Garry W. Toushan v. Minister of National Revenue, [1989] 2 CTC 2324, 89 DTC 568

Taylor, T.C.J.:— These are appeals heard in Toronto on July 7, 1989 against income tax assessments for the years 1978, 1979 and 1981, in which the M.N.R. reassessed as follows:

1978

— including in the computation of his income the sum of $39,999.85, purportedly paid by Great Lakes Forgings (1974) Limited to Toushan Enterprises Ltd.;

including in the computation of his income the sum of $788.42, as a benefit conferred by Toushan Enterprises Ltd. for personal travel expenses.

1979

— including in the computation of his income the sum of $40,000 — purportedly paid by Great Lakes Forgings (1974) Limited to Toushan Enterprises Ltd.;

including in the computation of his income the sum of $5,678.86, paid by Toushan Enterprises Ltd. to the Appellant.

1981

including in the computation of his income the sum of $30,000 purportedly paid by Toushan Enterprises Ltd. to Marie Toushan.

The notice of appeal gave the following basic information:

1978 and 1979

I object to this assessment on the first matter on the basis that the amounts received by Toushan Enterprises Ltd. are not my income. Toushan Enterprises Ltd. is not a sham, and an employer/employee relationship did not exist between mys^elf and Great Lakes Forgings 1974 Limited.

I object to the assessment on the second matter on the basis that the expenses incurred were on behalf of Toushan Enterprises Ltd. in the course of its carrying on its business. As such, any amounts reimbursed by Toushan Enterprises Ltd. are not income to me.

1981

— My wife performed valuable services for Toushan Enterprises Ltd. and accordingly, Toushan Enterprises Ltd. remunerated her for performing these services. The amounts received by my wife are not my income.

The Minister replied:

— the Appellant is the sole shareholder of Toushan Enterprises Ltd.;

Toushan Enterprises Ltd. owns 75% of the shares of Medi-Craft Ltd.;

Great Lakes Forging 1974 Limited did not enter into an agreement with Toushan Enterprises Ltd.;

the Appellant was controller of Great Lakes Forging up to October 31, 1979 when he resigned;

— Great Lakes Forging paid $40,000 in 1979 as salary for the Appellant, who was its employee;

— the (expenses) paid to the Appellant with respect to travel costs was not a reimbursement of expenses incurred on behalf of Toushan Enterprises Ltd. but a benefit conferred on him;

— the payment of $30,000 with respect to the 1981 year was made at the direction of the appellant to benefit the appellant or his wife.

The titles Great Lakes Forgings (1974) Limited, Great Lakes Forgings 1974 Limited, Great Lakes Forging 1974 Limited, and Great Lakes Forging, in the above are all apparently the same corporation, which may be referred to hereafter in these reasons simply as "Great Lakes".

The appellant, a chartered accountant, and his wife testified regarding the nature of the events and transactions involved. Little value would come from a detailed review of that evidence. Instead I will quote from the closing argument of counsel for the appellant:

Your Honour, my friend has stated that the minutes are the most significant evidence of the agreement with Great Lakes. I submit that is not the case. We also have Mr. Toushan's evidence that he was paid after submission of invoices submitted to Great Lakes. Those invoices are contained in the exhibit book. We also have an agreement. It is unexecuted, that is admitted. Mr. Toushan has explained his attempt to locate an executed copy. I would submit that the minutes are not the most significant evidence of the relationship between Toushan Enterprises and Great Lakes.

My friend has also said that based on the minutes, the minutes alone, that the company regarded Mr. Toushan as an employee and the controller. These minutes were kept by the lawyer and although my friend has said the lawyer was the secretary, in fact, if we look at the bottom of the minutes it is signed by Mr. Zalev as secretary, so it appears that the lawyer was in fact not the secretary of Great Lakes at the time that he kept those minutes.

To go as far as to say that the minutes reflect the company’s position is, I think taking it just a step too far. You have to look at what the other evidence was. Mr. Toushan's evidence in respect of the control put upon him by the company and the factors that I have already dealt with at great length, the hours, vacation, office space, vehicle, all of those factors I think are very relevant in determining how the company viewed Mr. Toushan.

Again, counsel for the Minister has stated that the bonus paid to Mrs. Toushan did not bear any significance at all to what she did for the company. I would submit that we must pay heed to her evidence that she spent approximately 30 to 40 hours per week doing various jobs on behalf of the company, one division of the company perhaps, but the company nonetheless. Her evidence was that she did the payroll. She spent numerous hours doing manual type of work in washing connectors and sorting them out. My friend is also disregarding the fact that there were cheques issued to her and T4 slips issued to her and that in fact she declared this income on her income tax return for the 1982 taxation year and has paid income tax on these amounts. So, it is not simply a question of bookkeeping entries.

It is my submission and it was Mr. Toushan's evidence that he incorporated Toushan Enterprises precisely because of a business problem with respect to the treatment of income that he received from Great Lakes at the time. His evidence was that income that he had received from the time that he performed consulting services for Great Lakes up until incorporation and the agreement with Great Lakes was treated as employment income. He wished to rectify this and to arrange his affairs so that the true nature of his relationship with Great Lakes would be reflected by way of management contracts with the company through his own management company.

