Date: 20000228
Docket: T-1337-93
BETWEEN:
HER MAJESTY THE QUEEN
Plaintiff
- and -
DAVID ROBINSON
Defendant
REASONS FOR ORDER
LUTFY A.C.J.
[1] This action is an appeal from the judgment of Rowe J. of the Tax Court of Canada.1 The plaintiff seeks the reinstatement of the reassessment by the Minister of National Revenue of the defendant"s 1986 income tax return to include as income the sum of $64,022 as funds or property having been appropriated by the defendant from David Robinson Ltd., a company in which he is the sole shareholder. This assessment was made pursuant to subsection 15(1) of the Income Tax Act .2
[2] The relevant provisions of subsection 15(1) of the Income Tax Act state:
| 15.(1) Where in a taxation year ... (b) funds or property of a corporation have been appropriated in a manner whatever to, or for the benefit of, a shareholder, or (c) a benefit or advantage has been conferred on a shareholder by a corporation, ... ... the amount or value thereof shall ... be included in computing the income of the shareholder for the year. |
15.(1) Lorsque, au cours d"une année d"imposition, ... (b) des capitaux ou des biens d"une corporation ont été attribués, de quelque manière que ce soit, à un actionnaire ou doivent servie à son profit, ou (c) un avantage a été accordé à un actionnaire par une corporation, ... ... le montant ou la valeur de ceux-ci ... doit être inclus dans le calcul du revenu de l"actionnaire pour l"année. |
[3] The evidence at trial was limited to two agreed statements of facts. The first, substantially similar to the one filed before the Tax Court of Canada, reads as follows:
| 1. At material times, the Defendant was the sole director, officer and shareholder of a corporation known as David Robinson Ltd. (the "Company") that carried on a business of retail antique sales and appraisals. The Company was incorporated in 1971 and has a fiscal year end of December 31. |
| 2. In April 1986, the Defendant left Canada, sold the Company"s premises in Victoria, British Columbia, and transferred the Company"s inventory to England (the "Inventory"). |
| 3. Later in 1986 the Defendant decided to return to Canada and to that end, the Company purchased another building for its business in Victoria, B.C., and most of the Inventory was left in England to be sold by the auctioneers, Tennants of Yorkshire ("Tennants"). |
| 4. Tennants gave the Defendant an advance of "60,000 (the "Advance"). The Defendant deposited the Advance to the Company"s bank account at the value of $122,466.36 Cdn, which amount was reflected in the Income Statement of the Company and reported in the Company"s T2 Return. Attachment "A" is a true copy of the Company"s T2 return for the 1986 taxation year. |
| 5. The total sales of Inventory sold through Tennants was "103,565 and, after the deduction of the Advance and other Tennants" expenses, the balance was "32,130.68 which had an equivalent in Canadian funds of $64,022.19 (the "Balance"). Attachment "B" is a true copy of the Invoice from Tennants. |
| 6. Tennant"s sent a cheque to the Defendant for the Balance, and on December 1, 1986 the Defendant deposited the cheque to the Company"s account in Victoria, B.C. Attachment "C" is a true copy of the deposit slip. |
| 7. In 1987, when compiling the financial statements for the Company"s 1986 taxation year, the Company"s accountants (the "Accountants") misclassified the Balance on the books and records of the Company as a credit to the Defendant"s shareholder loan account rather than a sale. This resulted in an understatement of the revenues and an overstatement of the Company"s payable to the Defendant. Attachment "D" is a true copy of the analysis of the Defendant"s shareholder loan account in the Company"s General Ledger. The Accountants were also the Defendant"s personal accountants. |
| 8. There was no further communication between the Accountants and the Defendant and there was no specific direction, at any time, from the Defendant that the Balance was to be credited to his shareholder loan account. |
| 9. At all material times the Defendant was in a credit balance in his shareholder loan account in the Company, even before the credit of the Balance. The Defendant never drew on the Balance, however the Company had sufficient underlying net assets to retire the whole of the Company"s debt to the Defendant. |
| 10. On November 4, 1987, an auditor of the Department of National Revenue (the "Auditor") advised the Accountant and the Defendant of the commencement of an audit of the Company. The Company had not made any changes to the it"s [sic] financial statements, including the shareholder"s loan account, prior to the commencement of that audit. |
| 11. At the Accountants" office on November 6, 1987, the Auditor examined the Company"s books and records, with respect to, inter alia , the shareholder loan account and the sales invoices. |
| 12. On November 10, 1987, the Accountants advised the Auditor that the Balance should properly be represented as a revenue or sales item of the Company and that it was credited in error to the Defendant"s shareholder loan account. |
| 13. The Defendant did not report the Balance on his Return of Income for his 1986 taxation year. Attachment "D" is a true copy of the Defendant"s 1986 Return. [Emphasis added.] |
[1] A second agreed statement of facts was filed before this Court, instead of the plaintiff calling the accountant for the defendant and his company to testify. This agreed statement of facts reads as follows:
