Tony Papa v. Minister of National Revenue, [1987] 2 CTC 2209, 87 DTC 529

Rip, T.C.J.: —The appellant Tony Papa failed to file a return of income for 1982 with the respondent the Minister of National Revenue, Taxation. In accordance with subsection 152(7) the Minister assessed Mr. Papa tax payable for 1982 under Part I of the Income Tax Act ("Act"). In assessing Mr. Papa, the Minister relied upon the earnings set out in a Statement of Remuneration of Pay, usually referred to as form T4-1982 supplementary, filed with the Minister by the appellant’s employer, Canadian Financial Recovery Holdings Limited, in accordance with section 200 of the Regulations to the Act. According to the form 14-1982 supplementary, Mr. Papa’s total earnings in 1982 were $49,312.88; this amount was added to Mr. Papa's income from employment in 1982 in accordance with sections 3, 5 and 8 of the Act.

Mr. Papa appealed the assessment for 1982 claiming that "according to my information I have paid all the taxes assessed". At trial his counsel admitted that his employment income for 1982 was $26,000 and that amounts in excess of $26,000 represent the aggregate of repayments by the employer of a shareholder's loan in the amount of $17,910 and a standby charge for an automobile in the amount of $6,462.88 which amount ought not to have been included in his income for 1982 pursuant to paragraph 6(1)(e) of the Act*. [1]

Mr. Papa is presently president of a company carrying on the business of a collection agency. During the years 1980 to October 1984 he was president of Canadian Financial Recovery Holdings Limited ("Recovery"), also a collection agency. Recovery was incorporated in 1980. At time of incorporation Mr. Papa owned 55 per cent of the issued and outstanding shares of the company. Mr. Peter Varganyi and Mr. Lynn Glickman were the minority shareholders of Recovery. All three were directors of the company during 1980 until 1982.

According to Mr. Papa in 1982 each of the directors drew approximately $1,500 to $2,000 per month from the company; they were paid every two weeks. Mr. Papa said he received $2,000 monthly of which $1,500 was on account of salary and $500 as repayment of his shareholder's loan.t [2]

On incorporation of Recovery Mr. Papa advanced to the company $50,000; Mr. Varganyi advanced $10,000 and Mr. Glickman advanced $5,200. These loans were recorded in the company's books as shareholder's loans. Subsequent to incorporation, according to Mr. Papa, additional moneys were loaned to Recovery by Mr. Papa and at the beginning of 1982 the company owed him approximately $80,000.

Of the $80,000 was an amount of $30,000 which Mr. Papa says he borrowed from Canada Permanent Trust Company in 1981 on a security of a first mortgage on his home. Mr. Papa testified that arrangements between him and Recovery provided that Recovery would make payments to Canada Permanent Trust Company of both interest and principal on the loan when the company was financially secure, but that the company would make interest payments in the meantime. In Mr. Papa's view he loaned $30,000 to the company. The $30,000 was entered in the books of the company as a Director's Loan on January 29, 1982. However, the loan was removed from Mr. Papa's ledger account on June 30, 1982.

Sometime prior to 1982 Recovery purchased a business from Canada Lease Financing Limited ("Canada Lease"). The exact terms and conditions of the transaction and the business involved were not given in evidence. However it would appear that the consideration included the issuance from treasury of Recovery of approximately $450,000 to $500,000 worth of preferred shares to Canada Lease. Each month Recovery was to have redeemed a number of preferred shares equal to ten per cent of the preferred shares issued, and did so for the first nine or ten months. However because of financial problems Recovery was unable to continue the redemption program and in order to avoid litigation requested the redemption terms be renegotiated.

In June 1982 an employee of Canada Lease, Mr. William H. Polley, became the Chief Financial Officer of Recovery and Canada Lease took de facto control of Recovery. In October Canada Lease caused a Comptroller to be hired by Recovery. The Comptroller and the officers of Recovery, including Mr. Papa, reported to Mr. Polley. All financial responsibilities were assigned to the Comptroller, a Mr. Mann.

One of Mr. Mann's main tasks when he became Comptroller, he stated, was to go through all Directors' accounts and reconcile the various amounts. He discussed the various reconciliations, he said, with all of the directors of Recovery.

Mr. Mann testified that according to his review of the books and accounts of Recovery prior to October 1982 each Director took out a fixed amount of salary and other amounts were charged to the Director's Loan accounts. Mr. Papa's salary was approximately $25,000 a year. He stated that when he started his functions as Comptroller of Recovery no amount was shown in the books of the company owing to Directors. Mr. Mann stated that Mr. Papa's loan account reflected payments being made by Recovery to Canada Permanent Trust in respect of the mortgage payments on his house. He was under the impression that although this was a benefit to Mr. Papa it was the intention of Recovery and Mr. Papa that these amounts would be cancelled by payment of dividends at the end of the year. Mr. Mann acknowledged that Mr. Papa's loan account had an error in that an amount originally loaned to Recovery by Mr. Papa’s father was reflected as owing to Mr. Papa; Mr. Papa indicated that the amount was not owing to him but to his father and the necessary adjustment was made.

Mr. Mann acknowledged that the loan ledger account of Mr. Papa showed a cash deposit to Recovery's bank account of $30,000 in January 1982 but was reversed in June of that year. He said that in October 1982 he reconciled all accounts and Mr. Papa agreed with his reconciliation, as did the other directors. In his view, Mr. Mann said, the $30,000 should never have been set up as a loan from Mr. Papa and this is the reason it was not reflected in the reconciliation he prepared of Mr. Papa's account.

Mr. Papa testified that he did not know when the $30,000 adjustment was made and "taken off" his loan account. He stated that he went to Mr. Mann complaining of the adjustment and that Mr. Mann told him “all the loans were mixed up” and they would eventually be "cleaned up”. Mr. Papa stated that he was told that the $30,000 would be put back into his loan account in 1983. Mr. Papa stated that Recovery never rectified the $30,000 to his satisfaction and he was unable to make "heads or tails" of the various adjustments in his loan account. This matter was never clarified before he left the employ of Recovery in October 1984, notwithstanding that during the summer of 1983 he advanced another $67, 000 to the company.

Mr. Papa testified that he never received his T4-supplementary form for 1982 which indicated employment income of $49,312.88. He stated that Recovery never forwarded the form to him and that he only obtained a photostat of the T4-supplementary from an officer of Revenue Canada after contacting Revenue Canada after he left the company. He stated that notwithstanding his efforts he was unable to obtain any information from Recovery since his separation from Recovery was "acrimonious". He felt the information contained in the T4-supplementary was not correct and so complained to Revenue Canada, who told him to send them a letter that would serve to start an investigation against Recovery. This letter was produced in evidence by the respondent and is dated February 25, 1986.* [3] In that letter Mr. Papa advises Revenue Canada that his salary was $1,000 per month in 1982.

In cross-examination Mr. Papa denied that it was the practice of Recovery not to pay its senior officers who were also shareholders of the company a substantial salary, but to put the amounts through their loan account to be offset through dividends when the company was profitable. Mr. Papa stated that he never considered, nor did he agree, the moneys he received in excess of $26,000 were on account of salary. In his view since he loaned money to the company there was no reason he should take it back as salary and be taxed on amounts he would otherwise receive tax free as repayments of loans.

Mr. Papa stated that notwithstanding he was president of Recovery and controlled the company during 1982 he was not concerned with the company's books; he was more interested in keeping the company solvent. He also denied reviewing the Director's Loan account with Mr. Mann, insisting he only discussed such matters with the company's auditor.

Both Mr. Papa, in replying to questions, and his counsel questioned why, if Mr. Papa was controlling shareholder of Recovery, amounts were withheld from him on account of unemployment insurance premiums. Mr. Mann replied to counsel that he thought that Canada Lease controlled Recovery. It should be noted however that even before Canada Lease entered into the affairs of Recovery, that is prior to Recovery being in default on the redemption program sometime in June 1982, Recovery was deducting from Mr. Papa's salary amounts for unemployment insurance, amongst other items.

Mr. Papa's loan account, according to the reconciliation of accounts prepared by Mr. Mann, showed him owing the sum of $17,910 at the end of 1982.

A Mr. Paul Beanister, presently National Administration Manager for C L Credit Recovery Corporation, the present name of the corporation previously known as Canadian Financial Recovery Holdings Limited, testified on behalf of the respondent. Mr. Beanister did not have knowledge of the events transpiring in 1982 but is responsible for the records of Recovery. As such he produced several documents from the books and records of the company including a bundle of photostats of fronts and backs of cheques made payable to Mr. Papa in the aggregate amount of $17,910 in 1982. These cheques were drawn on Recovery's general account, current account and its account in Greenfield Park, Quebec. All of the cheques bear the signature of Mr. Papa alone or Mr. Papa and another person. These cheques include payments to Canada Permanent Trust, the Canadian Imperial Bank of Commerce on account of payments to Visa and to Mr. Papa personally, some of which were endorsed to retailers. These amounts were shown as advances to Mr. Papa in the books of Recovery. It was these amounts Mr. Mann concluded were benefits paid to Mr. Papa and he added them to employment income in preparing form 14-1982 supplementary.

