BETWEEN:
and
____________________________________________________________________
Appeal heard on May 31, 2006, at Winnipeg, Manitoba
Before: The Honourable Justice R.D. Bell
Appearances:
____________________________________________________________________
JUDGMENT
The Appellant's appeal for his 1998 taxation year is allowed in that the amount of $1,538 was improperly included in income and that the penalty under subsection 163(2) of the Income Tax Act ("Act") was improperly levied and should be deleted.
His appeal for the 1999 taxation year is allowed to the extent that:
(a) the sum of $25,000 was not a benefit conferred on him by Stevens & Cook Ltd. under subsection 15(1) of the Act and should be deleted from his income for that year; and
(b) the amount of $3,288, by concession of the Respondent should be deleted from his income for that year; and
(c) the penalty under subsection 163(2) of the Act was improperly levied and should be deleted.
and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the foregoing.
The Appellant is entitled to costs.
Signed at Ottawa, Canada, this 23rd day of June, 2006.
"R.D. Bell"
BETWEEN:
CLIFFORD COOK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
ISSUES
[1] The issues are:
1. Were the sums of $1,538 and $886 properly included in the Appellant's income for his 1998 taxation year?
2. Were the sums of $25,000 and $3,288 properly included in the Appellant's income for his 1999 taxation year?
3. Were the penalties assessed under subsection 163(2) of the Income Tax Act ("Act") properly so assessed?
[2] The first issue was disposed of at the hearing of the appeal by the Respondent acknowledging that the sum of $1,538 was improperly included in the Appellant's income, that amount having been properly included in the income of Stevens & Cook Ltd..
The second issue was disposed of, in part, at the hearing of the appeal by the Respondent acknowledging that the sum of $3,288 was improperly included in the Appellant's income.
[3] Respecting the third issue, the Respondent conceded that any penalty assessed under subsection 163(2) was improperly levied.
[4] Accordingly, the Appellant will succeed in respect of his appeal for the 1998 and 1999 taxation years to the extent above described. This leaves, for my decision, the question of whether the sum of $25,000 was properly included in the Appellant's 1999 taxation year income.
FACTS
[5] With respect to the 1999 taxation year, an Agreed Upon Statement of Facts provided:
1. It is agreed that on December 30, 1999, a $25,000 cheque (a copy of which has been tendered to the Court) payable from Northland Rail Line Salvage Ltd. to Stevens & Cook Ltd. ("S & C") was posted by S & C's bookkeeper in error to Clifford Cook's shareholder account with S & C rather than S & C's income account.
2. It is agreed that Clifford Cook had no involvement in nor knowledge of the erred transaction described in paragraph 1 above.
3. It is agreed that Clifford Cook's shareholder account was, at the time of the erred transaction, in debit balance at approximately $30,000.
4. It is agreed that Clifford Cook's shareholder account was used regularly both before and after the erred transaction.
5. It is agreed that a $25,000 withdrawal in lump sum was never taken by Clifford Cook subsequent to the erred transaction.
6. It is agreed that no withdrawals were made from Clifford Cook's shareholder account subsequent to the erred transaction in 1999.
The Appellant conceded that the amount of $5,464 was properly includable in his 1999 taxation year income and the Respondent conceded, as above stated, that the amount of $3,288 was improperly so included. The Appellant states that the sum of $25,000 was improperly included in his 1999 taxation year income on the basis, as set out in the Reply to Notice of Appeal, that it was a benefit within the meaning of subsection 15(1) of the Act.
ANALYSIS AND CONCLUSIONS
I accept Appellant's counsel's submissions that the sum of $25,000 was not properly included in income as a benefit under subsection 15(1) of the Act.
[6] The pertinent parts of subsection 15(1) read as follows:
Where at any time in a taxation year a benefit is conferred on a shareholder, ... by a corporation otherwise than by
certain actions which do not apply in this case
the amount or value thereof shall, ... be included in computing the income of the shareholder for the year.
[7] The amount of $25,000 was posted in error to the Appellant's shareholder account. It is agreed that the Appellant had no involvement in or knowledge of that error having been made. Paragraph 14 of the Notice of Appeal states that when Canada Customs and Revenue Agency ("CRA") found the error, the incorrect accounting entry was corrected by debiting the shareholder account and crediting the income account and that the Appellant's company, Stevens & Cook Ltd. was taxed on that income. The paragraph in the Reply to Notice of Appeal dealing with this statement in the Notice of Appeal reads as follows:
With respect to paragraph (c)14 of the Notice of Appeal, he clarifies that the Canada Customs and Revenue Agency ("CCRA") determined that the journal entry crediting the shareholder loan account did not correctly reflect the transaction, but did not correct the error, as the CCRA does not correct bookkeeping errors.
