Morris Kula v. Minister of National Revenue, [1984] CTC 2664, 84 DTC 1556

Goetz, TCJ:—This is an appeal by the appellant with respect to his 1974, 1975 and 1976 taxation years. The reassessment included penalties and interest. The appellant asserts that the non-disclosure of income in the relevant taxation years resulted from advice given by a fellow shareholder and controller of Waltson Properties Limited (“Waltson”). The respondent, in his reply to notice of appeal, pleaded, inter alia, as follows:

6. The Respondent, in reassessments of tax to the Appellant for the 1974, 1975 and 1976 taxation years, included amounts of $46,544.46, $2,360.76 and $6,654.86 in computing the Appellant’s income in respect of the income earned by him in the 1974 taxation year and interest thereon in the 1975 and 1976 taxation years, which amounts the Appellant had not included in computing his income for those taxation years. The Respondent in addition assessed penalties on the said amounts in those taxation years respectively in the amounts of $5,039.07, nil and $275.96 pursuant to subsection 163(2) of the Income Tax Act.

7. The Respondent, in a reassessment of tax to the Appellant in respect of the 1975 taxation year, included an amount of $2,269.24 in computing the Appellant’s income and assessed a penalty pursuant to subsection 163(2) in respect thereof. In a subsequent reassessment of tax to the Appellant for the 1975 taxation year, all penalties assessed pursuant to subsection 163(2) of the Income Tax Act were cancelled. Further, the Respondent does not contend, for the purpose of this proceeding, that the amount of $2,269.24 is income of the appellant in the 1975 taxation year.

8. In so reassessing tax to the Appellant for the 1974, 1975 and 1976 taxation years, the Respondent made the following assumptions and findings of fact:

(a) the Appellant and two others, Harry Walters (“Walters”) and Herbert Grossman (“Grossman”), were the shareholders at all material times of the corporation Waltson Properties Limited (“Waltson”), incorporated under the laws of the Province of Ontario;

(b) Waltson constructed a building (“the property”) in the Township of Saltfleet, Ontario, and sold such property on March 28, 1974 to Admiran Holdings Limited, a corporation incorporated under the laws of Ontario and a subsidiary corporation of Technophon-Anstalt (“Technophon”), a corporation incorporated in Liechtenstein;

(c) the Appellant, Grossman and Walters, in their own right, negotiated a finder’s fee and were entitled to receive such finder’s fee in the amount of $230,000.00 on May 9, 1974 paid by Technophon in respect of the above-described sale;

(d) the Appellant, Grossman and Walters incurred expenses of $30,000 in earning the said amount of $230,000.00;

(e) the Appellant, Grossman and Walters incorporated a Liechtenstein corporation in June of 1974 under the name of Southern Finance and Trade Company Establishment (“Southern”) to which corporation they directed the finder’s fee of $230,00.00 less $30,000.00 in expenses incurred in relation thereto;

(f{) the Appellant, Grossman and Walters participation in the sale of the property in respect of which they were entitled to receive a fee of $230,000.00 constituted an adventure in the nature of trade, the Appellant participating to 24% thereto and being entitled to receive an amount of $46,544.64 accordingly;

(g) the Appellant was entitled to receive interest income in the amount of $2,360.76 and $6,654.86 in the 1975 and 1976 taxation years respectively in respect of the said amount of $46,544.64;

(h) the Appellant did not include in the computation of income, in his return of income for the 1974, 1975 and 1976 taxation years respectively, the aforesaid amounts of $46,544.64, $2,360.76 and $6,654.86 respectively, and so failed to include such amounts either wilfully or in circumstances amounting to gross negligence;

(i) the Appellant, in so failing to include the aforesaid amounts in his return of income for the 1974, 1975 and 1976 taxation years, made a false statement with the result that the amount of tax that would have been payable on the basis of the information provided by him in his returns of income was less by $20,156.26 and $1,103.84 than the tax payable by him in the 1974 and 1976 taxation years, respectively.

9. The Respondent relies, inter alia, upon Section 3, subsections 9(1), 163(2) and 248(1) of the Income Tax Act, RSC 1952, c 148, as amended.

10. The Respondent respectfully submits that as the Appellant was entitled to receive amounts of $46,544.64, $2,360.76 and $6,654.86 in the 1974, 1975 and 1976 taxation years respectively and did not include such amounts in his return of income either wilfully or in circumstances amounting to gross negligence, the Respondent correctly assessed penalties pursuant to subsection 163(2) of the Income Tax Act in respect of such amounts in the 1974 and 1976 taxation years respectively.

The appellant is an architect who joined Waltson in 1961 and was responsible for the design and construction of small buildings. In 1970 Herbert Grossman joined Waltson as controller in charge of accounting and administrative functions and as such he was chief financial officer. Waltson, by this time, had become a very large developer with many assets in cities in Ontario and Quebec. Both Grossman and Kula (the appellant) acquired a 15 per cent interest in Waltson. The balance of the shares were held by Harry Waltson who was described as the promoter of Waltson’s and in charge of acquisition and sale of property. As Waltson grew rapidly there were almost daily meetings of the three shareholders, at which I can only presume all of the affairs of the company were fully discussed.

The reassessments relating to the shareholders came about as a result of a lengthy investigation of Waltson by Revenue Canada. As a result of a search of the appellant’s home, a letter in Grossman’s handwriting was found. The said letter reads as follows:

February 18, 1975

Dr E E Hieber,

Handelskredit-Bank AG

82 Taistrasse, 8001, Zurich

Switzerland

Through this letter we wish to clarify the disposition of funds presently held in trust by you through Southern Finance and Trade Establishment. The shares are being held in trust for the beneficial shareholders on the following basis:

H Walters	—	52 per cent
H Grossman	—	24 per cent
M Kula	—	24 per cent

In the future all instructions concerning the activities of Southern Finance are to be signed by all three shareholders and no disposition of funds is to occur under any other circumstances.

In the event of the death of one of the three principals, their wife or appointee shall assume their interest and authority in Southern Finance.

H Walters

M Kula

H Grossman

Both Grossman and Kula gave evidence with Kula associating himself completely with the evidence of Grossman. Both men attempted to place the blame for any misdeeds on Harry Waltson who is now comfortably ensconced in the United States of America. The findings of the investigation resulted in a meeting between Revenue Canada, Harry Waltson, Herbert Grossman and their legal counsel, whereby it was agreed by Waltson and Grossman to pay tax on their undeclared income arising from the sale of the Proctor & Gamble building (the property referred to in paragraph 8(b) of the reply to notice of appeal). Penalties and interest were imposed and neither Waltson nor Grossman objected to or appealed against this action by Revenue Canada.

In that the appellant adopted the evidence of Grossman, I shall deal with some of the highlights only of Grossman’s evidence. He was aware that the so-called “finder’s fee’’ of $230,000 had been transferred to Southern Finance and Trade Company Establishment (“Southern’’) and that this was a part of the consideration of $1,450,000 for the sale of the Proctor & Gamble property (“the property”) to Admiran Holdings Limited (“Admiran”) in March 1974. Southern was a Liechtenstein corporation and was incorporated in June 1974. Grossman says he became aware of Southern in the spring of 1974. Although on March 21, 1974, Grossman was advised in writing by a real estate agent that a Dr Gieger, representing Admiran, was interested in purchasing the property, on March 22, 1974, Grossman wrote back to the agent saying that the property was no longer for sale and had been “withdrawn from the market”. The same day the property was sold by Waltson to Admiran for a purported $1,220,000.

Revenue Canada felt that the true selling price of the property was $1,450,000 and that the so-called “finder’s fee” of $230,000 was passed on to Southern in Liechtenstein and deposited in a Swiss bank. There were many strange and unnecessary legal steps taken to effect this and to apparently becloud the trail of the $230,000.

Grossman, in my view of the evidence, was always aware that the $230,000 — held by Southern — was an asset of Waltson’s. He prepared the financial statements of Waltson’s when its shares were sold to Berja Holdings Inc on January 31, 1975, and he excluded this asset from the financial statements as Waltson, Grossman and Kula had whisked the money out of the Swiss bank “into friendlier hands”. Kula’s uncle operated a bank in Venezuela and that is where the so-called “finder’s fee” ended up.

Grossman said he never inquired of Waltson as to how much money was overseas and this in face of the fact that the Waltson company was in deep financial trouble resulting in the sale of Berja Holdings Inc. He felt there was no need for Berja to know that Southern was owned by Waltson and that Southern had the money. He had the temerity to say that the placing of the money in a Venezuelan bank “was to protect us from Revenue Canada”. He says he never inquired of Harry Waltson as to what role Southern played in acquiring the funds from the property sale or precisely what his and Kula’s interest in Southern was. He says he never apprised Kula of these events and sought by his evidence to paint Harry Walters as the villain in the scenario and the appellant Kula as an innocent and unknowledgeable participant. Grossman’s evidence, to say the least, was lacking in credibility and I cannot bring myself to believe him.

The appellant’s evidence was in much the same vein as that of Grossman’s with variations to the effect that he, the appellant, was unaware of the existence of Southern until the time of the sale of Waltson’s shares to Berja Holdings Inc. He prepared his tax returns himself from information provided him by Grossman. In that the Berja sale was forced on Waltson because of financial difficulties, the money held by Southern was rather important. The appellant attended all weekly meetings of the three shareholders and towards the end of February 1975 their meetings were held almost “every half hour”. He claims he never asked either Walters or Grossman where Southern obtained the money. He was aware in 1976 that Revenue Canada was interested in these funds and agreed with Walters and Grossman to place the money in safer hands with his uncle’s bank in Venezuela and get it out of sight of Revenue in the hope that it would not be discovered during negotiations with Revenue Canada. Though the appellant was not present during the negotiations with Revenue Canada, I consider that he was privy to the totality of discussions and of their impact on him. His willingness to take a 24 per cent share of the funds held by Southern without asking where the funds came from is incomprehensible. The letter of February 18, 1975, written by Grossman to a Dr Hieber and which was found in his home would obviously be very important as far as the appellant was concerned. Yet, he says though he was aware of its contents, he never made any inquiries after its seizure by Revenue Canada in 1976. He shows mala fides in transferring the money to Venezuela on January 5, 1977 “to take it out of traceable property”.

I am fully convinced, having regard to the regular meetings between Walters, Grossman and the appellant, that the appellant was fully aware of all that transpired from the time of the sale of the Proctor & Gamble property to Admiran in March 1974. I am sure he was completely aware of the intricate machinations by Waltson to hide or obfuscate the routes the so-called “finder’s fee” money travelled to get to Southern in Liechtenstein. In associating himself with all of Grossman’s evidence, the appellant has painted himself with the same brush. He has hoisted himself onto his own petard. His evidence is not credible and by his actions and words the appellant has brought himself clearly within the provisions of subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

For the above reasons, I dismiss the appeal.

Appeal dismissed.