Budwal v. The Queen
(December 19, 2014 – 2014 TCC 370) was a decision involving section 160 assessments against husband and wife who were alleged to have received funds from a corporation they controlled at a time it had an unpaid tax liability:
 Budwal Investments carried on a business in residential construction and real estate, primarily in Victoria, British Columbia.
 G. Budwal and P. Budwal owned respectively 60% and 40% of the shares of Budwal Investments.
 In 2002, Budwal Investments purchased a parcel of land on Blackberry Road in Victoria, British Columbia, for the purpose of developing a four-unit townhouse project (the “Blackberry Project”).
 Budwal Investments sold the first two units of the Blackberry Project during its taxation year ending October 31, 2003.
 Budwal Investments then sold the last two units of the Blackberry Project (the “2004 Properties”) during its taxation year ending October 31, 2004. The company failed to report its net profit from these two sales in its income tax return for the 2004 taxation year. As a result, it was reassessed for unreported income in the amount of $149,054. The company did not succeed in its challenge of this reassessment.
 On March 26, 2008, the Minister of National Revenue (the “Minister”) assessed the Appellants under subsection 15(1) of the Act on the ground that they appropriated the net profit of $149,054 that Budwal Investments had failed to report. The amount that was added to the income of each of the Appellants’ under subsection 15(1) of the Act was based on their respective shareholdings.
 Although the Appellants filed notices of objection to challenge those assessments, they did not appeal the matter to the Tax Court of Canada upon receiving a notice of confirmation. While an issue arises as to whether the benefit that is the object of the assessments against the Appellants should be reduced by the amount of their liability, if any, under section 160 of the Act, the question is moot because that matter is not before me in the present appeal.
 On May 19, 2011, the Minister assessed the Appellants under subsection 160(1) of the Act with respect to Budwal Investments’ unpaid tax liability of $110,052.45, using the same methodology as that used to establish the amount of their respective shareholder’s appropriations. The assessment issued was in the amount of $89,432 for G. Budwal and $59,622 for P. Budwal in respect of the alleged transfer of property referred to in paragraph 8 above.
The appellants argued that the amounts transferred by Budwal Investments were paid to satisfy outstanding debts to them. The Tax Court rejected this line of argument in part because it conflicted with the corporation’s financial statements which showed the shareholder accounts in a deficit position:
 The Appellants argue that the evidence shows that they received the transferred funds in repayment of amounts Budwal Investments owed to them. I disagree.
 First, the evidence shows that Budwal Investments reported that it had a negative shareholders’ loan balance of $27,752 when it filed its T2 income tax return for its taxation year ending October 31, 2003. According to this information, the Appellants owed Budwal Investments $27,752 when they allegedly appropriated Budwal Investments’ pre-tax profit earned from the sale of the 2004 Properties. While the Appellants attempted to prove that this was a mistake, I find that the evidence that they presented fell well short of the mark.
 Mr. McCoy, the Appellants’ accountant and Budwal Investments’ external accountant, testified on behalf of the Appellants. The financial information that he presented at the hearing was substantially different than the information he had previously provided to the Minister at the objection stage. I found this evidence to be neither reliable nor credible. He offered no plausible explanation to justify his latest calculations. In addition, he could not explain how Budwal Investments could have ended up with an unpaid tax liability of $110,052.45 and no assets to satisfy this liability. He acknowledged that the Blackberry Project was a profitable venture, as did G. Budwal during his examination in chief. Therefore, Budwal Investments should have had sufficient funds to repay its shareholders’ loan and satisfy its income tax liability in full.
The Tax Court however rejected CRA’s allocation of the corporate appropriations based solely on the ratio of shareholdings:
 At the hearing, Mr. McCoy testified that $100,000 transited from Budwal Investments to 587667 B.C. Ltd. (“B.C. Ltd.”) and then on to G. Budwal. His testimony on this point was corroborated by bank statements showing the deposit in B.C. Ltd.’s bank account and two cheques from B.C. Ltd. to G. Budwal, each in the same amount of $50,000. Since these transfers occurred within a few days of the sale of the 2004 Properties, it is reasonable to infer that these amounts were paid out of Budwal Investments’ profit earned from those sales. It is clear from the evidence that P. Budwal was a passive shareholder and that her husband controlled all of Budwal Investments’ operations. Considering as a whole the evidence submitted, I conclude that G. Budwal was the only person who appropriated funds from Budwal Investments. At the very least, P. Budwal has presented a prima facie case that she did not appropriate the funds that the Minister alleged she did.
As a result Mr. Budwal’s appeal was dismissed but that of Mrs. Budwal was allowed and the section 160 assessment against her was vacated. In the case of both appeals the Tax Court allowed the parties 30 days to agree on costs or to make short submissions (not to exceed 5 pages) on costs.