to be. There was no diversion of income through the Appellant or a third party on his instructions.
[37] In written argument counsel emphasized that these were valid loans by 105 to Proma. These loans were made in accordance with the standard practice of inter-corporate lending which was regularly and accurately reflected as such for accounting purposes. Just because Metal Shapes Group was able to finance its various businesses through inter-company lending does not mean that the Appellant received a benefit. There was no evidence that the Appellant would have to finance Proma if 105 had not made the loans. The Appellant did not divert funds which he would have otherwise received. In law he was not personally entitled to receive the amounts lent by 105 to Proma.
[38] The four conditions required to make subsection 56(2) applicable have not been met.
[39] Subsection 56(2) is an anti-avoidance section designed to prevent avoidance by the taxpayer through the direction of the funds to a third party of funds that he or she would otherwise have received. It just did not happen here.
[40] The first condition was not met because there was a loan. A loan does not constitute a transfer of property. See Dunkelman v. M.N.R.[4]
[41] Inter-corporate advances that are recorded as loans are generally treated by the Courts as such. See M.N.R. v. Stewart & Morrisson Ltd.[5]
[42] As indicated there is ample evidence that all parties, including the auditor, viewed the inter-corporate advances as loans. There was no evidence that the amounts reflected in the shareholder loan account in 1996 and 1997 were any different from any other inter-corporate loans within the Metal Shapes Group.
[43] Counsel admitted that the Appellant was aware that the shareholder loan account reflected a loan from 105 to Proma in 105's 1997 taxation year.
[44] With respect to the third precondition, there was no benefit to the Appellant. There was no intention to divert income of the taxpayer. A bona fide business transaction, including an inter-corporate loan, is not a "benefit" for the purposes of subsection 56(2) as indicated in Fraser Companies, supra.
[45] The loans in question were legitimate and served a valid business purpose. These corporations were all independent legal entities and entitled to enter into commercial transactions and be treated as such. The loans were made as valid business transactions entered into in good faith in course of the normal business operations of the Metal Shape Group and were consistent with the historical lending practices of the Group.
[46] With respect to the fourth precondition the application of subsection 56(2), there was no evidence that the Appellant was entitled to receive the funds that 105 loaned to Proma. This entitlement requirement is consistent with the stated purpose of subsection 56(2) in accordance with Neuman, supra, at 788.
[47] If the loan should not have been made by 105 to Proma, there is no evidence to even suggest that the funds would have been transferred to the Appellant. The amount could have flowed to the Appellant as a dividend, but he was not entitled in law to the funds when no dividend was declared. Nothing would have stopped 105 from retaining the funds within the corporation and not declaring a dividend.
[48] The Appellant asked to have the appeals allowed on the basis that subsection 56(2) of the Act does not apply to treat the amounts loaned by 105 to Proma as benefits received by the Appellant. The Appellant also seeks costs of this action.
Argument on Behalf of the Respondent
[49] In written and oral argument counsel for the Respondent stated the four requirements or preconditions for the application of subsection 56(2) of the Act:
1. There must be a payment or transfer of property to a person other than the taxpayer (other than a loan);
2. The payment or transfer of property must be made pursuant to the direction of, or with the concurrence of, the taxpayer;
3. The payment or transfer of property must be for the benefit of the taxpayer or for the benefit of the person to whom the payment is made; and
4. The payment or transfer must be an amount which would have to be included in the taxpayer's income, if it had been received by him or her instead of the other person.
[50] She sumitted that all four preconditions have been met in this case. Amounts advanced by 105 to Promo were not loans even though they were so recorded in the books of 105. Even though there were no records of actual payment in 1997 of the amount in question of $119,197, the parties agreed that there was an actual cash payment in the amount of $155,008 in the 1996 taxation year. Therefore both of the amounts are payments or transfers of property accordance with precondition two.
[51] The payments were not loans because there was no loan agreement between the parties. Proma did not have an obligation to repay the amounts advanced and at the time the advances were made Proma had ceased operating and, accordingly, no implied prospect of repayment existed. She cited Davisson v. The Queen[6] in that regard.
[52] As earlier indicated she took the position that the amount $119,197 was recorded as having been advanced by 105 to Proma in the 1997 taxation year, even though there were no documents to establish that an actual transfer was made. However accounting entries reflect transactions and it is the reality of the facts that determine the true nature and substance of transactions. Accounting entries are evidence of the true facts. She relied upon Hickman Motors Ltd. v. The Queen[7] and Vander Nurseries Limited v. The Queen[8]. In accordance with those cases the record of the advances in the books of 105 is the best evidence of the truth. Condition one as been met.
