Norman Kaufman v. Minister of National Revenue, [1987] 2 CTC 2028, 87 DTC 364

Taylor, T.C.J.:—This is an appeal against income tax assessments, for the years 1978, 1979 and 1980, heard on November 19, December 2 and 3, 1986, in Montréal, Québec, in which the Minister of National Revenue included the following amounts as income of the appellant, with the noted explanation:

1978 Assessment Notice:

Personal expenses paid for by Irving
Samuel Inc.	$ 2,113.82
1979 Assessment Notice:
Personal expenses paid by Irving Sam
uel Inc.	$ 5,571.23
Benefit re: transfer of Corvette	3,634.00
Loan from Irving Samuel Inc.	22,170.80
	$ 31,376.03
1980 Assessment Notice:
Personal expenses paid for by Irving
Samuel Inc.	$ 82,110.40
Additional re: above	1,082.48
	$ 83,192.88
The Notice of Appeal read:
A. Statement of Facts
1. On July 2nd, 1967, the Appellant was married to Wendi Workman.

2. The marriage contract provided that the said spouses would be separate as to property.

3. During the taxation years under appeal, Wendi Workman was employed by Irving Samuel Inc.

4. During the same taxation years, Wendi Workman was a shareholder of Irving Samuel Inc.

5. During the same taxation years, Mr. Samuel Workman was the majority shareholder of Irving Samuel Inc. and was also the president of this company.

6. Wendi Workman is the daughter of Samuel Workman.

7. The Respondent reassessed the Appellant for benefits conferred on him by Irving Samuel Inc.

8. Almost all said benefits were conferred not on the taxpayer but on the daughter of the president of the company which conferred the said benefits.

9. Some of the benefits had to do with work that has been done on the jointly owned principal residence of Norman Kaufman and Wendi Workman.

B. Reasons

The Appellant relies, inter alia, on the provisions of paragraph 6(1)(a), sub-section 15(1) and on Section 56(2) of the Income Tax Act S.C. 1970-71-72, c. 63 as amended.

The Appellant should not be taxed for benefits which were not conferred on him but on another person who was an employee and shareholder of a company of which her father held 80% of the shares of such company.

WHEREFORE, THE APPELLANT PRAYS THAT THIS COURT ALLOWS HIS APPEAL AND REFER THE REASSESSMENTS BACK TO THE RESPONDENT FOR RECONSIDERATION AND REASSESSMENT.

For the Minister, the reply to notice of appeal contended:

A. Statement of Facts:

1. In respect to paragraph 1 of the Notice of Appeal, he admits that the Appellant is married to one Wendi Workman and he ignores the rest of the paragraph;

2. He ignores paragraph 2 of the Notice of Appeal;

3. He admits paragraph 3, 4, 5, 6 and 7 of the Notice of Appeal;

4. He denies paragraphs 8 and 9 of the Notice of Appeal and all the reasons invoked in part B of the Notice of Appeal;

5. In reassessing Appellant for his 1978, 1979 and 1980 taxation years, the Minister of National Revenue relies on the following facts:

(a) During the taxation years under appeal, Irving Samuel Inc. was a duly incorporated company which business was in the field of sales of women garments;

(b) During the taxation years under appeal, the shareholders of Irving Samuel Inc. were as follows:

Samuel Workman	68% of the voting shares
Maytie Workman	12% of the voting shares
Wendy Workman	1% of the voting shares
Norman Kaufman	9% of the voting shares
Martin Bergman	10% of the voting shares

(c) During the taxation years under appeal, Appellant was also an employee of the above mentioned company;

(d) During Appellant’s 1978 taxation year, the company paid on his behalf the following personal expenses:

Supplier	Amount	Amount
Lou Goldberg		$	108.00
Laing			243.00
Florsheim			430.13
Sport Expert			47.46
Blenheim (Lake George)			671.97
Dino (Lake George)			95.07
Holiday (Placid)			83.03
Georgian			112.35
N.K. Children			405.52
			- 82.76
		$ 2,113.82

