http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108835/index.do
Latham v. The Queen (March 26, 2015 – 2015 TCC 75, D’Arcy J.).
Précis: The appellants, John and Diane Latham, owned all of the shares of Farmers Feed and Supply Ltd. (“Farmers”). In 2005 it went out of business, paid its creditors and distributed most of the balance of its assets, $94,000, to Mr. Latham. CRA assessed this as a shareholder appropriation. In 2006 CRA assessed each of the Lathams pursuant to subsection 84(2) of the
Income Tax Act with a deemed dividend of $67,501 on the winding up of Farmers. The Court accepted Mr. Latham’s evidence that the $94,000 was a partial repayment of $100,000 he had paid personally to CIBC when it called Farmers’ line of credit in 2002. The Court further concluded that CRA’s calculation of Farmers’ retained earnings was incorrect. There were no retained earnings to distribute in 2006. The appeals were allowed with costs.
Decision: The assessments under appeal concerned an alleged appropriation from, and alleged deemed dividends from, Farmers:
[1] The Minister of National Revenue (The “Minister”) reassessed the Appellant John Latham for his 2005 taxation year to include in income shareholder appropriations of $94,000. She reassessed each of John Latham and the Appellant Diane Latham for their 2006 taxation years to include in income a deemed dividend of $67,501. The Minister also assessed John Latham a gross negligence penalty of $10,486 in respect of his 2005 taxation year.
[2] At the commencement of the hearing, counsel for the Respondent informed the Court that the Minister was prepared to consent to a reduction in the deemed dividends from $67,501 to $44,842.
[3] All amounts assessed relate to John and Diane’s shareholdings in Farmers Feed and Supply Ltd. (“Farmers”).
…
[8] The Appellants incorporated Farmers in 1989 to operate an agricultural livestock feed mill in Stony Plain, Alberta. Unfortunately, the mill was lost in early 1998 because of a fire.
[9] In 1999, after settling a dispute with its insurance company, Farmers built a new building on its land. Farmers rented most of the building to third parties; however, it also rented a portion of the building to a related company. The related company, Old Mill Feed, Seed & Pet Supply Ltd., sold feed and other types of seed.
[10] All of the assets of Farmers, including the building, were sold in early 2005 pursuant to a foreclosure action. Farmers ceased operations in 2006.
[Footnote omitted]
The Court accepted Mr. Latham’s evidence that the $94,000 paid to him in 2005 by Farmers was a partial repayment of the amount of $100,000 which he had to personally pay to CIBC in 2002 when CIBC called Farmers’ line of credit:
[18] I accept Mr. Latham’s evidence with respect to his provision of the Guarantee and the subsequent payment by him of $100,000 pursuant to the Guarantee. Once Mr. Latham paid this amount, it represented an amount owed by Farmers to Mr. Latham. The payment of the $94,000 in 2005 represented partial repayment of the amount owed by Farmers to Mr. Latham as a result of his payment under the Guarantee. It was not a shareholder’s benefit.
With respect to the alleged deemed dividends in 2006 the Court did not accept CRA’s computation of the retained earnings of Farmers:
[32] The evidence before me is that, pursuant to the Foreclosure Action, all of the assets of Farmers were sold in early 2005 for $600,000. If I accept Mr. McAllister’s calculation of the book value of Farmers’ assets at the time of the disposition thereof, then Farmers suffered a loss of at least $149,576 on the sale of its assets. In fact, the loss was higher since Farmers was required to pay its foreclosure expenses. The Respondent filed a document, Exhibit R-20, which shows that the CRA assumed that the foreclosure expenses were about $77,000. This means Farmers suffered a loss on the disposition of its assets of approximately $227,000. That loss wiped out the retained earnings of $202,102 calculated by Mr. McAllister.
[33] In summary, the Minister based her reassessment of the deemed dividend solely on Mr. McAllister’s determination that Farmers had $202,102 of retained earnings when it was dissolved. The evidence before me is that Farmers did not have any retained earnings when it ceased carrying on its business in 2006. In short, there is no evidence before me to support a finding that funds or property of Farmers were distributed or otherwise appropriated to or for the benefit of the Appellants.
[Footnotes omitted]
As a result both appeals were allowed, with costs:
[35] The reassessment in respect of John Latham’s 2005 taxation year is referred back to the Minister for reconsideration and reassessment on the basis that Farmers did not confer a benefit on Mr. Latham.
[36] The reassessments in respect of John Latham’s 2006 taxation year and Diane Latham’s 2006 taxation year are referred back to the Minister for reconsideration and reassessment on the basis that the Appellants are not deemed under subsection 84(2) to have received a dividend from Farmers.
[37] All penalties are vacated. John Latham is awarded costs of $1,500. Diane Latham is awarded costs of $500.
[Mr. Latham acted for both himself and his wife.]