Haldi Investments Ltd. v. R, [1997] 2 CTC 2640, 97 DTC 1087

Bowie T.CJ.:

A number of issues were raised in these appeals, but I was advised at the opening of the trial that the only one being pursued was that relating to an employee benefit plan. It is the Appellant’s position that such a plan was established by it, and that it is entitled to deduct contributions made by it as follows:

1983 - $500,000

1985 - $400,000

1986 - $525,000

It is the position of the Minister of National Revenue (the Minister) that the Appellant signed an agreement whereby it purported to establish an employee benefit plan, but that it has made no payment or contribution to the plan. The Appellant was reassessed accordingly for the 1985, 1986 and 1987 taxation years, and it is from those reassessments that the present appeals are brought.

Paragraph 18(l)(<s>) of the Income Tax Act (the Act) prohibits any deduction for contribution to an employee benefit plan unless it falls within subsection 18(10)(a) of the Act. There is no dispute in this case that the employee benefit plan, if one was created at all, was to benefit employees resident in the United States, for work done in the United States, so that paragraph 18(l)(o) would not prohibit the deduction of contributions made to it. The relevant provisions of the Act are as follows:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(o) an amount paid or payable as a contribution to an employee benefit plan;

18(10) Paragraph (l)(o) does not apply in respect of a contribution to an employee benefit plan

(a) to the extent that the contribution

(i) is made in respect of services performed by an employee who is not resident in Canada and is regularly employed in a country other than Canada, and

(ii) cannot reasonably be regarded as having been made in respect of services performed or to be performed during a period when the employee is resident in Canada; or

The Appellant company is in the business of excavation, construction, and the rental of property. Terry Kalikias is the only shareholder, and he was at the material times the person who made the important decisions concerning the affairs of the company. For many years he and his brother Michael have lived as permanent residents in the United States, where they run the U.S. operations of the company, under the name American Construction Company. A third brother, Angelo, lives in Toronto, and at the material time he ran the day-to-day affairs of the company as its general manager. He took instructions from Terry over the telephone as required from time to time. Terry and Michael visit Canada on business only infrequently, and then for very short periods of time.

At the trial Angelo Halikias identified the signature of his brother Terry, on behalf of the Appellant, on a photocopy of a document titled “Halikias Benefit Plan”. He was not able to identify the other three signatures, which were presumably those of the three persons named in the document as trustees. They are Robert Loffredit, George Alexander, and Frances Halikias. He did, however, testify that Frances Halikias is the wife of Michael Halikias, and that he had met George Alexander on one occasion. The document was drawn by a Toronto solicitor, and is dated September 15, 1983. The signatures on it are not witnessed. It was not argued by the Respondent that the contents of the document would not meet the requirements of paragraph 18(10)(«) of the Act, nor was it argued that the document was a sham. In view of this, and the Minister’s assumption pleaded in the Reply that “in 1983 the Appellant signed an agreement whereby it purported to establish an employee benefit plan”, I find that the Plan was established as it appears to have been, notwithstanding that neither of the witnesses who testified for the Appellant had any real knowledge of how the document came into being, that neither the solicitor who prepared it, nor Terry, who apparently signed it for the Appellant, was called to testify, and that no corporate resolution was put into evidence to prove when or by whom the decision was made to establish such a plan. The two beneficiaries of the Plan are Terry Halikias and Michael Halikias. It is not disputed by the Minister that they meet the non-resident requirement in paragraph 18(10)(æ) of the Act.

I turn now to what I take to be the real issue in dispute, which is the question whether or not the Appellant actually made any contributions to the Plan in the years under appeal. On this subject I heard evidence from Mr. Branister Petrov, and from Angelo Halikias. During the years in issue Mr. Petrov was employed by a large national firm of accountants. One of his duties was to prepare the financial statements of the Appellant company, and he identified the statements for the years 1983, 1985 and 1986 as having been prepared by him. He also identified what was described as a copy of an extract from the company’s general ledger, and copies of certain journal entries which he had made as part of the year end adjustments associated with the preparation of the statements for each of the three years in question. The first of these adjusting entries was dated December 31, 1983, and it purports to record a debit to the employee benefit plan account in the amount of $500,000, and a credit of the same amount to an account called “Loan Payable - Haldi Investments Limited - Employee Benefit Plan”. The entries for the 1985 and 1986 year ends are similar, the amounts being $400,000 and $525,000, respectively. The explanations for these journal entries read as follows:

Mr. Petrov testified that he made these entries some time after December 31 each year, in the normal course of closing the books of the company for the year. He did not recall who instructed him to make these entries, or how the instructions were conveyed to him. He had a vague recollection of having been at a meeting at which the subject of creating an employee benefit plan was discussed, but he could give no clear account of any such decision having been taken in his presence. Nor did he refer to any written record of a decision, either to establish the Plan, or to make any of the three contributions which his journal entries purported to record.

The financial statements prepared by Mr. Petrov were put into evidence. They are unaudited statements. In each of the three years there is a note to the financial statements which identifies the outstanding loan payable to the Employee Benefit Plan as a long-term liability. Each of these notes contains the following statement:

Employee Benefit Plan:

The loan is secured by a non-interest bearing floating charge debenture.

Mr. Petrov did not include these notes in the statements that he prepared, and he was unable to do more than surmise that one of his superiors in the firm had done so after the statements were prepared. He testified that to his knowledge there was no such floating charge in place to secure the loans. The evidence of Angelo Halikias confirmed that in fact there was never more than an oral promise to pay the purported contributions to the trustees. Neither witness had any first hand knowledge of the making of any such promise, however, nor of any terms attaching to the debt.

Angelo Halikias identified photocopies of two letters. The first purports to be from the trustees of the Halikias Benefit Plan, addressed to the Appellant, and signed by one Robert Charal. Mr. Halikias did not know who Mr. Charal was. This letter purports to make a demand upon the Appellant company for payment of the outstanding balance of the loan to the Trust, which at that time stood at $1,425,000. The letter is dated December 10, 1991, and payment is demanded by February 28, 1992. The other letter is in reply to it, dated January 6, 1992, and is signed by Terry Halikias as president of the Appellant. This letter acknowledges that the loan is payable on demand, says that the Appellant does not have sufficient funds to make payment, and offers to pay $1,000,000 in early March 1992, and the balance later in the year.

Angelo Halikias also identified a photocopy of a cheque drawn on the Toronto account of American Construction Company, dated March 4, 1992, payable to Ziebell Water Service Products in the amount of US$1,000,000. Zeibell is a company in Chicago which is controlled by Michael and Terry Halikias. Angelo Halikias explained that he had been instructed by his brother Terry, by way of a telephone call, to prepare and sign this cheque and forward it to him, and to make it payable to Ziebell Water Service Products, because the trustees did not have a bank account. It was established that this exchange of correspondence, and the issuing of the cheque, took place shortly after the Minister first took the position that the purported contributions to the benefit plan were not genuine.

Counsel for the Appellant argued that a contribution to a benefit plan need not have been paid during the year in order to be deductible, but that it is sufficient if it has become an obligation of the employer to the custodian of the plan during the year. I accept this for the purposes of this appeal. However, the evidence falls far short of convincing me that there was a genuine debt owed by the Appellant to the Plan, or a genuine contribution made to the Plan, in any of the three years under appeal. Conspicuously absent from the evidence was any resolution either establishing the Plan, or authorizing a contribution to the Plan. Also absent was any direct evidence of the supposed promise to pay, either from a person who made the promise or from one of the trustees. The directing mind of the company clearly was that of Terry Halikias. He chose not to give evidence, but to make a business trip to Mexico at the time of the trial instead. The journal entries have no evidentiary value without some corroborating evidence of the decisions that they purported to implement. Bookkeeping entries are supposed to reflect reality; they do not create it [1] . It is probably not by coincidence that the demand letter, the reply to it, and the cheque for US$1,000,000 payable to Ziebell all came into existence soon after the Minister took the position that the employee benefit plan, and the purported contributions to it, were not genuine.

The Appellant has failed to displace the Minister’s assumption that “no amount was paid or payable as a contribution to an employee benefit plan in the 1983, 1985 or 1986 taxation years”. The appeals are dismissed with costs.

Appeals dismissed.