BETWEEN:
and
Heard at Vancouver, British Columbia, on January 16, 2007.
Judgment delivered at Ottawa, Ontario, on February 15, 2007.
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
EVANS J.A.
Docket: A-465-04
Citation: 2007 FCA 62
CORAM: LÉTOURNEAU J.A.
EVANS J.A.
MALONE J.A.
BETWEEN:
DONALD LUST
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
MALONE J.A.
I. Introduction
[1] The appellant is a self-employed researcher and has worked for a number of years to develop a leaching technology for the extraction of gold from raw ore (the Process). Mr. Lust appeals to this Court from a judgment of a Judge of the Tax Court of Canada (Judge) dated July 30, 2004 (unreported), which upheld personal assessments against him for the taxation years 1998 and 1999 totalling $117,849 inclusive of interest.
[2] The Minister of National Revenue (Minister) grounded these assessments on subsection 15(2) and section 80.4 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) (Act), having determined that certain expense monies advanced to Mr. Lust were loans received in his capacity as the majority shareholder of Extrac Minerals Ltd. (Extrac) that remained unpaid (see Respondent’s Reply at paragraph 3). Extrac is an Alberta company that Mr. Lust incorporated to advance the development and promotion of the Process.
[3] In case of reference, subsection 15(2) is reproduced in part as follows:
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15(2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is
(a) a shareholder of a particular corporation, …
and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, any other corporation related to the particular corporation or a partnership of which the particular corporation or a corporation related to the particular corporation is a member, the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership [Emphasis added]. (2.6) Subsection 15(2) does not apply to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments. |
15(2) La personne ou la société de personnes -- actionnaire d'une société donnée, personne ou société de personnes rattachée à un tel actionnaire ou associé d'une société de personnes, ou bénéficiaire d'une fiducie, qui est un tel actionnaire -- qui, au cours d'une année d'imposition, obtient un prêt ou contracte une dette auprès de la société donnée, d'une autre société liée à celle-ci ou d'une société de personnes dont la société donnée ou une société liée à celle-ci est un associé est tenue d'inclure le montant du prêt ou de la dette dans le calcul de son revenu pour l'année. Le présent paragraphe ne s'applique pas aux sociétés résidant au Canada ni aux sociétés de personnes dont chacun des associés est une société résidant au Canada.
(2.6) Le paragraphe (2) ne s'applique pas aux prêts ou aux dettes remboursés dans un délai d'un an suivant la fin de l'année d'imposition du prêteur ou du créancier au cours de laquelle ils ont été consentis ou contractés, s'il est établi, à la suite d'événements postérieurs ou autrement, que le remboursement n'a pas été fait dans le cadre d'une série de prêts, de remboursements ou d'autres opérations. |
II. Proceeding in the Tax Court of Canada
[4] The appellant appealed the assessments to the Tax Court of Canada under its informal procedure. Although it is difficult to characterize Mr. Lust’s various complaints before the Tax Court, his core argument was that the Minister erroneously interpreted the meaning of a July 17, 1995 contract (the Development Agreement) between Pre-Min Resources Ltd., a Saskatchewan corporation (Pre-Min), and Extrac as well as the nature of certain expense monies advanced there under.
[5] Mr. Lust gave evidence and called two witnesses from Canadian Revenue Agency (CRA). The evidence of Brenda Gay Rahier, who was in the Verification and Enforcement Branch of CRA at the time of Mr. Lust’s reassessment, is relevant to the current appeal. No witnesses were called by the Minister.
[6] While Mr. Lust did not retain legal counsel and the court record is somewhat muddled, the following facts are uncontested:
(a) Mr. Lust incorporated Extrac and was at all material times a director and majority shareholder of that company. No income tax returns were ever filed on behalf of Extrac because, according to Mr. Lust, it never had income to report.
(b) Mr. Lust was also a director of Pre-Min until 2001.
(c) The Development Agreement was drawn by Mr. Lust who has no legal training and no legal or tax advice was ever sought or obtained prior to its execution.
(d) Under the Development Agreement, Pre-Min obtained from Extrac the worldwide rights to use the Process. Extrac agreed to supply, pay for and make available to Pre-Min its proprietary chemicals used in the Process. In return, Pre-Min agreed to pay Extrac a gross overriding royalty of 5% on all ore processed.
(e) Because the Process still needed refinement, section 7 of the Development Agreement was drafted to cover certain start-up expenses, including the purchase of equipment and chemicals by Extrac, and its promotion of the Process. It reads as follows:
i. 7. Pre-Min agrees to pay for the development of the process until such time that the royalty payments to Extra cover these expenses. Pre Min in the interim will supply to Extrac and/or Donald Lust expense money to work on the process as a loan the amounts to be determined from time to time by mutual agreement. This loan is to be repaid out of the 5% royalty to be paid to Extrac upon going into production at a mutually agreed upon rate.
