Huntley J. Farrow v. Minister of National Revenue, [1986] 2 CTC 2350, 86 DTC 1746

Taylor, T.C.J.:—This is an appeal heard in London, Ontario, on September 11, 1986, against an income tax assessment for the year 1982, in which the Minister of National Revenue assessed to tax the results of transactions connected with the winning of a “raffle”.

The notice of appeal read:

A. Statement of Facts

1. The Appellant resides in the City of Windsor and Province of Ontario.

2. The Appellant is President of Russell A. Farrow Limited, Customs House Broker.

3. In or about the month of June, 1982, the Appellant purchased $155.00 worth of raffle tickets from A.K.O. Fraternity on his own behalf and on behalf of other individuals.

4. On the 5th day of July, 1982, payment for the said raffle tickets, the Appellant caused to be issued a cheque in the sum of $155.00. Inadvertently the cheque was written on an account of Russell A. Farrow Limited, a Corporation wholly owned by and controlled by him.

5. In order to correct the said error on or about the 14th day of July, 1982, the Appellant caused to be issued a cheque on his personal account in the sum of $155.00 in favour of Russell A. Farrow Limited reimbursing the Corporation for the said disbursement.

6. One of the tickets was purchased in the name of an employee of Russell A. Farrow Limited, namely, Raymond Williamson whose name was inscribed on a ticket stub and who had agreed to hold such ticket on behalf of the Appellant, Huntley J. Farrow.

7. The raffle was held on the 1st day of July. The ticket stub on which the name of the said Raymond Williamson was inscribed was drawn and the prize was an automobile having a fair market value of $9,600.00. A.K.O. Fraternity publicly announced that the winner of the automobile was Raymond Williamson.

8. The Appellant did not require an automobile for his personal use and decided that same would be sold. Russell A. Farrow Limited was in need of an automobile and the Corporation decided to purchase same for the said market value of $9,600.00. A.K.O. Fraternity was therefore instructed by Raymond Williamson to transfer ownership of the said automobile to Russell A. Farrow Limited.

9. In payment for the said automobile, Russell A. Farrow Limited issued a cheque to Huntley J. Farrow in the sum of $9,600.00.

10. On October 11, 1984, the Minister of National Revenue reassessed the Appellant in respect to the 1982 taxation year and included the sum of $9,600.00 in his taxable income as an appropriation from Russell A. Farrow Limited which resulted in additional tax being assessed in the amount of $4,830.20 and additional interest of $483.91 for a total of $5,314.11 in unpaid tax.

B. Statutory Provisions Upon Which the Appellant Relies

and the Reasons Which He intends to Submit

1. The Appellant relies, inter alia, on paragraph 52(4), paragraph 54(c)(ii), paragraph 39(1) and paragraph 169(a) of the Income Tax Act of Canada.

2. The Appellant submits that the amount of $9,600.00 was paid to him by Russell A. Farrow Limited as the purchase price of the aforesaid automobile which was owned by the Appellant and thus Russell A. Farrow Limited received adequate consideration for said payment.

3. The Appellant submits that at no time was the said winning raffle ticket owned by or on behalf of Russell A. Farrow Limited.

4. The Appellant denies that the said amount of $9,600.00 were funds or property of Russell A. Farrow Limited and that they were appropriated in any manner to the Appellant.

In the reply thereto, the Minister contended:

3. In assessing tax, the Respondent relies inter alia, upon the following findings or assumptions of fact:

(a) Alpha Kai Omega Fraternity, (“A.K.O.”) of which the Appellant is a

member, held a raffle for a 1982 Dodge Mirada automobile on July 3, 1982;

(b) as a member of A.K.O. the Appellant was prohibited from winning any prize;

(c) The winner of the car was Ray Williamson, an employee of Russell A. Farrow Ltd. (the “Company”) of which the Appellant is president;

(d) the employee Ray Williamson was at all times acting as agent for the Company in respect to the draw for the prize automobile.

(e) on July 5, 1985 a cheque in the amount of $155.00 payable to A.K.O. for lottery tickets was requisitioned out of the corporate funds of the Company and charged to advertising expense;

(f) on the same day, July 5, 1985, the Company took possession of the automobile and registered the automobile in the Company name;

(g) the fixed asset account of the corporation indicates that on July 13, 1982, the Company acquired a 1982 Dodge Mirada, the prize automobile, from Huntley J. Farrow, the Appellant, for $9,600.00;

(h) on July 14, 1982, a cheque was issued from the Appellant’s personal account, although not signed by him, to the Company, in the amount of $155.00 to reimburse the Company for payment of tickets and the advertising account was relieved of the expense.

B. Statutory Provisions Upon Which the Respondent Relies

and the Reasons Which He Intends to Submit:

4. The Respondent relies, inter alia, upon the provisions of paragraph 15(1)(b) of the Income Tax Act, R.S.C. 1952, c. 148 as amended (the "Act").

5. The Respondent submits that the amount of $9,600.00 credited to the Appellant from the Company are the funds or property of the Company which were appropriated by the Appellant and which have been properly determined and taken into account by the Respondent in computing the Appellant's income for the 1982 taxation year pursuant to paragraph 15(1)(b) of the Act.

Counsel for the appellant, with the agreement of counsel for the respondent, put the point at issue very simply — if the winning ticket belonged to the company, the Minister’s assessment was correct; if the ticket belonged to the appellant, the appeal should be allowed.

During the course of the hearing, counsel for the appellant presented as witnesses — in the following order — these persons. All except the appellant, were excluded from the courtroom, on motion by counsel for the respondent, until called to testify.

Richard Farrow — Vice-president of Russell A. Farrow Ltd. (the Company).

Ray Williamson — Now employed in London, Ontario, but at that time an employee of the Company.

Jean Wellington — Private secretary to the appellant for many years prior to 1982, and continuing in that capacity.

Joseph Tomsich — Chartered accountant, now retired, but during the times material, responsible for the audit of the company, and familiar with the personal affairs of the appellant.

Huntley J. Farrow — The appellant, president of the Company, and 100 per cent owner of the shares.

There are certain discrepancies or differences, which do not appear to me to be critical, in the two documents filed with the Court — the notice of appeal, and the reply to notice of appeal, but merely for the record I shall note some of them, as the correct situation would seem to be from the testimony.

In the notice of appeal:

(1) Paragraph A-3 — The critical raffle ticket was purchased on Saturday July 3, 1982, not in June 1982.

(2) Paragraph A-6 — Mr. Williamson was informed that the ticket with his name on it was the winner, but prior to that he had no knowledge whatsoever of the fact that he was involved, or that any tickets had his name on them.

(3) Paragraph A-7 — The raffle was held on the 3rd of July.

(4) Paragraph A-7 — The “fair market value of $9,600.00’’, was not challenged by the respondent, although not substantiated.

(5) Paragraph A-8 — This is a major point in issue.

In the reply to notice of appeal:

(1) Paragraph 3(b) — It was more likely a policy of the club rather than a "prohibition", for the members not to purchase tickets in their own names.

(2) Paragraph 3(c) — This is part of the point in issue.

(3) Paragraph 3(d) — This is a major part of the point in issue.

(4) Paragraph 3(f) — The date of the registration of the car was Tuesday July 6, 1982, but actual possession was not for several days later.

A photostatic copy of the winning ticket stub was entered as Exhibit R-1, and identified by Ray Williamson. A photostatic copy of a newspaper announcement and photograph of Ray Williamson accepting the keys to the car as the winner, was also included with R-1. A copy of a "typical" complete ticket from the draw was also included, which had both the "ticket" (to be retained by the purchaser) and the "stub" to be kept by the vendor for the club. There was no indication thereon of any particular restriction or restraint regarding purchase or ownership of tickets by club members. The winning ticket stub was #8571, and had on it as the name — “Ray Williamson”, and as phone — "252-4415”, which turned out to be his office phone number at the Company. There was no further address or identification.

The cheques referenced above — the Company to A.K.O. Fraternity, dated July 5, 1982 for $155; and from the appellant to the Company dated July 14, 1982, also for $155 were presented as Exhibits A-1 and A-7 respectively. These were both signed by R. Farrow (Richard Farrow), and for A-1, it was countersigned by a Mr. John Bardwell, who was identified by the witnesses as the accountant of the company — then and now, — and as a competent, trusted employee; and in the case of A-7, the cheque was signed only “R. Farrow”, but with the addition of "per H. J. Farrow”. This addition on A-7 was described to the Court as representing the fact that Richard Farrow had power of attorney on this particular personal bank account of the appellant, H. J. Farrow.

The Company copy of the voucher for cheque A-1 (above) was entered as Exhibit A-2 and it contained the following typed detail:

Re: Raffle Tickets for Staff Members.

