Eva Zimmerman, Fredeva Sales Limited v. Minister of National Revenue, [1986] 1 CTC 2065, 86 DTC 1051

Christie, A.C.J.T.C.:—These appeals were heard together at the request of the parties and with the consent of the Court. The appeal of Mrs. Eva Zimmerman relates to her 1977 taxation year and the appeal of Fredeva Sales Limited ("Fredeva") relates to its 1977 taxation year. The questions to be answered are:

(i) Was the respondent correct in reassessing Zimmerman, the president and sole shareholder of Fredeva, by including $72,000 in computing her income for 1977 as funds of Fredeva appropriated for her benefit?

(ii) Was the respondent correct in reassessing Fredeva by including $72,000 in computing its income for 1977 as proceeds from the sale of its inventory upon ceasing to carry on business?

(iii) Was the respondent entitled to reassess Zimmerman on June 9, 1983, which was not within four years from the day of mailing of a notice of an original assessment, because Zimmerman, in filing her 1977 return of income, made a misrepresentation that is attributable to negligence, carelessness or wilful default or because in filing that return she committed fraud?

(iv) Are the appellants liable to be penalized for having knowingly or under circumstances amounting to gross negligence made an omission in the returns of income they filed in 1977 by not including the previously mentioned $72,000?

The only statutory provisions to which reference need be made are:

Paragraph 15(1)(b)

15 (1) Where in a taxation year

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder

the amount or value thereof shall be included in computing the income of the shareholder for the year.

Subsection 23(1)

23 (1) Where, upon or after disposing or ceasing to carry on a business or a part of a business, a taxpayer has sold all or any part of the property that was included in the inventory of the business, the property so sold shall, for the purposes of this Part, be deemed to have been sold by him in the course of carrying on the business.

Subparagraph 152(4)(a)(i)* [1]

152 (4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this act.

reassess or make additional assessments, or assess tax, interrest or penalties under this Part, as the circumstances require.

Subsection 163(2)

163 (2) Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made, or has participated in, assented to or acquiesced in the making of, a statement or omission in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation, as a result of which the tax that would have been payable by him for a taxation year if the tax had been assessed on the basis of the information provided in the return, certificate, statement or answer is less than the tax payable by him for the year, is liable to a penalty of 25% of the amount by which the tax that would so have been payable is less than the tax payable by him for the year.

Subsection 163(3)

163 (3) Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

On May 12, 1977, a document was signed by Zimmerman, Mr. John Sauber and Mr. Dominic Capobianco. The body of it reads:

This constitutes an agreement between Eva Zimmerman of E. Fried Sales Co., Limited,! [2] 124 Cartwright Ave., Toronto, to sell the business named above (i.e. E. Fried Sales Co. Limited) to John Sauber and Dominic Capobianco with a deposit given of $5,000.00 to bind this agreement. The selling price to be approximately $200,000.00 dependent on the inventory involved and covering the following, as agreed upon by the parties.

Stock to be taken and given at invoice price,

Office equipment, stationery, shelving, desks, and all other items of such nature on the premises pertaining to the business, including the truck valued at a total of $9,000.00

Goodwill valued at $50,000.00

Stock taking to be done on October 1 and 2nd 1977, or earlier, if possible.

Closing date to be the day following the stock taking.

A renewal of the lease on the premises will be arranged by the seller, and every care will be given by both parties to ensure good faith between buyers and seller.

Zimmerman testified that she agreed that Sauber should work with her for two or two and one-half weeks before the anticipated closing date so that Sauber could learn about the wholesale hardware business which was the nature of the business that he and Capobianco were buying. When this familiarization course got under way Sauber, for the first time, asked to see financial statements pertaining to Fredeva. After examining them and talking to several persons, including the foreman and the secretary, he informed Zimmerman that he was dissatisfied with the May agreement. The appellants introduced in evidence copy of a second offer to purchase all of the assets of Fredeva ("the business”) made by Freedex Holdings Inc. ("Freedex”). Freedex was incorporated in relation to the intended purchase of the business. Sauber and Capobianco each owned 50 per cent of its shares. This offer was signed on behalf of Freedex by Sauber on September 15, 1977, and on behalf of Fredeva by Zimmerman on September 26, 1977. In its original form the purchase price of $149,000 was allocated in this way: goodwill and business name — $50,000; fixtures, chattels and equipment — $9,000; and stock in trade was estimated at $90,000. These figures were struck out and $10,000, $4,300 and $85,000 respectively substituted. The changes were initialled by Sauber and Zimmerman. The taking of the inventory was to commence at the close of business on September 30, 1977. A substantial portion of the purchase price was secured by a promissory note and a chattel mortgage on the tangible assets of the business. A statement of adjustments as of October 3, 1977, shows the final sale price as being $101,850, broken down as follows: goodwill and business name — $10,000; fixtures, chattels and equipment — $4,300; stock in trade — $87,550. On October 11, 1977, Zimmerman received a cheque in her favour of the same date for $72,000 drawn on the chequing account of Freedex and signed by Capobianco as drawer.

It is the position of the respondent that the true purchase price of the inventory was about $159,550 and that the $72,000 represents part payment for it. The position of the appellants is that the $72,000 was repayment of a personal loan made to Sauber by Zimmerman.

Her narrative regarding the alleged loan commences in Budapest in 1956. This was the year of the Revolution and the time she migrated to Canada. Her parents joined her about three years later. Prior to their departure, Zimmerman’s father had a jewellery business which he sold. His wealth was in the form of gold, silver and valuable paintings. Hungarian law prohibited the removal of this metal and art and so the father left it behind with a sister-in-law and others. Pursuant to his instructions, they sold it from time to time on the black market for Canadian and American dollars, primarily the latter. After arriving in Canada, Zimmerman was employed in factories and offices. She then struck out on her own and, through Fredeva, became engaged in the wholesale hardware business. In the course of this activity she met Sauber, who was working for his uncle in Harris Hardware, a retail outlet on St. Clair Avenue in Toronto. Later Sauber acquired Sanders Dominion Hardware, also located in Toronto, which he managed in partnership with Capobianco.

Sauber was also born in Budapest and he came to Canada in 1946. He and Zimmerman became close friends. She told Sauber about her father’s money in Budapest and of their desire to transfer the currency to Canada. Sauber offered to assist. He said he would be going to Hungary and that he had an aunt in France who also might be able to lend a helping hand. The bargain struck between Sauber and Zimmerman was that he could use any of the money retrieved from Budapest for his own business purposes, interest free. It was to be repaid when he sold his business or in 1980, whichever came first.

The money recovered in stages over a period commencing in 1966 or 1967 and terminating 10 years later. Approximately six or seven trips to Budapest were involved. Some were made by Sauber and others by persons in France. The precise division of these voyages between Sauber and the others is not in evidence. By the time the exercise of extracting the money got under way, Zimmerman's aunt had died and the funds were with friends. The modus operandi to circumvent the Hungarian authorities and maintain covertness was that Zimmerman would sign a note to be passed on by the courier to a designated friend in Budapest which read: "Here is my friend. Will you please be nice to him and try to give him some accommodation for as long as you can.” Zimmerman's testimony goes on: "Then my friend would write back to me and say, ‘Yes, I got your letter. Your friend stayed with me for 10 days or 12 days or 15 days,’ and the days whatever they stated there, that was the amount of money he sent out.” Each day represented $1,000. These documents and copies thereof were kept until the loan was repaid, whereupon all were destroyed by Zimmerman and Sauber. As is perhaps already deducible, the amount alleged to have been retrieved is the equivalent of $72,000 Canadian.

On October 11, 1977, the date that Zimmerman received the cheque, Sauber allegedly requested and received what she described as "a receipt." It is addressed to Sauber and signed by him and Zimmerman. The handwriting was hers and it reads:

I Eva Zimmerman as of the above date do not hold any claim against John Sauber for the amount of 72,000.00 dollars which he brought out of Hungary for me during the years 1967 thru 1976.

The amount which was owing to me was not to be reclaimed until he had sold the store which he owned, and the above amount of monies has now been paid back to me in full without interest as agreed upon by both parties.

In an endeavour to bolster the testimony about the loan, a letter was introduced in evidence. The original is in Hungarian, but it was accompanied by a translation. It indicates its origin is Budapest and it is dated October 3, 1984, which is 19 days prior to the date of the notice of appeal to this Court. It is said to have been signed by Zimmerman's Budapest connection. His signature is witnessed by the signature of two others. It is addressed to Zimmerman and reads:

This is to certify that I sold the valuables left here by you, in the way of dollars.

I have personally delivered it to Mr. Sauber in Budapest, and to the persons sent by him the full amount which was altogether seventy-two thousand dollars.

I will sign this letter in the presence of two witnesses.

The code previously mentioned was not employed but, by way of security precaution, the name and address of the sender which appeared on the envelope is other than that of the author of the letter. When asked if she had suggested the figure $72,000 to the sender of the letter, Zimmerman replied that he had produced the figure entirely on his own. This infers that in preparing the letter of October 3 he translated that portion of the money removed from Hungary in U.S. currency over a considerable period of time into its value in Canadian currency.

Zimmerman also related that early in 1979 she discovered that the business was in serious financial difficulty. Payments due under the sale and purchase agreement were in arrears. The total outstanding indebtedness was in the order of $17,000 or $18,000. She consulted her lawyer and everything available that was secured by the chattel mortgage was seized by the bailiff. The matter was settled by payment to Fredeva of $15,000. This says Zimmerman introduced enduring animosity into her relationship with Sauber and Capobianco.

Sauber testified under subpoena on behalf of the respondent. He confirmed that he had known Zimmerman since the late 50s or early 60s, having met her through the hardware business and that they became close friends. He admitted having signed the offer to purchase of May 12, 1977, and as president of Freedex having signed the second offer to purchase on September 15, 1977. He acknowledged the statement of adjustments as of October 3, 1977. It will be recalled that this document showed the purchase price to be $101,850 allocated as follows: goodwill and business name — $10,000; fixtures, chattels and equipment $4,300 and stock-in-trade — $87,550. Sauber said this was not the true purchase price. Documentary and oral evidence followed which established that just prior to the closing there was a meticulous and thorough inventory taken of Fredeva's stock-in-trade which established its value at $158,523,37. Zimmerman, her husband, Sauber, Capobianco and employees of Freedex were present at the taking of the inventory.

It was also established that an affidavit which Sauber swore in relation to a bill of sale regarding the fixtures, chattels and equipment previously referred to was false in stating that the purchase price thereof was $4,300. He denied absolutely Zimmerman's testimony regarding the $72,000 loan. He said that he had visited Hungary and France on two occasions prior to 1977. The first visit was in 1967 and the second on the occasion of the death of his aunt in 1973. He also visited Hungary in the early 19805. The first two trips however had nothing to do with the alleged retrieval of $72,000 on behalf of Zimmerman. The third trip is necessarily irrelevant. He also testified that he had never used any money loaned to him by Zimmerman for business or other purposes. Financial statements pertaining to his hardware business prior to the acquisition of the business show no indication of resort to such borrowed money.

Immediately after the acquisition of the business an opening balance sheet regarding Freedex was prepared showing an increase in the value of its inventory from $87,550 to $147,550. Zimmerman says this was done on the advice of an accountant and because he “could not operate like that,” and because “I could not run a business under these circumstances." He says that this change of heart is what led to enmity on the part of Zimmerman toward Capobianco and him. The reason Sauber gave for being a party to the false documents and the payment of the $72,000 to Zimmerman was to “accommodate" her as a friend and because he wanted to acquire the business. He said he did not regard it as any concern of his what she did with the money. Capobianco also testified under subpoena on behalf of the respondent. He corroborated the essential points of Sauber’s evidence and in particular said that the removal of the $72,000 from Budapest and its being loaned to Sauber “never happened.” On the basis of the evidence which I have seen and heard and, having regard to the comportment of the witnesses while testifying, I am satisfied that the allegation that the payment of the $72,000 to Zimmerman was repayment of a loan is false. I conclude that Zimmerman, Sauber and Capobianco knowingly partook in a scheme which culminated in the deliberate misrepresentation by Zimmerman to the taxing authorities of the true purchase price of Fredeva's inventory. This is not to say that I accept as true everything that is said or implied in the testimony of Sauber and Capobianco. For example, I reject anything suggestive of their having had pangs of conscience because of what they had done and that this had some relationship to the increase shown in the value of the inventory in the opening balance sheet of Freedex as of October 4, 1977. The fact is that the new balance sheet was required by them in their dealings with their banker. Also it is possible that they came to the realization that, from their tax point of view, assigning an unrealistically low value to the inventory was very unwise. Nevertheless, on the cardinal dispute of whether the $72,000 was repayment of a loan I accept their evidence.

There is nothing which casts doubt on the validity of the respondent having treated the $72,000 in reassessing as proceeds from the sale of Fredeva's inventory. In filing her 1977 return of income Zimmerman made a misrepresentation in failing to include as income the $72,000 which she received by cheque dated October 11, 1977, and this misrepresentation is attributable to wilful default on her part. Also, it has been affirmatively established that she knew that, in making its return of income for 1977, Fredeva made a similar omission and that knowledge is attributable to Fredeva because Zimmerman was its directing mind and will at the time. Each of the questions posed at the commencement of these reasons is answered in the affirma- tive.The appeals are dismissed.

Appeals dismissed.