(f) Under Clause 7 of the Development Agreement, Pre-Min advanced directly to Mr. Lust $50,000 in 1998 and $60,000 in 1999. Neither amount has been repaid to Pre-Min according to its balance sheet placed in evidence. Specifically, the Pre-Min balance sheet for 1999 lists these amounts as loan receivables owed by Extrac.
(g) None of these direct advances to Mr. Lust were ever repaid.
(h) Pursuant to formal notices dated March 19, 2001, the Minister increased the appellant’s income in the following terms and in the following amounts:
1998 Subsection 15(2) shareholder loan $50,000
Subsection 80.4 interest benefit $ 1,424
________
Total $51,424
1999 Subsection 15(2) shareholder’s loan $60,000
Subsection 80.4 interest on benefit $ 6,425
________
Total $66,425
[7] In his reasons, the Judge first reviewed the wording of the Development Agreement and determined that Pre-Min and Extrac were the only parties to that agreement and that the funds advanced by Pre-Min were not loans to Mr. Lust personally, but rather were loans to Extrac. As no receipts were placed in evidence by Mr. Lust for any of the alleged expenditures, the Judge reluctantly determined that the appellant had “siphoned off” all of the advances for his own use, thus giving rise to the Minister’s assessments, which he confirmed. There is no analysis in his reasons as to the application of subsections 15(2) of the Act.
III. Analysis
[8] The purpose of subsection 15(2) is to include in a shareholder’s income amounts received from a corporation in the guise of loans or other indebtedness. In his reply to the appellant’s notice of appeal, the Minister characterized the funds received by Mr. Lust as subsection 15(2) shareholder loans and relied on a number of assumptions including the following:
j) the Payments were a loan made to Extrac and not to the Appellant;
…
l) Extrac is responsible for the repayment of the loan;
m) the Appellant received the Payments in his capacity as majority shareholder of Extrac;
[9] In my analysis, the Judge correctly determined that the parties to the Development Agreement were Pre-Min and Extrac, and not Mr. Lust, and that Extrac was responsible to repay the loan. Mr. Lust was mistaken that he was a party to that agreement. The Judge also correctly determined that Clause 7 amounted to a direction from Extrac to Pre-Min to pay expense advances to Extrac and/or Mr. Lust in the amounts and at the times agreed upon by these two corporate parties. Essentially, Mr. Lust was a third party to the Development Agreement and was expected to use the money for the benefit of Extrac for developing and promoting the Process. On this evidence, assumptions j) and l) advanced by the Minister that the payments were made as a loan to Extrac stand.
[10] A dispute exists, however, as to the nature of the benefits received by Mr. Lust; i.e. are they shareholder loans as the Minister alleged in his notice of March 19, 2001 or is there another basis for Mr. Lust’s indebtedness to Extrac for the purpose of that subsection?
(1) Shareholder Loan?
[11] The evidence on this point comes from Ms. Rahier, a CRA auditor. Her testimony is reproduced below:
Mr. Grewal, Counsel for the Respondent, Cross-Examines the Witness:
Q Miss Rahier, can you tell us why you assessed this money as a loan to (sic) Extrac to the Appellant rather than a straight appropriation of the money?
A I considered it an appropriation. That was the original letter. And went towards 15(2), which the Income Tax Act simply says, any loans or indebtedness of a shareholder to its company can be assessed to the shareholder.
… in your capacity as the shareholder of Extrac [you] are responsible for those funds since they were paid in your name. We assessed you as if they were a loan so if you did, in the future, repay them or prove the expenses, you could be allowed a deduction.
… So it’s actually a loan. It’s not a loan between you and Extrac. It’s an indebtedness that you’ve created by being paid from Pre-Min for money that’s supposed to be Extrac’s (Appeal Book, page 283 at lines 13-14).
[12] There is no doubt that by receiving the expense monies and using some of it for his own personal use Mr. Lust received a benefit. However, there is no evidence that the money paid directly to Mr. Lust by Pre-Min was a shareholder loan by Extrac to Mr. Lust, a fact of which CRA officials were aware of (Appeal Book at page 283, lines 10-13). The only repayment requirement that is evident from the record is Extrac’s obligation to repay Pre-Min. It is noteworthy that the reported cases in connection with subsection 15(2) involve a direct loan of money by a corporation to the shareholder (see, for example: Lavoie v. Canada (1995), 95 D.T.C. 673 (T.C.C.); Newton v. Canada, [1997] 3 C.T.C. 2631 (T.C.C.); Meeuse v. Canada (1994), 94 D.T.C. 1397 (T.C.C.)).