(e) During his 1979 taxation year, Company paid on behalf of the Appellant the following personal expenses:

Supplier	Amount
Kaufman (Prom)	$ 1,295.77
A. Goldhaber	585.56
Ralphs	22.50
Victoria Marenda	1,350.00
(house maid)
Z. R. Petila	1,500.00
Murray Sales	777.60
	$ 5,571.43

(f) Further during his 1979 taxation year, the company transferred to Appellant a 1974 Corvette for its book value of $1,366.00 which resulted in an additional benefit of $3,634.00 for Appellant based on the fact that the fair market value of the Corvette when transferred was $5,000.00;

(g) Further during Appellant's 1979 taxation year he received a $30,000.00 loan from the company without any agreement as to the repayment of the said loan nor does the said loan bear any interest; the said loan has not been repaid more than a year after having been received and as of October 30, 1980 the outstanding balance on the said loan was $22,170.80;

(h) In respect to Appellant's 1980 taxation year, the company made a voluntary

disclosure indicating that Appellant had received the following benefits:

Supplier	Amount	Amount
Austrian Ski Shop		$	552.15
Supérieur Propane			527.71
Ralph's Men's			392.75
Atlantic Pacific Travel			2,353.67
Progress Plumbing			3,500.00
BX Electric			7,592.17
Ramca Tiles			665.28
Ramca Tiles			677.38
Ramca Tiles			320.91
BX Electric			44.62
Ramca Tiles			76.84
Amex			352.39
Bart Leather			1,045.50
Multiform			6,460.00
Ramca Tiles			256.13
Marco Pinter			6,000.00
Amex			315.65
Napoli Construction			1,200.00
BX Electric			4,275.00
Charles English			4,950.00
Atlantic Pacific Travel			643.00
Langevin & Forest			204.45
Langevin & Forest			489.80
White Mirro			3,962.80
Bonaventure Metal			503.58
Langevin & Forest			503.58
International Rug Co.		10,188.32
B. Baker & Son			1,577.00
Alwin's			538.92
Reed Wall Covering			930.02
Supérieur Propane			606.34
Progress Plumbing			3,500.00
Alwin's			247.32
White Mirror			1,200.00
Lou Goldberg			2,129.76
Imperial Decorative			1,360.54
B. Baker & Son			35.00
Multiform			1,140.00
BX Electric			2,200.00
Langevin & Forest			151.68
Charles English			6,148.40
Ruth Moss			532.82
Cordovan			250.00
Réveillon Inc.			222.11
		$ 80,610.40
Estimate: Cleaners			1,500.00
B. Baker & Son		82,110.40
		$ 83,192.88

(i) There was a normal practice within the company that the person authorizing the invoice itself was normally the person for whose benefit it had been made;

(j) In respect to the 1980 benefits accrued to Appellant, most of the expenses identified above were for major renovation to a residence which he was the sole proprietor;

(k) In submitting his 1978 and 1979 income tax returns, Appellant acted with gross negligence of under circumstances amounting to gross negligence by ailing to report the benefits he had received from the company, amounts which he could not ignore or forget;

Statutory Dispositions upon which the Respondent Relies and the Reasons he Intends to Submit

6. The Minister of National Revenue, Respondent, relies, inter alia, upon Sections 6(1)(a), 15(1), 15(2), 56(2), 163(2) of the Income Tax Act, R.S.C. 1970-71-72, ch. 63, as amended;

7. Respondent duly added to Appellant's initially declared income the amounts of benefits identified above;

8. As normal practice, the Appellant made the expenditures above mentioned, and upon receipt of the invoices authorized the payment of the amounts by the company;

9. He has not established that he was not the sole proprietor of the residence in which major renovations were paid for by the company during the 1980 taxation years;

10. It was not the intention of the company of its principal shareholder to benefit his daughter Mrs. Wendy Workman, the wife of the appellant, in respect to the amounts and advantages identified above.