| 1. Mr. Chan was a partner of Austin Chan & Wallace, Certified General Accountants (the "Accountants"). |
| 2. Mr. Chan was responsible for the preparation of the tax returns of the Defendant and the company, David Robinson Ltd. (the "Company"), and had been preparing those returns for a number of years. |
| 3. Mr. Chan supervised the preparation of the tax returns for the Defendant and the Company including the misclassification of the Balance as a credit to the Defendant"s shareholder loan account rather than a sale. |
| 4. On Wednesday November 4, 1987, Mr. Chan was contacted by an auditor for the Department of National Revenue (the "Auditor") concerning the Company"s return. An appointment was made to review the Company"s books and records at the Accountant"s office on Friday November 6, 1987. |
| 5. On Friday November 6, 1987, the Auditor commenced his review at the Accountant"s office. The Auditor asked some initial questions of Mr. Chan that required Mr. Chan to review source documents located at the Company"s place of business. |
| 6. On the morning of Tuesday November 10, 1987 Mr. Chan met with the Defendant and reviewed documents at the Company"s place of business. |
| 7. Based on his discussion with the Defendant and a review of certain documents, Mr. Chan realized that the Balance should have been a sale rather than a credit to the shareholder"s loan account. |
| 8. In the afternoon of Tuesday November10, 1987, Mr. Chan phoned the Auditor to advise him of the error. |
| 9. The misclassification of the Balance resulted from Mr. Chan"s failure to ask questions of the Defendant to clarify the source of the Balance. [Emphasis added.] |
[1] At trial, the parties further stipulated that the 1987 financial statements of David Robinson Ltd. reflected the appropriate correction in the shareholder loan account.
[2] In the Tax Court of Canada, Judge Rowe concluded that the accountant"s error in misclassifying the payment to the company of $64,022 on its books and records, as a credit to the defendant"s shareholder loan account rather than as a sale, did not constitute an appropriation within the meaning of subsection 15(1) of the Income Tax Act . The plaintiff challenges Judge Rowe"s statement of the law and his finding of fact which he expressed as follows:
| It is apparent that the words used in subsection 15(1) refer to some form of action with a strong component of intent and certainly cannot be seen to embrace an event that is the result of mutual mistake between the parties, that is, the shareholder and the corporation, when the mistake is the result of an act or omission of a third party operating in good faith but on a faulty premise. |
...
| The Appellant has met the onus and there has been no appropriation by him of a benefit from the corporation nor has the corporation conferred on him a benefit. 3 [Emphasis added.] |
[3] In Chopp v. Canada,4 Judge Mogan of the Tax Court of Canada considered his colleague"s decision in Robinson5 and concluded that he would not interpret subsection 15(1) as referring "to some form of action with a strong component of intent". He stated the test to determine whether a benefit is conferred within the meaning of subsection 15(1) in these terms:
| I think a benefit may be conferred within the meaning of subsection 15(1) without any intent or actual knowledge on the part of the shareholder or the corporation if the circumstances are such that the shareholder or corporation ought to have known that a benefit was conferred and did nothing to reverse the benefit if it was not intended. I am thinking of relative amounts. If there is a genuine bookkeeping error with respect to a particular amount, and that amount is truly significant relative to a corporation"s revenue or its expenses or a balance in the shareholder loan account, a court may conclude that the error should have been caught by some person among the corporate employees or shareholders or outside auditors. Shareholders should not be encouraged to see how close they can sail to the wind under subsection 15(1) and then plead relief on the basis of no proven intent or knowledge.6 [Emphasis added.] |
This decision was affirmed by the Court of Appeal.7
[4] In this case, both parties accept the statement of the test as enunciated by Judge Mogan in Chopp. They further agree on the issue in this appeal: whether the circumstances are such that the defendant ought to have known a benefit was conferred to him by his company when he filed his 1986 income tax return.
[5] On March 18, 1987, the defendant signed his 1986 personal income tax return. On May 27, 1987, the defendant also signed the corporate tax return of David Robinson Ltd. Both returns were prepared by the accountant. The company"s financial statements for calendar year 1986, prepared by the accountant and dated May 12, 1987, were attached to the corporate tax return signed by the defendant on May 27, 1987. There is no other evidence as to when the financial statements were prepared.
[6] There are three relevant facts gleaned from the documentary evidence.
[7] First, I find that the company"s financial statements were not available to the defendant when he signed his 1986 income tax return. There is no evidence that the financial statements had been prepared as early as March 18, 1987.
