Nelson v. R., [1998] 1 CTC 2008, [1997] DTC 1253

Hamlyn T.C.J.:

The Appellant, Doris Merrill Nelson, is appealing reassessments of the Minister of National Revenue (the “Minister”), dated February 20, 1996, whereby the Minister recalculated the Appellant’s employment income for the 1989, 1990, 1991, 1992, 1993 and 1994 taxation years. In reassessing the Appellant for the 1989, 1990, 1991, 1992 and 1993 taxation years, the Minister also reassessed late-filing penalties of $1,224.00, $1,528.00, $1,742.00, $2,249.00 and $2,222.00 respectively pursuant to subsection 162(1) of the Income Tax Act (the “Art”). In addition, the Appellant is also appealing Notices of Assessment (numbers 02229 and 02231) dated August 1, 1996, whereby the Minister assessed the Appellant in the amount of $26,036.50 and $23,251.25 in respect of transfers of property to the Appellant within the meaning of section 160 of the Act.

Issues to be Decided

The issues are whether:

(a) the Minister properly calculated the Appellant’s employment income for the taxation years 1989 to 1994;

(b) the Minister properly assessed the Appellant for late-filing penalties in accordance with section 162 of the Act; and

(c) the Appellant is liable to pay the amounts of $26,036.50 and $23,251.25 pursuant to section 160 of the Act in respect of the transfers of the Delta Property and the Kelowna Property (non-arm’s length transfer of property) to the Appellant.

The Evidence

The Appellant represented herself. She chose not to give evidence herself and called one witness-in-chief (her spouse) and one witness (one of the owners of Lambeth Holdings Ltd. (“Lambeth”)) in rebuttal.

The Respondent was represented by two counsel and called six witnesses.

The Appellant’s evidence was narrowly focussed and did not address most of the Minister’s pleaded assumptions.

(a) Employment Income

The Minister’s Position

The Minister submits by way of pleaded assumptions that in each of the Appellant’s 1989 to 1994 tax returns, the Appellant reported $5,000.00 of employment income from Nationwide Motors Corporation (“Nationwide”). However, the Minister assumes that during the 1989 to 1994 taxation years, the Appellant was not an employee of Nationwide but instead an employee of Lambeth.

The Minister further assumes that during the taxation years in question, the Appellant provided accounting and bookkeeping services to Lambeth at all material times. The Appellant used equipment provided by Lambeth in carrying out her duties. The Appellant did not provide any other accounting and/or bookkeeping services to any other organizations or places of business other than Lambeth. The Appellant belonged to the medical, dental and life insurance plans of Lambeth at all material times with such plans being only available to employees of Lambeth.

The Appellant’s payment from Lambeth was based on a specific predetermined periodic amount. Further, for the 1989 to 1994 taxation years, Lambeth paid the Appellant vacation pay based on the amounts set out below. The Appellant earned the following employment income from Lambeth:

Nationwide did not include in any of its 1989, 1990, 1991, 1992, 1993 or 1994 T2 tax returns any income from Lambeth or any other employer of the Appellant. Nationwide did not claim any expenses for wages or salary paid to the Appellant for any of the taxation years in issue. Further, Nationwide did not have an employer remittance account with the Minister and did not make any remittances with respect to employee source deductions for the Appellant for any of the taxation years in issue. Nationwide did not issue any T4 slips to the Appellant for any of the taxation years in issue.

The Appellant’s Position

The Appellant maintains she was not an employee of Lambeth. Her only employment or contractual relationship was to Nationwide and Nationwide provided all services to Lambeth.

Analysis

Section 3 of the Act contains the basic rules for determining income for a taxation year for the purposes of Part I of the Act. The relevant parts read as follows:

The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s income for the year determined by the following rules:

(a) determine the total of all amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property.

As can be seen each category of income in subsection 3(a) is referred to as “income from a source” whether inside or outside of Canada. The named sources of income include income from employment.

Employment relationship as defined requires a contract of service. In order that there should be an employment, the relationship of employer and employee must exist.

The Federal Court of Appeal reviewed the various tests of employment in Wiebe Door Services Ltd. v. Minister of National Revenue, (1986), 87 D.T.C. 5025 (Fed. C.A.). MacGuigan J., speaking for the Court, discussed the various tests that had been applied over the years and adopted a variation of the British Privy Council decision in Montreal (City) v. Montreal Locomotive Works Ltd., (1946), [1947] 1 D.L.R. 161 (Canada P.C.). In that decision, the Privy Council cited four tests: the control test, ownership of tools test, chance of profit test and risk of loss test. These last two tests are essentially similar to the economic reality test. The Federal Court of Appeal summarized the applicable tests under the headings of (a) control test, (b) entrepreneur test and (c) organization test. In relation to the tests, no single test is conclusive and all the evidence must be looked at.

The decision of Weibe Door Services was cited by the Federal Court of Appeal in Moose Jaw Kinsmen Flying Fins Inc. v. Minister of National Revenue, (1988), 88 D.T.C. 6099 (Fed. C.A.), as the definitive authority on the issue of the test of employment.

Thus, the outcome of this issue depends on the facts adduced at trial. In determining the Appellant’s employment income, resort should be made to the decision in Weibe Door Services and the guidelines provided in that judgment in relation to the test of employment. The burden of proof to disprove the assessment is on the Appellant and as such she must adduce evidence to show that she was not an employee.

As a matter of pleading and evidence, the Minister’s pertinent assumptions not addressed in evidence are assumed to be correct.

The essence of the Appellant’s evidence by way of her spouse was that she was not an employee. Moreover, in rebuttal, Mr. Kassam, one of the owners of Lambeth, also said she was not an employee. Both of these witnesses had a vested interest in the positions they advocated. As stated, the Appellant did not give evidence.

This raises the issue about the necessity of the Appellant giving evidence. Judge Dussault of this Court in Rouleau v. Canada (June 1, 1992), Doc. 91 -1581 (IT) (T.C.C.) reviewed this question, the failure of a party to give evidence, at page 5 of the official English translation:

[T]he treatise by Sopinka and Lederman entitled, “The Law of Evidence in Civil Cases” [1] J concerning the absence of evidence which appears essential to the resolution of a dispute and which reads:

In Blatch v. Archer [2] Lord Mansfield stated:

It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.

The application of this maxim has led to a well-recognized rule that the failure of a party or a witness to give evidence, which it was in the power of the party or witness to give and by which the facts might have been elucidated, justifies the court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed.^ [3]

I conclude the omission of the Appellant’s evidence in this case is crucial and decisive, especially in view of the pertinent assumptions that were pleaded and not addressed.

From all before the Court I find the Appellant provided bookkeeping and accounting services to Lambeth. The Appellant belonged to the medical, dental and life insurance plans of Lambeth. The medical, dental and life insurance plans were employee plans and the Appellant was described in the plan documentation as an employee with an employee number. The place of work and the equipment was that of Lambeth. The Appellant worked at Lambeth for at least twenty days per month on flexible hours and the hours worked were long. The payment made for the services rendered by the Appellant to Nationwide was specific and predetermined. For the period in question no T4s were issued to the Appellant by Lambeth or Nationwide. No written contract for the period in question existed between Lambeth and Nationwide. No invoices were rendered by Nationwide to Lambeth.

The Appellant in her function was described on several documents as a long standing employee of Lambeth and witnesses described her as the comptroller for Best Western Kings Inn (Lambeth). She also was a signing officer for Lambeth. Ed Prygiel, a witness for the Respondent, stated that during an earlier interview with the Appellant, the Appellant said the monies paid to Nationwide by Lambeth on her behalf were used for household expenses and she further admitted she was an employee of Lambeth.

The services she provided to Lambeth were precise and specific and she was the sole provider of the services. The services were continuous and long standing, she had a position of authority (comptroller and a signing officer) and was held out to the public as being an employee of Lambeth.

I conclude one of the purposes of Nationwide for the years in question was to have the Appellant work for Lambeth through Nationwide so that the Appellant could avoid the payment of income tax on employment income.

Income flowing from Lambeth to Nationwide does not preclude a finding of an employer-employee relationship. All the factors of the relationship must be examined to determine the true legal essence of the relationship.

From the evidence, I conclude that the Appellant was integrated into the operation of Lambeth. The monies paid for her services to Nationwide were fixed and the Appellant did not incur expenses nor did she bear any financial risk. The work was specific, defined and repetitive and she held the office of comptroller for the hotel owned by Lambeth. Moreover, she held the office for several years.

I conclude Lambeth was the employer of the Appellant as an employee and the Appellant worked under a contract of service.

Employment Conclusion

The Minister properly calculated the Appellant’s income for the 1989 to 1994 taxation years by including in the Appellant’s income her employment earnings from Lambeth.

(b) Late Filing Penalties

The Minister’s Position

The Minister submits that the Appellant late-filed her 1989, 1990, 1991, 1992 and 1993 tax returns on April 3, 1995. Further, the Minister submits that the Appellant did file her 1994 tax return on or before April 30, 1995 and as such no late-filing penalty was assessed for the 1994 taxation year. The Minister submits that the Appellant owes the following amounts in late-filing penalties:

The Appellant’s Position

The Appellant offered no pleading or relevant evidence on the issue of penalties.

Analysis

Section 150 of the Act provides the authority under which taxpayers, whether taxable or not, are required to file tax returns under Part I of the Act. More specifically, subsection 150(1) sets out the time within which various taxpayers are required to file their returns of income. Failure to file an annual return as and when required by subsection 150(1) renders the taxpayer liable for a penalty under section 162 of the Act. Subsection 162(1) reads as follows:

Every person who fails to file a return of income for a taxation year as and when required by subsection 150(1) is liable to a penalty equal to the total of

(a) an amount equal to 5% of the person’s tax payable under this Part for the year that was unpaid when the return was required to be filed, and

(b) the product obtained when 1% of the person’s tax payable under this Part for the year that was unpaid when the return was required to be filed is multiplied by the number of complete months, not exceeding 12, from the date on which the return was required to be filed to the date on which the return was filed.

Penalty Conclusion

The returns for the 1989 to 1993 taxation years were not filed with the Minister as and when required by subsection 150(1) of the Act and the Appellant is liable to pay late-filing penalties for the 1989 to 1993 taxation years pursuant to subsection 162(1) of the Act.

(c) Non-Arm’s Length Transfer of Property

The Minister’s Position

(i) Delta Property

The Minister assumed that at all material times, Robert Hannes Nelson (the “Transferor”) was the spouse of the Appellant and that at all material times, the Transferor and the Appellant were not dealing at arm’s length. Further the Minister assumed that:

(1) On April 11, 1980, Nationwide, a corporation controlled by the Transferor, purchased the Delta Property.

(2) On February 5, 1981, the Appellant and the Transferor purchased the Delta Property (a stated fair market value (“FMV”) of $130,000.00) from Nationwide for consideration of one dollar

(3) On June 12, 1992, the Appellant and the Transferor, as joint tenants of the Delta Property, obtained a mortgage with the Royal Bank of Canada in the amount of $200,000.00.

(4) On October 26, 1993, the Appellant and the Transferor, as joint tenants of the Delta Property, obtained a further mortgage from the Royal Bank in the amount of $42,000.00.

(5) On July 4, 1994, the Appellant and the Transferor, as joint tenants of the Delta Property, obtained a further mortgage from Time Realty Mortgage Corporation in the amount of $25,927.00.

(6) On April 20, 1995, the Appellant and the Transferor, as joint tenants of the Delta Property, obtained a further mortgage from Time Realty Mortgage Corporation in the amount of $12,250.00.

The Minister assumed that on or about July 25, 1995, the Transferor transferred his 50% interest in the Delta Property to the Appellant for the consideration given by the Appellant of one dollar ($1). At the time of the transfer, the FMV of the property was at least $320,000.00 and, at the time of the transfer, the FMV of the Transferor’s interest in the Delta Property was at least $26,036.50. Further, the aggregate of all amounts that the Transferor was liable to pay under the Act in respect of the taxation year in which the Delta Property was transferred or any preceding year was at least $26,036.50.

(ii) Kelowna Property

The Minister submits that at all material times, the Transferor and the Appellant were not dealing at arm’s length. Further, on or about November 5, 1992, the Kelowna Property was purchased for $230,000.00 by the following persons:

(a) The Transferor and the Appellant as joint tenants as to an undivided '%oth interest.

(b) Garth Nelson as to an undivided 'Aoth interest.

(c) Cindy Davy as to an undivided '/20th interest.

On or about October 24, 1992, a five year mortgage to purchase the Kelowna Property was obtained by the above mentioned parties from CIBC Mortgage Corporation in the amount of $207,050.00 at 9.25% interest. The Minister submits that Garth Nelson is the son of the Transferor and the Appellant and that Cindy Davy is the daughter of the Transferor and the Appellant.

On or about January 7, 1994, Cindy Davy transferred her '/20th interest in the Kelowna Property to the Transferor and the Appellant for consideration of one dollar ($1). The value of the Kelowna Property was reported as $230,000.00 and as a result of the transfer, the interests in the Kelowna Property was on January 7, 1994:

(a) The Transferor and the Appellant as joint tenants as to an undivided /20th interest.

(b) Garth Nelson as to an undivided ’/zoth interest.

On or about July 25, 1995, Garth Nelson transferred his ’/20th interest in the Kelowna Property to the Appellant for consideration of one dollar ($1). Further, on or about July 25, 1995, the Transferor transferred his /4oth interest in the Kelowna Property to the Appellant for consideration of one dollar ($1). At the time of the transfer, the FMV of the property was at least $275,000.00. The Minister submits that at the time of the transfer, the FMV of the Transferor’s interest in the Kelowna Property was at least $23,251.25.

The Minister assumed that the aggregate of all amounts that the Transferor was liable to pay under the Act relating to his 1985, 1986, 1987, 1990, 1991, 1992, 1993 taxation years was in excess of $82,000.00 on the date that the Transferor transferred his interest in the Delta Property and the Kelowna Property to the Appellant. Further, the Transferor’s appeals with respect to his 1985, 1986, 1987, 1989, 1990 and 1991 taxation years have all been dismissed by the Tax Court of Canada.

Non-Arm’s Length Transfer of Property

The Appellant’s Position

As with the employment issue, the specifics of the assumptions were not addressed and the evidence was narrowly focussed. The essence of the Appellant’s position as presented was:

(i) at all times, the properties in question were held by the Transferor in trust for the Appellant; and

(ii) there was no tax liability of the Transferor when the transfers were made by the Transferor to the Appellant.

Analysis

(i) The Family Trust Issue

There was no written trust arrangement, nor was there any independent evidence to justify a conclusion of a family trust.

Most of the Minister’s assumptions reviewed herein before were not addressed in evidence by the Appellant and those assumptions are pertinent to the issue of a family trust. The only testimony was that of the Transferor. Only latterly was it stated and argued that there was a trust arrangement. On this issue, as concluded, the absence of the Appellant’s evidence is crucial.

The non-rebutted assumptions indicates the properties throughout were dealt with specifically by the Appellant and the Transferor without the hint of a trust. The properties were dealt with as the vested property of both the Appellant and the Transferor including mortgage purposes.

Family Trust Conclusion

This Court concludes the properties were not held in trust by the Transferor in trust for the Appellant.

Analysis

(ii) The Transferor Tax Liability at the Time of the Property Transfers

The Transferor’s tax liability was assessed by the Minister, objected to by the Transferor, confirmed by the Minister, appealed to the Tax Court of Canada by the Transferor. The appeals were dismissed by the Tax Court of Canada. Further, appeals were brought by trial de novo to the Federal Court of Canada. The Respondent moved to have the Statement of Claim in those appeals struck out. Three weeks later the Transferor transferred the properties to the Appellant. Shortly thereafter, the Transferor sought a bankruptcy application.

The Transferor then sought a T1 Adjustment Request to have his taxation years in question reassessed in part on the basis that he had claims for losses that would be allowable as business deductions because he had, in each of those years, business endeavors that had in his words “a reasonable expectation of profit” and, further, for the years in question he was entitled to claim a spousal tax credit.

Revenue Canada has not responded to the T1 Adjustment Requests. Given the history of these appeals for both the Appellant and the Transferor, the voluminous material that has been filed, the various positions adopted by the Appellant and the Transferor, I conclude there will be no response. Needless to say, throughout, the Transferor’s tax liability was and still is fixed. This includes the period of time when the properties in question were transferred.

Property Transfer Conclusion

The Minister correctly assessed the Appellant in accordance with section 160 of the Act as the Transferor transferred property to the Appellant (non-arm’s length transfer) for inadequate consideration at the time the Transferor was liable to pay an amount under the Act.

Decision for all Appeals Herein

The appeals of the Appellant for the reassessments of the Minister dated February 20, 1996, for the taxation years 1989, 1990, 1991, 1992, 1993 and 1994 are dismissed and the appeals of assessment numbers 02229 and 02231 dated August 1, 1996 in respect of transfers of property to the Appellant within the meaning of section 160 of the Act are dismissed.

The Respondent is entitled to one set of costs including only one counsel fee.

Appeal dismissed.