Stavroulla (Panayi) Follett v. Minister of National Revenue, [1987] 1 CTC 2394, 87 DTC 328

Taylor, T.C.J.:—This is an appeal against an income tax assessment, for the year 1981, heard in London, Ontario, on March 3 1987, struck by the Minister of National Revenue under subsection 152(7) of the Income Tax Act, in which an amount of $14,194 representing the appellant’s share of income from business was included. It was the position of the appellant that she did not have business income that year. The Minister in the reply to notice of appeal contended:

Statement of Facts

— that at all material times, the Appellant and her husband were equal partners in Quo Vadis Pizza;

— that in 1981, the Appellant and her husband earned $28,387.00 from Quo Vadis Pizza, the Appellant’s share being $14,194.00;

— that the Appellant did not include her share of the partnership income in the computation of income for the 1981 year.

— the Respondent relied, inter alia, upon the provisions of sections 3 and 9, and subsections 96(1), 103(1) and (1.1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended (the “Act’’).

Mrs. Panayi testified that by the year 1977 she had two children and was living separated from her husband in Windsor, Ontario. In that year he purchased a "Pizza" business in Chatham, Ontario for about $25,000 — all his own money. At that time she had no money of her own, certainly none to invest in a business. He asked her to resume living with him and move to Chatham which she did. During the years from 1977 to 1980 they purchased

— in both their names — two houses, one in which they lived, the other they rented. The "Pizza" business property was rented from another party. According to the appellant, she had little to do with the business, but did assist on some evenings when she had child care assistance available. She was not aware of any documentation signifying a "partnership", and none had been discussed with her. She had no authorization or signing authority on any matters dealing with the business, and could not make withdrawals. There were no marginal or administrative responsibilities she held, and her only source of funds came from her husband (now ex-husband). She was presented with a copy of her 1980 income tax return (which she had signed) and it indicated clearly that the Pizza operation had been conducted on a partnership basis. Mrs. Panayi stated she knew nothing about it, never had it explained to her, and did not understand it at all — other than she had to sign it to be entitled to the “child tax credit". The financial statements for 1980, and the income tax returns for that year (Exhibit A-1) were prepared by Mr. Donald Orendorff, C.A., Accounting & Tax Services, Wallaceburg, Ont., but she had no dealings with them as she recalled. In 1981 she assisted even less in the business, because the marriage was again going through difficulties and she had her children to look after. A copy of a set of financial statements and an income tax return for 1981 for Mrs. Panayi (Exhibit R-2) was filed with the Court, and Mrs. Panayi stated it had been obtained from the C.A. firm after the instant assessment to which she objected. Before then (in 1983) she had no knowledge of the reasons that Revenue Canada continued to request payment from her. She had no interest in the business and had received no money as she understood it. In January 1982 she and her husband signed a separation agreement — Exhibit R-3 was filed with the court, and in my view the significant clauses therein are:

13. The Wife agrees to release and convey in favour of the Husband, all her right, title and interest which she now has, or may acquire in the future, including but not limited to all claims and causes of action for title to or possession and distribution of the business Quo Vadis Pizza, operated at 421 St. Clair Street, in the City of Chatham, whether such claim be at common-law or by virtue of any statute, including without limiting the generality of the foregoing, The Family Law Reform Act, 1978, Revised Statutes of Ontario, 1980, Chapter 152.

14. The Wife agrees to release and convey in favour of the husband, all her right, title and interest which she now has, or may acquire in the future, including but not limited to all claims and causes of action for title to or possession and distribution of real property acquired by the parties in Cyprus, hereinafter referred to as the “Cyprus farmland”, whether such claim be at common-law or by virtue of any statute, including without limiting the generality of the foregoing, The Family Law Reform Act, 1978, Revised Statutes of Ontario, 1980, Chapter 152.

