Stanley Radonich v. Minister of National Revenue, [1992] 2 CTC 2243, 92 DTC 1840

Bell, T.C.C.J.:—The appellant has appealed from reassessments of his 1985 and 1986 taxation years.

The following facts were not in dispute:

(1) The appellant was, at all relevant times, the sole shareholder of Stanley Fishing Company Ltd. ("company") engaged in the business of fishing in British Columbia.

(2) During the 1985 and 1986 taxation years the appellant worked as a crew member on the fishing vessel, B.C. Safari, owned by the company.

(3) The appellant included, as fishing income, in his income tax return, the following amounts for the following taxation years, namely:

(4) The aforesaid reassessments added the following amounts as unreported fishing income to the income of the appellant for those taxation years, namely:

(5) The aforesaid reassessment for the appellant's 1985 taxation year also increased his income as shareholder appropriations from the company in the following amounts, namely:

(6) The aforesaid reassessments for the appellant's 1985 and 1986 taxation years added certain amounts to the appellant's income in respect of the disallowance of various claimed deductions.

(7) The aforesaid reassessments for the appellant's 1985 and 1986 taxation years assessed penalties pursuant to the provisions of subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as follows, namely:

A reassessment dated April 25, 1990 deleted the penalty in respect of the aforesaid $1,000 amount.

At the hearing counsel advised the Court that:

(a) the $1,000 addition to the appellants 1985 income as a shareholder appropriation would be deleted from such income,

(b) the appellant would abandon his claim for various deductions referred to in (6) above, and

(c) a portion of the $4,505 respecting personal vehicle expenses paid by the company in an amount to be determined by the Minister of National Revenue, upon direction of counsel for both parties, would be allowed as a deduction to the appellant and the penalty imposed in respect of automobile expense addition to the appellants 1985 income would be deleted.

The Court was then advised that there remained two matters for determination, namely,

(1) the reassessed "Unreported Fishing Income" as follows:

(2) the penalty assessed in respect of the aforesaid additions to income.

Counsel for the appellant stated that the total amount of fishing income not reported by the appellant and/or the company in respect of the appellant's 1985 and 1986 taxation years was $14,106.14 and further stated that evidence would be adduced on this point.

The appellant's evidence indicated that he was the sole shareholder, sole director and sole officer of the company, that he bought the boat, B.C. Safari in 1975, that he fished for “Canadian Fish" in that year and that subsequently, including the years under appeal, the boat was involved in a salmon fishing operation in which all fish were sold to Ocean Fisheries Ltd.

On May 22, 1979, the appellant incorporated the company and he testified that on that date he transferred his fishing business to the company. Although no written agreement respecting such conveyance was produced, counsel for the appellant entered as an exhibit a copy of a document bearing the name Revenue Canada, Taxation and the number T2057 and described as ELECTION ON DISPOSITION OF PROPERTY BY A TAXPAYER TO A CANADA CORPORATION. Although there was no evidence that the document was filed with the Department and although no signature is visible, it was examined by counsel for the respondent and no objection in respect of it was made. This document, described on the face thereof as being a joint election under subsection 85(1) by a Canadian corporation and a taxpayer who received shares of that corporation as consideration for all or any property disposed of, lists the assets conveyed to the company as Boat, Equipment, Radio, Truck, License and Goodwill. This document is consistent with appellant's evidence of the transfer of those assets to the company and I accept the fact that such conveyance was made.

The appellant also testified that, before incorporation of the company, the monetary proceeds of the fish catch were divided" 11 ways and that the crew gets 7 of the 11 shares". He stated that the crew usually consisted of five or six members and further that the remaining 4/11 went to the boat owner.

He advised the Court that he incorporated the company because he had too much income in his own name and that he transferred the entire fishing business to the company, keeping none of it in his own name. He said that the company started carrying on the fishing business when it was incorporated and continued to carry it on to this day". He gave the following evidence with respect to 1978 and subsequent taxation years:

In 1978 he received some income as a machinist from a machinery company and all his crew share and boat share income went into his “fishing income”.

In 1979 he received some income as a machinist, his crew share income went to the company and he received a management fee from the company and the company reported all fishing income.

In 1980 his crew share income went to the company and he received employment Income from the company and the company reported all fishing income, being his crew share income and the boat income.

In 1981 his crew share income went to the company and he received a management fee and a small amount of employment income from the company and the company reported all fishing income.

In 1982 he received fishing income of $5,102.32 shown on a T4F supplementary form bearing the designation STATEMENT OF FISHING INCOME, such amount shown thereon as having been paid by Ocean Fisheries Ltd.

In 1983 and subsequent taxation years the appellant took a portion of the crew share so that he could qualify for Unemployment Insurance and the rest went to the company.

