David Korn v. Minister of National Revenue, [1976] CTC 2459

A W Prociuk (orally: April 30, 1976):—The appellant, David Korn, of Winnipeg, Manitoba appeals from the respondent’s reassessment of his income for the taxation year 1968 wherein a sum of $105,000 was added to his declared income. The said sum represents the value of 9,000 shares of Dylex Diversified (1967) Ltd received by the appellant in 1968. The quantum is not in dispute. The respondent reassessed on the basis of certain assumptions of fact which are set out as follows in his Reply to Notice of Appeal:

3. He assumes as a fact that:

(a) the receipt of 5,000 shares of Dylex Diversified (1967) Ltd was for services rendered to Mr James F Kay by the Appellant, or

(b) in the alternative, if there was a “co-ownership” or partnership agreement in existence between Mr James F Kay and the Appellant, which is not admitted, that the said 5,000 shares received by the Appellant represented

(i) remuneration for services rendered over the period of his association with the said Mr Kay; or

(ti) his portion of the profits of the venture which had been carried on by the co-ownership or partnership.

4. With respect to the Appellant’s contention that he had entered into a co-ownership agreement with James F Kay entitling him to a 10 per cent interest in Mr Kay’s investments, the Respondent assumes as a fact that:

(a) there is no written documentation to support the existence of the alleged co-ownership agreement;

(b) there is no written documentation to support the contention that Mr Kay and the Appellant were co-owners of the various shares and equities built up over the period of the alleged co-ownership agreement;

(c) the Appellant did not contribute financially to the alleged co-ownership or partnership; and

(d) the Appellant’s only contribution to the alleged co-ownership or partnership was his professional advice, counsel and service in the acquisition, operation and merger of companies for Mr James F Kay.

The appellant appeals on the ground that the said 5,000 shares valued at $105,000 constituted a capital accretion of his interest in a partnership in which he was a 10% participant with James F Kay who held the remaining 90%. The appellant’s grounds for appeal are set out in his Notice of Appeal in paragraphs 4, 5, 6 and 7, which read as follows:

4, Several years earlier, the Appellant entered into a verbal agreement with James F Kay, of Toronto, under which it was agreed between them that investments would be made on a co-ownership basis in various businesses and, in fact, an interest in a series of businesses were acquired culminating, after various acquisitions and through association with others, in a realization of a share interest in Dylex Diversified (1967) Ltd.

5. Under the agreement between the parties, James F Kay was entitled to 90% of the holdings and the Appellant to 10% of the holdings, after deduction of al financing costs, carrying charges and other expenses and the parties undertook to share any losses as well as gains on realization in exactly the same proportions.

6. Indeed, for a number of years, as a result of the initially adverse evolution of the investments made for the account of the co-owners, the Appellant was subject to losses and resultant liabilities. If there had been a realization and liquidation at that time, any assertion on the part of the Appellant that the loss to him would be deductible would have been treated by the Department of National Revenue, and appropriately so, as bordering on the humerous [sic].

7. The final arrangements amongst the co-owners which led to the grouping of holdings of theirs and of others into Dylex Diversified (1967) Ltd brought about a realized appreciation in respect of which the Appellant’s 10% share amounted to the value of 5,000 shares of Dylex Diversified (1967) Ltd which he received on the liquidation of the co-ownership account.

The appellant is chartered accountant by profession and practised his profession in Winnipeg, Manitoba, in partnership with one James F Halliday, from 1952 to 1962, and then with a Mr Stanley Thow to 1966. The evidence is not clear on the question of the exact date, but it it can reasonably be inferred that the appellant incorporated his own company under the name of Arlington Management Consultants Ltd some time in the early 1960’s to provide commercial management and consultant services. He gained prominence and recognition in this field, and appears to have been highly regarded for his knowledgeability and expertise.

