Agar v. The Queen, 80 DTC 6311, [1980] CTC 397 (FCTD)

Grant, DJ:—This is an appeal by the plaintiff from a reassessment of his 1973 and 1974 personal income tax returns by the Minister of National Revenue whereby there was added to his previously declared income for the year 1973 the sum of $41,000 and to his 1974 previously declared income the further sum of $36,163. In his returns the plaintiff had shown his employment income to be for the year 1973 only the sum of $12,000 received by him from Ossam Enterprizes Limited and for the year 1974 the sum of $10,000 received by him from the same company.

The plaintiff had been in the construction business since 1950. In 1956 he and associates caused a company known as Ossam Enterprizes Limited (hereinafter called Ossam) to be incorporated. It was not active for some time. The plaintiff took over the total interest of other parties interested in such company in 1958. He is the President and Director thereof. He owns two-thirds of the issued shares therein and his wife owns the balance.

In 1961 he decided to specialize in the construction of shopping plazas. He had associated with himself in such business on Curtis Conrad who was a real estate agent with considerable experience in leasing properties and knowledgeable as to appropriate areas in which such plazas might be operated profitably.

Their practice was to seek out such locations and then incorporate a company to purchase the land on which the plaza was to be erected. A separate company was incorporated for each plaza. Before construction some of the shares in each company were sold to provide funds for the cost of the building. The plaintiff says that in each case Ossam was engaged by the owner of the company to have Agar provide his expertise in approving plans and specifications, making all necessary arrangements with the municipality and supervising the construction and its remuneration therefore was only to be fixed and payable when the owner company had progressed financially to the extent that it could afford to make such payment. If the company did not become a financial success then Ossam was to forego any such fee.

However there is no evidence that Ossam was ever a party to such agreement. It was a matter arranged between Agar and Conrad on the one hand and the related company receiving the benefit of the services on the other.

After the plaza was completed and occupied, Ossam, together with a company named Palm Springs Developments Limited (hereinafter called Palm Springs) assumed the obligation of maintaining the building and making whatever changes might be needed when new tenants took over one of the stores. Palm Springs was a company entirely owned by Curtis Conrad, Agar’s associate. It also was responsible for keeping the plaza occupied. Remuneration for such services was on the same indefinite basis as that associated with services rendered in the construction of the building. Such company was organized in 1956. Conrad in his testimony stated that prior to that he had carried on all his activities without the benefit of such a company through which he might operate. He had been urged by Agar and his accountant to form such a company. Prior to that the companies owned by Agar and him had not been providing much income but by 1956 they were beginning to be profitable. He acknowledged that after such company was formed he carried on with his duties to the related companies in the same way he had done before. The Company had no salaried employees. Its offices were in those of Maplevale but there was no Sign on the door to indicate such fact. The actual sign on the door was “Conrad Realty” and it had no telephone or printed letterhead. It never advertised in its own name. Conrad advertised for tenants in his own name and they were not told of Ossam of Palm Springs. Even the plaintiff’s witness Edgar Eberle who owned a one-third share in Southwick Investments Limited, one of the related companies, had never heard of Ossam.

The defendant submits that it was really the plaintiff who rendered such services in each case and while such fees were paid by a number of companies to Ossam, it was the plaintiff who earned the same and became entitled thereto but he requested and directed that such payments be made to Ossam who in turn paid him a lesser sum as salary. The defendant submits that such arrangements were made so that the plaintiff’s personal income tax would thereby be lessened in each year but that the amounts paid by such companies to Ossam in the years in question were actually income to the plaintiff.

In the year 1973 the following companies paid to Ossam for such services the following amounts, namely

The plaintiff had reported in his 1973 returns employment income from Ossam $12,000 leaving a balance in dispute of $41,000.

In the year 1974 the following companies paid to Ossam for such services

The plaintiff had reported in his returns for 1974 as employment income from Ossam the sum of $10,000 leaving a balance in dispute of $36,163.

