Stanley Stern v. Minister of National Revenue, [1980] CTC 2642, [1980] DTC 1532

D E Taylor:—This is an appeal heard in Ottawa on April 22, 1980 against an income tax assessment for the year 1974 in which the Minister of National Revenue taxed the appellant on an amount of $25,000 deemed to have been received as remuneration. According to the reply to notice of appeal, the respondent relied, inter alia, upon sections 3 and 78 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

History

The evidence of the only witness, the appellant himself, was given in the English language and, accordingly, the Board will use that language in giving its findings and decision. Some parts of the documentation were in English, some in French, and the argument of both counsel was in French. Where a specific quotation from any of these is given, it will be in the language used.

The amount in dispute arose from the filing with the Minister of a Form T2049 “Agreement In Respect Of Unpaid Remuneration”, authorized under subsection 78(3) of the Act, by a company, TH & S Electric Limited (“TH & S”), for the 1973 taxation year.

The photostatic copy of the above which was filed with the Board as Exhibit A-1 carried a date stamp indicating that it had been received by the Toronto District Taxation Office on August 13, 1973.

Contentions

The notice of appeal, dated October 16. 1979, reads as follows:

SEE LETTER OF October 26, 1978

To Georges Lachance

by YALE ET PARTNERS

and other reasons already mentioned in notice of objection.

Letter from Yale & Partners, Chartered Accountants of Toronto, Ontario, reads as follows:

PERSONAL AND CONFIDENTIAL

October 26, 1978

George Lachance, Esq

1321 Sherbrooke Street West

Suite 020

Montreal, Quebec

H3G 1J4

Dear Mr Lachance:

I am writing to you to provide you with some details regarding the circumstances surrounding Mr Stanley Stern’s Notice of Objection. When he was employed at TH & S Electric Limited it was decided at the February 28, 1973, year end that a $25,000 management wage would be accrued in favour of Stanley Stern. By August 13, 1973, Revenue Canada, Taxation, had received an Agreement in Respect of Unpaid Remuneration, Form T2049, which agreed to consider the unpaid amount of $25,000 as having been paid as of the first day of the second taxation year being, March 1, 1974. Subsequent to that time T H & S Electric Limited went bankrupt and Stanley Stern did not receive any money out of the corporation, and certainly no money in respect of the $25,000 unpaid amount.

During this time Mr MacFeeters was an officer and employee of the company. It would appear that he prepared the agreement form T2049 and counselled Stanley Stern to sign such form. Stanley Stern did not know what he was signing. He did not understand the gravity and importance of the document nor did he understand its implications. If he had understood it he certainly would not have signed this agreement. Moreover, since he was not informed of the nature or quality of the act that he had performed he certainly cannot be held responsible for its consequences.

This agreement was filed at least one year in advance of the time when it should have been filed. Because of the lack of proper advice and counsel the agreement was prepared for the taxation year 1973 regarding an unpaid amount accrued as of that year end. The first day of the second taxation year is March 1, 1974, and the taxpayer has six months after the end of that time to prepare and file this agreement. That would be August 31, 1974. However, the form was filed by August 13, 1973. If the parties had waited until the proper time for filing such an agreement they would have had the benefit of knowing the results of the subsequent years operations, and certainly, would not have filed this agreement. The company was getting into dire financial circumstances and it would have made much better sense to allow the accruals to remain unpaid and be added back to the income of the corporation. Subsequent to this time the company went bankrupt and the principals did not receive any additional funds from the corporation. If such a course of action had been followed there would have been no personal tax consequences to Mr Stanley Stern. Because of the above mentioned reasons I believe that this agreement should be set aside and considered null and void. A series of errors and unfortunate circumstances have led to the present situation and an additional personal tax liability would only add insult to the injury.

Yours very truly

YALE & PARTNERS

(Sgd) Sheldon Gold

Sheldon Gold, CA

SG/kms

The respondent contended:

(a) au cours des années d’imposition 1973, 1974 et 1975, l’appelant était un employé de la compagnie TH and S Electric Limited. (TH & S, “la compagnie” or “the Company”).