Appellant's counsel stated, in making his submissions, that when the mistake was discovered, it was reversed reflecting the fact that he owed the company $25,000 more. This was not disputed by Respondent's counsel.
[8] Appellant's counsel referred to the following cases:
1. Chopp v. R., 95 D.T.C. 527 in which an employee erroneously posted a debit of $28,490 to the legal expense account whereas the debit should have been posted to the shareholder loan account. The error was discovered by a Revenue Canada audit and the sum was included in the Appellant's income on the basis that the corporation had conferred a benefit upon the Appellant in accordance with subsection 15(1) of theAct. This Court, at page 531 said:
I cannot accept the Respondent's argument so broadly stated that a bookkeeping error which benefits a shareholder to the disadvantage of his corporation is a benefit within subsection 15(1) even if the error was not intended and was not known to the shareholder. In my opinion, if the value of a benefit is to be included in computing a shareholder's income under subsection 15(1), the benefit must be conferred with the knowledge or consent of the shareholder; or alternatively, in circumstances where it is reasonable to conclude that the shareholder ought to have known that the benefit was conferred. I am supported in this view by the decisions of this Court in Simons v. Minister of National Revenue., [1985] 1 C.T.C. 2116, 85 D.T.C. 105 (T.C.C.) and Robinson v. Minister of National Revenue, [1993] 1 C.T.C. 2406, 93 D.T.C. 254.
In Simons, a series of accounting errors resulted in an overstatement of gas purchases and an understatement of corporate profit.
To bring the balance sheet at July 31, 1977 into balance, the corporate accountant made a credit entry to Mr. Simons' shareholder loan account in the amount of $29,383. The actions of the corporate accountant were based on error and were done without the advice, instruction, knowledge or approval of the individual shareholder, Mr. Simons. The Minister of National Revenue added the amount of $29,383 to Mr. Simons' reported income for 1977 under subsection 15(1) of the Act. In allowing Mr. Simons' appeal, this Court stated, at page 108:
On the authorities the question of whether or not funds or property of the company were appropriated to or for the benefit of the Appellant as a shareholder, or that a benefit or advantage had been conferred by the company on the Appellant as a shareholder, is primarily a question of fact rather than a conclusion of law ...
In either case there was no probative evidence tendered to show that the Appellant acted upon or received any measurable benefit from this erroneous balancing entry during his 1977 taxation year which is the taxation year to which this appeal is confined.
[9] Appellant's counsel also referred to Long v. Canada 1998 D.T.C. 1420. In this case, Long, the sole shareholder of a contracting company, constructed a house for his own use. One of the company's suppliers performed plumbing work on the construction and mistakenly submitted Long's bill to his company. The company inadvertently paid the bill. The company's accountant later discovered the mistake and reversed the supplier charge and reduced the shareholder loan account. The Minister of National Revenue refused to allow the reduction to the shareholder loan account and reassessed Long's income tax return adding the amount of the bill to Long's income as a shareholder benefit under subsection 15(1) of the Act. The Appeal was allowed.
[10] This Court, was referred to M.N.R. v. Pillsbury Holdings Ltd. 64 D.T.C. 5184. Cattanach J., in dealing with the predecessor to subsection 15(1), said at page 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.
This Court then said:
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".
[11] No benefit was conferred by Stevens & Cook Ltd. upon the Appellant in respect of the $25,000. It was simply an accounting error which was rectified. Accordingly, I have concluded that the $25,000 was not a benefit that was properly included in the Appellant's income by virtue of subsection 15(1) for his 1999 taxation year. Therefore, in addition to the above, the Appellant will succeed in his appeal for that year to the extent that the amount of $25,000 added to his income by reassessment for that year was improperly so added.
[12] As above stated, the Minister conceded that any penalty assessed was improperly levied and should therefore be deleted.
Signed at Ottawa, Canada, this 23rd day of June, 2006.
"R.D. Bell"
Bell, J.
STYLE OF CAUSE: CLIFFORD COOK AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Winnipeg, Manitoba
REASONS FOR JUDGMENT BY: The Honourable Justice R.D. Bell
DATE OF JUDGMENT: June 23rd, 2006
APPEARANCES:
|
Counsel for the Appellant: |
Kris Janovcik |
|
Counsel for the Respondent: |
Julien Bédard |
COUNSEL OF RECORD:
Firm: Tapper Cuddy LLP
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada