Citation: 2012TCC409
Date: 20121121
Docket: 2007-2740(IT)G
BETWEEN:
THE ESTATE OF THE LATE ANNA NTAKOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
This is an appeal by
the Estate of Anna Ntakos in respect of an assessment of the 2004 taxation year
of Anna Ntakos (the “Deceased”). At the hearing, the Appellant was represented
by Olga Fousteris (“Fousteris”), an executrix of the estate and a daughter of
the Deceased.
[2]
The Deceased died on
October 5, 2004. Her income tax return for the 2004 taxation year was signed by
Fousteris on April 28, 2005 and filed with the Minister of National Revenue (the
“Minister”). In that return, taxable capital gains of $249,980 and business
income of $169,587.38 were included in calculating the income of the Deceased.
The return was assessed as filed. The Appellant objected to the assessment and
it was confirmed by notice dated March 21, 2007.
[3]
Although both the
amount of taxable capital gains and business income were pled as issues in the
notice of appeal, the Appellant abandoned the issue with respect to the taxable
capital gains. At the hearing of this appeal, the only issue was whether
business income of $169,587.38 was properly included in the income of the
Deceased for the 2004 taxation year.
[4]
The witnesses who
appeared at the hearing on behalf of the Appellant were:
Navin Mahendra, chartered accountant and
present accountant for Dupont Construction Supplies Ltd.;
Peter Ntakos (“Peter”), son of the Deceased
and executor of the estate;
Tammy Boulias (“Tammy”), daughter of the
Deceased and executrix of the estate.
[5]
Firoz Teli, an auditor
with the Canada Revenue Agency (“CRA”), testified for the Respondent.
[6]
At the time of her
death, the Deceased owned one third of the outstanding shares of Ntakos
Holdings Inc. (“NHI”). These shares had been owned by her spouse, John and had
devolved to her under John’s Will when he died in November 1995.
[7]
The remaining shares in
NHI were owned equally by the brothers-in-law of the Deceased, Konstantinos
Ntakos (“Gus”) and Teofanis Ntakos (“Ted”).
[8]
NHI owned all of the
outstanding shares of Dupont Construction Supplies Limited (“Dupont”).
[9]
There were several
documents submitted into evidence which stated that the Deceased had received
business income in the form of management fees from Dupont in 2004.
[10]
There was an invoice
dated November 30, 2003 and signed by the Deceased which indicated that she had
provided management services to Dupont for the period December 1, 2002 to
November 30, 2003 for a fee of $100,000 plus $7,000 Goods and Services Tax
(“GST”). There was also a receipt to Dupont signed by the Deceased wherein she
acknowledged payment in full of the fees by way of set-off against loans she
owed to Dupont. The receipt was dated May 31, 2004.
[11]
There was a Resolution
of the Shareholders of NHI (the “Resolution”) signed by the Deceased and the
other shareholders and dated July 8, 2004 wherein NHI voted its shares in
Dupont to approve that Dupont pay management fees to the shareholders of NHI.
According to the Resolution, the fees approved for the Deceased were $100,000
and $169,587.38. The Resolution also included the following statement:
(iii) (NHI)
vote its shares in Dupont Construction Supplies Limited to approve that Dupont
Construction Supplies Limited finalize and or amend its financial statements
and books of account so as to be consistent with acknowledgements signed by
each of Konstantinos Ntakos, Teofanis Ntakos, and Anna Ntakos as of even date
herewith in respect of net loan advances made to them by Dupont Construction
Supplies Limited.
[12]
For the 2004 taxation
year, there was an invoice dated July 30, 2004 and signed by the Deceased which
indicated that she provided management services to Dupont for the period
December 1, 2003 to November 30, 2004 for a fee of $169,587.38 plus GST. In a
receipt dated July 30, 2004, the Deceased acknowledged payment of these fees by
way of set-off against loans she owed to Dupont.
[13]
Both Peter and Tammy
identified the Deceased’s signature on the documents described in the above
paragraphs. They both testified that the Deceased could not read English. She
spoke little English and her native language was Greek. It was Peter’s evidence
that the Deceased signed the invoices and receipts because she believed that
she would receive the management fees in cash. Tammy testified that she and her
siblings were not aware that the Deceased had signed the documents noted above
until after they received the assessment from the CRA.
[14]
Peter testified that
the management fees were not paid to the Deceased nor could they have been
satisfied by way of set-off because the Deceased did not owe any money to
Dupont. He stated that Dupont owed money to the Deceased as a result of a loan
which his father had made to it. It was his evidence that in 1991 when Dupont
required an infusion of capital, his father, John Ntakos, had borrowed $250,000
from the Toronto Dominion Bank and secured the loan by a mortgage on the family
home at 1 Biggar Avenue, Toronto, Ontario. Both John Ntakos and the Deceased
signed the mortgage for the loan of $250,000. John Ntakos then advanced
$170,150 to Dupont.