[53] The payments made by 105 to Proma were made at the direction of, or with the concurrence of, the Appellant because he was the sole shareholder, director and president of 105. As such, he made all decisions for 105, including financial decisions. These payments could only have been made with his concurrence or at his direction.
[54] Further, the payments were made for the benefit of the Appellant in 1996 and 1997. Proma had ceased operating. Accordingly, even if 105 had been related to Proma, which it was not, 105 had nothing to gain from the advances even if Proma benefited from the advances because it was relieved of its outstanding financial difficulties. This is sufficient to satisfy the requirement of precondition three.
[55] With respect to precondition four, it has been met because if payments had been made to the Appellant directly, without repayment obligations, these amounts would have been required to have been included in his income in accordance with subsection 15(1) of the Act. This liability to taxation of the Appellant might not have resulted in double taxation and consequently subsection 56(2) of the Act still applies.
[56] Counsel referred to Neuman v. M.N.R. supra; at paragraph 53; Outerbride Estate v. The Queen,[9] and Peddle v. The Queen.[10]. The payments involved are not dividend income and no issue of double taxation arises.
[57] Counsel submitted that the appeals should be dismissed and the Minister's assessments confirmed.
Analysis and Decision
[58] The Court is of the opinion that these appeals must succeed. The factual situation as outlined by the evidence, and any reasonable inferences that the Court is entitled to draw from the evidence, do not lend themselves to the application of subsection 56(2).
[59] The evidence makes it clear that the payments in question were made within the Metal Shapes Group, in accordance with the standard practice of inter-corporate lending. These transactions were regularly and accurately reflected in the records of the various companies for accounting purposes. The companies accountant testified to this effect and there was nothing in his cross-examination which would bring into question the efficacy of what he had to say. His evidence was reflective of this situation.
[60] A typical situation where subsection 56(2) should be applied is set out in Neuman v. M.N.R. supra. From that case it is easy to discern that the section was intended to cover cases where taxpayers seek to avoid receipt of property which would be income in their hands by seeking to have the amount transferred to a third party. However, the benefit referred to is a benefit on behalf of the taxpayer giving the direction.
[61] It was indicated in that case that where there is a business contract with that person for added consideration there is no benefit. This situation is reflected by the evidence given in the case at bar. There is no question about the accuracy of the statements of account, there is no question about their records, there was no question that the inter-company transfer of funds was done according to normal business practices and there was nothing "under the table" about them nor indeed about the transfer of the amounts in question in this case.
[62] The situation in the case at bar is also similar to that found in M.N.R .v. Stewart & Morrison Limited[11]. The Court is satisfied that in the case at bar, 105 arranged and guaranteed a bank loan to Proma as can be seen from the document in Exhibit A-1, Tab 7. The Guarantee and Postponement of Claim in favour of the CIBC signed by 105, guaranteed payment to the bank immediately and after demand, of all of the debts and liabilities which Proma had incurred with the bank. The Court is satisfied that the payments in question were made on the basis of that Guarantee and Postponement of Claim as directed by the bank.
[63] As indicated by the Appellant himself in his testimony before the Court, once the bank decided to call it's security, the Appellant had no say in what was going to be done, how the funds would be dispersed or what accounts were to be paid out. This was at the complete discretion and control of the bank.
[64] It can hardly be said that under those circumstances "the payment or transfer of property was made pursuant to the direction of, or with the concurrence of the taxpayer to some other person for the benefit of the taxpayer or was the benefit that the taxpayer desired to have conferred on the other person ...".
[65] At that time all matters were out of 105's hands and the hands of the taxpayer. The bank was the entity that directed such payments be made. The Appellant and the group of the companies were just bystanders at that point in time waiting for the bank's indebtedness to be paid out before 105 and the other group of companies could be released. At the end of the day this indeed took place.
[66] The quotation from Fraser Companies v. R., supra, relied upon by counsel for the Appellant speaks volumes in this regard.
"The man in the street if obliged to categorize the two transactions
--- between Fraser Companies and Fraser Paper would, in my view, unhesitatingly describe them as "loans" and not as "payments" or "transfers"." Money was made available by Companies to Paper but repayment was expected. These are the attributes of a "loan". There is a borrower and a lender.
[67] In the case as bar, obviously the borrower was Proma and the lender was the bank and the guarantor was 105 and all of the subsidiary companies. Even though there were no specific loan agreements covering these individual transfers of funds, they were caught by the Guarantee and Postponement of Claim between Proma, 105 and CIBC. Obviously any monies that were transferred were on the basis of the indebtedness incurred by 105 and Proma as a result of the Guarantee and Postponement of Claim.