[8] Second, the defendant"s 1986 employment income of $5,000, according to his tax return, could not have alerted him to any discrepancy. His company"s statement of expenses, in its financial statements for 1986, discloses wages and benefits of $5,528 for 1986 and $7,200 for 1985. There is no other evidence concerning the defendant"s employment income for the years prior to 1986. On the basis of the material before me, there was no information in the defendant"s 1986 income tax return, or otherwise available to him, which could have suggested that his declared employment income was incorrect, particularly given his move to England and the interruption of his business activities during part of that calendar year.
[9] Third, the company"s balance sheet for 1986 disclosed a liability under "due to shareholder" of $151,794, an increase of some $74,000 over 1985, which apparently reflects the erroneous classification of the amount of $64,022. The plaintiff argues that when the defendant signed the corporate tax return with the attached financial statements, he ought then to have known of the bookkeeping error. In my view, I can make no such finding of fact on the basis of the increase in the shareholder"s loan account from 1985 to 1986. It has not been established that the defendant had the knowledge to appreciate the significance of this entry in the statement of the company"s liabilities, even if I assume that he read or ought to have read the financial statements.
[10] I have also considered the plaintiff"s arguments based on calculations to show the material relevance of the amount of $64,022. This amount is almost thirteen times the defendant"s reported income for 1986. This multiple quantification is of little relevance in comparison with the relative similarity of the defendant"s income for 1985 and 1986, the only evidence of his employment income on the record.
[11] The plaintiff further argues that the amount of $64,022 also represents 82% and 42% of his shareholder loan account in 1985 and 1986 respectively. The expression of the amount in issue as a percentage of the shareholder loan account may have been relevant if the evidence disclosed that the defendant read and understood the significance of his shareholder loan account when he signed the corporate tax return. There is no such evidence in this case.
[12] The plaintiff also characterized the amount of $64,022 as 24% of the company"s gross sales of $267,000 for 1986. Again, this retrospective calculation is of very little significance, if any at all. If the defendant had focussed on his company"s gross sales, he would have noted an increase of 15% over 1985, even in a year where its business activities in Canada were interrupted for several months. This kind of analysis, in and of itself, ought not to have made the defendant aware of the misclassification of this revenue.
[13] In summary, on the evidence before me, I find the defendant could not have known, when he signed his 1986 income tax return, that the amount of $64,022 had been erroneously credited to his shareholder loan account, instead of having been included in the company"s income for 1986. Similarly, I find the evidence does not establish on the balance of probabilities that the defendant knew or ought to have known of the misclassification when he signed the 1986 corporate tax return.
[14] The plaintiff"s final submission is that the error of the accountant be imputed to the defendant taxpayer.
[15] It is not in dispute that the accountant"s treatment of the amount of $64,022 was a genuine bookkeeping error. According to the agreed facts, there was no specific direction, at any time, from the defendant that the balance was to be credited to his shareholder loan account. The misclassification of the amount resulted from the accountant"s failure to ask questions of the defendant to clarify its source. In her memorandum of fact and law, counsel for the plaintiff acknowledged that there was no intent nor actual knowledge on the part of the defendant concerning this error.
[16] There is no evidence concerning the circumstances of the "misclassification", other than the assertion that the defendant himself was totally uninvolved. Even if I assume that this bookkeeping error was one which, in the words of Judge Mogan in Chopp , "should have been caught by ... [the] outside auditors", the circumstances are not such that "the shareholder or corporation ought to have known that a benefit was conferred and did nothing to reverse the benefits if it was not intended." While there may be certain circumstances where the shareholder and the corporation cannot disassociate themselves from the error of the outside auditors, this is not one of those cases.
[17] Here, the agreed statements of facts do not provide the basis to hold the defendant responsible for the error of the accountant. The defendant received no money from his company as a result of the misclassification. The plaintiff acknowledges that the defendant was unaware of the error. The defendant"s credibility is not in issue. There was no oral testimony from the defendant or his accountant. The Court had no opportunity to assess their demeanour under cross-examination. The position of the plaintiff, expressed in terms of the defendant"s constructive knowledge, comes fairly close to imposing vicarious liability on the taxpayer for the errors of the accountant, a road upon which I am not prepared to embark on the basis of these facts and the legislative provisions in force in 1986. I simply cannot conclude in this case that the accountant"s error constitutes an appropriation or benefit to the shareholder from the corporation about which the defendant ought to have known and for which he must be held responsible.
[18] Accordingly, this action and appeal will be dismissed with costs.
"Allan Lutfy"
A.C.J.
Ottawa, Ontario
February 28, 2000
__________________1 David Robinson v. Minister of National Revenue (1993), 93 DTC 254 (T.C.C.). This appeal proceeded as a trial de novo: Minister of National Revenue v. Simpson"s Ltd. (1953) 53 DTC 1127 (Ex. Ct.) at 1129.