The appellant testified that in 1978 he took all the fishing income in his own name, that in 1979 he transferred the fishing business to his company and that he did not receive any fishing income personally until 1982. He stated that as the result of a discussion with Mr. Jim Geros, the chief bookkeeper at Ocean Fisheries Ltd., he decided to take enough fishing income in his name to quality for unemployment insurance benefit, that income being a portion of his crew share as a crew member of the company's boat, B.C. Safari, for that year. He stated clearly that the balance of his crew share went into the company in 1982.

Appellant's counsel then produced and entered as an exhibit a document bearing Ocean Fisheries Ltd. heading which consisted of two parts, one entitled B.C. Safari (Stan Radonich) and one entitled B.C. Safari (owner's account). The appellant testified that the former part showed his fishing income which went to the company and the latter part showed all fishing income and stated that the crew share account figure was consolidated with the owner's account. He then gave evidence of the material he provided to his accountant who, on the basis of same, prepared income tax returns both for the appellant and the company. Cross-examination of the appellant did not in my judgment, compromise any of the evidence given by him. Examination of the appellant's second witness, the aforesaid Mr. Jim Geros, substantiated the method in which fishing income was divided between crew share and boat share, affirmed the advice given to the appellant respecting qualifying for unemployment insurance and described the mode of accounting used.

Appellant's counsel also adduced evidence through Mr. Robert Pasman, a certified general accountant, who was the accountant for the appellant and the company. He described the procedure followed by his firm in preparing the income tax returns of both. He stated that the appellant's return was prepared at a time different from that of the company, it having a February 28 year end, and that the appellant

. . . would bring into our office the information for his personal return, the T4F for the fishing income, and then anything else that he had personally, like his rental income properties, and he would summarize those expenses for us and hand those to us.

He then added that they would look at his files to see if there was anything from the company that he had to declare personally as a wage that had been paid to him.

Appellant's counsel then produced a letter from Mr. Pasman to him dated November 25, 1991, presented same for identification, and examined Mr. Rasman on its contents. The distillation of his evidence in that regard was that a transfer was made from the Stan Radonich crew account with Ocean Fisheries Ltd. in May 1986 in the amount of $23,428.35. The sum of $8,116.29, being the amount on the appellant's T4F from Ocean Fisheries Ltd., was deducted therefrom leaving a balance of $15,312.06. He explained that the aforesaid $23,428.35 was credited to the owner's account in May 1986 and that the balance of $15,312.06 was, therefore, included in the company’s 1987 taxation year. He added that a second transfer was made from Stan Raoonich's account on February 28, 1987 to the owner's account (company) in the amount of $20,760.14. He said he had discovered that that sum was credited to the appellant personally in his shareholder's account and was not recorded in the company's income for its 1987 taxation year. He stated that the journal entry effecting this credit was "not picked up" in review as not being the appellant's money and consequently was not reported as company income. He then stated that the sum of $15,312.06 which was reported in the company's 1987 taxation year should have been reported in the company's 1986 taxation year. He expanded on this by saying that in searching the records he determined that Ocean Fisheries Ltd. account revenues were deposited on December 31, 1985 totalling $23,428 and not in May 1986 and should not therefore have been included, as was the case, in the company's 1987 taxation year.

With respect to the transfer of $20,760.14 from the Stan Radonich account to the company on February 28, 1987, Mr. Pasman testified that because the amount of $6,654.95 was included by the appellant pursuant to a T4F from Ocean Fisheries Ltd. in his 1986 taxation year income, the only amount remaining unreported was the difference between those two amounts, namely $14,106.14. This is the amount referred to above as described by appellant's counsel to be the total amount of fishing income not reported by the appellant and/or the company in respect of the appellant's 1985 and 1986 taxation years.

On cross-examination of Mr. Pasman, counsel for the respondent suggested that the income was declared by the company only after and because of an audit of the company conducted by the Department of National Revenue. Indeed, respondent's counsel said, during such cross-examination, in response to a question from the Court,

Well, your Honour, what I'm getting at is that it wasn’t reported by the company because there was no intention to report it to anybody.

I find no basis in evidence to support that statement and I accept, as a matter of fact, the evidence of the witness testifying on behalf of the appellant. Further, the fact that any amount was not declared by the company is irrelevant in the appellant's appeal.

Evidence adduced on behalf of the respondent through an official of the Department of National Revenue did not, in my opinion, compromise the evidence given on behalf of the appellant. That evidence tended to draw conclusions of law, characterizing certain transferred amounts as shareholder's loans. That official even stated that the amount reported by the company was reported in "error" and that” it wasn't income of the company".

At the close of his case, respondent's counsel stated that,

The Minister's contention is that the income cannot be reported by the company. It must be reported by the individual. That is the full amount, the $28,000.

and

. . . it’s possible to incorporate. It is not possible to allocate a crew share to the company.

