Marcel Goldhagen v. Minister of National Revenue, [1978] CTC 2491, [1978] DTC 1364

The Chairman:—This is the appeal of Marcel Goldhagen from an assessment of tax for the 1970, 1971, 1972 and 1973 taxation years. The appellant, in this complex appeal, appeared on his own behalf and since the several issues involved in this appeal run into several taxation years it was agreed by the parties that for purposes of hearing the appeal the items, as set out in paragraph 2 (a to h) of the Statement of Facts in the respondent’s reply, would be dealt with one at a time and consecutively. It was also agreed that since the taxpayer’s notice of appeal reflected all the claims raised in his notice of objection and that some of the appellant’s claims therein had already been allowed by the respondent, only the items set out in paragraph 2 of the respondent’s reply to the notice of appeal would be debated.

Paragraph 2 of the respondent’s reply to notice of appeal reads as follows:

2. In assessing the Appellant for tax for the Appellant’s 1970, 1971, 1972 and 1973 taxation years, the Respondent assumed, inter alia, that, with respect to:

(a) Deductions claimed by the Appellant for interest paid on personal bank loans; 1970: $729.87, 1971: $1,763.61, 1973: $694.63

(i) the Appellant did not expend amounts in his 1970, 1971 and 1973 taxation years in payment of interest on borrowed funds;

(ii) if funds were borrowed, such funds were not used by the Appellant for the purpose of earning, gaining or producing income.

(b) Profit respecting the sale of property at Yonge and Gerrard; 1971 : $13,000, 1972: $215, 1973: $9,150

(i) in 1971, on or about August 3, 1971, the Appellant entered into an agreement with Calsto Investments Limited (“Calsto”), a company in which the Appellant was. a shareholder, whereby Calsto agreed to ^ employ the Appellant, as a manager;

(ii) . in 1971, the Appellant received a cheque for an amount of $13,000 from Calsto. notated thereupon to be in payment of a personal management fee;

(iii), in 1971. Calsto recorded the payment of the $13,000 to the Appellant f as a management fee on its Statement of Income and Expense;

(iv) in 1971, Starmount Investments Ltd (“Starmount”), a company controlled by the Appellant, did not have any agreement with Calsto to provide management services to Calsto:

(v) in 1971, the Appellant incorrectly attributed the $13,000 payment received from Calsto to Starmount, and in preparing his income tax return for 1971 the Appellant did not report the $13,000 receipt from Calsto as his personal income, but rather recorded the $13,000 as the income of Starmount;

’(vi) in 1972, the Appellant received a cheque for an amount of $100

from Calsto which represented payment of a management: fee from '— Calsto to the Appellant;

(vii) in 1972. an amount of $115 was credited to the Appellant’s shareholders account with Calsto representing payment of a management fee from Calsto to the Appellant;

(viii) in 1972, in preparing his income tax return for that year, the Appellant did not report as income the amounts referred to in the immediately preceding sub-paragraphs 2(b)(vi) and 2(b)(vii);

(ix) in 1973, the Appellant received a cheque for an amount of $9,150 from Calsto representing the Appellant’s share of proceeds from a litigation settlement, which cheque was apparently deposited into a bank account of Starmount’s;

(x) in 1973, in preparing his incomé tax return for that year, the

Appellant did not report, the amount of $9,150 received by him.

(c) Income from Share of Profit respecting the sale of 2457 Eglinton Avenue East; 1971: $8,350

(i) in 1971 the Appellant was involved in a business transaction with Mr Zwi Swirsky and others, in which an: option on property located at 2457 Eglinton Avenue East was sold resulting in:the Appellant becoming entitled to $8.350 as his share of the profit from the :transaction;

(ii) in preparing his income tax return for 1971, the Appellant did not record the amount of $8,350 from the ‘aforesaid transaction: as income.

(d) Disallowed expense claim re forfeited deposit recovered; 1971: $5,000

(i) in 1971 the Appellant took over the liability for a bank loan incurred by Mr Alex Choc, the funds from which borrowing had been lent to a company controlled by the Appellant, 137 University Avenue Limited;

(ii) in 1971, 137 University Avenue Limited recorded the loan made to it by Alex Choc (which was subsequently taken over by the Appellant, as aforesaid) as an account payable, and in subsequent years the company retained the said account payable on its records;

(iii) in preparing his income tax return for 1971, the Appellant incorrectly took a deduction for the amount of $5,000 respecting the aforementioned

assumed liability.

