Howard Sniatowski, Leon Sniatowski, Continental Aluminum Smelting Limited v. Minister of National Revenue, [1984] CTC 2513, 84 DTC 1448

Taylor, TCJ:—These are appeals heard on common evidence in Toronto, Ontario on May 1 and May 2, 1984 against income tax assessments which are summarized below.

Leon Sniatowski (Leon) owned and controlled the appellant corporation (Continental), and another corporation Whitby Alloys Limited (Whitby). His son Howard Sniatowski (Howard) had, at critical times, a one-third interest in Thane Developments Limited (Thane) and in 567 Jobbers Limited (Jobbers). One of the other shareholders in each of Thane and Jobbers was a Michael Basen (Basen). In addition, through other non-arm’s length relationships, Leon was involved with Bilnia Investments Limited (Bilnia).

Summary of Reassessments

(Continental)

Amount

	at						Statute
Year issue Description					Income Expense Penalty Barred
1974 $24,500 Lease					X	X	X
		Payments
		disallowed
1975	25,000			Improperly	X		X
15,500				recorded	X	X	X
				invoice
1976	25,100				X	X
27,790					X	X
	13,725				X	X
	5,000				X	X
1977	25,100					X
	3,610				(a)x
	3,847
1978	25,100				X	X
	2,281				X
(a) Accounting and legal fees
(Leon)
1975	15,500	Benefit (Re: Jobbers			X		X
1977	5,468		(Re: Mortgage wife
				and Whitby)	X
	5,649	7”	(Re: Thane and
				Basen)	X
	5,649		(Re: Thane and
				Bilnia)	X
1978	5,468		(Re: Mortgage wife
				and Whitby)	X
(Howard)
1979	1,930		Loan Interest
1980	2,470

At the commencement of the hearing, counsel for the appellants informed the Court that the “loan interest” amounts for Howard were no longer contested and accordingly that appeal will be dismissed. At the same time counsel for the respondent volunteered to assume conduct of the case, and put the Minister’s evidence and witnesses before the Court. It was recognized that the Minister had a clear responsibility to fulfil the conditions of subsection 152(3) of the Act with regard to the statute-barred years in any event. Counsel for the respondent also noted that there was one line of case law which held that when penalties had been imposed under section 163 of the Act, the burden rested with the Minister to establish the facts justifying the assessment of both income tax and penalty. Without being required to rule on the Minister’s precise responsibility, the Court accepted the Minister’s proposition and the matter proceeded in that way, with counsel for the respondent putting in his entire case in advance of any evidence or testimony on behalf of the appellants. Counsel for the appellants noted that if the amount of $27,790 added to income as sales in 1976 was held by the Court to be sales, it should be so credited to 1977 and not 1976.

Mr Richard Lester Buchan, CGA, a tax auditor with Revenue Canada, was called by counsel for the Minister. He had conducted the investigation of the accounts of Continental and had received almost all the information and explanations from either Howard or from a Mr Silverberg, a chartered accountant who had prepared the relevant financial statements and income tax returns for Continental. The portion of the Minister’s reply to notice of appeal, for Continental, to which counsel for the respondent directed a major part of the questioning of Mr Buchan was as follows:

9(a) The President and sole shareholder of both the Appellant and a corporation called Whitby Alloys Limited (“Whitby”) was, at all material times, one Leon Sniatowski;

(b) the Appellant leased one forklift, one bailer, two trailers and one tractor from Whitby in the 1974 through 1978 taxation years for $30,500, $29,000, $29,000, $29,000 and $29,000, respectively, which amounts were known to the Appellant to be inflated and unreasonable. Reasonable lease costs in each of the stated taxation years, respectively, for such equipment were no more than $6,000, $4,800, $4,800, $4,800 and $4,800;

(c) the Appellant in 1975 delivered goods of the fair market value of $40,500 to a corporation named 567 Jobbers Ltd (“Jobber”) in which corporation Leon Snia- towski’s son, Howard Sniatowski, had a 33% shareholding and was president thereof, in respect of which sale: an amount of only $25,000 was credited to sales in the Appellant’s book of account; and payment was effected by Howard Sniatowski personally in the form of an unsecured loan to the said Howard in the Appellant’s books of account, with the result that the Appellant knowingly sold goods at $15,500 less than the fair market value to a party with whom he was not dealing at arm’s length;

(d) the said $40,500 of goods delivered to Jobbers and paid for as described by the said Howard constituted Howard’s capital contribution to Jobbers as consideration for his shareholding.

Buchan submitted a copy of an equipment lease from Whitby’s to Continental dated January 21, 1974 which called for payments of $575 per week for equipment apparently owned by Whitby and leased to Continental. Other documentations submitted by Buchan indicated that the same equipment had earlier been leased at much lower rates by Whitby from the original supplier. Based on discussions he held with either or both of Howard and Silverberg, he calculated the proper lease amounts for the equipment to be those now allowed to Continental in the assessment at issue. It was his recollection that there had been an agreement with Howard on these amounts (although Howard later disputed this). Over a lengthy period of time during which Buchan’s audit and investigation took place, he had not been provided with any answers or information from Leon. It was his understanding that Leon was ill. Buchan also provided office copies of the sales invoices for $40,500 to “Jobbers”, and showed that no appropriate chronological entry had been made in the sales record for the amount, although a later journal entry did record an amount of $25,000 to sales. There was no dispute between the parties that, in any event, goods to the value of $40,500 had been sold from Continental to Jobbers, and that it had some relationship to the $25,000 journal entry noted above. Documentation or testimony relevant to the various other items in dispute was also provided by Buchan. Asked for the bases upon which he recommended penalties, Buchan noted that it would have been impossible for the parties not to have known that the lease payments by Continental were very excessive, and that the improperly recorded amounts of sales could not have been simply clerical errors. No adequate explanations have ever been provided to him for many items, and the books and records of Continental were not kept in the best of order. In his view the major discrepancies (noted above) together with the several others which constituted the reassessments would only have occurred with either the knowledge or the conscious agreement of Leon, and he had already stated that Leon had not seen fit to provide any other rationale for the situation.

In response to the testimony, and evidence presented by Buchan, counsel for the appellants called Howard and Basen. Basen referred to one item in dispute which ultimately resulted in two of the benefit amounts of $5,649 each arising in Leon’s income tax reassessment, (supra). It concerned an inventory of scrap materials (which had been owned by Whitby), moved to the same property and sold by Continental, at the time Whitby sold its real estate, and ceased regular operations as a result of an arrangement with its (Whitby’s) creditors. Whitby did not go bankrupt (in the strict sense of the word) and (allegedly) remained the owner and lessor of the equipment at issue, as well as the “scrap” with which Basen was concerned. The proceeds of the sale of scrap (some $16,950) had been divided in equal thirds to Basen, Bilnia and Whitby (presumably as reduction of some obligation Whitby had to Continental). How crediting the one-third nominally belonging to Howard (as a shareholder in Thane) according to the rationale given by Basen equated with giving the other two portions directly to Basen and Bilnia was not explained to the Court. The degree Basen’s testimony was expected to reassert the appellants’ propositions in this appeal after the very convincing and relevant testimony of Buchan, was entirely lost on me. The same can be said of the testimony of Howard, who although helpful and direct, simply was in no position to answer or deal with the critical questions which arose out of the testimony of Buchan. His major contribution was in the form of certain information provided to him by suppliers etc, on past and current leasing costs for equipment said to be similar to that used by Continental during the time material. It seemed to be his position, that Whitby was in the business of leasing equipment — albeit its only customer was Continental, and that the amount paid by Continental to Whitby had been reasonable for that type of equipment and not inflated as asserted by the Minister for the prime purpose of “using up” the loss accumulated in Whitby. That also formed the basis for the argument of counsel for the appellants on this point.

As may be seen, I have provided only a brief summary of testimony, the physical evidence (exhibits filed) and the testimony of Buchan in support of the Minister’s assessments. There is no need for anything more extensive, and the appellants’ efforts at rebuttal were quite ineffective. The prices paid for the equipment by Continental, had no relationship whatsoever to either the cost of the equipment, or to competitive lease prices which were in effect. It would have been virtually impossible for Leon not to be aware of the enormous differences, and the procedure must have been consciously entered into by him. The information supplied by Howard to assert otherwise is unacceptable in the circumstances of this case, since it is directly at variance with the actual situations portrayed by the facts in the appeals. While the fact that no money changed hands (Continental to Whitby), and the lease transactions were all dealt with by book entries, could be a positive factor for the appellants in some situations, in my view, in these appeals, it is a negative factor. It had the effect of further contributing to the lack of order and distinction which should have been maintained not only within the internal records of the various corporations and individuals but also between and among these several taxpayers. Therefore, with regard to the “lease arrangements” between Continental and Whitby, the Minister has fulfilled his obligations under section 152 of the Act, and the “misrepresentation” which has occurred was the result of “wilful default”. There was neither carelessness nor neglect in the program to charge excessive and unreasonable costs to Continental for the benefit of Whitby. It was deliberate. In the end analysis, as the sole shareholder of both corporations, only Leon stood to benefit. The same result obtains in an examination of the $15,500 worth of merchandise, delivered to “Jobbers” for which no sales invoices were recorded in Continental. That was not an innocent bookkeeping error. The Minister has succeeded in reopening the taxation years 1974 and 1975 for Continental and 1975 for Leon, and has, at the same time, established the bases of the assessments both for tax and penalty for those years.

All the other matters at issue I shall deal with summarily. Whatever burden rests on the Minister’s shoulders with regard to the items for penalties imposed was completely discharged by the Minister during the two days of the trial. Leon was the only person, in my opinion, who could have shed proper (or any) light on the questions which arose out of the testimony of Buchan. That he did not so testify is, of course, his prerogative. The Court is thereby left in much the same position as was Buchan after his investigation — a great many unanswered questions but also some very reasonable and rational conclusions — after the available facts are weighed against the limited explanations provided. I find nothing in the conclusions reached by Buchan, and reflected in the reassessment by the Minister, which was not appropriate.

In the end analysis the appeals are dismissed in all respects, and the assessments upheld. That includes the rejection of the assertions made by counsel for the appellants, that one particular amount ($27,790) if considered as income should be credited in the year 1977 rather than the year 1976. I have not seen conclusive evidence to support such a contention.

The appeals are dismissed.

Appeals dismissed.