Mr. Papa explained that Recovery reimbursed its employees for expenses incurred for the business. He would use his own personal credit cards and then request reimbursement. He said he would spend approximately $350 or $500 per month on credit cards and airline tickets since Recovery had offices across Canada. Mr. Varganyi, who also testified, confirmed that Recovery would either reimburse the employee for expenses incurred or pay the amount directly to the credit card company.

Mr. Varganyi stated that the $10,000 he invested in the company as a shareholder's loan was withdrawn over a period of time. He was not asked, nor did he state, whether Recovery issued to him a T4-supplementary for 1982.

Mr. Mann stated that all the amounts paid to Mr. Papa, or charged to his account for his benefit, were included as a shareholder's loan; this included all payments made to the Canada Permanent Trust as well as personal expenses made on his personal Visa card. Mr. Mann also stated that Recovery would pay the expense directly to the individual or directly to the credit card company as directed by the employee.

Mr. Polley also testified on behalf of the respondent.

Mr. Polley stated that when he came on the scene there were two types of loans, one being shareholders' loans made to Recovery and the other being loans made by shareholders from Recovery. In 1982, because of preferential treatment available on dividends to shareholders of Canadian controlled private corporations, the shareholders preferred their salaries be paid by way of dividends rather than actual salary. It was intended that the shareholders would draw money out of the company during the year and declare a dividend at the end of the year. However at the end of 1982 Recovery was in a deficit position and was unable to pay its creditors. Therefore in his view it would not be proper to pay dividends. It was decided at a meeting between Mr. Papa, himself, Mr. Mann, Mr. Varganyi and the company's auditor to include the advances as salaries. He stated this decision was made in early 1983 for the 1982 taxation year. He said that the meeting was called to resolve the question as to "how do we treat the balances (in the accounts) when the statements are prepared" and the conclusion was to put them through as salaries. He insisted that the monthly drawings were never intended to be paid back. Mr. Polley said he wanted to “clean the slate” and put the salaries on the T4 form; he wanted everything to be done on a proper basis.

Mr. Papa has denied being party to this decision nor does he have any recollection of any meeting called to decide this problem.

In cross-examination Mr. Polley replied that when Recovery was acquired it required an injection of capital in order to pay its debts as they became due. He acknowledged that Mr. Papa put in additional funds together with Canada Lease sometime in 1983. At the same time Mr. Papa ceased to be controlling shareholder of Recovery. Canada Lease insisted upon having voting control of Recovery and a deal was struck to take control of Recovery once the additional funds were injected by Canada Lease.

Mr. Polley continued to insist under cross-examination by the appellant's counsel, Mr. Bellissimo, that a meeting took place, probably in February 1983, when the treatment of the T4-1982 supplementary form was discussed. He said that the meeting was called by Recovery's auditor, Mr. Chan, to determine how to solve the problem. He said that Mr. Chan was having difficulty sorting out the loans to shareholders and this was also one of the purposes of the meeting.

To Mr. Bellissimo’s suggestion that as an alternative to balancing the various accounts, a portion of the shareholders' loans to Recovery could have been paid as a reduction of shareholder's loans, Mr. Polley said that this was discussed but it was decided to "net" the various accounts and expense the loans owing to Recovery and to leave the loans owing to Directors in the company; the Directors were to take the funds they received as salary.

In so far as the $30,000 loan was concerned, Mr. Polley admitted that discussions had taken place in respect of this loan but the records were not clear and the waters were muddy. He was aware Mr. Papa may have loaned the company $30,000 and that the company paid interest. It was Mr. Polley's understanding that Mr. Mann had reviewed all of the accounts of the company and at the meeting all agreed with the procedure followed.

Mr. Mann did not come onto the scene until October 1982; therefore it is difficult to accept his evidence as to what events transpired in Recovery prior to that time. His sole function in respect of the loan accounts, as far as I can make out, was to review documentation on file and discuss these accounts with the shareholders. I can only give weight to his evidence in respect of what he actually did and what knowledge he has.