(e) Shareholder’s benefit received from Stanfred Construction Limited— re purchase of shares from Max Monetta; 1973: $41,807.86

(i) in 1964 the Appellant obtained the shares of Stanfred Construction Limited (“Stanfred”) owned by Max Monetta in a transaction or series of transactions wherein Max Monetta was paid an amount of or about $41,807.86 for the shares, the funds for the payment for which shares coming from the proceeds of a mortgage taken by Stanfred upon real property owned by it;

(ii) the liability for the repayment to Stanfred of the funds used to purchase the shares was recorded on Stanfred’s books and Financial Statements for 1973 as a receivable due from a shareholder;

(iii) in 1973 the receivable in question was eliminated from the books and Financial Statements of Stanfred by being written off against the retained earnings of Stanfred, thereby in effect forgiving the Appellant from paying the debt, thereby conferring a benefit upon the Appellant by the amount written off, $41,807.86.

(f) Shareholder’s Benefit from Stanfred—re Alex Choc; 1973: $4,500

(i) in 1973 Stanfred owed an amount of or about $4,500 to Mr Alex Choc;

(ii) Stanfred applied the amount owing to Alex Choc toward the Appellant’s shareholder’s loan account with Stanfred, resulting in a reduction of the Appellant’s loan account with Stanfred by an amount of $4,500, thereby conferring a benefit on the Appellant for that amount.

(g) Shareholder’s Benefit from Stanfred—re Commissions Payable to Ben Weinstein from Stanfred: 1973: $10,000

(i) in 1973 Stanfred owed an amount of or about $10,000 to Ben Weinstein;

(il) Stanfred applied the amount payable to Ben Weinstein toward the Appellant’s shareholder’s loan account with Stanfred, thereby reducing the Appellant’s loan account with Stanfred by an amount of $10,000 thereby conferring a benefit on the Appellant of that amount.

(h) Shareholder’s Benefit from Stanfred—re profits on the sale of 183-189 Bathurst Street; 1973: $2,365.33

(i) in 1970 the Appellant purchased property at 183-189 Bathurst Street in conjunction with Stanfred, with Stanfred paying the Appellant’s share of the purchase price;

(ii) in recording the loan made to the Appellant for his share of. the purchase price, Stanfred charged the Appellant’s loan account with an amount rightly owing by the Appellant, thereby resulting ‘in. a benefit being conferred on the Appellant of that amount of $2,365.33.

As a result of new evidence adduced by counsel for the respondent’s patient and thorough cross-examination of the appellant, the respondent was prepared to allow subsection (a) and subsection (e) and it is my understanding that the appellant no longer disputes subsection (f) and subsection (h) of paragraph 2 of the respondent’s reply to the notice of appeal.

The issues to be adjudicated, therefore, are subsections 2(b), 2(c), 2(d) and 2(g) of paragraph 2 of the respondent’s reply.

Subsection 2(b)—Profit respecting the sale of property at Yonge and Gerrard; 1971: $13,000; 1972: $215; 1973: $9,150.

It was agreed by the parties that since the amount in issue in each of the years 1971, 1972 and 1973 arose from one transaction, once the principal issue was determined for one year it would apply to the amounts in the two subsequent years.

The issue here is simply whether or not the appellant personally received the above stated amounts in the pertinent taxation years as profit realized as a result of the purchase and sale of property at Yonge and Gerrard Streets.

The facts, as I understand them, are that the appellant had sought to purchase, through one of his companies called Starmount Investments Ltd., the property at Yonge and Gerrard Streets, however, being unable to finance the purchase, the property was purchased with other parties and subsequently sold at a profit. There is on record as Exhibit R-2 an Agreement of Purchase and Sale dated March 12, 1971, which the appellant claims bound the parties to the agreement viz Starmount Investments Limited, Calsto Investments Limited and Zwi Swirsky. In cross-examination counsel for the respondent pointed out that in the agreement the parties had agreed to either register a partnership or form a new corporation for the purpose of purchasing the property jointly, neither of which was carried out and the property was purchased by Calsto. The appellant admitted that a partnership was never entered into and suggested, however, that Calsto was the new corporation to which the agreement (Ex R-2) referred. It is the appellant’s contention that Calsto agreed to include Starmount and Swirsky as co-purchasers in the March 12th agreement of purchase, but that it was Calsto that sold the property. The profits were to be shared on a /3, /3, /3 basis between Starmount Investments Limited, Calâtb Investments Limited and Zwi Swirsky in the event of a partnership being formed.

There is also on record an agreement dated January 26, 1971, (Ex R:8), fully executed and signed by the parties which the appellant admitted in cross-examination was substituted by the March 12, 1971, agreement. In the January 26, 1971, agreement Starmount was purported to have purchased the property from Calsto but the appellant admittéd that that purchase was not carried out.

