Ronald Goldstein v. Minister of National Revenue, [1974] CTC 2021, 74 DTC 1033

Roland St-Onge:—This appeal is from a reassessment dated December 3, 1969 with respect to the 1967 taxation year.

It was agreed by the parties that the evidence adduced in the appeal of Goldstein and Oddy Limited would apply mutatis mutandis to the appeals of Ronald Goldstein and Russell Oddy and it was further agreed that the judgment in the Ronald Goldstein appeal would apply to the appeal of Russell Oddy.

The appellant is an employee of Goldstein and Oddy Limited. On September 2, 1965 the said company adopted a deferred profit sharing plan which was registered on October 21, 1965 and became effective retroactively as of September 17, 1965. The appellant and Mr Russell Oddy, the two main shareholders of Goldstein and Oddy Limited, were nominated as members of the said plan. A contribution of $60,000 was made by the company and as members of the plan the two main shareholders benefited by the said contribution.

However, in accordance with the provisions of the plan, amounts were reallocated to the appellant upon cessation of employment of other members of that plan. In 1967 an amount standing to the credit of the appellant in the deferred profit sharing plan was transferred allegedly in accordance with the provisions of the Income Tax Act and more particularly those of paragraph 11(1)(u). On December 3, 1969 the respondent reassessed the appellant and included in his 1967 taxation year $32,754 as being a sum of money transferred on behalf of the appellant from the company’s deferred profit sharing plan to the appellant’s registered retirement savings plan. From this amount, a sum of $2,400 [sic] was however recognized as constituting a proper contribution to the appellant’s registered retirement savings plan.

In his reply to notice of appeal, the respondent alleged that the reassessment was based on the following assumptions:

(a) the appellant was at all material times the president and one of the principal shareholders of Goldstein and Oddy Limited, a corporation Incorporated under the laws of the Province of Ontario, having its Head Office in the City of Hamilton, carrying on the business of a placement service for individuals with engineering and other technical qualifications and backgrounds;

(b) the individuals employed by Goldstein and Oddy Limited are hired out at specific hourly rates and are paid by Goldstein and Oddy Limited on an hourly basis; the said individuals only worked for the appellant on a temporary basis;

(c) on the 2nd day of September, 1965, Goldstein and Oddy Limited purported to establish a Deferred Profit Sharing Plan which was registered by the Respondent pursuant to a letter dated October 21st, 1965. The registration was to be effective as of the 17th day of September, 1965;

(d) the Deferred Profit Sharing Plan was in respect of any employee who had at least 12 months of continuance service with Goldstein and Oddy Limited and whose contribution to the prosperity and profits of Goldstein and Oddy Limited had been of greater than average significance;

(e) of the 40 employees who were designated as beneficiaries under the purported Deferred Profit Sharing Plan, 12 did not have the required length of service;

(f) on the 21st day of February, 1966, Goldstein and Oddy Limited purported to contribute $60,000.00 to the Deferred Profit Sharing Plan as follows: on the 21st day of February, 1966, Goldstein and Oddy Limited borrowed $47,400.00 together with its own funds on hand in the amount of $12,600.00, issued a cheque in the amount of $60,000.00 payable to the Trustees of the Plan. On the 22nd day of February, 1966, $60,000.00 was paid back to the Company and the bank loan of $47,400.00 was repaid on thai date. As a resuli of this transaction, the Trust acquired 6,000 preference shares of Goldstein and Oddy Limited having a par value of $10.00 each

(g) most of the individuals employed by Goldstein and Oddy Limited could only be considered as temporary or transient employees who would subsequently move on to permanent employment with other companies or in other parts of ihe country;

(h) on the 25th day of March, 1966, and on the 31st day of October, 1966, Goldstein and Oddy Limited purported to re-allocate the contributions in respect of 28 other members of the purported Deferred Profit Sharing Plan who were no longer employed with the Company to Russell Oddy and the Appellant to the extent of 30% and 70% respectively;

(i) on the 14th day of July, 1967, Goldstein and Oddy Limited was advised by the Respondent that certain amendments governing Deferred Profit Sharing Plans would result in revocation of the purported Deferred Profit Sharing Plan established by Goldstein and Oddy Limited;

(j) on the 29th day of December, 1967, the National Trust Company Limited purchased 4,500 preference shares of Goldstein and Oddy Limited;

