Albert a De Mezey v. Minister of National Revenue, [1972] CTC 2186, 72 DTC 1174

A J Frost:—This is an appeal from four assessments, each one dated March 17, 1969, in respect of the appellant’s taxable income for the years 1963,1964, 1965 and 1966.

The appeal was heard on May 28, 1971 at Victoria, BC, and will hereby be disposed of by virtue of subsection 21(2) of the Tax Review Board Act in conformity with the provisions of this Act.

The appellant is an industrial consultant residing in the city of Victoria. He acquired a working knowledge of the “particle board industry” through study and by maintaining a liaison with equipment manufacturers and institutions which provided him with detailed information relating to various technological processes and current developments. His initial studies and research began in 1956 and extended over a period of three years. As early as 1956, he formed an association with the Kreibaum Export Company of Germany while attending an international industrial conference. The Kreibaum company had developed its own process as manufacturer of prefabricated buildings and invited the appellant to visit their plant in Hanover. Later the company appointed him its agent to represent their firm in Canada. Following this appointment, the appellant travelled extensively with a view to interesting companies in erecting plants based on the Kreibaum process. He would prepare detailed analyses of local and internal conditions for prospective clients and submit feasibility studies and cost calculations. He would advise a company, say a sawmill, on how to set up a particle board plant, at the same time working with the technical staff on the processes involved and advising them with respect to machinery requirements. The evidence adduced indicates that the preparatory equipment was for the most part manufactured in Germany and the finishing equipment in Switzerland. Although some progress has recently been made in the field by American corporations, the industry is still European based. As a specialist and consultant in the field, the appellant was interested mainly in the Kreibaum process and in the equipment designed to handle that process.

The appellant developed a number of prospects but most efforts never got past the prospect stage as the prefabricated building industry was not sufficiently developed to market the entire output of a Kreibaum type of plant. While trying to promote the Kreibaum process, the appellant became acquainted with Ferro Machinery Company Limited and its subsidiary Transatlantic Machinery Company Limited (hereinafter referred to as “Transatlantic”).

As of February 1, 1961 the appellant caused to be incorporated, pursuant to the laws of Switzerland, a company under the name of Premura A G (hereinafter referred to as “Premura”) with an authorized share capital of 50,000 Swiss francs divided into 50 owner-shares with a value of 1,000 Swiss francs each. The shareholders of the company had untransferable authority to elect the administrative council annually to manage and supervise the business of the company. According to the evidence, Premura was incorporated to achieve certain bona fide objectives which were in the main as follows:

1. To allow the appellant to enjoy limited liability in his dealings with the Ferro company and Transatlantic. As an individual he had been faced with several unpleasant litigations and had experienced some difficulty in receiving payment for his services.

2. As the particle board industry was based in Europe with 80% of the machinery required for building a plant manufactured in West Germany, Belgium and Switzerland, the appellant wanted his company to be based in Europe. It is also of some importance that the appellant was born in Hungary and consequently had a European background.

3. The appellant also wanted to be located in Switzerland for financial reasons. He wanted to be in the best possible position to obtain financing for equipment purchases.

At the hearing no evidence was adduced with regard to the assessments for the taxation years 1965 and 1966 and, since neither the documents filed with the Board nor the pleadings adequately indicate why these assessments for the said years were incorrect, they are hereby confirmed and the appeal in this respect is dismissed. My reasons are therefore confined to the assessments for the taxation years 1963 and 1964 and the appeal therefrom.

The appellant complains that the Minister of National Revenue added the amounts of $14,624.25 and $32,539 to his income as reported for the years 1963 and 1964, respectively. The appellant denies ever having received or earned those amounts and contends that Premura had received and earned the said amounts. The respondent, on the other hand, stated that Premura was never in receipt of any income earned by it other than interest income on funds directed to it by the appellant.

The rationale of Premura dominated this appeal and has a decisive bearing on the outcome of this dispute. It is therefore important to examine the several facets of the case rather closely. The only person who could have shed any light on these matters was the appellant himself. I have carefully reviewed the evidence in the light of what ! consider general knowledge concerning off-shore tax havens and money havens.

Switzerland has been in some respects a convenient place for foreign investors. It is true that Switzerland has a variety of taxes which take their share from the earnings of corporations formed under the provisions of Article 620 es of the Swiss Law of Contract (Schweizerisches Obligationenrecht), however, there are also important advantages. At this point, I would like to note that whatever the implications are of the provisions of subsection 9(2) of the Tax Review Board Act as to the Board’s freedom of procedure in establishing the truth as to the facts which are relevant for the proper disposal of disputes, I have based my findings on the appellant’s own evidence and the documentary evidence adduced, although ! have been forced to interpret appellant’s testimony, cryptic remarks and answers, especially in reply to the questions put to him by the respondent’s counsel, in the light of what I! could learn about the subject matter from authoritative sources indicated herein below. Before the appellant had incorporated Premura, he asked the advice of various experts in the field. He must have been fully informed about what he was getting into by “going Swiss”. Appellant’s adviser appeared to be one Dr Frick, a lawyer in the Swiss city of Zug. Dr Frick was not only appellant’s trusted adviser but, as a Swiss citizen, the one who, with two others (other than the appellant), signed the statutes of Premura AG under date February 1, 1961. Appellant was extremely vague as to the precise legal position of Dr Frick and his co-signers. One thing was established in cross-examination, namely, that the appellant was the sole beneficial owner of the company and that all his commission earnings were to be transferred to Premura, supposedly as income of the company for the benefit of its shareholders. Whatever appellant’s hopes had been for the future about participation of Swiss financiers in enterprises in Canada for which he expected a 60% capital contribution by the Canadian Government, the plans never materialized. My conclusion from all this is that Dr Frick and his co-signers were nothing but nominees of the appellant. Of these three nominees eventually only Dr Frick remained. He was president-director, manager, legal counsel of the company who in all important matters advised his client in Canada, argued with him and sometimes threatened to resign if the appellant did not follow his advice. It was Dr Frick who asked for a trust deed and did not get it, at least not initially, because the appellant had to think about its terms. In English legal terminology: Dr Frick was a trustee or what is called in Switzerland a “Treuhand”. In that capacity he could, as a Swiss citizen, fulfil all the functions which would be required from the management of a Swiss corporation in Switzerland.