[15]
I note that in the
notice of appeal, it was pled that John Ntakos had advanced $250,000 to Dupont
in 1991. The Appellant has now altered its position because it was shown at the
discovery that only $170,150 was deposited into Dupont’s bank account by John
Ntakos in 1991.
[16]
Peter also testified
that his uncle, Gus, misappropriated funds from Dupont and had these funds
allocated in Dupont’s books as management fees to the Deceased and the fees
were never received by the Deceased.
[17]
According to the
evidence of both Peter and Tammy, a family feud which had been simmering since
their father’s death in 1995, finally erupted in 2004. Ted and Gus were accused
of surreptitiously taking significant amounts of money from Dupont. Although no
details of the financial arrangements were given, Peter testified that a
settlement was finalized with Ted in July 2005 and with Gus in April 2011.
[18]
One of the results of
the settlements with Ted and Gus was that Peter and his sisters now own all of
the shares of NHI. They engaged Navin Mahendra in 2011 to be the accountant for
Dupont and tasked him with “unravelling” the shareholder accounts. He has not
finished this task but Navin Mahendra did testify that he saw no documents to
support that the Deceased was paid management fees in 2004. According to
Dupont’s General Ledger for the year end November 30, 2004, there were no
management fees paid in 2004 and Dupont owed the Deceased $107,000. He stated
that the year-end adjustment entries were in writing but had not been entered
into Dupont’s books. There were no details given of the proposed year-end
adjustments.
[19]
Firoz Teli, an auditor
with the CRA, performed a review of Dupont’s records to ascertain whether the
management fees declared by the Deceased were actually received or enjoyed by
her. On a review of the shareholders’ accounts, he found that John Ntakos had
initially made loans which totalled $170,150 to Dupont in February and March
1991. However, he also found that there were year-end adjustment entries in
1991 to reallocate these loans to a related company called Marbot. After this
entry, the John Ntakos’ shareholder account was in a debit position. Based on
the records available to him, Mr. Teli concluded that Dupont did not owe John
Ntakos and the Deceased any amount of money.
[20]
He testified that
Dupont’s records did show that it made all payments on the mortgage for 1 Biggar Avenue since the mortgage was given in 1991. These payments were debited to John
(Anna) Ntakos’ shareholder account. As of October 4, 2004, the Deceased owed
Dupont the amount of $155,955.13. Dupont continued to make the mortgage
payments on 1 Biggar Avenue after the death of Anna Ntakos. (I note that this
account also recorded monthly payments to the CRA. There was no testimony with
respect to these amounts.)
[21]
I asked Fousteris why
she signed the return for the Deceased if she believed that the Deceased did
not receive management fees. Her answer was that the return was prepared by
Dupont’s accountant and she signed the return without reviewing it.
Analysis
[22]
In this appeal, the
Appellant had the difficult task of proving a negative. By demonstrating that
the Deceased did not earn and was not credited with management fees from Dupont
in 2004, the Appellant argued that the amount of management fees reported by the
Appellant was incorrect. It is my view that the Appellant has been successful.
[23]
Each of the Deceased’s
children testified that because the Deceased could not read English, she could
not have understood the documents she signed. I believe the witnesses that
their mother did not read English. However, none of them were present when the
Deceased signed the invoices and receipts and they do not know if the documents
were explained to her or what was said to her. I do not actually know who
presented the documents to the Deceased for her signature. I have only the
assumptions and allegations made by Tammy and Peter that it was Gus. Also, Gus
was not a witness before me and I make no findings on any of the allegations
made against him.
[24]
Both Peter and Tammy
testified that the wives of the original shareholders received $500 weekly as a
salary from Dupont. However, the Deceased had not received a salary from Dupont
since March 2001. The General Ledger for Dupont as of November 30, 2004
supported this testimony.
[25]
I have concluded from
the evidence that the Deceased never worked for Dupont and that she did not
participate in any of the business or financial decisions made for Dupont. The
Deceased was not a director of either NHI or Dupont.
[26]
Navin Mahendra
testified that there was no evidence in Dupont’s books that a management fee
was paid in 2004 to the Deceased or that she received it by way of set-off.
This was confirmed by Firoz Teli in his Audit Report.
