Goldstein and Oddy Limited v. Minister of National Revenue, [1974] CTC 2017, 74 DTC 1029

Roland St-Onge:—This is an appeal from a reassessment whereby the Minister of National Revenue added to the appellant’s income for the 1965 taxation year the sum of $60,000 paid as a contribution under a deferred profit sharing plan.

The appellant was incorporated around 1964 under the laws of the Province of Ontario with its head office in the City of Hamilton. At all material times it carried on the business of operating a placement service for individuals with engineering and other technical qualifications and background. The said employees were hired by the appellant company, then leased out to specific projects. On September 2, 1965 the appellant decided to establish a deferred profit sharing plan for the benefit of any employee who had or would have twelve months of continuous service with the appellant. On October 21, 1965 the Minister advised the appellant that the plan was registered and was effective from September 17, 1965. On September 2 of the same year the appellant admitted into the plan 40 employees who purportedly had twelve months of service with the appellant. However, the evidence adduced shows that of the 40 members admitted to the plan, 12 did not have the required length of service and on February 21, 1966, when $60,000 was paid to the plan, 10 individuals were no longer employees and 10 new names were added to the list. Furthermore, the payment was accomplished by arranging a bank loan in the amount of $47,400 together with the current funds on hand of $12,600, with a certified cheque drawn on the account in the amount of $60,000 payable to the trustees of the plan. The next day the trust acquired 6,000 preference shares having a par value of $10 per share and consequently the $60,000 was paid back to the company.

Messrs Ronald Goldstein and Russell Oddy were at all material times the principal shareholders of the appellant company. Mr Goldstein testi- tied that in 1962 he entered into a partnership agreement with Mr Oddy in order to recruit engineers from England and that in 1964, 80% of the appellant’s business was the leasing of employees for the execution of various projects. In 1964 the appellant company owned 90% of the shares in a subsidiary in Australia and had a branch office in London, England.

Mr Goldstein also explained that in order to attract and retain employees from England, the appellant company had to pay their travelling expenses and had to introduce a medical and a deferred profit sharing plan for its employees. Apparently all this did not succeed in stopping the employees from leaving the company and when the Government of Quebec introduced legislation with respect to the deferred profit sharing plan and directed the trustees of such a plan as to how to invest the funds, the appellant company decided to discontinue its employee deferred profit sharing plan.

Mr Goldstein also stated that as the employees left the plan, he and Mr Oddy were the only ones to get the benefit of the money invested because in his opinion they were the only ones to have a vested interest in the said money which was accrued to them in the form of preference shares and that the fact of reallocating the unattached money to the other employees was not a guarantee to keep them from leaving the company.

As to acquiring the appellant company’s preference shares by the profit sharing plan, Mr Goldstein contended that it was a sound investment because an insurance policy in the amount of $69,000 had been taken on his life, with the benefits payable to the company in order to redeem the preference shares and thereby protect the funds of the plan.

Upon cross-examination he further stated that at all material times he was president of the company and owns 70 shares whereas Mr Oddy was the vice-president and owns 30 shares. Their wives also had shares and received remunerations. He was not certain whether all of the 40 employees had served for twelve months but he admitted that he was aware of the tax advantage in instituting the said plan. He also admitted that within a month after the first contribution to the plan what has been referred to as being the “unattached money” was reallocated to the main shareholders. At that time the appellant company’s line of credit was between $50,000 and $60,000.

Mr Lawrence, the appellant’s chartered accountant, testified that in 1966 some $3,600 in dividends were paid by the appellant for the preference shares held by the trust and that in 1967 the money was still in the trust bank account.

Mr David Pawlik, a chartered accountant and auditor for the Department of National Revenue since 1966, testified that in September of 1966 he had discovered through the payroll sheet and the T-4 slip for each employee that out of the 40 employees who were supposed to have twelve months of service, 15 of them did not have such service with the company and that, when the contribution of $60,000 was paid to the plan on February 21, 1966, 11 individuals were no longer employees of the company. To refute this evidence, Mr Lawrence was recalled to state that the appellant company had a branch in Australia, that the employees sent there by the appellant were paid through a bank account in England, and therefore those salaries were not shown on the appellant’s payroll sheet.

Counsel for appellant argued that the latter was reassessed on the basis that its deferred profit sharing plan was not a bona fide transaction but a sham which constituted an artificial transaction under section 137.