The "Cheque Requisition” (Exhibit A-3) for A-1 gives us the reason for the cheque "Raffle Tickets for Staff Members”, but it also contains "Account Number — Advertising H/O”, identified by the witnesses as an indication the amount was to be charged to Head Office Advertising. None of the witnesses took responsibility for the "advertising” designation, but indicated it was probably put there by Mr. Bardwell — whose role was noted earlier. The "Cheque Requisition” also had on it:

Requested by — H.J.F. (assumed to be the appellant)

and Approved by — J.R.B. (assumed to be the accountant)

It was less than certain from the testimony, precisely who had prepared Exhibits A-2 and A-3 — but it was certain that both Jean Wellington and John Bardwell had been involved in the preparation of all, or part of each document.

Richard Farrow who had signed A-1 (and later A-7) could not recall any specifics about A-1 — signing many cheques during any one day. It would have been presented to him by either Mr. Bardwell or Jean Wellington and he would have signed it. He had no knowledge of the descriptive words "Raffle Tickets for Staff Members” or "Advertising” on either A-2 or A-3. He stated however, that raffle tickets were never purchased and paid for by the Company. The descriptive designations must have been in error, in his opinion.

Ray Williamson stated that he did not buy or pay for the winning ticket (#8571) and that when he was informed on Sunday July 4, 1982 by Richard Farrow that his name was on the ticket, he was also told it had been put in his name by the appellant, but that the car would be acquired by the Company for its use. He would be required to pick it up. He also stated in answer to question by counsel for the respondent, that he had signed some form of "transfer of ownership” document from himself to the Company — but on re-examination by counsel for the appellant he was unable to recall details or add, or supply anything to indicate such a transfer had taken place.

Jean Wellington stated that she had received a telephone call from the appellant on Monday, July 5, 1982, instructing her to see that the outstand ing amount for tickets ($155) be paid to A.K.O. immediately. She initiated the procedure which resulted in the payment described above. She had not been told by the appellant to take it from one of his personal accounts — and she did not have signing authority on his personal accounts. It was pointed out to her by counsel for the respondent that therefore, — knowing both the company and the personal situation — she needed to obtain the signature of Richard Farrow in any event. She was not responsible for charging the amount to “advertising”. With regard to A-7 (also for $155) she had received a telephone call from the appellant — by this time he was in Florida — and when questioned about A-1, had been told that she had made a mistake and to correct it right away — and she did. She added that for years Mr. Farrow had purchased A.K.O. tickets in the names of other people, including her own name, but always “it was understood” they were his tickets.

Joseph Tomsich had been contacted by the appellant — as well as he could recall — on the morning of Tuesday, July 6, 1982, and basically told by Mr. H. J. Farrow that he (the appellant) had won a car — did not want to keep it, and wanted to put it in the Company. Mr. Tomsich had advised the appellant to sell it to the Company — but that there was no reason to go through a process of first registering it in his own name and then transferring ownership to the Company — to do it directly. In his view that is exactly what had happened — the evidence for Mr. Tomsich, that the appellant had sold the car to the Company, was simply that he had been paid the amount of $9,600, at a later date. According to Mr. Tomsich, it was not unusual for the appellant to have amounts owing to him from the Company

— and to get paid when he wanted the money. Mr. Tomsich also pointed out that raffle tickets could not be a deductible expense as advertising in any event. It was not unusual, in his professional experience, that errors for “posting” in the accounting records were made and corrected when discovered. He agreed, Mr. John Bardwell was a competent, trusted employee.

Mr. Huntley Farrow, the appellant stated that in his effort to sell the most tickets for the raffle — (he did sell eventually some 4,500 tickets) he had purchased for himself, but in the names of his two employees Ray Williamson and Jean Wellington an additional $100 on Saturday morning July 3, 1982. He had been made aware on Friday July 2, 1982, that he still owed the club about $80 or $90 for. tickets which he had previously sold, and which obligation he intended to settle. He turned money in from time to time during the raffle and it was not a surprise to him that on Saturday the day of the raffle he would have still owed $155 as a final balance. He had put Ray Williamson’s name on some of the tickets (certainly on Exhibit R-1 — the winning ticket) at the suggestion of his son Richard. Richard Farrow had indicated to the appellant that Ray Williamson was in need of a Company car anyway. In total on July 3, 1982 he sold an additional four or five hundred dollars worth of tickets. In “settling up” with the raffle committee that night he was told that he was $155 short and he committed himself to paying it directly on Monday morning. At the time of being told of the $155 above, the draw had already taken place and he had informed the committee chairman that “he” had won the car, but wanted it put in the Company name. That was agreed. He left for his cottage, phoned his secretary Monday morning to give instructions regarding the $155 (Exhibit A-1), contacted his auditor, made arrangements to see him Tuesday morning, came back to Windsor to the head office, went with his son to get the car registered in the Company name, and went back to his cottage. A few days later he left for Florida, from where, as noted earlier, he called his secretary on July 14, 1982. He had required the cheque for $9,600 to purchase U.S. funds for the trip.