[27]
The General Ledger for
Dupont had two shareholder accounts for Anna Ntakos. One account in the name of
the Deceased showed a credit of $107,000 and the account which recorded the
mortgage payments made by Dupont on the Deceased’s behalf indicated that she
owed Dupont the amount of $155,955.13 as of October 4, 2004. According to
Dupont’s books, the Deceased was indebted to Dupont at the time of her death.
[28]
There was no evidence
concerning the credit of $107,000 to the Deceased in Dupont’s books and I make
no observations with respect to it.
[29]
On a review of all the
evidence, I have concluded that the invoice dated July 30, 2004 which indicated
that the Deceased provided management services to Dupont for the period
December 1, 2003 to November 30, 2004 created a fiction. The Deceased did not
provide services to Dupont in 2004 and she did not receive management fees from
Dupont in 2004. She was neither an employee nor a director of Dupont.
[30]
I have also concluded
from Firoz Teli’s evidence that Dupont was not indebted to the Deceased. His
evidence was that the moneys lent to Dupont in 1991 by the Deceased’s spouse
were reallocated to a related company called Marbot.
[31]
The Deceased did incur
a debt with Dupont. She received a benefit from Dupont by having it make her
mortgage payments.
[32]
Although it was not
argued at the hearing of the appeal, the Respondent made the alternative
argument in the Reply that the amount of $169,587.38 received by the Deceased
in 2004 was a benefit conferred on her as a shareholder of Dupont and NHI in
accordance with subsection 15(1) of the Income Tax Act (the “Act”).
[33]
However, the Deceased
was not a shareholder of Dupont and therefore the benefit she received from
Dupont was not a shareholder benefit. The Deceased as a shareholder of NHI was
only an indirect shareholder of Dupont. In Mullen v. Minister of National
Revenue, [1990] 2 C.T.C. 2142, Brulé J. made an analysis of the application
of subsection 15(1) with respect to a benefit received by an indirect
shareholder. He stated:
37 Originally it was alleged that benefits were received by the
Mullens as shareholders of the company. The evidence showed that this was not
the case. They were only shareholders of a holding company and as such did not
receive any benefit as shareholders contemplated in subsection 15(1) of the Income
Tax Act. The rationale for this position may be found in examining
subsections 15(1) and 15(2).
38 The important wording of subsection 15(1) is as follows:
Where, in a taxation year, a benefit has been conferred on a
shareholder, or a person in contemplation of his becoming a shareholder, by a
corporation (...) the amount or value thereof shall (...) be included in
computing the income of the shareholder for the year.
39 Although a liberal interpretation of the words “a shareholder of
a corporation” could encompass on its scope the situation of a shareholder of a
corporation connected to the one conferring the benefit, such an interpretation
does not seem to be the appropriate one.
40 The basis of this conclusion lies in a simple argument;
subsection 2 of the same section, which relates to a shareholder debt, uses
express words to cover in its scope an indirect link between a shareholder and
a corporation, that is the situation of a connected corporation.
41 Subsection 15(2) of the Income Tax Act reads:
Where a person (...) or a partnership (...) is a shareholder of a
particular corporation, is connected with a shareholder of a particular
corporation or is a member of a partnership, or a beneficiary of a trust,
that is a shareholder of a particular corporation and the person or partnership
has in a taxation year received a loan from or has become indebted to the
particular corporation, to any other corporation related thereto or to a
partnership of which the particular corporation or a corporation related
thereto is a member, the amount of the loan or indebtness shall be included in
computing the income for the year of the person or partnership ...
42
I infer from this that the legislator, by not using express words as to cover
the situation of a connected corporation, does not want 15(1) to encompass more
than a direct link between shareholder and corporation. By its silence or
omission, the legislator seems in fact to have meant that 15(1) should not
cover any indirect link like the situation at bar.
[34]
In its Reply, the
Respondent relied on only subsections 6(1) and 15(1) to include the amount of
$169,587.38 in the Deceased’s income. When Firoz Teli finished his audit of
Dupont in 2010, the Minister knew the true state of affairs with respect to the
Deceased’s 2004 taxation year. However, the Reply was not amended to accord
with the new facts discovered by the audit. Had the further facts and proper
sections of the Act been pled, the onus would have been on the
Respondent to prove them but based on the evidence which was before me, it would
have been difficult for the Appellant to have been successful: Pillsbury
Canada Ltd. v. M.N.R., [1965] 1 Ex. C.R. 676 and del Valle v. M.N.R.,
[1986] 1 C.T.C. 2288 (TCC).
[35]
However, no such
amendments were made to the Reply, and the appeal is allowed on the basis that
the Deceased did not receive management fees in 2004 from Dupont. At the
request of the representative for the Appellant, there will be no costs.
Signed at Ottawa, Canada, this 21st
day of November 2012.
“V.A. Miller”
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