Mitzelos v. The Queen, docket 2002-69-IT-I (Informal Procedure)

Date: 20020628

Docket: 2002-69-IT-I

BETWEEN:

GEORGE MITZELOS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Little, J.

FACTS

[1]            Carpet City Limited ("Carpet City") was incorporated under the laws of the Province of Ontario in 1979. Carpet City was involved in the business of selling carpets to individuals and commercial customers.

[2]            The shares of Carpet City were owned as follows:

                                Saul Lutwak                                           50%

                                Appellant                                               50%

[3]            In addition to owning 50% of the shares of Carpet City, the Appellant was employed as a salesman and buyer for Carpet City.

[4]            In 1997, the Appellant and Mr. Lutwak had a serious and irreconcilable difference of opinions. On the 14th day of February 1997 the Appellant was fired by an official of Carpet City. At the time of the termination of his employment, Carpet City requested that the Appellant reimburse Carpet City for the amount owing on the Appellant's shareholders' loan. Since the Appellant did not pay the balance owing on the shareholders' loan, Carpet City wrote off the amount of $24,405.52. Carpet City also issued a T-4 Supplementary Form which stated that the Appellant had received employment income from Carpet City in 1997 of $49,409.59. The amount of $49,409.59 included the balance of $24,405.52 referred to in the shareholders' loan.

[5]            By a Notice of Reassessment issued on the 3rd day of May 2000 the Minister of National Revenue (the "Minister") issued a Notice of Assessment for the Appellant's 1997 taxation year. In the said assessment the amount of $24,405.52 was included in the Appellant's income as a taxable benefit. During the hearing Counsel for the Respondent stated that the taxable benefit in question was taxable as a benefit under either paragraph 6(1)(a) of the Income Tax Act (the "Act") or subsection 15(1) of the Act.

[6]            Pursuant to a further Notice of Reassessment dated November 13, 2001 the Minister reassessed the Appellant's 1997 taxation year and the taxable benefit of $24,405.52 was reduced to the amount of $22,457.65. During the hearing of the appeal Counsel for the Respondent stated that the amount of the taxable benefit was reduced further to the amount of $22,148.00.

ISSUE

[7]            The issue before the Court is whether the Appellant is required to include the amount of $22,148.00 in determining his income for the 1997 taxation year.

ANAYLSIS

[8]            The amount of $22,148.00 is made up of a number of cheques issued by Carpet City either to George Mitzelos to the Royal Bank (re C.I.B.C.) or to the Royal Bank re the Appellant's visa account.

[9]            The Appellant and the Appellant's wife testified that many of the cheques issued to the Royal Bank of Canada by Carpet City were issued in connection with a line of credit obtained by the Appellant to enable him to purchase an automobile. The Appellant and the Appellant's wife testified that the Appellant was required to use the automobile in the course of the Appellant's employment with Carpet City. The Appellant and his wife referred to the following cheques:

                                September 30, 1994                               $ 649.29

                                October 31, 1994                                       649.29

                                November 30, 1994                                   649.29

                                December 31, 1994                                   850.00

                                January 31, 1995                                       850.00

                                February 01, 1995                                     840.00

                                February 28, 1995                                     640.00

                                March 01, 1995                                         840.00

                                April 01, 1995                                            840.00

                                May 01, 1995                                             840.00

                                June 01, 1995                                             840.00

                                July 01, 1995                                              840.00

                                August 01, 1995                                       840.00

                                September 30, 1995                                  840.00

                                November 01, 1995                                   840.00

                                December 01, 1995                                   840.00

                                January 01, 1996                                       840.00

                                February 01, 1996                                     895.00

                                March 01, 1996                                         895.00

                                April 01, 1996                                            895.00

                                May 01, 1996                                             895.00

                                June 01, 1996                                             895.00

                                July 01, 1996                                              895.00

                                July 31, 1996                                              895.00

                                                                                                                $19,792.87

[10]          The Appellant and his wife testified that all of the above cheques were paid by Carpet City to the Royal Bank of Canada in connection with the line of credit obtained by the Appellant to purchase an automobile that was used by the Appellant in the course of his employment with Carpet City. I accept their testimony. However, until the Appellant was fired by Carpet City effective February 14, 1997, there was never any suggestion that the Appellant should repay the amounts that had been provided to him by Carpet City in connection with the line of credit or car loan that he had obtained from the Royal Bank of Canada. In other words, until the acrimonious relationship had arisen between the Appellant and Mr. Lutwak, Mr. Lutwak was prepared to have Carpet City issue cheques to the Royal Bank of Canada to cover the Appellant's line of credit (re the purchase of the Appellant's automobile). However after the Appellant was fired Mr. Lutwak caused Carpet City to demand repayment of the Appellant's car loan payments. When repayment of the car loan payments was not made by the Appellant, Mr. Lutwak (or Carpet City) attempted to have the Appellant subject to tax on all of the said car payments plus other items.

[11]          The Appellant and his wife also testified that the Appellant was required to use his automobile on a daily basis in connection with his position as a salesman/buyer for Carpet City. I accept this testimony.

[12]          The Appellant estimated that his personal use of the automobile was approximately 5% to 10%.

[13]          As noted in paragraph [9] above, the automobile payments made by Carpet City in 1994, 1995 and 1996 total $19,792.87. A personal use factor of 10% of this amount would be equal to $1,979.28.

[14]          Based on the sworn testimony of the Appellant and his wife, I have concluded that the amount of $17,756.89 ($19,792.87 - 10% or $1,979.28) should be deleted from the Appellant's income for his 1997 taxation year. In all other respects the Reassessment will remain unchanged.

[15]          In reaching my conclusion, I have noted that the Appellant and his wife were not able to obtain copies of the relevant documents or other information relating to the shareholders' loan from Carpet City because of the acrimonious relationship that existed between the Appellant and Mr. Lutwak and between the Appellant and Carpet City after the Appellant was fired.

[16]          I also recognize that Carpet City did not issue the certificate as specified by subsection 8(10) of the Act, presumably because of the firing of the Appellant by Carpet City and the demand by Carpet City that the Appellant immediately repay the shareholders' loan.

[17]          I have also noted that after being employed by Carpet City for almost 16 years, the Appellant was locked out of Carpet City's office on February 19, 1997, and all of his employee privileges and benefits were cancelled as of February 17, 1997 (see Exhibit A-4). The attempt by Carpet City to have the Appellant subject to tax on the previously approved payments made by Carpet City on the Appellant's car loans appears to be unjustified.

[18]          I have not been convinced by the evidence presented by the Appellant that the other items in issue should be allowed.

[19]          The appeal will be allowed, with costs, and the matter will be referred back to the Minister for reconsideration and reassessment.

Signed at Ottawa, Canada, this 28th day of June 2002.

"L.M. Little"

J.T.C.C.

COURT FILE NO.:                                                 2002-69(IT)I

STYLE OF CAUSE:                                               George Mitzelos and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           April 24, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge L.M. Little

DATE OF JUDGMENT:                                       June 28, 2002

APPEARANCES:

Agent for the Appellant:                     Louis Leclair

Counsel for the Respondent:              Nicolas Simard

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2002-69(IT)I

BETWEEN:

GEORGE MITZELOS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on April 24, 2002 at Ottawa, Ontario, by

the Honourable Judge L.M. Little

Appearances

Agent for the Appellant:             Louis Leclair

Counsel for the Respondent:      Nicolas Simard

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 28th day of June 2002.

"L.M. Little"

J.T.C.C.