The statutory capital of Premura was 50,000 Swiss francs, about $12,500. All the money Premura received during its existence was, except for some incidental returns on invested funds less losses suffered on investment, three payments — one of $14,624.25 received by Premura in May 1963, and two in 1964 totalling approximately $32,539. According to the appellant, no shares were issued. Perhaps the following quotation from the “Switzerland Law Digest” by Drs Pestalozzi and Gmuer of the Zurich Bar in the Martindale-Hubbell Law Directory (1966 ed, R R Donnelley & Sons Company, Chicago, Illinois) page 3278, concerning the incorporation of a Swiss joint stock company may explain why, according to the appellant, Dr Frick had asked for the moneys sent over in 1963:

The following data have to be recorded in the Commercial Register: date under which the articles have been passed, corporate name and seat of registered office of the corporation, purpose, proposed length of existence, amount of capital, amount paid up, par value of shares, type of shares issued, property received in payment of shares, . . .

At the time of the constituent incorporators’ meeting, at least 20% of the capital must have been paid up in cash or other assets, but not less than 20,000 francs.

The corporation is incorporated upon its entry in the Commercial Register. Shares issued prior to registration are void. (Code of Obligations 643-644).

(The italics are mine.)

This makes it obvious why Dr Frick was anxious to receive. the $14,624.25. In answer to my question as to whether Dr Frick himself had any financial interest in the company, the appellant answered: “I don’t think so.” Otherwise it would also be completely incomprehensible why the appellant was willing to have all his earnings diverted to a Swiss corporation which would receive such earnings as income for the benefit of its shareholders. The money had to come from the appellant. However, at the time of liquidation Dr Frick represented the entire share capital. Again, what else could he have been than a trustee for the appellant? I shall not make juridical conclusions from the fact that Premura did apparently legally not exist before it was registered and that it could not have been registered before evidence could be produced that the required portion of its share capital (20,000 Sfrs) had been paid up, nor shall I conclude that it is highly problematic whether the employment contract of January 1, 1963, between Premura and the appellant pursuant to which the latter was going to perform all his consultant’s activities as an employee of Premura, was legally valid or not. Since the respondent did not adduce expert evidence as to the effect of the Swiss law on the validity of this contract, I shall assume that it was effective when Premura received payments from Transatlantic after, but not before, June 1, 1963. There is no conclusive evidence whatsoever that the payment of $14,624.25 received by Premura from Transatlantic in May 1963 was made pursuant to a valid service contract between Transatlantic and Premura in conjunction with an equally valid contract of employment between Premura and the appellant at the relevant time. I fully agree with the respondent’s counsel that this amount must have been paid at the direction of the appellant as a capital contribution in Premura, and was correctly assessed as his income. The amount which the appellant reported in his 1963 income tax return as commission income must have come from the same source through the treasury of Premura and may, therefore, have to be deducted from the $14,624.25 added to the appellant’s 1963 income. For this reason, the matter has to be referred back to the Minister for reconsideration and reassessment, but only in so far as it pertains to the 1963 taxation year.

With regard to the 1964 taxation year, I am prepared on the strength of the evidence adduced and not adequately refuted by the respondent, to accept in principle the appellant’s argument that Premura was his employer at that time and that the amounts transmitted to Premura by Transatlantic in that year were not to be considered as representing appellant’s personal income transferred to Premura at his direction. However, I must say that I have had serious doubts as to the entire arrangement, but I will give the appellant the benefit of the doubt in allowing his appeal in so far as it concerns the 1964 taxation year. The appellant stated that only nominal taxes had to be paid by Premura. “When you take the money out, in whatever form you do it, you have to pay the 30% tax, and there is nothing you can do about it”, he said. Without going into further details, I am convinced that the appellant, who is an intelligent man, was not exclusively motivated by the idea that financing a Canadian enterprise would have had a better chance, had he acted through a small private Swiss corporation than by organizing a Canadian limited company, nor can I see how a Swiss corporation could protect him better against liabilities resulting from litigation with former principals than a Canadian limited company. On the contrary, I feel that the evidence clearly shows that he expected substantial tax advantages. This was undoubtedly his good right. However, having been frustrated in his expectations by miscalculation and by a more effective control by the Swiss fiscal authorities, he, himself, has to suffer the consequences of his action in this respect, even though he was probably misinformed by his own advisers about the anticipated tax implications.

For the reasons set out hereinbefore, I therefore allow the appeal for the 1964 taxation year, allow it in part for the 1963 taxation year and dismiss it in all other respects, referring the matter back to the Minister for reconsideration and reassessment in accordance with above-mentioned findings and conclusions pertaining to the assessments of appellant’s income for the 1963 and 1964 taxation years and the tax payable thereon.

Appeal allowed in part.