Counsel for the appellant had subpoenaed several witnesses, among them Mr. Samuel Workman, who, in my opinion contributed most to the Court's understanding of the situation. Simply put, following an audit by Revenue Canada of the business affairs of Irving Samuel Inc., a voluntary disclosure of some inaccuracies in the accounting and financial records of that company was made to Revenue Canada by Mr. Samuel Workman. During the years in question, the various amounts noted above in the reply to notice of appeal had been paid by the company and charged off to a variety of expense accounts in the records of the company. The details of that situation, as disclosed by the audit of Revenue Canada, and to Revenue Canada by Mr. Samuel Workman were confirmed to the Court by Mr. Saul Greenfield, CA external auditor of the company during the years under review. The examination of the income involved and/or documentation available to him with regard to the corrections noted above, including the cancelled cheques, did not lead Mr. Greenfield to the conclusion that the charges originally made in the company records were in error, when he made his original audit. He did agree now that the changes reflected in the reassessments at issue were in order, and he had assisted Revenue Canada in its examination of the company affairs. Much of this "source" documentation was made available to the Court, and the questioning and examination of this information by both parties, with the assistance of both Mr. Workman and Mr. Greenfield, supported the view that taken at face value, at the time of the various transactions, there was little reason for Mr. Greenfield to challenge the propriety of the original charges and recording of the amounts which later formed part of the voluntary disclosures noted above. The official transcript of the proceedings provides the following comment by the presiding judge:

And just for the record Mr. Greenfield, you made a comment, you made a clarification of your role and I want to assure you there is no criticism or comment or reflection of any sort from these proceedings with regard to your work on the matter.

The sole witness for the respondent was Mr. Jacques Bouchard, during the relevant years an Investigator with "Revenue Canada". It was Mr. Bouchard's testimony that his "mandate was to establish if the disclosure was complete, and conformed to the books and records of the company.", ”. . .I made an audit related to the disclosure to find out that all the amounts that were there had to be there by the books and records of the company. To make sure that all expenses and all amounts there were personal, belonging to Mr. Norman Kaufman and were included in the disclosure". Mr. Bouchard agreed however that his examination of the documentation and records critical to this appeal was largely restricted to discussions with Mr. Workman, a review of the list provided by Mr. Workman (representing the "voluntary disclosures") and checking the invoices also provided by Mr. Workman to see that they were on the list (supra) and to see that there appeared on the invoices, some initial such as "N" or other indications that it should be attributable to Mr. Norman Kaufman. Although he was not given any general explanation for the purpose of the amounts on the list, Mr. Bouchard understood from Mr. Workman that this “initialling” indicated the amount had some personal — as opposed to business — relationship to the individual involved. Other than a cursory review of the purchase journal, Mr. Bouchard did not pursue this avenue to any great extent. There was no indication in the company records that the amounts involved had been treated in any way differently than proper amounts payable — for purchases or expenses attributable to the company, rather than any individual. Mr. Bouchard did not meet with Mr. Kaufman. In my view Mr. Bouchard's “audit” added very little of benefit to the Court, beyond the framework of the situation already agreed to or asserted by Mr. Workman.

During examination of the witnesses, efforts were made by counsel for both parties, to assign or apportion responsibility or blame for the inaccurate recording and reporting of the payments in issue, to either of Mr. Samuel Workman, or to the appellant Mr. Kaufman. In effect, the efforts of the lawyers for Mr. Kaufman were directed towards establishing that Mr. Workman was fully aware that the recording of some or all of the amounts in issue left the clear impression not only that they represented proper charges against the operation of the company, but that they were not to be regarded as "personal" charges against Mr. Kaufman — at the time the transactions occurred. At least, if any “benefit” could be seen in the transactions, that benefit should somehow accrue to Wendi Kaufman or to Mr. Workman himself, not to Mr. Kaufman, was the thrust of the line of questioning from counsel for the appellant. Further, some attempt was made to assert that the amounts at issue could have been part of a "shareholder's account" in the name of Mr. Kaufman, or might have figured in some subsequent "dividend" declaration. Conversely, the thrust of the respondent's questions was that Mr. Kaufman had at least some involvement with the various invoices or source documents produced — either in the form of an “initial” (often "N" allegedly for "Norman") or some other identification. Because of the animosity evident between the parties, I did not find much assistance in the details of much of this examination and cross-examination. So little purpose would be served by a minute repetition of it in this decision. However, as I understand the situation, certain very general outlines are quite apparent, and they do serve the Court in reaching a decision.

