Federal Court of Appeal Decisions

Date: 20020128

Docket: A-635-00

Neutral citation: 2002 FCA 38

CORAM:        STRAYER J.A.

ROTHSTEIN J.A.

SEXTON J.A.

BETWEEN:                                                                                                           

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                       Appellant

                                                                                 and

                                                                 JOHN FRANKLIN

                                                                                                                                                   Respondent

                                             Heard at Toronto, Ontario, on January 17, 2002

                                  Judgment delivered at Ottawa, Ontario, on January 28, 2002

REASONS FOR JUDGMENT BY:                                                                              ROTHSTEIN J.A.

CONCURRED IN BY:                                                                                                         SEXTON J.A.

DISSENTING REASONS BY:                                                                                          STRAYER J.A.

Date: 20020128

Docket: A-635-00

Neutral citation: 2002 FCA 38

CORAM:        STRAYER J.A.

ROTHSTEIN J.A.

SEXTON J.A.

BETWEEN:

HER MAJESTY THE QUEEN

                                                                                                                                                       Appellant

and

JOHN FRANKLIN

                                                                                                                                                   Respondent

                                                        REASONS FOR JUDGMENT

ROTHSTEIN J.A.

[1]                 This is an appeal from a September 13, 2000 decision of Beaubier J.T.C.C. allowing the respondent's appeal from an assessment by the Minister of National Revenue under subsection 15(1) of the Income Tax Act.

[2]                 The respondent and his wife owned Homeguard Video Systems Ltd. ("HVSL"). In March 1991, HVSL purchased a condominium unit in Florida. All monies to acquire the condominium unit were advanced out of the respondent's personal resources and were reflected as a shareholder's loan in the books of HVSL. Shortly after the purchase of the condominium unit, an undivided one half interest was sold for CAD $59,423.50. The respondent was the recipient of this sum. The sale of the one half interest was not recorded in the books of HVSL nor was the respondent's shareholder's loan account reduced to reflect the receipt by the respondent of the sale proceeds, until the error was discovered by the Minister's audit of the respondent and HVSL some time later.

[3]                 The respondent, instead of keeping the sale proceeds, used the funds to acquire automobiles for HVSL. When the autos were purchased by the respondent for HVSL, their cost was added to the assets of the company and the respondent's shareholder's loan balance in the books of the company.

[4]                 Because the proceeds of the sale of the one half interest in the condominium unit were paid to the respondent, the Minister assessed the respondent under subsection 15(1) of the Income Tax Act which provides in relevant part:

Where at any time in a taxation year a benefit is conferred on a shareholder ... the amount or value thereof shall, ... , be included in computing the income of the shareholder for the year.

[5]                 Beaubier J.T.C.C. found there was no receipt of a benefit by the respondent and allowed his appeal. At paragraph 13 of his reasons he stated:

However, had the sale to Yates been properly recorded by HVSL, its assets would have fallen by one half the value of the condominium as would the shareholders' loan to Mr. Franklin. Therefore, Mr. Franklin's total equity in his shares and his loan in HVSL would not have changed. Moreover Mr. Franklin's correct net loan position in HVSL never fell into a deficit position during the years under appeal. As a result, what has occurred is a series of bookkeeping errors in HVSL's statements which were caused by Mr. Franklin either on purpose or inadvertently. But none of them gave him any benefit that is in evidence. He did not withdraw any money from HVSL in excess of his correct loan balance during the years in question. Nor is there any evidence that he used the incorrect financial statements to obtain a benefit elsewhere for himself. There was no receipt of a benefit by Mr. Franklin.

[6]                 Normally, it is for the trier of fact to determine whether a benefit is conferred for purposes of subsection 15(1) (see Smith v. H.M.Q., 99 D.T.C. 5724, at paragraphs 5 and 6 (F.C.A.)). Beaubier J.T.C.C. concluded that what occurred here was a series of bookkeeping errors but that the respondent received no benefit. I am unable to find any palpable or overriding errors in his assessment of the facts that would justify this Court interfering with his decision.

[7]                 The problem here is that the books of the company do not reflect the facts. The facts are that the respondent received the proceeds of the sale of the one half interest in the condominium unit which was owned and sold by HVSL. The asset and shareholder's loan accounts of HVSL did not accurately reflect these transactions. However, that does not justify ignoring the fact that no benefit was conferred on the respondent and assessing tax on the basis of financial statements which have been found to be in error.

[8]                 The appeal should be dismissed with costs. However, obviously, this judgment is not to be interpreted as condoning taxpayers negligently keeping inaccurate records or deliberately not

disclosing transactions. The Income Tax Act provides remedies to the Minister when taxpayers engage in such activity.

                                                                                   "Marshall Rothstein"           

                                                                                                             J.A.                          

"I agree

J. Edgar Sexton"

STRAYER J.A.(dissenting)

[9]                 I regret that I am unable to concur with my colleagues. In my view the appeal should be allowed.

[10]            I am satisfied that the learned Tax Court Judge either committed an error of law in his interpretation of the word "benefit" in subsection 15(1) or he committed a palpable error of fact, or both. He failed to find that the respondent in fact received the benefit of a sum of $59,423.50, by directing the proceeds of sale of the company's properties into his own bank accounts or for the reduction of his personal debts, with no strings attached. Whatever occurred or did not occur thereafter is irrelevant to whether he received a benefit.

[11]            At the times when this sum was received in instalments it became part of the respondent's personal estate which he could use as he wished. He could have spent it on travel, on a new house, on cars for his own use registered in his own name, or on investment in the stock market. There is no objective evidence that this sum was subject to any claims by the company or anyone else. There were no encumbrances on the money: no reduction in the company's recorded debt to him on his loan account; no promissory note signed by the respondent acknowledging that the money was the company's, not his; nor any company resolution authorizing a loan to him in this amount. The money was his to spend. The fact that he chose to "invest" it in his company and thereby get credit for it yet again as a further loan to the company (having already had credit for it once when he loaned it to the company to buy the Florida condominium) is of no relevance.

[12]            The Tax Court Judge at paragraph 13 of his reasons describes these events as mere "bookkeeping errors". This is hard to reconcile with his finding in paragraph 12 that the respondent's recorded shareholder's loan to his company remained $59,423.50 more than it should have been when he deposited to his own accounts the proceeds of sale of the company's property. He proceeded to find that:

This was known to Mr. Franklin and certainly ought to have been known to him in any event. Mr. Franklin did nothing to reverse this state of affairs and it was only when Revenue Canada's audit occurred that it was discovered by anyone else, namely, Mrs. White, the auditor. The entire set of occurrences was due to Mr. Franklin's actions, records and system of dealing with [the company's] activities in his own name.

This is not my understanding of a "bookkeeping error".

[13]            I have difficulty in understanding how the "benefit" of the $59,423.50 can be said not to have been received in the taxation years in question just because by chance a Revenue Canada auditor subsequently found a failure to account for the receipt of company property. This was a failure of which, according to the learned trial judge, the respondent was aware or should have been aware at the time.

[14]            I would allow the appeal with costs.

                                                                                                                      "B.L. Strayer"                  

J.A.