Harry Abelson v. Minister of National Revenue, [1985] 2 CTC 2302, 85 DTC 604

Tremblay, TC) [TRANSLATION]:—This case was heard at Quebec on common evidence with Leeds Manufacturing Co on April 11, 12 and 13, 1984. The arguments were presented on July 29 and August 28, 1984.

1. The Point at Issue

The question is whether the appellant, the principal shareholder in Leeds Manufacturing Co, was correct in not including in the calculation of his income for 1971, 1972, 1973, 1974 and 1975 the sums of $87,687.65, $49,448.28, $108,467.12, $169,622.40 and $198,662.42 respectively, making a total of $613,887.87. The appellant denied that he had appropriated any money whatever from Leeds, as was argued by the respondent, who included the said amounts in the appellant’s income. According to the respondent, he appropriated the said money by means, inter alia, of fictitious purchases and sales which were not reported in calculating Leeds' income, taking the money himself. The appellant maintained that he spent it paying for under-the-counter work to benefit the company. The appellant further argues that 1971-73 are prescribed.

2. The Burden of Proof

2.01 The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof results not from a particular section of the Income Tax Act, SC 1970-71-72, c. 63, as amended, but from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The facts assumed by the respondent are described below.

3. Facts

3.01 The facts stated in the notice of appeal are as follows:

1. In the period from 1971 to 1975, the appellant was employed by and a shareholder of Leeds Manufacturing Co.

2. In notices of assessment dated October 30, 1978, the respondent included in the company’s income certain amounts representing fictitious purchases and unreported sales, and these assessments are now the subject of a notice of appeal to the Board.

3. Some time later, on November 3, 1978, the respondent issued notices of assessment to the taxpayer for the 1971-75 taxation years, including in his income all the net amounts included in the company’s income, assuming this was money appropriated from the company.

4. The appellant denies having appropriated any money whatever from the company, and further adopts the company’s arguments against the additional income attributed to him by the respondent and included in his own income as money appropriated.

4a. (amendment) The respondent’s assessments for 1971, 1972 and 1973 are prescribed.

5. The Minister’s assessments are incorrect in fact and in law.

3.02 In the reply to the notice of appeal, the respondent stated the following:

(A) Statement of facts

1. He admits paragraph 1 of the notice of appeal and adds that the appellant was the principal shareholder in Leeds Manufacturing Co (hereinafter referred to as “Leeds”).

2. He admits paragraphs 2 and 3 of the notice of appeal, and as appears from the notice of appeal in Leeds (case 82-349), Leeds admits the fictitious purchases and unreported sales.

3. He denies paragraphs 4 and 5 of the notice of appeal.

4. In assessing the appellant for his 1971-75 taxation years, the respondent relied inter alia on the following facts:

(a) for the period from 1971-75, Leeds claimed as operating costs fictitious purchases totalling $771,655.80;

(b) these purchases are fictitious because the goods the cost of which Leeds claimed to deduct were not delivered;

(c) cheques covering the said fictitious invoices were issued by accommoda- tors, who paid the amounts of the cheques, less a 2 per cent commission, to Frances Long Weinstock, a director and vice-president of Leeds;

(d) the said Frances Long Weinstock paid the money to the appellant, on the appellant’s instructions;

(e) during the period from 1972-75, Leeds failed to report sales amounting to $120,128.07;

(f) Leeds was allowed expenses in addition to those which it claimed for 1972-

75, which had the effect of increasing its income for 1971-75 as follows:

	Fictitious	Unreported	Additional	Additional
Year	purchases sales sales		expenses	income
1971	$ 87,687.65			$ 87,687.65
1972	133,451.53	$ 5,985.75	($ 89,989)	49,448.28
1973	133,875.44	42,463.68	(67,872)	108,467.12
1974	177,193.59	54,547.81	(62,119)	169,622.40
1975	239,447.59	17,130.83	(57,916)	198,662.42
	$771,653.00	$120,128.07	($277,896)	$613,887.87

(g) The additional income of Leeds set out in the preceding paragraph for each of the years 1971-75 was paid or allocated by Leeds to the appellant as shareholder;

3. Argument of the Respondent

The fundamental argument of the appellant [sic] reads as follows, at paragraph 4 of the reply to the notice of appeal:

6. He [the respondent] argues that Leeds paid or allocated to the appellant, as Leeds shareholder, the “additional income” mentioned above in paragraph 4(f) for each of the years at issue, and so these amounts were duly included in calculating the appellant’s income under s 15(1) of the Act.

4. Evidence and analysis

For an analysis of the facts entered in evidence and of the Act and case law, reference should be made to the judgment in Leeds Manufacturing Co, 82-349 ([1985] 2 CTC 2284).

In that judgment the Court, at paragraph 4.03.5, concluded that the reassessments for 1971-73 should be regarded as validly made, though they appeared to be prescribed under subsection 152(4) of the Income Tax Act.

In paragraph 4.03.6 the Court further concluded that Mr Abelson had appropriated amounts for which there was no evidence that they had been used to pay for under-the-counter work on behalf of Leeds.

Finally, as the Court decided in paragraph 4.03.6 that Leeds, in calculating its income for the 1972, 1973, 1974 and 1975 taxation years, was entitled to deduct $15,000 for each of those years for under-the-counter work paid for on behalf of Leeds, it follows that these amounts should not be regarded as an appropriation by Mr Abelson.

5. Conclusion

The appeal is dismissed for 1971. It is allowed in part for 1972, 1973, 1974 and 1975, and the matter is referred back to the respondent for reassessment in accordance with the foregoing reasons.

Appeal allowed in part.