BETWEEN:
and
____________________________________________________________________
Appeals heard on September 26, 2006, at Edmonton, Alberta,
By: The Honourable Justice Campbell J. Miller
Appearances:
____________________________________________________________________
JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 2000 taxation year is dismissed.
The appeal from the assessment of tax made under the Act for the 2001 taxation year is allowed, with costs, and the assessment is and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amounts of $4,787 and $15,000 are not to be included in Ms. Maan's income as shareholder benefits.
Signed at Ottawa, Canada, this 6th day of October 2006.
BETWEEN:
KULDEEP MAAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] Ms. Maan appealed the assessments of her 2000 and 2001 taxation years. It was agreed at the outset of the trial that the issues remaining to be resolved related only to the 2001 taxation year. The issuefor that year is whether Ms. Maan received shareholder benefits of $2,800, $4,787 and $15,000 from 783879 Alberta Ltd. (783879).
[2] These issues arise primarily as a result of what I can only describe as shoddy bookkeeping. Ms. Maan looked after keeping the books and records for 783879, a company she owned, which carried on the business of home construction. Her bookkeeping consisted mainly of keeping original invoices, statements of adjustments on house sales, receipts and bank records and then simply delivering all these items to her accountant, who would attempt to prepare general ledgers and proper books of account as well as prepare tax returns. My impression of this method of maintaining the company's books is that it inevitably led to inaccuracies and misunderstandings. This was compounded by a not uncommon approach by a small business where a shareholder's and a company's finances are not as carefully separated as is appropriate. I got the impression that Ms. Maan occasionally personally covered company's expenses. She did not appreciate the significance perhaps of having a separate entity. It was left to the accountant to make sense of these financial comings and goings. In this respect, he appears to have relied heavily on entries to the shareholder's loan account.
[3] With respect to the three amounts in issue, I will deal first with the amount of $2,800. This amount appeared in the general ledger prepared by the accountant as a year end adjusting entry for automobile expenses, debiting automotive and crediting the shareholder loan account. Ms. Maan, unfortunately, was unable to shed any light on the background of this amount, other than to protest that, as it was denied as a corporate expense, then it should not be included in her personal income.
[4] One plausible explanation for this accounting entry is that Ms. Maan paid a corporate automobile expense out of her own pocket. Another possible explanation, however, is that this was a payment for Ms. Maan's personal automobile expenses and should never have gone through the company's books. Regrettably, the accountant was not available to confirm why he accounted for the $2,800 in this fashion. Without any detailed explanation from Ms. Maan, I am unable to find that she has demolished the Crown's assumption that the $2,800 constituted a benefit to her.
[5] Next, with respect to the $4,787 amount, Ms. Maan offered the explanation that 783879 paid this amount on February 8, 2001 to a trucking company, as a favour to that trucking company. The trucking company, within a few days, repaid the amount to Ms. Maan personally, who deposited the amount back to 783879. 783879 has been denied any deduction by Canada Revenue Agency. The accountant recorded the payment from Ms. Maan back into 783879 to Ms. Maan's shareholder loan account on February 12, 2001. At the end of October, 2001, Ms. Maan had drawn her shareholder's loan account down to zero. Under these circumstances, has she received a benefit?
[6] What should have been reported? 783879 should have reported either (i) a loan to the trucking company and a repayment of that loan by the trucking company. (Nothing would have gone through the shareholder loan account, and it would have been income neutral in 783879.); or (ii) a loan to Ms. Maan who pays the trucking company, gets repaid and repays 783879. Instead, Ms. Maan has had her shareholder's loan account increased by $4,787 in February 2001 to recognize the money she actually put into 783879. The accountant's treatment reflects a position that 783879 gifted monies to the trucking company, followed by a loan of a similar amount to it from Ms. Maan.
[7] The Federal Court of Appeal decision in The Queen v. Chopp,[1] adopted an explanation of shareholder benefit given by Justice Cattanach in M.N.R. v. Pillsbury Holdings Ltd.[2] It reads:
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.
[8] Any benefit conferred by 783879 on Ms. Maan has been incurred inadvertently. Certainly, had the amount been properly accounted for, there would have been no benefit. I cannot find any purpose of 783879 to confer a benefit or advantage on Ms. Mann. The increase to the shareholder loan account did not arise from any direction of the directing mind of the corporation (Ms. Maan), but arose solely due to a misunderstanding of the circumstances by the person trying to create proper books. There is no method, arrangement or device to confer a benefit.