I have only summarized the basic assertions in the testimony of the witnesses, however the hearing in total took an entire day.

Some of the points made by counsel for the appellant in argument were:

(1) It was quite normal for the appellant to have amounts credited or debited to his "shareholder's drawings” account in the Company, and to “settle up" or receive cheques when appropriate.

(2) There was no relationship at all between the $155 amount and the particular critical ticket in Ray Williamson’s name. It was clear that during the course of selling more than $4,500 in tickets, Mr. Farrow was allowed by the club to settle up at various times. Having sold several hundred dollars worth of tickets the very day of the draw, including the $100 that he bought (as he put it) for himself, but in the names of others, he still found after turning in some money that he did not have the cash on him to settle up completely. He took his obligations to the club seriously and made sure it was settled on Monday morning.

(3) As soon as he found out that the above $155 had been taken from the Company, in error, he made restitution by his personal cheque.

(4) He did not need a car (he already had two) and intended to sell the car in any event — so why not to the Company which needed one for Ray Williamson.

(5) Mr. Williamson said the ticket belonged to the appellant.

(6) The Company had never paid for raffle tickets.

(7) The Company could not charge off the “raffle tickets" as an expense anyway.

(8) Jean Wellington had made a mistake in not making sure the amount of $155 (A-1) was taken from the appellant’s personal account.

(9) The major mistake however, was made by Mr. Bardwell in charging the amount to “advertising” rather than to "shareholder's account". Had it been done properly the first time (to shareholder's account), very likely there would not have been a reassessment.

Counsel for the Minister noted:

(1) It was still questionable that the appellant could win the car, by owning a ticket, according to the club rules.

(2) Mr. Williamson was permitted (in fact required) to publicly accept the car and to be treated as the winner by the newspaper.

(3) There was a requirement in the Company for a car for Mr. Williamson.

(4) The telephone number on the winning stub was a Company telephone number.

(5) The balance owing on tickets (A-1 — $155) had been paid by a Company cheque.

(6) It had been described as “Raffle Tickets for Staff Members”.

(7) It had been charged to "advertising".

(8) The car had not been transferred to the Company (apparently by the dealer — Exhibits A-4, A-5 and A-6) until Tuesday July 6, 1982, and according to the appellant he had talked to Mr. Tomsich only that morning to receive the advice about putting the car in the Company name. But the cheque in payment for the tickets had been made out on July 5, 1982 — the day before, and the appellant himself, Richard Farrow and Ray Williamson were all aware before Tuesday, July 6, 1982 that the car was to go to the Company. Certainly Mr. Huntley Farrow, the appellant, had spoken to the club committee chairman on Saturday night about the car, and agreed it was to go to the Company — long before he had talked to Mr. Tomsich.

(9) It would appear that Mr. Huntley Farrow controlled every aspect of the Company, and people who worked for him did exactly what he said. Alleged "mistakes", such as those attributed to his secretary, and/or the Company accountant could not have happened. They would have dealt with the amount, and described it precisely as told to do so by Mr. Farrow.

Analysis

As I see it, the Minister's assessment must have been based in large measure on one assumption noted in the reply to notice of appeal — "the employee Ray Williamson was at all times acting as agent for the Company in respect to the draw for the prize automobile".

Both Mr. Williamson and the appellant have denied any such role. Indeed Mr. Williamson, lacking any knowledge of the purchase or existence of the ticket, until the draw was over, could not even have consciously acted as agent for the appellant, let alone the Company. I do not regard the use of Mr. Williamson’s office phone number (at the Company) although significant, as sufficient evidence to overturn his own statements as a witness. I can assume that Mr. Williamson would have had great difficulty collecting the prize without being able to produce the winning ticket — and there is no evidence that he ever had that ticket in his possession other than for the particular purpose of accepting the keys to the car (Exhibit R-1). Mr. Williamson’s recollection that he had signed some form of automobile transfer of ownership is also significant but there was no further substantiation of this point. The ethics or morals of the situation — Ray Williamson publicly acclaimed as the winner of the car — are not a consideration for me in deciding this appeal, this is simply a question of the income tax treatment to be accorded a cheque for $9,600 paid to the appellant out of the Company funds. I fail to see how the role of Mr. Williamson in this matter, can shed any light on that point — it has not been shown that he was or could have been the owner of the ticket on behalf of the Company, which as noted above seemed to be a major plank in the platform upon which the Minister stuck the assessment.