(b) l’exercice financier de TH and S se termine le dernier jour du mois de février de chaque année.

(c) à la fin de son exercice financier pour l’année 1973 se terminant le 28 février 1973, ladite compagnie imputa un montant de $25,000 à ses dépenses à titre de salaire de gestionnaire de l’appelant.

(d) le ou avant le 13 août 1973, ladite compagnie et l’appelant produisirent un accord tel que prévu par l’article 78(3)(b) de la Loi de l’impôt sur le revenu à l’effet que la somme impayée de $25,000 serait réputée avoir été payée par ladite compagnie le premier jour de la deuxième année d’imposition en question, soit le 1er mars 1974, et reçue par l’appelant le 1er mars 1974 soit le premier jour de la deuxième année d’imposition en question.

(e) lors du calcul de son revenu pour son année d’imposition 1974, l’appelant omit d’inclure dans son revenu ladite somme de $25,000 conformément à l’accord mentionné au paragraphe précédent.

Evidence

Counsel for the appellant, with the agreement of counsel for the respondent, filed with the Board a document showing that the appellant purchased his interest in TH & S Electric Limited on June 8,1973. The appellant stated in his oral testimony that previous to that acquisition, he had no association with TH & S in any way.

Argument

The essential point in the opinion of counsel for the respondent was:

Vous avez entendu les faits, quoiqu'il n’y a pas de débat sur les faits entre les parties. La compagnie—il n’y a pas de preuve au contraire—la compagnie a déclaré ce qu’on appelle en anglais: “A group management salary”, à la fin de son année financière 1973, le 28 février, un montant de $25,000 en faveur de monsieur Stern. Vous n’avez aucune preuve devant vous à l’effet contraire.

L’article 78-3 ... si on regarde ça, je pense qu’on peut dire que l’intention du législateur, c'était d’empêcher que des compagnies déclarent des “A group management salary” à des employés et déduisent, que la compagnie déduise dans l’année encourue cette dépense-là, ce montant-la, comme dépense de salaires et puis qu’on se retrouve huit (8) ans après, n’ayant jamais reçu ces montants-là, et dire: “Vous ne pouvez pas me taxer, je l’ai pas eu”. On accorde une deduction de $25,000 d’un autre côté et ils disent: ‘‘Vous ne pouvez pas me taxer, je l’ai pas eu.” Le but de l’article a été fait dans le but de prévenir ce genre de problème-là.

Findings

The explanations, both written and oral provided to the Board regarding the origin, purpose and meaning of Exhibit A-1 are confusing and perhaps conflicting. In any event, they are unimportant to the determination of this matter. The Minister’s assessment relies upon Exhibit A-1, meaning precisely what it says it represents, which is a perfectly appropriate posture for the Minister in examining any documents filed by a taxpayer.

The Board dealt with the matter of retroactive interpretation of records in a recent decision: Clifford E McCall v MNR (not yet published) and I quote:

Contractual business arrangements are not to be determined, interpreted or varied, based upon calculated or perceived income tax liability. It is the reverse which must be the rule—income tax liability is to be based upon the contractual business arrangements which existed at the time the relevant events or transactions occurred. Accounting entries and financial statements for income tax purposes are only a convenient and acceptable format for recording such commercial events and transactions—they do not give official character to the events and transactions, nor do they become such events and transactions in themselves. Such accounting entries and financial reports are not immutable, but they do take on a very substantive and dependable character when it is the taxpayer himself who alleges that they are not consistent with the business arrangements that existed and that, therefore, they should be rejected, ignored or altered.

The instant appeal, however, provides a specific case in point for rejection of the taxing results which would flow from the acceptance of Exhibit A-1 in the form in which it was filed. The Minister’s treatment of the document is completely understandable if it is accepted at face value. But the document cannot be what it purports to be in view of the fact that the company’s fiscal year ended February 28, 1973 and at that date the appellant had no involvement whatsoever with TH & S according to his own uncontradicted testimony. Further, when that testimony is accepted, the rationale and explanations provided by Yale & Partners (supra) are irrelevant and misleading.

Decision

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.