(2) Another basis of Indebtedness?
[13] In his reasons, the Judge failed to characterize the nature of the indebtedness, which he determined did exist (see Appeal Book at page 14, lines 15-17). The question must be asked, therefore, is there a legal basis on which to find that Mr. Lust was obliged to pay to Extrac a sum equivalent to the amounts advanced to him by Pre-Min? In my analysis, there is as far as the advances have been used by Mr. Lust for personal expenses.
[14] Under Clause 7 of the contract, Mr. Lust has received money which another, Extrac, is liable to repay to Pre-Min. In other words, Mr. Lust received a benefit from Pre-Min at Extrac’s expense, for which he is liable to Extrac for unjust enrichment, if indeed the enrichment is unjust. Whether an enrichment is unjust depends on whether there is an enrichment of the defendant, a corresponding deprivation of the plaintiff, and an absence of juristic reason for the enrichment (see Garland v. Consumers' Gas Co., 2004 SCC 25, [2004] 1 S.C.R. 629 at para. 30, 237 D.L.R. (4th) 385).
[15] In purchasing this benefit for Mr. Lust under Clause 7, Extrac cannot be taken to have intended to make him a gift. Corporations cannot normally give away company property to a shareholder. However, Extrac, and its shareholders, have an interest in the development of the Process, since this will enable them to earn royalties from Pre-Min. Hence, if the money advanced by Pre-Min to Mr. Lust was spent on this purpose, the advance was for the benefit of Extrac.
[16] A person is liable in restitution to pay for benefits acquired as a result of services rendered by another if the services were requested. In my view, Clause 7 is a sufficient indication that Extrac requested that the advances to Mr. Lust be spent on the Process. In these circumstances, Mr. Lust would not be unjustly enriched at Extrac’s expense as long as he spent the money on developing and promoting the Process.
[17] The Minister assumed that the entire advances from Pre-Min were spent on Mr. Lust’s living expenses. Mr. Lust would not produce into evidence any receipts for chemicals and equipment purchased for the Process due to confidentiality issues. However, he did produce receipts for expenses for accommodation, meals and fuel incurred for promotional activities. He said at one point that more than half of the advances were spent on purchasing supplies for the Process over the entire period from 1996 to 1999.
[18] His evidence was less clear when it came to the 1998 and 1999 taxation years, by which time most of the equipment had been purchased. Consequently, he said that he must have spent a significant portion of the advances in those years on promotion, which, as I understand it, he estimated at $1,000 per month. The Judge discussed this issue with Mr. Lust at pages 24-26 of the transcript and it is the subject of cross-examination and further discussion at pages 51-63.
[19] The Judge believed that Mr. Lust had spent some of the money on the stipulated purposes; however, he declined to allow him to deduct any amounts in the absence of receipts (see Appeal Book at page 15, lines 6-21). He believed that Mr. Lust could get back from the company any money that he had spent on purchasing chemicals. On this evidentiary record, I do not think that it is possible to say that the Judge made a palpable and overriding error in concluding that there was not adequate proof of what portion of the advances Mr. Lust had spent for the benefit of the company as opposed to personal expenses. Accordingly, unjust enrichment has been established.
IV. Conclusion
[20] In summary, Mr. Lust was indebted to Extrac on the basis of unjust enrichment for the amount of the advances used for his personal expenses. In the absence of evidence of how much he spent for the benefit of the company, he is liable to Extrac, for the full amount, which must be included in his income for 1998 and 1999. When and if Extrac pays Pre-Min, Mr. Lust may be called upon to discharge his indebtedness to Extrac. At that time he will then be able to deduct any payment that he makes to Extrac from his income for that year.
[21] Accordingly, I would dismiss the appeal but without costs.
"I agree
Létourneau J.A."
"I agree
Evans J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-465-04
STYLE OF CAUSE: Donald Lust and
Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: January 16, 2007
REASONS FOR JUDGMENT BY: Malone J.A.
CONCURRED IN BY: Létourneau J.A.
Evans J.A.
APPEARANCES:
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FOR THE APPLICANT
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FOR THE RESPONDENT
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SOLICITORS OF RECORD:
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11200 – 115 Street Osoyoos, British Columbia V0H 1V5
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FOR THE APPLICANT
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Deputy Attorney General of Canada
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FOR THE RESPONDENT
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