The appellant did not take the witness stand, and Wendi Kaufman is now deceased. Accordingly the decision reached will be without benefit to the Court of testimony they might have given.

First, I am quite satisfied that little, if anything, of major consequence went on in the company without the specific, or at least, tacit approval of Mr. Workman. His knowledge of the operations — even in detail, and his control of the company were very clearly presented. He is a competent and experienced executive, who has built a business of substantial proportions with hard work and acumen. I am quite satisfied that he was fully aware that payments were being made from company funds — and charged as costs of operating the company, which had not any proper relationship to that operation. Equally, he was fully aware that some benefit could accrue to someone, by virtue of these improper deductions — at least some part, perhaps a major part of the "expense" invoices paid had a direct bearing on the construction of the house Mr. Kaufman was building at the time. I do not accept Mr. Workman's protestations that he was only vaguely familiar with the acquisition of the land for building the house, or with the progress of the actual construction of the house. In addition, at least some of the "expense" items involved were so blatantly unrelated to the business of the company, that the slightest query of them by Mr. Workman would have resulted in a different recording when they were paid out of company funds. Even the initial "N", or some other identifications cannot be held out to mean that Mr. Kaufman, rather than Mr. Workman, was finally and ultimately responsible for the payment. There was no indication at the hearing that Mr. Workman left to Mr. Kaufman a major directing role in the operations of the company, and certainly not in the use or control of company funds. With regard to the $30,000 loan (supra) the testimony of Mr. Workman was at the best confusing and vague, and at the worst contradictory and conflicting. Just as with the other payments noted above, Mr. Workman either directly or indirectly permitted the alleged “loan” of $30,000. Incidentally it was far from certain whether it was ever actually a "loan" at all — but that in the end is not a critical matter.

In the end analysis, Mr. Workman cannot assert shock, or surprise, at any "revelations", which required restructuring the accounts of the company to properly reflect the transactions at issue. Nor can he ascribe to Mr. Kaufman a role in that aspect of the matter any larger than the circumstances and facts clearly warrant.

On the other hand, I do not assert for a moment that Mr. Kaufman could have been unaware, naive or totally innocent of the inappropriate funding and accounting procedures used in the operations of the company. There was no indication that he ever made any attempt to correct or reimburse the company for the inaccurate charges, other than the payments on the "loan" noted above.

The Minister’s assessment is. based on an assumption that Mr. Kaufman enjoyed "benefits" as a result of the transactions at issue and that these "benefits" are taxable to him as a result of the provisions of either subsections 15(1) or 15(2) of the Act.

In contrast thereto, counsel for the appellant contends that if benefits can be seen arising out of the transactions, they are benefits which Mr. Workman wished conveyed on his daughter Wendi, not on this appellant at all. I should point out here, that I have reviewed argument and written submissions by both parties which dealt with a relationship between subsections 15(1) and 15(2) of the Act, and subsection 56(2) of the Act, and I regret that I am unable to agree — as the Minister asserted — that somehow subsection 56(2) of the Act can encompass the transactions at issue here in a manner that would permit of taxation against Mr. Kaufman. As I read that subsection (56(2)) in the light of this appeal, — even if — it can be said that the payments were made "pursuant to the direction of, or with the concurrence of" — Mr. Workman, I would only be able to see therein the prospect of taxation under that section against Mr. Workman — which is precisely the point made by counsel for Mr. Kaufman.