A final agreement was entered into on August 3, 1971, signed by Mr Zwi Swirsky, Mr Julio Callegari, the appellant and Calsto. Mrs Goldhagen, Mrs Swirsky and Mrs Callegari are referred to on the cover sheet of the agreement as the fifth, sixth, seventh parties respectively. This last agreement (Ex R-4), page 6 paragraphs 7 and 8 read:

EMPLOYMENT

7. The Corporation agrees to employ each of the individual parties hereto as co-managers at such equal salary as the Board of Directors from time to time determine so long as they remain shareholders of the Corporation. Each of the individual parties hereto shall devote only such time and attention to the business of the Corporation as each of them in their uncontrolled discretion considers necessary.

8. Any monies received by the individual parties hereto from the Corporation, either directly or indirectly, whether by way of bonuses, expenses or other compensation as may be directed by the Board of Directors are to be divided equally among all the individual parties hereto.

Counsel for the respondent introduced as Exhibit R-5, Calsto Investments Limited balance sheet as of August 31, 1971, and in the Statement of Income and Expense, the appellant, Mr Callegari and Mr Swirsky each received $13,000 as management fees, which conforms with the profit sharing arrangement in the March 12, 1971, agreement (Ex R-2).

The appellant’s explanation of the existence of the three agreements was lengthy, laborious and not too credible. The appellant admits that the January 26, 1971, agreement (Ex R-3), was not carried out but claims that the March 12, 1971, agreement (Ex R-2), was valid. However, since no partnership was formed and no new company was incorporated and since Starmount never did purchase the property it is difficult to see how that agreement can be considered as valid.

In my opinion, the only valid agreement is that of August 3, 1971, in which the appellant, as well as Mr Swirsky and Mr Callegari, are shareholders of Calsto but where each of the individual parties viz the appellant, Mr Swirsky and Mr Callegari are co-managers and are to receive an equal salary (Exhibit R-5) in the Statement of Income and Expense of Calsto as at August 31, 1971, indicates that the appellant, Mr Swirsky and Mr Callegari each received $13,000 as management fees.

In my opinion, regardless of what the intention of the appellant may or may not have been throughout the transaction and regardless of the fact that the equal payment of management fees to each of the co-managers can be compared to the proposed sharing of profits as indicated in the March 12, 1971, agreement, no valid evidence was adduced by the appellant to establish that the $13,000 received by him as management fees from Calsto in 1971, was paid to him as trustee for Starmount Investments Limited as suggested by the appellant or that Starmount Investments Limited was in any way involved in the August 3, 1971, agreement which, in my opinion, is the only valid agreement before the Board. Subsequently, what the appellant may have chosen to do with the said amounts received is immaterial to the decision in this appeal. Since the amounts received by the appellant in 1972 and 1973, were from the same source and form part of the one issue and since it was agreed that the determination by the Board of the issue in that respect for the 1971 taxation year would apply as well to the other two taxation years, on the basis of the valid evidence before the Board I must conclude that the amounts received by the appellant from Calsto in the pertinent taxation years were income in his hands and as such were taxable. The appellant’s claim in respect of the issue described in paragraph 2(b) of the respondent’s reply to the notice of appeal is therefore dismissed.

Subsection 2(c)—Income from Share of Profit respecting the sale of 2457 Eglinton Avenue East; 1971 : $8,350

In hearing the evidence, particularly with respect to paragraph 2(c) as well as paragraphs 2(d) and 2(g), the Board adopted an unprecedented procedure which it felt might help to clarify a most confusing series of transactions and permitted the appellant a great deal of flexibility in presenting his case.

However, the exercise proved to be fruitless and frustrating. After considerable debate between the appellant and counsel for the respondent, the assessor for the Department of National Revenue, Mr Brian Da Silva, explained to the Board the basis on which the appellant was assessed. As a result, it became quite evident that the basic cause of the various issues was the appellant’s misunderstanding of the proper accounting method of declaring for tax purposes, the outcome of related transaction.

With reference to paragraph 2(c) the following is a record of the transcript at page 85.

Mr. Kerr: Would this be 2(c) on page 3 of the Reply?

Mr. Goldhagen: Yes. Income from share of profit respecting the sale of 2457 Eglinton Avenue East; 1971: $8,350. It is on the appeal on page 2 No 3, at the bottom of the page.

The Chairman: On the Notice of Objection?

Mr. Goldhagen: Yes. And we stated several reasons, and we have the exhibits to it. It is true I made $8,350 as my share of the profit on this transaction, (b) However, I have lost $10,200 in that particular year as my share of loss in the Downtown Medicentres transaction. (c) Mr Swirsky put up my share of the $10,200 for me. Therefore, these $8,350 were made. I gave direction to the lawyer to pay the $8,350, my share of profit, directly to Mr Swirsky in repayment of my share of loss. That is the. Downtown Medicentres. Since I never put up the monies that were lost, and I never received the monies that I earned, I did not report neither [sic] of them. I have not put them up.

