Murphy v. The Queen, 85 DTC 5462, [1985] 2 CTC 248 (FCTD)

Collier, J:—This is an appeal from a decision of the Tax Review Board. The presiding member upheld assessments by the Minister for the plaintiff's 1970-74 taxation years, inclusive.

The assessments levied increased taxes and penalties. For the taxation years set out, the Minister added into the plaintiff's taxable income, the

These amounts were said by the Minister to be suppressed income of a company that was appropriated to the plaintiff as a shareholder of the company.

The question, as I see it, is essentially one of fact.

The plaintiff, in the years under review, was married. Her husband's name was Kenneth J Murphy. They had three sons. In 1970, they were 13, 9 and 6 years old.

The plaintiff and her husband separated in 1978. They have since been divorced.

The plaintiff and Kenneth Murphy were the major shareholders in a company called Murphy Hotel Enterprises Limited (“the company"'). The plaintiff held 2,447 of 5,000 issued and outstanding common shares of the company. There was no evidence before me as to who the directors of the company were. The company operated the Hotel Quinte in Belleville. During the latter part of 1972 and thereafter, the company operated, as well, the Dutch Mill Inn in Trenton. The plaintiff was the secretary-treasurer of the company. She had authority to sign company cheques, with hers as a sole signature. There was no evidence before me as to the actual position of Kenneth Murphy. He ran the businesses. He also had signing power as a sole signatory. According to the plaintiff's evidence, which I accept, she rarely signed cheques on behalf of the company. That was done by her husband. He also looked after the company's banking.

The plaintiff, during the periods in question, worked two to three hours a day for the company. She worked at the Hotel Quinte supervising housekeeping and some dining-room staff. She also calculated the retail tax payable on the sales made by the three bars in the hotel. She did not have as much to do with the Dutch Mill Inn operation, but did do some calculations of revenue when the auditor was absent. She did some daily cash sheets during the years under review.

The plaintiff was paid a salary by the company. The amounts were as follows:

1970 — $1,000 1971 — 5,200 1972 — 5,200 1973 — 5,300 1974 — 5,200

She set out these amounts on her income tax returns. No other income, or sources, were declared

In February 1974, the Revenue Department was carrying out an audit of the company. As a result of that audit, it was felt there had been suppression of income by the company. Further investigations were made. Criminal charges were laid against the company, Kenneth Murphy and the plaintiff. They were dismissed.

The Minister, in 1975, issued the assessments earlier referred to. Assessments were also made against the company and Kenneth Murphy.

The assessments against the company asserted suppressed income of $112,998.30 over the five years.

The assessments against the plaintiff amounted to 50 per cent of that figure. A similar assessment of 50 per cent was issued against Kenneth Murphy.

In each year, the amounts are described as “unreported income . . ." of the hotel Quinte or the Dutch Mill Inn, or both “. . . appropriated from Murphy Hotel Enterprises Ltd".

For the year 1971 there was, in addition, an amount of $840.31 described as

Unreported appropriation

re work done at 180 William Street,

Belleville and paid by Murphy Hotel

Enterprises Ltd (50% of $1,680.62).

One hundred and eighty William Street was the family home. It was in the name of the plaintiff and her then husband.

All three taxpayers, the company, the plaintiff and Kenneth Murphy, appealed the assessments to the Tax Review Board. The appeals were heard at the same time in 1980. The assessments were, in each case, upheld.

All three taxpayers then appealed to this court. The only appeal now remaining before the Court is the present one by the plaintiff. The appeals of the company and of Kenneth Murphy were dismissed for want of prosecution.

The plaintiff neither attended, nor gave evidence, at the Tax Review Board hearing. Kenneth Murphy did. At the hearing of this appeal, the plaintiff was the only witness on her behalf.

She testified, in chief, as to what services she performed for the company. I have already briefly outlined that evidence. She said she never handled, in the course of her duties, any cash. Nor did she at any time have possession of cash.

There was a safety deposit box in the name of her husband and herself. She testified she never entered the safety deposit box. She was corroborated in this by evidence from one of the defendant's witnesses.

It was admitted, on behalf of the plaintiff and for the purposes of this action only, that the company suppressed, or failed to include in its tax returns, income of $112,998.30.

She said she never took or received anything from the company, cash or otherwise, other than her reported earnings; nor did the company give her anything other than those earnings. She further testified she received no benefit or advantage, cash or otherwise, from the company through Kenneth Murphy.

The plaintiff was not, in my opinion, shaken in cross-examination. I found her to be an honest and credible witness. As one illustration, I refer to her candid and forthright explanation as to why she did not attend the Tax Review Board hearing. She was careful in her answers, both in chief and in cross-examination. That was understandable. These matters occurred as long as 15 years ago. The issues raised amounted, in effect, to fraud on her part. I found no reason to disbelieve her statements. I accept her evidence.

In cross-examination, a number of documents prepared by the plaintiff were put to her, as well as other documents where her handwriting appeared. For the defendant, it was submitted this evidence, and other circumstantial evidence, must militate against the plaintiff and her credibility; that she had not met the “onus” of showing the assessments and the assumptions on which it was made were wrong.

I have found the plaintiff to be a credible witness. The documents I have referred to did not, to my mind, indicate she should be disbelieved, or that her evidence she neither received nor took cash, or anything, from the company, should not be accepted. The basis of the assessment according to Mr Carson, who was responsible for it, was: the company had suppressed income of over $112,000; Kenneth Murphy and the plaintiff had control of the company, because between them they owned approximately all the shares; the company income appropriated was, in the view of the Revenue Department, in cash (as distinguished from cheques); it ended up in the hands of the Murphys; because of their equal share holdings, 5! per cent of the appropriations were apportioned to each.

It may well be that income of the company may have been appropriated to Kenneth Murphy. That was not an issue before me.

I find the plaintiff has met the “onus”, stated by her counsel, to demolish the Minister’s assumptions and the correctness of the assessments.

The assessments for the years 1970, 1972, 1973 and 1974 are vacated.

I turn now to the assessment for the year 1971. In that year some work, amounting to $1,680.62, was done on the family residence. A company cheque was paid to the contractor who did the work. This amount later found its way into the asset side of the company’s books.

Again, I accept the plaintiff’s testimony on this matter. She recalls the contractor being at the house and doing work. She did not order the work to be done. Nor did she personally pay anything to him. She did not even know if he was paid, or by whom. Apparently, according to Mr Carson, a company cheque was signed by Kenneth Murphy. Technically, the charging of half the amount to the plaintiff is, in my opinion, correct. The property was jointly owned.

That part of the assessment will remain. The appropriation of $15,150.73 into income will be deleted. The penalty of $1,450.35 will also be vacated. There was, in my view, no gross negligence on the part of the plaintiff in not including that amount in her 1971 return. She had no knowledge of the matter, nor any means of knowledge.

The plaintiff has substantially succeeded. She is entitled to the costs of this action.

Appeal allowed in part.