Turning to the first part of the question to be answered — was there a benefit which arose out of the transactions at issue? The unequivocal response must be in the affirmative. There is simply no evidence to the contrary — Mr. Kaufman himself did not even deny that there was a benefit of some kind, and all the circumstantial evidence of the other witnesses points to a benefit arising to someone out of the transactions. The second part of the question therefore is — has the Minister assessed this benefit properly against Mr. Kaufman? The only viable evidence the Court has to deal with this question comes from Mr. Workman — and he has denied that it was his intention or desire to benefit his daughter Wendi. But equally he resisted any effort to establish that he wished to or did in fact, provide a benefit to Mr. Kaufman, and in every possible way left the impression with the Court that he had not intended to benefit Mr. Kaufman either. In some way Mr. Kaufman had benefited himself, or appropriated funds to himself, as Mr. Workman saw the situation.

The action which initiated this was the "voluntary disclosure” by Mr. Workman, on behalf of the company. But, all that could accomplish in the primary instance, would have been the prospect of reassessments against the company. We are not aware if such company reassessments were struck, and as noted earlier, that has no bearing on this appeal. It was therefore, the Minister's decision to take the second step — and reassess Mr. Kaufman.

And so, can it be said, that in the circumstances of this case the Minister's assessment against Mr. Kaufman has been substantiated . In my view, the answer to that question must be "no", to the degree at least, that Mr. Kaufman appears no more likely a prospect than does Mr. Workman himself, or perhaps even Wendi Kaufman. But that is not the question to be asked. The real question remains — has Mr. Kaufman during this hearing cast sufficient doubt upon the Minister's assessment against him, that the onus for overturning the assessment has been fulfilled "on the balance of probabilities’, when the provisions of section 15 of the Act, as it relates to this appeal read?

Section 15 - Appropriation of property to shareholder.

(1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

The amount or value thereof shall, . . . be included in computing the income of the shareholder for the year.

(2) Shareholder debt. Where a person . . . is a shareholder of a particular corporation, . . . and the person . . . received a loan . . . the amount of the loan or indebtedness shall be included in computing the income for the year of the person . . . unless

(a) the loan was made or the indebtedness arose

(ii) in respect of an employee of the lender or creditor or the spouse of an employee of the lender or creditor to enable or assist the employee or his spouse to acquire a dwelling for his habitation,

and bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time;

We turn to the Minister’s reply to notice of appeal again to determine just what challenge the appellant needed to meet:

(B) Statutory Dispositions Upon Which the Respondent Relies and the Reasons he Intends to Submit

6. The Minister of National Revenue, Respondent, relies, inter alia, upon Sections 6(1)(a), 15(1), 15(2), 56(2), 163(2) of the Income Tax Act, R.S.C. 1970-71-72, ch. 63, as amended;

7. Respondent duly added to Appellant's initially declared income the amounts of benefits identified above;

8. As normal practice, the Appellant made the expenditures above mentioned, and upon receipt of the invoices authorized the payment of the amounts by the company;

9. He has not established that he was not the sole proprietor of the residence in which major renovations were paid for by the company during the 1980 taxation years;

10. It was not the intention of the company of its principal shareholder to benefit his daughter Mrs. Wendy Workman, the wife of the appellant, in respect to the amounts and advantages identified above.

Taking then in the reverse order, it is my conclusion that:

(1) The appellant has not established that it was "the intention of the company, or its principal shareholder to benefit his daughter Mrs. Wendy Workman, the wife of the appellant in respect to the amounts and advantages identified above”. It may well have been Mr. Workman's intention to do so — but equally it may well have been his intention to benefit Mr. Kaufman (Mr. Workman's protests to the contrary), if indeed Mr. Workman intended to benefit anybody. The result of that, is simply that Mr. Kaufman has not succeeded in disproving that particular assumption of the Minister. It cannot be said that this is in fabour of Mr. Kaufman's contention.

(2) Certainly Mr. Kaufman has not established that he was not the “sole proprietor of the residence". It is quite clear however, that he was at least a proprietor — together with his wife. I fail to see how this favours the appeal of Mr. Kaufman.