At page 123 of the transcript we find:

The Chairman: It is a question of an error in the accounting, is it not?

Mr Goldhagen: Yes.

The Chairman: If that is it, are you saying now that you understand and accept what the auditor has explained to. you just now?

Mr. Goldhagen: Mr Chairman, I think in all logic and fairness I would say if I gave these $8,350 to Mr Swirsky that he was not entitled to get back from me what I thought was my share of the loss, if I gave it to him. wrongly and the accountant would not show that I lost the money, you know, so that he would be entitled to get it back, by all means he is right. But if indeed he laid out the money for me, lost it for me, and then I made it up in s.'cne other deal and I gave it to him rightly so to cover my loss, he is wrong. I didn't make the profit. Sure, if I made a mistake, it is a mistake. But I don’t think so.

The Chairman: Are you an accountant?

Mr Goldhagen: No. I am an engineer.

In my opinion the appellant did not establish to the satisfaction of the Board that he did not realize, as his share of a profit, an amount of $8,350 and paragraph 2(c) must therefore be dismissed.

Subsection 2(d)—Disallowed expense claim re forfeited deposit recovered; 1971 : $5,000

The issue here is who is to claim the loss of $5,000—137 University Avenue Limited, a company owned by the appellant or the appellant personally?

At pages 141 and 142 of the transcript we find:

Mr Da Silva: That is not for me to decide. All I am saying is that the loss was claimed by this taxpayer and you are the President and. you signed it and you want to claim the loss is a previous taxation year, and that just cannot be done.

Mr Goldhagen: Mr Chairman, if I may answer Mr Da Silva’s remark now. Of course I agree, if that is the case, that you cannot take a personal loss on the money at the same time the company claims to have lost the same amount. That makes sense. It is true. Okay. That is what he is saying now, that is his reason. Not what he said here. And I will now say one thing. If that is the case, no doubt about it, it is 100 percent clear to me, that the loss in the company is improperly recorded and I would like to amend that. Why should we then go and say, this is. correct and this is not correct? We have an equal chance now.

Mr Da Silva: It was all done through 137 University and you have yet to establish this agency—do you have the agreement?

Mr Goldhagen: I am sure I have. I didn’t bring it.

Again, the appellant did not establish to the satisfaction of the Board that the Minister’s assessment is wrong and Subsection 2(d) is dismissed.

Subsection 2(g)—Shareholder's Benefit from Stanfred—re Commissions Payable to Ben Weinstein from Stanfred: 1973: $10,000

At pages 178 and 179 of the transcript we find:

The Chairman: At this stage of the game, this cannot be done. You come up on an appeal and you have stated your case. I am going to decide on the case. As you say, it is a mistake. That is what you say, okay. Then I am going to have to decide the case, that somebody made a mistake, that the assessment that was made was correct. As I understand it, the Minister I think on two points has consented to allow the issue. I think you have on one. I think this is also another one where you say, okay we get it back to the Minister. I can’t say I am going to change the books or anything like that. All I can do is decide on each one of the items that came before me. In your own words, you say there could have been a mistake in having it done that way. That is the point. There is no use discussing it anymore if it was a mistake.

Mr Goldhagen: A. mistake can. be reversed and corrected.

The Chairman: I know. But it cannot be done here, it cannot be done here. It could have been done before. Once you get here—

Mr Goldhagen: I don't understand why he would do that.

The Chairman: Neither can I. We cannot start figuring out why he did or did not do it. The only thing is that he did.

Mr Qoldhagen: It would be just the same to leave it the way it was and there is no problem. I understand what you are saying. Mr Chairman.

The onus of proving that the Minister’s assessment was wrong was not satisfied by the appellant and subsection 2(g) is also dismissed.

By way of obiter dictum, it appears to me that the difficulty in hearing this appeal stems from the fact that the issues were not fully joined in that the appellant did not understand or did not want to understand that an assessment is made on valid records and he appeared to underestimate the necessity of making proper record entries of transactions, particularly when they occurred between himself and five or six corporations which he owned. The Board must decide the issues on the basis of the evidence before it and the appellant adduced no evidence which would justify correcting book entries made by the appellant’s accountants and on which the assessment was based.

I conclude, therefore, that the appeal be allowed and the matter referred back to the Minister for reassessment on the basis that the deductions claimed by the appellant for interest paid on personal bank loans in the amounts of $729.87 in 1970; $1,763.61 in 1971 and $694.63 in 1973, be allowed; the appellant did not receive, as shareholder’s benefit, an amount of $41.807.86 in the 1973 transaction and that item is also allowed.

The appeal for each of the pertinent taxation years is dismissed in all other respects.

Appeal allowed in part.