Date: 20000621
Docket: 2000-3306-IT-I
BETWEEN:
ARTHUR BALLEGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2000-3307-IT-I
AND BETWEEN:
LINDA BALLEGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2000-3308-IT-I
AND BETWEEN:
A & L CONSULTING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
GENERAL:
[1] The cases of A & L Consulting Ltd. ("Ltd."), Arthur Ballegeer ("Arthur") and Linda Ballegeer ("Linda") were heard together on common evidence.
ISSUES:
[2]
1. Whether a benefit was conferred on each of Arthur and Linda, in the 1995 and 1996 taxation years, by Ltd., within the meaning of subsection 15(1) of the Income Tax Act ("Act") in the following amounts:
|
1995 |
1996 |
|
|
Arthur |
$14,565.71 |
$7,257.81 |
|
Linda |
$14,565.71 |
$7,257.81 |
2. Whether the Minister of National Revenue properly assessed Arthur and Linda for penalties for each of the 1995 and 1996 taxation years pursuant to subsection 163(2) of the Act.
3. Whether Ltd. was entitled, in its 1995 and 1996 taxation years, to deduct the following amounts as expenses incurred by it for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act, namely:
|
1995 |
1996 |
||||
|
Ltd. |
$34,436.07 |
$14,358.11 |
|
||
4. Whether the Minister of National Revenue properly assessed Ltd. for penalties for each of the 1995 and 1996 taxation years pursuant to subsection 163(2) of the Act.
FACTS:
[3] Each of Arthur and Linda owned fifty percent of the issued and outstanding shares of Ltd. throughout the 1995 and 1996 taxation years. In both years Ltd. owned and operated two transport rigs.
[4] Arthur, in describing the organization of Ltd.'s business, testified that he cashed in registered retirement savings plans to advance money to the company. He said that bookkeeping was close to non-existent at the start of the company's operation and that accounting was, at best, done in a "shoebox" style. He said that he assembled records at the end of the year and took them to an accountant. He stated that during the two years in question Ltd. contributed to the operating cost of the residence in lieu of office rent. He stated that entries to the shareholders' loan account were made by journal entry by the accountant at the end of each year. The shareholder loans as at February 28, 1995 are shown on the balance sheet of Ltd. as $40,656.15. The amount of the shareholder loans on the February 28, 1996 balance sheet is $49,581.70.
[5] Arthur said that he operated the business as if it were his own and he described it as an exercise of survival. In short, he paid little, if any, attention to Ltd. as an entity. He said that he never tried to hide any expenses and he simply did not understand what were valid business expenses, for example, travel, et cetera. He said that sloppy bookkeeping, involving documents being thrown into a box 11 to 12 months later, resulted in the reassessment. He stated that he just assumed they were company expenses. For example, he said that Costco was the source of a number of supplies and that both company supplies and personal supplies were purchased at Costco. He also explained how, in the past three years, Ltd.'s accounting system has been altered.
[6] Appellants' counsel conceded at the beginning of the hearing that Ltd.'s expenses in the amounts above shown were not business expenses. Among other features, Ltd. now pays monthly rent for office space in Arthur and Linda's home.
APPELLANTS' SUBMISSIONS:
[7] Appellants' counsel submitted that the amounts paid by Ltd. on behalf of Arthur and Linda should be offset against the shareholders' loans which were in excess of these amounts. He said that it simply made sense that expenses incurred by the company on behalf of the individuals should decrease the shareholders' loan account. He argued that if Ltd. wished to pay the other Appellants' expenses, it should just debit the shareholder loan account because there was money there to do so. He submitted that the Appellants thought that the expenses deducted by the company were business expenses, that they had a very crude financial organization in 1995 but now had very careful analysis of and separation of personal and corporate expenses.
[8] He also submitted that endorsement for that action comes from the fact that if money was spent for the company it was added to the loan account, thereby increasing the shareholders' loans. He argued that one could logically assume that that displays a two-way intent. He also said that this does not imply that Ltd. would not reduce the loan account if it spent money on its taxpayers.
RESPONDENT'S SUBMISSIONS:
[9] Respondent's counsel referred to several authorities which set forth the proposition that it was an unacceptable notion that a company and its shareholder are entitled, for purposes affecting the rights of third parties, to rewrite history and to treat imaginary events as having happened.[1] In Gannon v. M.N.R., 88 DTC 1282 this Court dismissed a similar appeal by saying:
This is simply a case in which the company and the Appellant each owe the other money. There is no authority for the proposition advanced by the Appellant which is, in effect, that mutual debts cannot co-exist and that in all cases where they might arise a set-off is automatically effected.
[10] In both of those cases the Appellant was unsuccessful.