(3) There is certainly some evidence — that from the testimony of Mr. Workman and Mr. Bouchard, that the initial ("N") to be seen on the invoices does represent some recognition and acceptance of these by Mr. Kaufman. It is fair to assume, I believe, that after having so initialled them and left them with the financial section of the company, that Mr. Kaufman intended that they be paid out of company funds. To whatever degree that can be described as "authorized for payment", it does not favour Mr. Kaufman's case.

As I see it therefore based on points (1) and (2) above there is little reason to question the validity of the Minister's assessment against Mr. Kaufman, simply based on subsection 15(2) of the Act alone, with respect to the $30,000 loan — the outstanding balance of which was $22,170.80 as of October 30, 1980.

Turning to the "expense" amounts which form the base of point (3) above, and are also reflected to some degree in point (2) above, I fail to see how the amounts involved can properly fall under either paragraphs 15(1)(a) or 15(1)(b) of the Act. No "payment" was made to Mr. Kaufman, in the strictest sense of the word; and due to his limited responsibility and authority in the company, it cannot be said that he "appropriated" the amounts. It remains then to see if the provisions of paragraph 15(1)(c) encompass the circum- stances of the assessment and the appeal — "a benefit or advantage has been conferred on a shareholder by a corporation”. There can be little question that a "benefit or advantage has been conferred" on Mr. Kaufman by virtue of the fact that personal obligations had been paid out of corporate funds. Mr. Kaufman's argument in this appeal comes down to challenging the portion of paragraph 15(1)(c) which reads: ”. . . by a corporation". He says, in effect, that any "benefit" which might be seen for him in the transactions at issue arose out of "a payment or transfer of property made pursuant to the direction of, or with the concurrence of" — Mr. Workman (see subsection 56(2)). The extension of that argument for the appellant, if I properly comprehend it, would be that he (Mr. Kaufman) would escape taxation on the amounts at issue if the court could find that a payment or transfer of property was made from company funds pursuant to the direction of, or with the concurrence of Mr. Workman. I am quite prepared to find that Mr. Workman was involved, but I fail to see how that provides relief for Mr. Kaufman since the provisions of section 15 of the Act are still at work

— and there can be no doubt that the “benefit or advantage" was conferred on him by the corporation. Mr. Workman, in my view, did not confer on Mr. Kaufman — a “benefit or advantage". That was "conferred" by the corporation, and it seems to me quite irrelevant to the determination of this appeal, whether the corporation so conferred "pursuant to the direction of, or with the concurrence of . . .” Mr. Workman. Whether the Minister could also assess Mr. Workman, based on the application of subsection 56(2), in addition to the assessment at issue against Mr. Kaufman, it is not necessary for this Court to decide at this time. But whatever involvement may be perceived by Mr. Workman in the transaction at issue, that involvement does not obviate the tax liability to be imposed on Mr. Kaufman under section 15 of the Act.

I turn now to the penalties imposed. While no specific mention was made of it, I am assuming that for some reason — possibly the "voluntary disclosure" penalty was not imposed for 1980. In my view, nothing arose during the course of the trial which would necessarily restrict the Minister's right to impose the penalties, and I am satisfied that Mr. Kaufman was at least aware that some benefit was accruing to him. But the Minister’s assumption that Mr. Kaufman had been "grossly negligent" in not reporting as "income" the benefits he enjoyed during the years 1978 and 1979 has not been substantiated. The “benefit” to Mr. Kaufman can be seen in a review of all the facts for the hearing, and there can be no doubt that Mr. Kaufman was aware he could be the recipient of some such benefit. However the possibility that in Mr. Kaufman’s mind these amounts might be part of his "shareholder's account”, or that they would be covered by "dividends", or dealt with in some other way was not totally eliminated by the Minister — and that rests with the Minister in order to firmly establish a charge of "gross negligence" on the basis that Mr. Kaufman should have been aware these amounts were income in 1978 and 1979. The penalties will be deleted.

The appeal is allowed in part, in order that the penalties imposed for the years 1978 and 1979 shall be deleted. In all other respects, the appeal is dismissed. No costs are to be awarded.

Appeal allowed in part.