Mr. Toushan was never an employee. His evidence was that resignation was never discussed with his lawyer or with Mr. Zekelman because he was never an employee and there was therefore no need for a resignation.

Mr. Toushan's position was he was always consulting.

Dealing with the elements of the appeal in reverse order I would note:

1981

The evidence is that Mrs. Toushan performed some services for a segment of Toushan Enterprises Ltd. called "Medi-Craft" for which the income in the year was about $11,000. Charging against that income an amount of $30,000 for Mrs. Toushan's wages (leaving aside other expenses which were incurred) resulted in approximately $19,000 of the disputed income received by Toushan Enterprises Ltd. from Great Lakes as consulting fees, which is in dispute in this appeal, ultimately being received by Mrs. Toushan. Whatever services were performed for Great Lakes by either Toushan Enterprises Ltd. or Garry Toushan, there is no evidence that any of these services were provided or could be provided by Mrs. Toushan, The payment to Mrs. Toushan only serves to split the income from Great Lakes permitting some to go to Mrs. Toushan for no services rendered that I can see. I could be convinced that Mrs. Toushan deserved some remuneration from Toushan Enterprises Ltd., but it was not $30,000, and that is the item in dispute. The corporate structure does nothing to veil this direct reallocation of income. That part of the appeal will be dismissed.

1978 and 1979

With regard to the expenses, in 1978, $788.42 and in 1979, $5,678.86, the evidence is that these were incurred on behalf of Great Lakes or more properly with respect to whatever services were being provided to Great Lakes. They were not reimbursed by Great Lakes to Toushan Enterprises Ltd. These could be an expense to Toushan Enterprises Ltd. if it were established that there existed a contractual arrangement between Toushan Enterprises Ltd., and Great Lakes but no such arrangement was demonstrated to the Court. Further, in turn, a direct "employee-employer" relationship would be required between Toushan Enterprises Ltd. and Garry Toushan. These amounts therefore rest on the determination of Garry Toushan's relationship with Toushan Enterprises Ltd. It is possible for Garry Toushan to incorporate Toushan Enterprises Ltd. and become its employee and be paid for services rendered. However, the evidence is quite clear that Garry Toushan's only role during the years in question for which he personally could expect any remuneration was his performance in fulfilling the requirements of Great Lakes. None of his alleged salary income from Toushan Enterprises Ltd. could have a “reasonable” relationship to the operation of Medi-Craft, as determined above with regard to the wages paid to Mrs. Toushan, there was not sufficient income in that element of Toushan Enterprises Ltd. There was no employment contract between Garry Toushan and Toushan Enterprises Ltd. and, while that might not be fatal to his cause, it simply highlights that the only real source of income — allegedly to Toushan Enterprises Ltd. — was from Great Lakes. There is no basis for concluding that the interjection of Toushan Enterprises Ltd. between Great Lakes and Garry Toushan effectively accomplished, for income tax purposes, the purpose for its

incorporation as stated by counsel for the appellant: I would cite the case of Fotheringham v. M.N.R., [1977] C.T.C. 2372; 77 D.T.C. 275, as support for that proposition. The question then becomes whether Garry Toushan was an independent contractor to Great Lakes — with all the flexibility pertaining thereto (see Bradford v. M.N.R., [1988] 2 C.T.C. 2359; 88 D.T.C. 1661). The critical evidence on that point is in three parts:

(1) An unsigned "agreement" between Garry Toushan, and a Mr. Zekel- man (now deceased) who executed it. It was Mr. Toushan’s assertion that Mr. Zekelman had so executed the agreement — which does give some limited indication of the contractual arrangement described by Mr. Toushan — on behalf of the company Great Lakes.

(2) A set of minutes of a Directors’ Meeting in which Mr. Toushan is described as “controller”, and arguments are detailed for terminating his relationship with Great Lakes. There is no indication in these minutes that Mr. Toushan is anything other than an employee, nor is there any reference at all to the above agreement" with Mr. Zekelman.

(3) Mr. Toushan's testimony regarding his view of the relationship with Great Lakes.

In my view, if there was an "independent contractor” relationship between Great Lakes and Garry Toushan, then it is not something demonstrated by anything presented to the Court in support of the appellant's assertions, and it is not a relationship which was known and understood by the Directors of Great Lakes. I hold this view even more strongly with regard to any purported "independent contractor" relationship between Great Lakes and Toushan Enterprises Ltd. I have no doubt that Garry Toushan would have preferred an "independent contractor” role for himself to that of an employee, and there is evidence he made some private efforts to try to obtain it. Having succeeded in doing so (in his mind) he then decided that this relationship should be transferred from himself to Toushan Enterprises Ltd. Both of these efforts were futile — borne of faulty attempts to fulfill some forlorn tax-benefit hopes — in my view. Garry Toushan was and remained, throughout the time material, an employee of Great Lakes.

The appeals are dismissed.

Appeals dismissed.