Turning back to the ticket — it belonged to somebody, and the only two available parties are the appellant himself, or the Company. Aside from the assertion of the Minister noted immediately above (and rejected) — that Ray Williamson was agent for the Company — what evidence is there that the Company was in any way involved with the ticket? It was argued by counsel for the appellant that this balance of $155 (Exhibit A-1) owing by Mr. Farrow was not connected directly with the ticket. It could have just as easily come from any of the other tickets he sold, particularly the 700 he sold that day. This is a rather weak argument in view of the admitted $100 group of tickets sold by Mr. Farrow the day of the draw, on which he used the names of Williams and Wellington, but I must agree there has been no direct connecting link made between the Company and the $155 amount, other than to assume it included the ticket #8571. The strongest connection between the $155 and the Company is, as noted by Mr. Ormston, that it was

(1) paid by the company, (2) shown as “Raffle Tickets for Staff Members", and (3) charged to "advertising". Mr. Easton, counsel for the appellant, in argument, attributed the major "mistake", to Mr. Bardwell by charging the amount to "advertising" — but Mr. Easton did not produce Mr. Bardwell as a witness. In light of their trusted roles and competent background, it would be very unusual for either Mr. Bardwell or Jean Wellington, let alone both of them, to make a mistake of this kind. Also I have the most serious doubts that the terminology “Raffle Tickets for Staff Members", and the charge to "advertising" could have developed without the concurrence and direction of someone in the Company — and the only two possible people were Mr. Richard Farrow, and Mr. Huntley Farrow. This was the thrust of the assertion of counsel for the respondent. Nevertheless, the Court is faced with the fact that the available witnesses who had any knowledge of the chain of events on Monday, July 5, 1982, all contended that no such instructions were provided to Mr. Bardwell. Without his denial of that and/or some explanation for the questionable descriptions, I have no reason to reject their common testimony. It is difficult to imagine that dealing with these transactions which arose out of the good fortune of winning the car, could have gone so unnoticed by all parties involved. Nevertheless the Court must accept that payment of the $155 cheque; describing it as staff tickets; and charging it to advertising; all developed undirected and unchallenged.

Counsel for the respondent also expressed certain difficulty with regard to the testimony of Mr. Huntley Farrow that he required the $9,600 (payment for the car) for U.S. funds in connection with his trip to Florida, and it can be seen that that cheque was apparently not issued till July 13, 1982, on a date when it would appear he was already in Florida. The $9,600 cheque was not produced as evidence and virtually no questions were directed toward it. I merely note this — not take issue with it — since there could be some reasonable explanation for the apparent date discrepancies.

Finally we come to the fact that the car was registered in the Company name. It might be argued that was the clearest evidence of Company involvement with the ticket. However, I can quite accept that there was no specific reason in this 100 per cent owned private Company, to first register it in Mr. Huntley Farrow's name (assuming that could have been done) and then immediately transferring it to the Company. Counsel for the Minister did not assert that this technicality was a main impediment in the mind of the Minister. The appellant did not actually sell the car as is his contention, and in a purely legalistic way, he could have done so, irrespective of Mr. Tomsich's advice to him, which advice might well have been convenient and practical because at no time did he actually have completely legal title to it in his personal name. The mere payment of the $9,600 does not, of itself, guarantee any relationship to an alleged "purchase" of the car. But I do not see that this issue should be decided against the appellant merely on the lack of a more proper internal procedure, or a legal technicality.

In summary, therefore, according to the viable evidence and testimony, Mr. Ray Williamson did not act in any role for the Company, with regard to ownership of the ticket. Further there remains considerable doubt that the Company can be regarded as the proprietor of the ticket in its own right — there was no record of the Company ever buying raffle tickets, either on its own or for its employees. Conversely, it was common practice of the appellant to purchase A.K.O. raffle tickets for himself — and pay for them himself — but put the name of other people on the tickets. On the balance of probabilities it must be decided in favour of the appellant’s contention.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.