In reviewing the evidence, counsel for the appellant stated that the plan was introduced, along with other means such as a medical plan and the paying of the employees’ travelling expenses from England, because the appellant company wanted to attract and retain its employees; that the said deferred profit sharing plan was abandoned only because of the amendments to the Provincial Income Tax Act which were enacted to direct the trustees as to how to invest the money of the plan; that only one contribution was made to the plan early in 1966 but that another one would have been made early in 1967 had it not been for the amendments to the Income Tax Act; that Messrs Goldstein and Oddy received the unattached moneys because they were the founders of the appellant company and had the most years of service.

In his opinion, although some money was used in 1969 for the benefit of the two main shareholders, this action did not constitute a sham because the said shareholders were also employees of the company and the latter in 1969 could not have anticipated that employeemembers would leave their employment so soon.

On the other hand, counsel for the respondent argued that the Minister has the right to attack the transaction although he had accepted the plan for registration (MNR v Inland Industries Ltd, [1972] CTC 27; 72 DTC 6013); that in Cam Gard Supply Ltd v MNR, [1973] CTC 111; 73 DTC 5133, Mr Justice Cattanach dismissed the appeal on the ground that there was no legal obligation to make the payments and consequently the contribution was not made in strict accordance with section 76 of the Act;. that the pension plan was a sham and consequently the deduction should not be allowed and assuming it was a bona fide transaction, the Minister was still able to use subsection 137(1) to say that the payment had artificially or unduly reduced the income of the appellant company (MNR v James A Cameron, [1972] CTC 380; 72 DTC 6325). He also stated that the appellant company’s pension plan was not in accordance with subsection 79C(7) of the Act because the payment was not made for the benefit of “employees of the employer who are beneficiaries under the plan” and that according to the pension plan, the retirement benefits except in the discretion of the trustees could not be paid until a person reached the age of 65, no matter how long he had been with the company. Because of the nature of the appellant’s business, its employees came and went in a proportion of 40 to 50%. Consequently because of this stipulation it was impossible for the appellant’s employees to get a benefit within a short period of time and according to him this stipulation was clearly drafted for the benefit of the appellant’s principal shareholders. He concluded his argument by saying that no one other than the main shareholders claimed and obtained a benefit, that long before the amendments were made to the Quebec Provincial Income Tax Act the principal shareholders were allocating to themselves, and this within one month after the initial contribution of $60,000, $1,500 for each of the employees who had already left the company and that, within fourteen months after the date of registration of the pension plan, only the two main shareholders of the appellant company were beneficiaries.

According to the evidence adduced, it appears that on the effective date of the registration of the plan, 15 people out of 40 had not, in fact, the length of service required by the plan, and that when the $60,000 was paid on February 21, 1966, 11 people were no longer in the employ of the appellant company. It would have been easy for the appellant to file documentary evidence to show that the missing employees were working in another country and were paid by the appellant company’s London, England office. The Board is not satisfied with the evidence adduced by the appellant in that respect since this shortage of employees with twelve months’ service was one of the main allegations in the respondent’s reply to the notice of appeal and since the appellant did not see fit to introduce better evidence to rebut that important allegation.

it must be remembered that the appellant had the onus to show that the respondent’s reassessment was wrong in law and in fact and, especially in the case of seeking the benefit of a deduction, it should fall squarely within the exempting section. In the present case, the appellant company sought a deduction under subsection 79C(7) which provides that the payment in the plan must be made for the benefit of employees of the employer who are beneficiaries under the plan. It is well established that the appellant company allocated $1,500 for each of 15 persons who did not fall within the provisions of the plan because they did not have the length of service required by the said plan to qualify as beneficiaries, and when the $60,000 was paid, 11 people were no longer in the employ of the company. In spite of this fact, the appellant company has paid $1,500 for each of the 40 employees, which means that right from the beginning the appellant company was not complying with the provisions of subsection 79C(7). A further study of the plan shows that the retirement benefits could not be paid until a person reached 65 years of age, no matter how long he had been with the company. Consequently, because of the nature of the appellant’s business, it was impossible for its employees, except for its two main shareholders, to become beneficiaries of the plan. In fact, except for the two main shareholders, fourteen months after the creation of the plan no one was a beneficiary. It should be remembered that in addition to being the main shareholders, they were the sole owners of the company, the sole beneficiaries and the trustees of the plan. No other employee derived any benefit from this plan. Furthermore, a scrutiny of the plan shows that it was carefully drafted for the benefit of the appel- lant’s main shareholders. The plan has all the earmarks of a sham and certainly does not fit squarely within subsection 79C(7) of the Act. The contribution to the plan was not for the benefit of the 40 employees of the appellant company but only for its two main shareholders who in fact derived benefits therefrom and this only after fourteen months of its registration.

For the above reasons, the appeal is dismissed.

Appeal dismissed.