[68] In the absence of more evidence being adduced one might wonder why funds would have been advanced to pay off debts of Promo after they had ceased operating. However, the bank had complete control as to how the indebtedness of Proma would be handled by virtue of the Guarantee and Postponement of Claim by 105. The Appellant certainly had nothing to do with that and had no control over it.
[69] Dealing with the more specific requirements of subsection 56(2), of the Act, the Court finds as follows:
1. There was no transfer of property to a person other than the taxpayer because payments were made on the basis of loans that were incurred by the group of companies and by Proma to the bank on the basis of normal business transactions entered into among the parties in the normal course of doing business which were recorded in the books of the company and which reflected normal creditor-debtor relationships.
2. However, should the Court be wrong in that and some higher authority be inclined to find that there was a payment or transfer of property, then the Court is satisfied that such payment was not made pursuant to the direction of, or with the concurrence, of the taxpayer because the taxpayer at the time of the transfer had no control over the transactions whatsoever even though he was chief shareholder and an officer of the various entities. Anything that was done was done under the direction of CIBC and the authority which they had by virtue of the Guarantee and Postponement of Claim.
3. The Court is satisfied that if there was a payment or transfer of property, then it was not for the benefit of the taxpayer or for the benefit of the person to whom the payment was made. All that was happening in this case was that the indebtedness of Proma was being paid out on the direction of the CIBC on the basis of existing security that it held against the group of companies. Although payment of some of the funds may have been directed to the payment of outstanding indebtedness of Proma at a time when it appeared to be out of business, the indebtedness of Proma to 105 and the other group of companies still existed even though there may have been little likelihood that the debt would ever be repaid by Proma. This does not change the fact that such a payment was of no benefit to the Appellant. The Appellant was in exactly the same position that he was in before. Any benefit that incurred to Proma was not a real benefit at the end of the day because the company was still responsible for the monies paid on its behalf.
4. In any event, the Court could envisage no possible benefit to the taxpayer or Proma in the overall context of subsection 56(2).
[70] In the context of precondition four, the Court is satisfied that under strict technical interpretation of that section this condition may have been met. However, taking into account the purpose of the section and the scenario as outlined in Miller v. M.N.R., supra[12], the Court would be hard pressed to find that this condition has been met.
[71] At the end of the day, what the Respondent is seeking to do is to penalize the fortunate taxpayer for being in the enviable position of being involved with a group of companies that were in such good financial condition that the lending institution, CIBC, did not ask for and did not require that the individual shareholder or officer personally guarantee the loans but were prepared to accept guarantees of the group of companies. Subsection 56(2) was not meant to cover such a situation. The Court would be hard pressed indeed to interpret it so broadly that the Appellant in the situation as outlined in the evidence here, would be caught by it.
[72] The appeals are allowed, the assessments of the Minister in the years still in issue, 1996 and 1997 are vacated.
[73] The Appellant is entitled to costs to be taxed on a party and party basis.
Signed at Ottawa, Canada, this 21st day of December 2004.
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"T. E. Margeson" |
Margeson J.
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CITATION: |
2004TCC838 |
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COURT FILE NO.: |
2002-3018(IT)G |
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STYLE OF CAUSE: |
Joseph A. Williams. v The Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
November 23, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice T. E Margeson |
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DATE OF JUDGMENT: |
December 21st, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
Louise R. Summerhill and Kay W. Leung |
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Counsel for the Respondent: |
Carol Calabrese |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Louise R. Summerhill and Steven L. Graff. |
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Firm: |
Aird & Berlis LLP |
|
For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |
[1] [1998] 1 S.C.R. 770.
[2] [1990] 3 S.C.R. 1020.
[3] 81 DTC 5051 particularly at pp. 5058 and 5059.
[4] 59 DTC 1242 (Exch. Ct.) at 1246.
[5] 70 DTC 6295 (Exch.Ct.).
[6] 2000 DTC 2140 (T.C.C.).
[7] 97 DTC 5363 (S.C.C.).
[8] [1994] 2 C.T.C. 2347 (T.C.C.) at 2355.
[9] 90 DTC 6681 (F.C.A.) at paragraphs 14 and 15.
[10] [2004] DTC 2459 (T.C.C.) at paragraphs 34-36.
[11] 70 DTC 6295 (Exch.Ct.).
[12] [1962] C.T.C. 199 at p. 212.