15. The Husband agrees to pay to the Wife, the sum of $22,000.00 as follows:

(a) Payment of $7,000.00 in cash on the signing of this Agreement;

(b) The balance of $15,000.00 to bear interest at the rate of 10% per annum and to be repaid in blended monthly instalments of $500.00 per month, to be applied against the principal and interest outstanding from time to time. In the event that the said business, Quo Vadis Pizza is sold before the payment of the aforementioned sum of $15,000.00, then the balance due and owing at that time, shall be paid by the Husband to the Wife upon the sale of the said pizza business.

It was the testimony of the appellant that the family home and the rental property were both heavily mortgaged, and that the ex-husband retained these and the responsibility for them. With regard to the “Cyprus farmland” (supra), her name was not on that title, and she had no interest in it at all — it belonged to her husband.

The court understood from the parties, that the reason Mr. Panayi had not been subpoenaed by the appellant was that he now lived in Cyprus. This apparently had also inhibited any efforts the Minister might have made to “join” the parties by way of a section 174 application.

According to her testimony, Mrs. Panayi did not understand that she was a “partner” in the Pizza business, nor did she conduct herself in a fashion that would so establish it. However there is the “Agreement” Exhibit R-3 (above) to consider — and the references therein to the Pizza business leaves some concern about her status in that business. There is also the 1981 unsigned and unfiled income tax return for the appellant prepared by the C.A. firm. But the major item which lends support to the Minister's assessment is the 1980 income tax return of the appellant — signed by her and filed upon a partnership basis. Mrs. Panayi asserted that she was totally unaware of its meaning, and if income tax had been paid on her account, for 1980, she did not know that either. Obviously it comes down to a matter of credibility.

The normal “indicia” of a partnership (other than the filing of the 1980 income tax return) may be lacking in this matter, there is one item which might be connected between the Agreement (Exhibit R-3) and the 1981 financial statements (Exhibit A-1), to assert in this credibility question. It may be noted from Exhibit R-3 that Mrs. Panayi received no regular alimony or maintenance payments for herself — just for her children. Her only explanation for the $22,000 she received, was that “it was for 10 years of marriage”. There does not appear to be any mathematical connection between that amount and any of the other clauses in the Agreement. Mrs. Panayi insisted that she received no “drawings” in 1981, and there is no reason to dispute that. But the Partners' Equity position of the 1981 financial statements reads:

These statements were prepared by the C.A. firm on October 28, 1981, for the year ended September 30, 1981, and I am inclined to construe that Mrs. Panayi was aware of their contents before signing the separation agreement

— and generally aware of what might be called her equity in Quo Vadis Pizza — something in excess of $22,000, (before any allowance for drawings). I can think of no other reason the financial statements would have been prepared so promptly in this small business. For the year ended September 30, 1980, the statements were prepared on April 27, 1981.

The results of the C.A. firm's work — the forms and content of the 1980 and 1981 financial statements, and the prepared related income tax returns for Mrs. Panayi (recognizing that the 1981 return was not signed or filed), would indicate that the accounting firm handled its responsibilities to its clients in a professional way. I would find that inconsistent with somehow keeping Mrs. Panayi totally in the dark about such matters as she now implies. There was even some slight bit of testimony from Mrs. Panayi that she had sought independent legal advice about the financial aspects of the separation, which advice had been that she should receive more money. She had not acted on that advice or pursued it.

In my view, the $22,000 to which Mrs. Panayi became entitled by virtue of the Agreement (Exhibit R-3) can best be related to her proprietory interest in Quo Vadis Pizza which arose out of the profits of that business. There is no reason for the Court to assume that she was completely innocent of the financial or business affairs of Quo Vadis pizza, or that her filing of the 1980 "partnership" income tax return was done without some knowledge of the effect thereof and acquiesence thereto. That same situation obtained in the year 1981, as I see it, and she is responsible for payment of the income tax on her share of the property of the business applicable to that year.

The appeal is dismissed.

Appeal dismissed.