Berbynuk v. The Queen, 78 DTC 6322, [1978] CTC 448 (FCTD)

Mahoney, J:—This action, an appeal from a decision of the Tax Review Board rendered in 1972, in respect of the reassessment of the plaintiff’s 1956 personal income tax, came on for trial at Windsor, Ontario, on May 31, 1978. The final reassessment was dated August 29, 1967. The amount in issue is $687.68 made up of $550.15 federal tax and a 25% penalty of $137.53, plus interest.

The plaintiff was represented by counsel before the Tax Review Board, where the proceedings were held in camera, but was without counsel in this action. Her appeal to the Tax Review Board was, by agreement of counsel, heard together, on common evidence, with that of another /3 shareholder, director, officer and employee of Johnstel Metal Products Limited, (hereafter “Johnstel”). The plaintiff is obviously a competent business person concerned about her reputation. She is not a lawyer and her view of the materiality of certain matters and the relevance of certain evidence led her to deal at length with matters at best peripheral and to lead evidence of dubious value.

I mention all of the foregoing because, in order to come to grips with what I see to be the real issue in this action, I have been obliged to refer to certain unchallenged facts that appear on the record although they were not dealt with by the plaintiff, who testified herself and also called the since retired supervisor of the special investigation section, Revenue Canada, at Windsor. The defendant called no witnesses.

The plaintiff was, in 1956, owner of /3 of the issued shares of Johnstel. Two other individuals, one her husband, each owned /3. The plaintiff was a director and secretary-treasurer of the company and was, until August 31, employed by it as office manager. Her termination of employment appears to have been an aspect of a very bitter estrangement from her husband.

Johnstel was engaged at Windsor in stamping shapes from metal sheets for the automobile industry. The process generated a certain amount of scrap metal which had a resale value. Beginning in 1956, at least insofar as the evidence goes, some of the scrap was sold for cash and the cash receipts were neither recorded in Johnstel’s books of account nor reported as income in its tax returns. The plaintiff asserts that while she was employed by Johnstel, the cash was used for a variety of business purposes. These disbursements were neither recorded in the company’s books nor reflected as expenses in its tax returns.

Following an investigation, apparently completed in 1964, Revenue Canada determined that Johnstel had suppressed income from the sale of scrap metal in each of the years 1956 through 1962. As to 1956, the amount suppressed was determined to have been $6,082.24, whereof, after a proration apparently taking account of both her /3 equity and eight months’ employment, $1,234.89 was attributed to the plaintiff as personal income. The balance was attributed equally to the other two shareholders. An aggregate of $30,097.10 income was found to have been suppressed by the company over the entire period, whereof $3,694.68 was received between January 1 and August 31, 1956. As to 1957 through 1962, the suppressed income was attributed to the other shareholders, who remained employees, but not to the plaintiff, who remained a shareholder throughout. I infer a determination that the cash or benefit of Johnstel’s suppressed income was received by the individuals as employees rather than as shareholders.

The evidence does not support the plaintiff’s challenge of the amount of income determined to have been suppressed during 1956 and I accept it. Likewise, the calculation of the amount attributed, necessarily arbitrarily, to the plaintiff is unshaken. If it was properly attributed to the plaintiff, there is no basis for my disagreeing with $1,234.89 as being the correct amount.

The plaintiff, however, denies that she received any of the suppressed income and I believe her to be telling the truth. In this regard, I am in agreement with what I appreciate the Tax Review Board to have found as a fact.

The witness Mrs Stella Berbynuk impressed the Board as a capable business executive. She testified that the cash which came into her possession from January 1 to August 31, 1956, constituted a slush fund which was used for business purposes including promotion. The Board feels that, while the sworn testimony of Mrs Berbynuk clearly reflected the facts as they had been registered in her mind, it cannot from an objective viewpoint give them sufficient weight to refute the findings of the Departmental auditor, especially since it was her legal responsibility to see that Johnstel kept adequate business records including vouchers.

That, as I see it, is a finding that the determination that income had been suppressed and the calculation of its amount ought not be disturbed on the basis of the plaintiff’s evidence. As I have said, I agree with that. I do, however, have difficulty with the attribution of that income to the plaintiff personally when she did not, in fact, receive any of it. This question appears not to have raised before the Board.

Counsel for the defendant relies on sections 3, 5 and 8 of the Income Tax Act, RSC 1952, c 148, as amended by SC 1956, c 39, s 1, as it stood in 1956, for authority for the attribution. I see nothing in any of those provisions which would authorize the attribution of a corporation’s suppressed income to an employee or a shareholder simply because it was suppressed income. In order for it to be attributable the individual, whatever the relationship to the corporation, the individual must have either received the money or its value in the form of a benefit or advantage.

The plaintiff is entitled to judgment with costs; however, in the circumstances, costs to be recovered shall be limited to amounts paid or payable to the court’s registry which, I trust, can be settled without taxation.