[11] In Docherty v. M.N.R., 91 DTC 537, the accountant's testimony and working papers were considered sufficient evidence of the intention to effect a set-off. In another case, evidence was found in the records of the corporation, which, combined with consistent testimony of witnesses, produced sufficient evidence to allow the Court to conclude the existence of an intention to set off.[2] Yet another case determined that an Appellant could be successful where mistakes or accounting errors had occurred, concluding that there should be no subsection 15(1) benefit where the mistake is the result of an act or omission of a third party operating in good faith but on a faulty premise.[3]
ANALYSIS AND CONCLUSION:
[12] Arthur had started a new business in the wake of a personal tragedy and I have no doubt that that business was, as described by him, a survival operation. He, as the operating shareholder of Ltd.'s business, has effected the installation of an accounting system which should, for years after 1996, accurately categorize Ltd.'s expenditures. However there is no evidence to support the set-off of amounts expended by Ltd. on behalf of the other Appellants. Not only was there no such evidence but no set-off could have been in contemplation because Ltd. was seeking to deduct, as expenses, the amounts expended by it on behalf of Arthur and Linda. Therefore, I cannot conclude that Arthur and Linda were entitled during the taxation years in question to set-off such expenditures against shareholder loans.
[13] Penalties were assessed against all three Appellants under section163(2) of the Act which gives authority for imposing penalties where a person,
... 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 ...
[14] Subsection 163(3) reads:
Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.
[15] Respondent's counsel made no submission respecting the matter of penalties.
[16] I conclude, in the circumstances, that none of the Appellants "knowingly" or "under circumstances amounting to gross negligence" made a false statement in a return. The Appellants, unsophisticated in business operation, were negligent but not grossly negligent.
[17] Accordingly, the sums aforesaid were properly disallowed as deductions to Ltd. and the remaining sums aforesaid were properly included in the income of Arthur and Linda pursuant to the provisions of subsection 15(1) which states that the amount or value of a benefit conferred on a shareholder of a corporation shall be included in computing the income of that shareholder. All penalties will be deleted.
[18] No costs will be awarded.
Signed at Ottawa, Canada this 21st day of June, 2001.
"R.D. Bell"
J.T.C.C.
COURT FILE NO.: 2000-3306(IT)I; 2000-3307(IT)I;
and 2000-3308(IT)I
STYLE OF CAUSE: Arthur Ballegeer v. Her Majesty the Queen
Linda Ballegeer v. Her Majesty the Queen
A & L Consulting Ltd. v. Her Majesty the Queen
PLACE OF HEARING: Winnipeg, Manitoba
DATE OF HEARING: June 1, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge R.D. Bell
DATE OF JUDGMENT: June 21, 2001
APPEARANCES:
Counsel for the Appellant: Sergio Pustogorodsky
Counsel for the Respondent: Tracy Harwood-Jones
COUNSEL OF RECORD:
For the Appellant:
Name: Sergio Pustogorodsky
Firm: Thompson Dorfman Sweatman
Winnipeg, Manitoba
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3306(IT)I
BETWEEN:
ARTHUR BALLEGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Linda Ballegeer
(2000-3307(IT)I) and A & L Consulting Ltd. (2000-3308(IT)I)
on June 1, 2001 at Winnipeg, Manitoba, by
the Honourable Judge R.D. Bell
Appearances
Counsel for the Appellant: Sergio Pustogorodsky
Counsel for the Respondent: Tracy Harwood-Jones
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, without costs, only to the extent that penalties assessed pursuant to the provisions of subsection 163(2) of the Income Tax Act are deleted, and the reassessments are referred back to the Minister of National Revenue on the foregoing basis in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 21st day of June, 2001.
|
"R.D. Bell" |
J.T.C.C.
2000-3307(IT)I
BETWEEN:
LINDA BALLEGEER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Arthur Ballegeer
(2000-3306(IT)I) and A & L Consulting Ltd. (2000-3308(IT)I)
on June 1, 2001 at Winnipeg, Manitoba, by
the Honourable Judge R.D. Bell
Appearances
Counsel for the Appellant: Sergio Pustogorodsky
Counsel for the Respondent: Tracy Harwood-Jones
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, without costs, only to the extent that penalties assessed pursuant to the provisions of subsection 163(2) of the Income Tax Act are deleted, and the reassessments are referred back to the Minister of National Revenue on the foregoing basis in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 21st day of June, 2001.
|
"R.D. Bell" |
J.T.C.C.
2000-3308(IT)I
BETWEEN:
A & L CONSULTING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Linda Ballegeer
(2000-3307(IT)I) and Arthur Ballegeer (2000-3306(IT)I)
on June 1, 2001 at Winnipeg, Manitoba, by
the Honourable Judge R.D. Bell
Appearances
Counsel for the Appellant: Sergio Pustogorodsky
Counsel for the Respondent: Tracy Harwood-Jones
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, without costs, only to the extent that penalties assessed pursuant to the provisions of subsection 163(2) of the Income Tax Act are deleted, and the reassessments are referred back to the Minister of National Revenue on the foregoing basis in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 21st day of June, 2001.
|
"R.D. Bell" |
J.T.C.C.