Vir K Handa, Appellant, >>minister of National Revenue, Respondent., [1978] CTC 2256, 78 DTC 1191

The Chairman:—This is the appeal of Vir K Handa from an income tax assessment in respect of the 1973 taxation year in which the Minister of National Revenue included in income the sum of $3,100 which had not been included in the taxpayer’s tax return for that year.

The appellant was obviously annoyed because of confusion that arose in his assessments for the 1973 taxation year. As I understand it from the file, the appellant was first assessed on March 7, 1975 and a penalty was imposed to which a notice of objection was filed by the taxpayer. Although there was no record on the Board’s file, counsel for the respondent admitted that subsequent to the March 7, 1975 assessment, the Minister vacated the assessment and in fact the appellant received a refund of taxes. On March 2, 1976 the appellant was again reassessed for the same year in which the amount of $3,100 was added to the appellant’s income but the penalties previously imposed were deleted.

Counsel for the respondent explained how the confusion came about and the hearing proceeded on the basis that the appeal was from the assessment dated March 2, 1976.

The issue in this appeal is whether an amount of $3,100 earned by the appellant was his personal income or whether it was income for Handa Systems Limited, a company incorporated by the appellant. Facts

The appellant is a civil engineer who had studied in England, the Middle East and in South America. The appellant has his Master’s degree and his doctorate in civil engineering and has been acting in the capacity of professor at the University of Waterloo for several years.

In 1971 the appellant incorporated Handa Systems Limited under a federal charter for the purpose of limiting his personal liability and keeping his consulting fees separate from his other income. The object of the company, of course, was to permit it to act as a consulting firm.

The evidence is that in 1971 and 1972 the company was inactive. In 1973 there were two or three transactions recorded in the company’s books. It is alleged that the company was more active in 1974, but that it is presently not very active.

In 1973 the appellant received from his employment as professor at the University of Waterloo a salary of $23,992.42 which he properly included in income. In that year the appellant also received from the university an amount of $3,100 as consulting fees which the appellant did not include in his personal income, but which was included. in Handa Systems. Limited’s returns for 1973.

There was no written contract between the university and Handa Systems Limited for the services rendered and for which an amount of $3,100 was paid. Nor was there any written agreement between the university and the appellant in that respect.

The remuneration for consulting services was by verbal agreement, based on a per diem basis.

The consulting services rendered by the appellant for which the amount of $3,100 was paid had to do with a proposal to the Canadian International Development Agency for a 5-year development grant for assistance and exchange of teaching staff between the University of Waterloo and the University of Paraiba, Brazil. It is my understanding that the guidelines, proposals and reports were made by the appellant and that the program was put into effect.

Submissions

Mr Violi, an accountant who acted as agent for the appellant, admitted that the payment was made by the university to the appellant personally and not to Handa Systems Limited. However, he stated that although the appellant deposited the $3,100 in his personal account, the books of the company were credited with an income of $3,100 and that income was reflected in the company’s return for 1973. In 1973 the appellant also received consultant fees from Shell Canada for giving lectures to graduate and undergraduate students in engineering and from Memorial University for acting as referee in a dissertation on engineering at that institution. All the income from consultation fees was entered in the company’s books and the expenses were charged against it. The principal company expenses were a salary of $2,500 for the appellant and a salary of $700 for the appellant’s wife who acted as bookkeeper and secretary and for which proper T4 forms were issued by the company (Exhibit A-1).

The agent contended that the fees were earned by the appellant independently of his employment as a professor at the university and that the consulting remuneration was paid separately from his salary as a professor and that it constituted income for the company.

The question to be determined is not whether the accounting procedure followed by Mr A Violi as accountant for the taxpayer was correct or not, but whether the income was earned by the company or by the appellant personally.

Counsel for the respondent, in his cross-examination, established that although the company had been incorporated it had no assets, no address of its own, no real property, no employees except the appellant’s wife and the appellant himself, and no taxable assets except a filing cabinet and a typewriter.

It was also established that the reason why the $3,100 cheque was issued in the name of the appellant was because the university did not even know of the existence of Handa Systems Limited. Whatever oral contract or agreement that may have existed between the appellant and the university could not, under the circumstances, have been between the university and Handa Systems Limited. Any legal recourse the university may have had arising from the contract would have been against the appellant personally with whom the agreement had been made and not against the appellant’s company.

The nature of the consultations given by the appellant not only arise from the appellant’s personal qualifications and competence, but they are very closely related to the appellant’s work as a professor at the university. The exchange of teaching staff program between the University of Waterloo and the University in Brazil was a university project for which the appellant as a professor of that university was chosen and authorized by the university to study and report on the possibility of such an exchange. Giving lectures for Shell Canada on engineering or acting as a referee in a dissertation, in my opinion, are also very closely related to and stem from the appellant’s profession as a professor of engineering at the university and are not consulting services of Handa Systems Limited for which that corporation could be held responsible.

Li-

In holding that Handa Systems Limited was merely a shell and a sham company, counsel for the respondent pointed out that no business purpose can be attributed to Handa Systems Limited. In my view, ‘all of the appellant’s activities in 1973 related exclusively to the appellant’s professional competence. Since none of the services rendered in 1973 can be said to have been rendered by the corporation one might well ask for what purpose exactly was Handa Systems Limited incorporated. Law

Counsel for the respondent indicated that the appellant’s assessment was based on subsections 5(1), 56(2) and 56(4) of the Income Tax Act, SC 1970-71-72, c 63, as amended. He concluded that since the $3,100 was paid directly to the appellant personally and a T4 slip to that effect was issued by the university, the relationship between the appellant and the university was one of employer and employee. The duties were executed at the request of and under the control of the Dean of the university. The report written by the appellant was referred back to and acted upon by the university.

In my view, the whole program of exchanging teaching staff has much to do with the university’s general educational objectives and the appellant’s employment as a professor at the university contributes to that general objective. The study and the report were made by the appellant in his capacity of professor of engineering.

The lectures at Shell Canada and the refereeing at Memorial University were also effected in the appellant’s capacity of professor at the University of Waterloo since Handa Systems Limited had no address of its own and its existence was unknown.

The only logical reason for. the incorporation of Handa Systems Limited in these circumstances is the possibility of transferring the appellant’s personal income to that of the corporation for whatever tax advantage. might be realized. This by itself, with no other business purpose, is not sufficient to justify the incorporation of the company and in that sense Handa Systems Limited is a sham company.

Subsections 56(2) and 56(4) taken together imply that any payment or transfer of property on the direction or concurrence of a taxpayer, particularly if the payment or the transfer of property is not at arm’s length, the payment or the property will be included in the taxpayer’s income.

There can be no question in my mind that the transfer of the appellant’s personal income to the appellant and his wife, the only shareholders of Handa Systems Limited, is a non-arm’s length transaction and the income must be included in computing the taxpayer’s income.

For these reasons I conclude that the amount of $3,100 was properly included in the taxpayer’s income for the taxation year 1973.

The appeal is therefore dismissed.

Appeal dismissed.