James F Kay, formerly of Winnipeg, Manitoba, was successfully engaged in the plastic industry in that city, in partnership with his elderly father. He has known the appellant for some years and held him (that is, the appellant) in high esteem as a consultant in the commercial field. In 1959 Mr Kay, then aged 36, sold out to Canadian Industries Limited, commonly known as CIL, and netted a profit of $1,000,000. Initially he invested this sum in bonds and securities. Under the terms of the sale or transfer of his former business to CIL, Kay agreed to work for CIL for at least two years, but this period apparently was extended to six years.

Kay states that in about 1961 he wanted someone in whom he had utmost confidence to assist him in broadening his investment portfolio in various businesses as opportunities arose. The appellant was the person he turned to because, to paraphrase his testimony, he said “The appellant had business ability and expertise”. Kay looked to the appellant to provide the judgment factor and to keep a watching brief on his various business interests as they developed. Both Kay and the appellant stated that the arrangement was that Kay would provide all the investment funds for the acquisition of businesses and the appellant and Kay would share in the profits and losses therein in the ratio of 10 to 90 respectively. They characterized, or termed, this arrangement as a partnership or a co-ownership. It is agreed that the appellant contributed no capital to any of the businesses which Kay either purchased or commenced. This was simply an oral arrangement. There appears to be no documentary evidence whatsoever to substantiate or corroborate the testimony given in that regard at the hearing.

The first business acquired was Tops Discount Store, a retail discount outlet in Winnipeg, which was started by four Winnipeg businessmen, the appellant and Kay, some time in 1961 or 1962. By 1963 Kay acquired the shareholdings of the other four shareholders, and the appellant states that he himself held, registered in his own name, 10% of the issued stock. Initially this venture was very successful, but it soured around 1967 and in 1969 an assignment in bankruptcy was made.

The appellant states that he was called upon to make good the guarantees he had signed to the extent of some $65,000. He filed, as Exhibit A-2, a series of cancelled cheques allegedly made to make good the said guarantees. In the absence of any other documentary evidence, I I have grave doubts as to their probative value, if any, to resolve the issue herein.

The remaining business expansion took place essentially in the Province of Ontario, with Kay causing the shares in each enterprise to be registered in his own name or in the name of one of his companies. The appellant served in the capacity of management adviser to Kay.

I do not consider. it it necessary to recite the chronological details of the acquisition of each of the five or so businesses in Ontario as related by the appellant and Kay at the hearing except to note that no documentary evidence was produced in any of the cases to indicate the nature of the appellant’s interest therein, if any. I find it inconceivable that a series of major business operations carried on for a number of years would not have been recorded and the records retained for the purpose of substantiating a course of conduct which ‘the appellant must surely have anticipated would come under the scrutiny of officials of the Department of National Revenue at a a later date.

The appellant states that, in the summer or fall of 1967, he and Kay agreed to terminate their relationship. In the result, in 1968. the appellant was given and accepted the 5,000 shares aforesaid. One would have thought that this transaction at least would have been reduced to writing, mutual releases executed and the matter properly brought to a conclusion. I should add that the presence or absence of any particular document does not of itself determine the nature of the relationship between the appellant and Kay. However, there appear to be no records whatsoever in any financial statements, annual returns, records of minutes passed at directors’ or shareholders’ meetings, relevant correspondence or any other document that would tend to corroborate the oral testimony of the appellant and of his onetime associate and friend of many years’ standing, Mr James F Kay. The evidence adduced strikes me as well rehearsed and self-serving.

In contrast to this, the appellant, in 1968, established an estate for his children in a corporate structure entitled Emarjay Holdings Ltd. Exhibit A-3 is a copy of an agreement which he executed. It will be noted that this document, prepared by the appellant’s solicitors, carefully spells out the conditions thereof and, in particular, foresees the possibility that the income tax department might question the market value of the stock the appellant transferred to the said holding company.

There is no such agreement nor any similar document executed between the appellant and Kay or any of his companies.

Viewing the evidence adduced in its totality, including the exhibits filed, I cannot conclude that the appellant has discharged the onus the Income Tax Act places on him. The preponderance of evidence, in my humble opinion, indicates that the said 5,000 shares were received by him for services rendered as a a consultant.

Accordingly, the appeal is dismissed.

Appeal dismissed.