(k) on the 29th day of December, 1967, cheques were made payable in the amounts of $14,946.00 and $32,754.00 to the National Trust Company Limited in respect of Registered Retirement Savings Plans for Russell Oddy and the Appellant, respectively, which payments represented the vested balances of their accounts in the purported Deferred Profit Sharing Plan;

(l) the Appellant deducted from his net income for the 1967 taxation year the sum of $32,754.00 allegedly in respect of the amount received under the provisions of Section 79C(9) and contributed to a Registered Retirement Savings Plan. On the 3rd day of December, 1969, the Respondent reassessed the Appellant for the 1967 taxation year and disallowed the deduction of $32,754.00, and instead allowed a deduction of $2,500.00 in respect of the premium under the Registered Retirement Savings Plan in accordance with Section 79B(5) of the Income Tax Act.

B. STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT:

4. The Respondent relies, inter alia, on Sections 3, 8(1), 79B(5) and 79C of the Income Tax Act, RSC 1952, Chapter 148, as amended.

5. The Respondent says that the Deferred Profit Sharing Plan purportedly established by Goldstein and Oddy Limited was a sham in that Goldstein and Oddy Limited purported to make contributions to employees who were not and were never intended to be beneficiaries of the said Plan.

6. The Respondent says that the creation and existence of the Deferred Profit Sharing Plan was to facilitate an artificial reduction from the income of Goldstein and Oddy Limited and to transfer indirectly to a Registered Retirement Savings Plan for the Appellant a sum in excess of $2,500.00 which if received by the Appellant and paid by him as a premium under the Plan would be taxable to the extent of the premium in excess of $2,500.00.

7. The Respondent says that a bona fide Deferred Profit Sharing Plan did not exist under the provisions of Section 79C of the Income Tax Act, and that therefore the Appellant is not entitled to the deduction permitted under the provisions of Section 11 (1)(u) of the Income Tax Act.

8. The Respondent says that the amount received by the Appellant as a distribution from the Deferred Profit Sharing Plan purportedly established by Goldstein and Oddy Limited was in fact an appropriation of the funds or property of Goldstein and Oddy Limited for the benefit of the Appellant who was an officer and principal shareholder of Goldstein and Oddy Limited and a Trustee of the Deferred Profit Sharing Plan.

Therefore, the Respondent says that he properly included in the income of the Appellant for the 1967 taxation year the sum of $30,354.00.

Counsel for the appellant argued that Mr Goldstein was taxed in 1967 under subsection 8(1) of the Act on the basis that a benefit had been conferred upon him as a shareholder because the deferred profit sharing plan was a sham and indirectly gave him a benefit of all the amounts contributed under the plan. He referred the Board to MNR v Pillsbury Holdings Ltd, [1965] 1 Ex CR 676; [1964] CTC 294; 64 DTC 5184, and stated that section 8 applies only when a payment is made to a shareholder by a corporation. He maintained that the plan was established for the benefit of the employees and not for the benefit of Mr Goldstein and Mr Oddy but because of the new Quebec legislation it became a necessity to enter into a new arrangement whereby the corporation conferred a benefit or advantage upon the shareholder.

If the deferred profit sharing plan was a sham, why did the Minister not assess the appellant when the contribution of $60,000 was made to the plan in 1966? According to the appellant, the assessment is not for the right year and if he was taxed in 1967 because the money was transferred under paragraph 11(1)(u) in that year, the Minister considered the plan to be in effect because the registration of the plan was still valid at that time. Counsel for the appellant concluded by saying that the deferred profit sharing plan was not a sham and there was no benefit conferred on the two shareholders in the taxation year 1967.

Because of the decision in Goldstein and Oddy Limited v MNR rendered this day, the deferred profit sharing plan has been ruled as nonexistent since it is not in conformity with the provisions of subsection 79C(7) of the Act, and it follows that the amount received by the two main shareholders of the appellant company can in no way whatsoever be considered as a legal transfer to a registered retirement savings plan, except for the amount of $2,500 allowed by the law.

As to the taxation year, in no way whatsoever could the 1966 taxation year be considered as the proper one since the appellant did not receive anything in that year. According to the evidence adduced, the amount credited to the appellants was effectuated in 1967 when cheques were made payable in the amounts of $14,946 and $32,754 to the National Trust Company Limited, in respect of a registered retirement savings plan for Russell Oddy and the appellant respectively, which payments represented the vested balances of their accounts in the purported deferred profit sharing plan.

For the above reasons and those mentioned in the decision of Goldstein and Oddy Limited v MNR rendered this day, the appeal is dismissed.

Appeal dismissed.