According to Mr. Mann the T4-supplementaries were prepared in most cases by his assistant, but as far as the directors were concerned he personally determined the amounts on the forms. It was his recollection that he handed Mr. Papa's T4-supplementary form for 1982 to Mr. Papa in the latter's office together with a pay cheque. He said that two directors subsequently came back to him with comments on the T4.

Mr. Chan, Recovery's erstwhile auditor, was not called as a witness. The minute book of Recovery which may have included a Director's resolution authorizing the purported loan was not put into evidence.

Mr. Papa had use of an Audi 5000 automobile during 1982. He acknowledged he used the automobile to go from his home to work and return. He also stated the automobile was available during working hours for other employees of Recovery. He did not keep a diary of his use of the car and what proportion was used for personal and for business purposes.

Mr. Varganyi also testified the company cars were used for sales staff and managers for company use. There was a pool of new and used cars available for the staff. He felt himself free to use Mr. Papa's car for business, if Mr. Papa was out of town. Mr. Mann confirmed that from time to time Mr. Papa's car would be used for others in the business. Mr. Mann stated that he asked all the directors for a log of distances travelled in respect of the use of the automobiles provided to them and that Mr. Papa was unable to provide him with this information.

The decision in this appeal depends on the credibility of witnesses, in particular Mr. Papa. Mr. Papa, as appellant, also has the onus of proving the respondent erred in reassessing him for 1982.

From observing Mr. Papa during his testimony I conclude that he is an intelligent and aggressive individual. I have no doubt he is an astute businessman, notwithstanding the difficulties experienced by Recovery, who brings his personality to bear in carrying on business. Thus, I have been troubled by vagueness in the evidence in general, and in Mr. Papa's evidence in particular.

Mr. Papa left the employ of Recovery in 1984 but the evidence is silent as to whether he remains a shareholder of the company; in any event he is still owed money by Recovery. Mr. Papa left Recovery under, what he describes, "acrimonious" circumstances.

Recovery owed Mr. Papa at least $67,000 in respect of the advances he made to it in 1983. The matter of the $30,000 obviously was not "cleaned up" when he left the company, notwithstanding that in 1982 or early 1983 Mr. Mann told him it would be. Mr. Papa loaned Recovery an additional $67,000 in 1983 without clarifying the purported loan of $30,000. He says he left Recovery under unpleasant circumstances with the $30,000. loan still in issue. Counsel for the appellant informed the Court that no legal action was taken by Mr. Papa against Recovery. Mr. Papa does not impress me as one who would leave a quantum of $30,000 owed to him to remain unresolved for an indefinite period. He says he spoke about the $30,000 to Mr. Mann on numerous occasions; I would have thought his discussions would have been with Mr. Polley, who was then in charge of Recovery, if he wanted matters resolved. All this leads me to question whether a "bona fide” loan of $30,000 was ever made by Mr. Papa to Recovery and was outstanding at the end of 1982.

No audited financial statement of Recovery for 1982 was produced in evidence to verify treatment of the purported loan. The former auditor of Recovery, Mr. Chan, was not called to testify, although no reason was given for his absence. According to both Mr. Mann and Mr. Polley, Mr. Chan discussed the reconciliation of the various loans at meetings, the existence of which Mr. Papa denies. Mr. Chan's evidence would have been of assistance.

I find no comfort in Mr. Papa's explanation of the existence of the loan of $30,000 and in my view he has not satisfied the onus on him to prove firstly he made the loan, and secondly Recovery had not repaid the $30,000 prior to the end of 1982. The cheques aggregating $17,910 were not, in my view, payments in reduction of a loan.

Counsel for Mr. Papa submitted that in respect of the standby charge added to Mr. Papa's income by Revenue Canada, an error was made since the automobile was not used “exclusively” by Mr. Papa. Paragraph 6(1)(e) required an amount, called a standby charge, to be added to the income of an employee whose employer makes an automobile available to him in the year. Subsection 6(2) establishes a formula to compute a minimum amount of the standby charge. In neither provision is there any requirement that the automobile is to be used “exclusively” by the employee for a standby charge to be added to the employee's income. Mr. Papa could not state the number of days in 1982 the automobile was not available to him and accordingly could not establish an error in the standby charge added to his income.

The appeal is dismissed.

Appeal dismissed.