Thaddeus J Pawlowski v. Minister of National Revenue, [1978] CTC 2187, [1978] DTC 1161

A W Prociuk:—The appellant appeals from the respondent’s reassessment of his income for the taxation year 1973 wherein a sum of $24,000 was added to his income and taxed accordingly.

The appellant’s ground of appeal is that the said sum was paid to his and his brother’s company, A Pawlowski & Sons Limited, as a management fee by Kaiser Investments Limited and that he did not receive any of that money personally.

The appellant has over 30 years’ experience in the construction industry in Kitchener, Ontario. His father was a builder there since 1921 and the appellant and later his brother, Joseph, joined their father in construction under the corporate name of A Pawlowski & sons Limited, which was incorporated in Ontario in 1951. The appellant owned 66 /3% of the issued and outstanding common stock and his father and brother owned the other 33 /3%. When the father died his shares were divided equally between Joseph and the appellant. Two years ago the company name was changed to Pawlowski Inc. At the material time the appellant was the president of A Pawlowski & Sons Limited, Joseph was the vice-president and J L Ditner was office manager. The company did everything necessary in the construction field and had the necessary yards, material and equipment to carry on. The company built some 2,000 houses and six or seven apartment blocks over the years. At the date of hearing of this appeal! it had some 24 houses under construction. The appellant was and is the driving force behind this enterprise. The company was in a loss position for some years including the year 1973. The appellant drew a salary only when financial circumstances permitted. Joseph drew a Salary except for one or two years.

The appellant and Paul Tuerr, as equal partners, incorporated Kaiser Investments Limited in October 1964. Its business was mainly land development. Paul Tuerr is also an experienced builder. Kaiser Investments Limited assembled land and put up several office buildings. Neither Tuerr nor the appellant drew any salary for 8 years from Kaiser. Each devoted at least one day a week to Kaiser and sometimes more depending on the nature of Kaiser’s undertakings. The appellant states that he would ordinarily recommend the purchase of certain lands, assemble them and later proceed to construction thereon and/or sale. In 1972 Kaiser had some money on hand. The two shareholders met on August 8, 1972 ‘and, amongst other things, discussed the matter of payment for their services. I should mention that apart from the annual incorporation returns there appear to be no other minutes of meetings. The appellant stated that the two operated by verbal agreements and each had complete confidence in the other. Books of records pertaining to the business operations of the company were kept. On August 8, 1972 they recorded a minute which reads as follows (see Exhibit R-6):

It is to be noted that both Mr P Tuerr and Mr T J Pawlowski are to receive payment in the amount of $24,000.00 each, based on a $3,000.00 per year payment, to pay for the last eight years which have not been paid for to-date.

The appellant states that he directed that Kaiser make the said payment to A Pawlowski & Sons Limited to compensate this company for the time he took off to work on behalf of Kaiser. He stated that it was only fair as far as his brother was concerned since the latter worked full-time for A Pawlowski & Sons Limited. This was treated by the appellant as a management fee. The said $24,000 was paid to A Pawlowski & Sons Limited in 1973 by Kaiser.

The respondent, pursuant to subsections 56(2) and (4) of the Income Tax Act, SC 1970-71-72, c 63, as amended, included the said sum in the appellant’s personal income.

Subsections 56(2) and (4) read as follows:

56. (2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

(4) Where a taxpayer has, at any time before the end of a taxation year (whether before or after the end of 1971), transferred or assigned to a person with whom he was not dealing at arm’s length the right to an amount that would, if the right thereto had not been so transferred or assigned, be included in computing his income for the taxation year because the amount would have been received or receivable by him or in respect of the year, the amount shall be included in computing the taxpayer’s income for the taxation year unless the income is from property and the taxpayer has also transferred or assigned the property.

There is no record nor any evidence of any contract or agreement of any kind between Kaiser Investments Limited and A Pawlowski & Sons Limited whereby the latter undertook to provide management services to Kaiser. There is no record nor any evidence of the matter of the appellant’s services on behalf of A Pawlowski & Sons Limited ever being discussed with Joseph Pawlowski, the other shareholder. A Pawlowski & Sons Limited never billed Kaiser for any such services. The very informal minute, Exhibit R-6, appears to have been put together by Tuerr and the appellant only after reviewing the financial picture of Kaiser. The appellant may have had good tax reasons for directing that payment be made to A Pawlowski & Sons Limited but this does not assist him in any way.

The appellant had the major control of A Pawlowski & Sons Limited which gave him the right to act as he pleased. This company, the evidence satisfies me, had no effect on the relationship between the appellant and Kaiser.

In my humble opinion the respondent was correct in his assessment and same ought not to be disturbed.

The appeal, accordingly, is dismissed.

Appeal dismissed.