In argument, appellant's counsel said that before 1979 the appellant's returns did not "separate out two sources of income" but that there was one source—fishing income. He added that in 1979, the year of incorporation and transfer of the fishing business to the company, the company reported all the fishing income from the business as its own. He then referred to the case of The Queen v. Dr. H. Hoyle Campbell, [1980] C.T.C. 319, 80 D.T.C. 6239, a decision of the Supreme Court of Canada. In that case the taxpayer doctor incorporated a company to operate a private hospital and beneficially owned all the shares of the company. The company employed the taxpayer and paid him a salary. He paid to the company all fees for medical services received by him from the provincial health insurance plan which required that bills be paid directly to the practitioner. For the taxation years in question he declared as income not professional fees he received from the plan but the salary received from the company. The Minister of National Revenue reassessed him on the basis that the fees received from the plan represented his income. The Supreme Court of Canada, in upholding the Minister’s appeal from the Federal Court of Appeal, decided, apart from the fact that the company was not practising medicine, that the fact that fees under the provincial health plan were required to be paid directly to the practitioner was not the controlling element when there was a valid arrangement between the taxpayer and the company regarding salary to the taxpayer and an accounting of fees to the company as employer. The income from the professional services provided by the taxpayer was the income of the hospital company. Chief Justice Laskin said at page 321 (D.T.C. 6241),

I should say at this point that, in my opinion, nothing in this case turns on the fact that billings for insured medical services were in the names of the doctors performing them when this was done to comply with government regulations.

and at page 322 (D.T.C. 6242),

It was, of course, the respondent personally who performed the particular surgical services and if he is to be assessed for tax in respect of the fees for those services, fees which he assigned to the hospital, it would be because under the taxing statute the fees are properly part of his income and not the income of the hospital to which they were assigned pursuant to his contract with the hospital.

and at page 323 (D.T.C. 6243), after stating that the Federal Court of Appeal correctly held, on the facts, that it was the doctor and not the hospital who was practising medicine,

Moreover, that did not inevitably require the conclusion that, in assigning his fees to the hospital, the respondent was assigning his own money rather than carrying out an arrangement under which the fees belonged to the hospital. The billing procedure was required by provincial regulations and cannot be the controlling element in determining to whom the fees belong when there was a valid arrangement for the provision of a salary to the respondent and for the accounting of fees to the hospital as employer.

The evidence established that a crew share account (i.e. a crew member's share of 7/11 of the proceeds of sale of fish) was in that crew member's name as a matter of convention in the fishing industry. The evidence also established that the appellant had transferred his entire fishing business to the company and that his entire crew share was income of that company until the appellant commenced receiving some of such income in respect of which he received a T4F form from Ocean Fisheries Ltd. The appellant testified that this occurred during the years 1982 through to the present. Appellant's counsel submitted ”. . . that should probably have been done by way of a salary from the company."

That would have added clarity but may have created other problems. However, I accept the fact, as stated above, that the appellant conveyed the entire fishing business to his company including his share of the crew income. This is amply demonstrated by the company including all of same in its income until the commencement of the arrangement under which he received some fishing income from Ocean Fisheries Ltd. for unemployment insurance qualification. The accounting system was complex and difficult of comprehension and it is apparent that proper attention was not paid to detail. However, in my opinion, this does not change the substance of the arrangements between the appellant and his company, arrangements which as sole director and officer of the company he had the ability to make.

Respondent's counsel submitted that the company had no right to the appellant's portion of the crew share of the fishing income. He suggested that if the appellant had not been in the boat, Ocean Fisheries Ltd. would not have been paid his crew share. I agree with that because obviously no such income would have been earned. However, that is not the point. He then submitted that the income was not income of the company because it was transferred to the company after he received it. However, in my view, in accordance with the decision of Chief Justice Laskin, and based upon the facts as I perceive them in this case, the appellant and the company were carrying out an arrangement under which the crew share belonged to the company until an arrangement was made under which the appellant received some income from Ocean Fisheries Ltd. Based upon my conclusions, the appellant did report the correct amount of fishing income in his 1985 and 1986 taxation years, namely the amounts in respect of which he received a T4F form from Ocean Fisheries Ltd. and, accordingly, the aforesaid amounts of $13,323.31 and $15,000 were improperly added to his income for those years.

Counsel for both parties spoke to the matter of penalty assessed with respect to the income allegedly unreported by the appellant. By virtue of my conclusions, the appellant is not subject to any penalty in respect of those years.

The appeal is allowed with respect to the additions to income and penalties for his 1985 and 1986 taxation years.

Costs are awarded to the appellant.

Appeals allowed.