The plaintiff was President of all such companies. There was no written agreement between Ossam and any of such Plaza companies nor with the plaintiff in respect of the services for which such payments were made. The plaintiff’s full time was taken up with the services he so rendered. Ossam kept no record of the time spent by him in such work and gave him no written instructions as to his work. He and his wife were the only persons who performed services for Ossam. He even attended to the removal of snow from the office premises of Maplevale.

There was no documentation of any agreements or understandings as between Agar and Conrad. They both worked out of the Maplevale offices.

Maplevale Development Limited was also a related company owned jointly and equally by Conrad and Agar. In the years in question it was strictly a management company. It employed an accountant. Ossam did not contribute to his salary nor to the maintenance of the office. Until 1968 it owned an office which was the headquarters for all such related companies. The names Ossam or Palm Springs were not shown on the door of such office. In the years in question Ossam used the letterhead of Maplevale as it did not have any of its own. It never had a telephone but the plaintiff’s telephone was used for communication. The last recorded minutes of a meeting of its directors was that of March 26, 1969 and that was the last meeting of such directors. Conrad said any business done after that was by telephone between Agar and himself.

The allegation that Ossam was to be paid for services rendered to each of the related companies only when that company was financially able to pay is a most unusual arrangement. One would have expected such terms of a contract to be in writing particularly when large amounts were involved and postponement of payment might be for years. It never could have been binding on Ossam in any event because there was no evidence that such company was a party to such arrangement.

Both Agar and Conrad said they had agreed between themselves to split a management fee of 5% of rentals from each plaza and have the amounts paid to Ossam and Palm Springs but again Ossam had no part in such arrangement. Agar said that the amount of money paid to him by Ossam a salary from time to time was fixed by his need. On cross examination he said he would take more as he needed it and that the amount was determined on the basis of what he needed to operate comfortably.

In my opinion these facts are more consistent with Agar rendering whatever services he did personally and directly to the company receiving the benefit thereof rather than as an employee of Ossam.

Maplevale Developments Limited was the company which appears to have performed all the administrative and managerial work of all the related companies. It provided the office and had an accountant and two other employees. Ossam had no facilities whatever for performing such services. It is not suggested that it had any other employee than Agar. It is my opinion from all the evidence that any services performed by him for any of the related companies were rendered as an officer of the company for whom the services were performed rather than as an employee of Ossam. Exhibits 7 and 8 are invoices from Ossam and Palm Springs respectively to Summerfield for what appears to be identical services performed by Maplevale as shown in invoice exhibit 6. The latter company was the one equipped to do the administration work for all the related companies and the one that actually performed such work. This fact raises serious doubts as to the bona fide character of the claim that Ossam performed any services for these related companies.

As in the case of Norman Leon v MNR, [1977] 1 FC 32; [1976] CTC 541; 76 DTC 6303 there was ‘‘a complete absence of any bona fide business purpose for the interposition of Ossam into the provisions of the appellant’s services” to any of such related companies except for purposes of reducing income tax.

The fact that the payment for Agar’s services may have been paid into a bank account in the name of Ossam over a period of years by the related companies for whom such services were performed is not conclusive of the issue herein.

I find that Ossam did not perform any services for which the moneys in question were paid in the years 1973 and 1974 to it nor was there any valid agreement whereby that company should provide such services to any such related companies. The same were performed by the appellant personally or as an officer of the company receiving the benefit thereof and not as a servant or agent of Ossam. Ossam received such moneys for and on behalf of the appellant at his direction and at all times were held in trust for him for the purpose above stated. His contentions that he only rendered such services as a servant of Ossam and the arrangement whereby the remuneration therefore was paid to Ossam amounted to a sham.

G D Adams v MNR, 24 Tax ABC 154; 60 DTC 253.

Leonard Mendels v The Queen, [1978] CTC 104; 78 DTC 6267.

AIM Steel Limited v MNR, [1969] CTC 479; 69 DTC 5305.

For the foregoing reasons the appeal is dismissed with costs.