Longford Communications Limited v. Her Majesty the Queen, [1996] 3 CTC 2254 (Informal Procedure)

Rip J.T.C.C.: — Longford Communications Limited (“Longford”) appeals (Informal Procedure) from an income tax assessment issued by the Minister of National Revenue (“Minister”) under section 160 of the Income Tax Act (“Act”). The Minister assessed Longford on the basis that Adco Holdings Limited (“Adco”) transferred accounts receivable to Longford, a person with whom Adco was not dealing at arm’s length, at a time in 1993 when Adco was liable for tax in the amount of $31,727.39 under Part I of the Act.

Gary O’Hara, Sales Manager of Carlow Security Services, who informed me he is not an employee of Longford, acted as Longford’s agent and testified for the appellant. Mr. O’ Hara was employed by an automobile dealership in 1993 and was not involved at the time in any activities carried on by Longford and Adco. Mr. O’Hara joined his present employer - who it is, I do not know since Mr. O’Hara referred to the employer’s trade name - in 1995.

In cross-examination Mr. O’Hara acknowledged he is the uncle of Colleen O’Hara who is married to Peter Gallant, the President of the appellant. Gary O’Hara is the brother of Gerald O’Hara, Colleen O’Hara’s father. In 1992 and 1993 Gerald O’Hara was General Manager of Adco in charge of operations.

At various times - whether or not at the same time is in issue - Longford and Adco had carried on the business of selling and installing security systems under the trade name “Carlow Security Systems” (“Carlow”). Among the facts assumed by the Minister in making the assessment, which facts the appellant’s agent acknowledged to be true were the following:

(a) the Appellant was incorporated on February 23, 1993;

(d) the trade name “Carlow” was formally registered on behalf of the Appellant on July 12, 1993;

(e) the Appellant issued the following invoices in the name of Carlow:

Date/Customer/Amount

July 26, 1993: Tara Foods Ltd.: $11,640.07

Aug. 30, 1993: Edmonds Landscape & Const.: 3,210.00 $14,850.07

(f) the invoice for Tara Foods Ltd. covered work started in 1992 and completed prior to 1993, i.e. before the Appellant’s incorporation;

(g) the invoice for Edmonds Landscape & Const. was for a security system which was installed in March of 1993 and completed a couple of months later, i.e. before the Appellant obtained the use of the trade name Carlow;

(h) at all relevant times the Appellant did not have any employees;

(i) at all relevant times ADCO had employees;

The “relevant times” referred to above are the years 1992 and 1993.

The following facts so assumed by the Minister were denied by Gary O’ Hara:

(b) at all relevant times the Appellant and ADCO Holdings Limited (“ADCO”) were not dealing with each other at arm’s length;

(c) at all relevant times ADCO was in the business of selling and installing security systems and operated under the trade name of Carlow Security Systems (“Carlow”);

(j) the items covered by the invoices described in subparagraph 9(e) above were in fact supplied by ADCO;

Gary O’ Hara presented documentary evidence in an attempt to establish that Adco and Longford dealt with each other at arm’s length and that Adco and Longford did not use the trade name “Carlow” at the same time. The documentary evidence consisted of the following photocopies of extracts from the Province of Nova Scotia Department of the Attorney General and Registrar of Joint Stock Companies, among others:

Exhibits A-1, Confirmation of Registration of name Carlow Security A-2, & A-4Systems by Longford, July 12, 1993; use of name since February 1, 1993.

Exhibit A-3 Certificate of Incorporation of Longford, February 23, 1993.

Exhibits A-5, Confirmation of Registration of name Carlow Security A-6, A-7 Systems on behalf of Adco on July 12, 1985 and in force on May 8, 1986.

Exhibit A-8 Letter dated June 30, 1989 from Adco to Registrar of Joint Stock Companies that Adco has no further use of the name Carlow Security Systems.

Exhibit A-9 Use of name Carlow Security Systems by 1909197 Nova Scotia Limited (“Scotia”) as of March 15, 1993; reference to Gerald O’ Hara as contact.

Exhibits A-10 Confirmation that the name Carlow Security Systems was registered on July 12, 1985. Its status was “complete” March 21, 1990 and the name was reinstated by Scotia on March 21, 1990 the name was in use by Scotia since June 30, 1989 - A.H. Wood, agent.

Exhibit A-13 Letter of February 13, 1990 from Department of Attorney General to A.H. Wood accepting charge of ownership of the name Carlow Security Systems from Adco to Scotia.

On the basis of this documentation Mr. O’Hara concluded that Adco gave up the use of the name “Carlow” in June 1989. Three and a half years later, in February 1993, after Scotia had used the name, Longford started using the name “Carlow”.

Appellant’s agent testified that Scotia carried on business as Nightowl Arms. He stated that after June 30, 1989 Adco carried on business “for a while” until it was struck from Companies Register of Nova Scotia. He said Adco ceased to carry-on business in 1991 or 1992. The shareholder of Adco, he recalled, was Russell Lesson who is not related to Peter Gallant, the shareholder of Longford. Mr. O’Hara had “no knowledge” if Adco and Longford had other shareholders at any time in 1993.

Mr. O’Hara insisted Adco stopped using the name “Carlow” when Adco surrendered its use. In his view that is the reason the registration of the name by Scotia was treated as a “reinstatement”.

Mr. O’Hara testified that in 1993 Longford “took over some accounts” from Scotia, although he said he was not involved with Scotia. Longford purchased assets, including work in progress, from Scotia. Mr. O’ Hara did not have with him at trial the Agreement of Purchase and Sale and he did not know the purchase price of the assets. He explained that Longford “picked- up” the name Carlow. According to Mr. O’Hara, Scotia and Longford are not controlled by the “same people”.

Mr. O’Hara did not have available at trial the minute book or other corporate records of Adco, Scotia and Longford to confirm the shareholders of each of the corporations. His reason was that he had no control over Adco and Scotia and therefore had no way to obtain these books and records. He admitted he could have brought into court the books and records of Longford but did not. He explained he did not subpoena any officer of Adco to bring the minute book of Adco to trial because the appeal was under the Informal Procedure.

In cross-examination Mr. O’Hara said he had no knowledge when Adco ceased to carry on business or what business it carried on after June 1989. If Adco did carry on business after June 1989 it was “low-keyed”, he said. Mr. O’Hara was shown the 1992 income tax return of Adco by respondent’s counsel. The return was signed by his brother Gerald. Adco’s fiscal year terminated on December 31. Expenses for its 1992 fiscal year were $291,000, of which $120,000 were for wages. Expenses for materials were $64,000. To respondent’s counsel’s suggestion that Adco was in the security business in 1992, Mr. O’Hara replied “Obviously ...”. Mr. Russell, respondent’s counsel, also drew Mr. O’Hara’s attention to Adco’s revenue in 1992 of $750,000. Adco did incur a loss in 1992 of $44,000. Mr. O’Hara did not know if his brother received the largest portion of the wages in 1992.

Mr. Russell also produced for Mr. O’Hara’s review a Statement of Account of Montreal Trust for the period ending June 15, 1993. The account was in the name of:

Adco Holdings Limited

Carlow Security Systems

Mr. O’Hara could not offer any evidence that Adco did not continue to use the name Carlow in 1993. Mr. O’Hara stated that to the best of his knowledge Colleen O’ Hara held no position with Adco. However a deposit slip dated June 3, 1993 to the same account at Montreal Trust was signed by her. Ms. O’Hara entered the name “Carlow Security” as the account name. Mr. O’Hara had “no knowledge” and could not explain the reason Adco was using the Carlow name in 1993.

Mr. Lawrence Langdon, a collection officer with Revenue Canada, testified for the Minister. In its Notice of Appeal the appellant complained that “requests of explanations for the assessment have gone unheeded from Revenue Canada”. Mr. O’Hara also declared that Revenue Canada was not forthcoming. Mr. Langdon’s evidence was to the effect that Longford’s representatives were not cooperative. From time to time, he said, he had discussions with Gary O’Hara, Gerald O’Hara, Peter Gallant and Colleen O’Hara. I assume Mr. Langdon is an aggressive tax collector and that the O’Haras and Mr. Gallant did not like the way they were treated. They may or may not be right. This, however does not affect the issue before me.

At the outset of the appeal I informed Mr. O’Hara that if he testified he should know the facts in the appeal so that he could be in a position to refute the facts relied on by the Minister if they were wrong. Unfortunately, while Mr. O’Hara did have the ability to give evidence that was favourable to the appellant, he frequently could not answer questions put to him by respondent’s counsel. Mr. O’Hara failed to convince me that any one of the facts assumed by the Minister in assessing was wrong. Mr. O’ Hara did not participate in the activities of Adco, Scotia and Longford in 1993. A witness who was present at the events in issue ought to have testified if the appellant had evidence to refute the respondent’s assumptions of fact. In my view the name “Carlow” was passed from Adco to Longford to Scotia, not unlike a hockey team’s forward line passing the puck from player to player during a power play. However there were times that more than one player was using the name. Registration of a trade name by a person does not prevent another from using that name if the registrant does not oppose it. That, it appears, was the case here.

Adco was using the name Carlow in 1992 and 1993 and issued invoices in that name to Tara Foods Ltd. and Edmonds Landscape & Const, for work performed in 1992 and 1993. The accounts receivable from Tara Foods Ltd. and Edmonds Landscape & Const, were transferred by Adco to Longford at the time Adco was indebted under Part I of the Act.

The Act provides, at subsection 251(1), that for its purposes related persons, such as individuals connected by blood relationship and marriage and any two corporations who are controlled by related individuals, [1] shall be deemed not to deal with each other at arm’s length. However even where persons are not related to each other, it is a question of fact whether these persons were at a particular time dealing with each other at arm’s length. On the facts before me I am not convinced - even if Adco and Longford are not related persons - that Adco and Longford dealt with each other at arm’s length when the accounts receivable were transferred.

I am inclined to dismiss this appeal. However I do have a problem: the respondent stated in subparagraph 9(n) of her Reply to the Notice of

Appeal [2] that in assessing, the Minister assumed:

(n) the proportion of the amount of $14,850.07 which is attributable to federal tax not remitted by ADCO is less than $12,00.00 [sic].

I do not know what this statement means. According to subsection 160(1) of the Act, a transferee of property who does not deal with the transferor at arm’s length is liable (jointly and severally with the transferor) for the amount of tax owed by the transferor under Part I of the Act at the time of the transfer. The transferee’s liability is limited to the value of the property it received, assuming, as in this case, no consideration passed. In assessing, the Minister assumed the transferor’s liability under Part I of the Act was $31,727.39 and the value of the property transferred to the appellant was $14,850.07. These amounts were not challenged by the appellant. Therefore it appears that the appellant’s liability under subsection 160(1) ought to be $14,850.07. A copy of the Notice of Assessment attached to the appellant’s Notice of Appeal provides that the amount assessed was $14,850.07.

Subparagraph 9(n) purports to be a fact assumed by the Minister when assessing. This cannot be so since the Minister assessed the appellant $14,850.07, not an amount less than $12,000. I guess - if that is the correct word - the person who drafted the Reply was trying to indicate in subparagraph 9(n) that the Crown agreed the appeal was one that was eligible to proceed under the Informal Procedure. However, it is doubtful the fact alleged in subparagraph 9(n) was ever contemplated, let alone assumed, by the Minister. I understand that in Informal Procedure appeals the Reply is not drafted by a lawyer but by an agent of the respondent. The confusion caused by subparagraph 9(n) should serve as a warning to lawyers appearing for the respondent in Informal Procedure appeals to review the Reply once the appeal is set down for hearing, at the latest, to avoid any embarrassment.

An assessment issued under section 160 is for tax owed by a transferor under Part I of the Act; such assessment does not include any amount owed by a transferor under any other statute, for example, a provincial Income Tax Act, the Unemployment Insurance Act or Canada Pension Plan. The draftsman of subparagraph 9(n) appears to suggest the assessed amount of $14,850.07 includes amounts of liability under a statute other than the Act itself; this is not so.

I advised Mr. O’Hara and respondent’s counsel that I would give respondent’s counsel 30 days to submit how, in the circumstances, I should deal with the conflict between the amount assessed and the contents of subparagraph 9(n) of the Reply. (Mr. O’Hara would have time to reply.) May I refer the assessment back to the Minister for reconsideration to reassess a lesser amount of tax? Or do I vacate the assessment for reason that the amount assessed may be wrong according to the respondent’s pleadings and there is no true amount before me? Or do I dismiss the appeal because the assessment is correct?

The appellant subsequently retained a solicitor to reply on its behalf. Written submissions were forwarded to the Court; these submissions referred to the Nova Scotia Income Tax Act. A conference call was then held between both lawyers and myself to clarify the conflict between the amount assessed and subparagraph 9(n) of the Reply. Further written submissions were made.

The solicitor for the appellant submitted that the appellant’s appeal be allowed and the assessment be vacated. He further submits that the pleadings suggest an amount of less than $12,000.00, not the $14,850.07 assessed, is owing under subsection 160(1) of the Act. Doubt exists as to the amount of tax owing and therefore the matter must be resolved in favour of the taxpayer. The appellant would be prejudiced if he must pay a tax in an amount greater than the Act provides.

Upon reviewing this matter I am confident that there is no doubt as to the amount of tax owing by the appellant and that amount is the amount assessed. The pleadings review the facts and, based on the facts, the assessment under appeal is a good assessment. The appellant ought to have been assessed $14,850.07 under subsection 160(1) and that is the amount it has been assessed. It is only because of an unfortunate and muddled statement in the Reply to the Notice of Appeal that this question has gone on as far as it has. Subparagraph 9(n) of the Reply added nothing to the facts before me, except confusion. It is a statement that is wrong in fact and wrong in law and, on the facts of this appeal, is of little or no import.

The appeal is dismissed.

Appeal was dismissed.