[9] Finally, I turn to the amount of $15,000. Ms. Maan deposited $15,000 of her money into 783879 in early 2001, and this is properly recorded to the shareholder loan account. In March, she withdrew $6,000 and in April 2001, she withdrew another $9,000. These amounts were erroneously recorded by the accountant in the general ledger as labour expense: he did not adjust the shareholder's loan account. Ms. Maan testified, and I believe her, that the cheques themselves indicated they were repayments of her loan. The auditor, Mr. Miller, quite properly denied the labour expense to 783879. Ms. Maan was assessed a $15,000 benefit, however, on the basis that the shareholder loan account was not debited the $15,000. Certainly, it was not debited to the shareholder loan account as it was incorrectly accounted for as wage expenses. So, the question is, does the taxpayer have an opportunity to correct the error? CRA has corrected the error on the corporate side by disallowing the labour expense.
[10] I find that no benefit arises upon the receipt of the $15,000 by Ms. Maan. I am satisfied that the legal reality was the repayment of a loan. If there is a benefit, it can only arise because Ms. Maan's shareholder loan account is overstated by $15,000; in other words, without adjusting that loan account, she could take out another $15,000 tax free. Ms. Maan stated that the ledgers have been revised. Mr. Miller, the auditor, indicated he had seen revised legers, but could not recall the details. He described these revisions as being for information purposes.
[11] In the Chopp decision referred to me by counsel for the Respondent, the Federal Court of Appeal, following the passage cited earlier, indicates:
The same reasoning lead Bowman, J.T.C.C. to a similar conclusion in a very recent case, Long v. Canada (July 24, 1997) Doc. 96-4714(IT)I (T.C.C.)) where the taxability asserted by the Minister was based upon an erroneous failure to adjust a loan account. ...
[12] In the Long decision, Justice Bowman had this to say:
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 was not in accordance with the company's established practices constitutes "in reality a method, arrangement or device for concurring a benefit or advantage on the shareholder qua shareholder".
Ms. Levesque, counsel for the Respondent, very fairly referred me to a number of decisions of this Court, in particular, Robinson v. M.N.R.,[3] Simons v. M.N.R.[4] and Chopp v. R.,[5] where erroneous bookkeeping entries were held not to be an appropriate basis for taxation. I understand that the Robinson and Chopp cases had been appealed to the Federal Court. Oddly speaking, these cases support the conclusion I have reached and I think that as a matter of policy, the Judges of this Court should strive, to the extent possible, to achieve consistency. Each case under subsection 15(1), however, as stated in Pillsbury, turns on its own facts and I find as a fact that no benefit was conferred on the Appellant qua shareholder within the meaning of subsection 15(1) of the Income Tax Act.
[13] Respondent's counsel argued that the distinguishing factor in this case, from the Chopp decision for example, is that here Ms. Maan actually received $15,000 from the company. Yet, as I stated earlier, I characterize that payment, just as the company did, as legally a repayment of a shareholder loan. No benefit arises on that payment.
[14] The benefit on which the Respondent seeks to tax Ms. Maan arises from the bookkeeping error, an error which Ms. Maan indicates has since been corrected. In these circumstances, in accordance with the Long and Chopp decisions, I do not find the $15,000 is a shareholder benefit.
[15] The appeal for the 2000 taxation year is dismissed, and the appeal for the 2001 taxation year is allowed and referred back to the Minister for reassessment on the basis that the amounts of $4,787 and $15,000 are not to be included in Ms. Maan's income as shareholder benefits. The Appellant is entitled to costs.
Signed at Ottawa, Canada, this 6th day of October 2006.
"Campbell J. Miller"
Miller J.
STYLE OF CAUSE: KULDEEP MAAN AND
HER MAJESTY THE QUEEN
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: September 26, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice Campbell J. Miller
DATE OF JUDGMENT: October 6, 2006
APPEARANCES:
|
For the Appellant: |
The Appellant herself |
|
Counsel for the Respondent: |
Margaret A. Irving |
COUNSEL OF RECORD:
Firm: N/A
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada