MRS Lodie Saykaly v. Minister of National Revenue, [1976] CTC 702, 76 DTC 6440

Marceau, J:—This is an appeal from a decision of the Tax Appeal Board dated January 23, 1970, whereby the appeal of the herein appellant from reassessments to income tax dated January 19, 1966, in respect of the taxation years 1958, 1959 and 1961, was dismissed.

During the years 1958 to 1961 the appellant was the president, the controlling shareholder and the beneficial owner of all the shares of a company doing business as a lingerie in Montreal and known as Francine Manufacturing Company Limited (to which I will refer hereinafter as Francine Company). In 1966 the respondent discovered that in 1958, 1959 and 1961 Francine Company’s purchases. had been fraudulently overstated by amounts of at least $5,098.50, $16,429.51 and $8,766.77 respectively, the effect of which being that the net and taxable income of the corporation had been understated by equivalent amounts. Assuming that the said unreported income had been appropriated by the appellant, the respondent issued a notice of reassessments adding the amounts to her taxable income for the corresponding taxation years. The appellant objected saying that she had no knowledge of the said understatements and had never received the amounts for which she was taxed but her objection was rejected on the ground that the additional amounts were payments within the meaning of subsection (1) of section 16 of the Income Tax Act, and had been properly included in the taxpayer’s income in accordance with subsection (1) of section 8 of the said Act. After a long hearing, the Board dismissed the appellant’s contentions and the reassessments remained undisturbed. The present appeal was then launched and at last came on for trial.

At the outset of the trial, the appellant—who was acting on her own behalf with the assistance of her son Michael Saykaly—and counsel for the respondent announced that they had reached an agreement whereby (1) the evidence before the Tax Appeal Board was to be accepted as evidence before this Court; (2) the originals of the exhibits filed at the hearing before the Board having been lost apparently when transferred to the Court in 1970, copies of some of them were to be used in their stead; and (3) the appellant would be at liberty to adduce additional evidence concerning a certain power of attorney she had allegedly given to her former husband during the years pertinent to the appeal. As the advantages of such a course were in the circumstances quite obvious, I concurred therein.

The basic facts of the case, as they have been established before the Board, have not been challenged before me. They can be summarized as follows.

The appellant, who was born in Lebanon, married one Charles Saykaly, in Jamaica, in 1940, and came to live in Canada with her husband, a businessman with interests in Montreal. In 1943 she bought a house in the town of Mount Royal for $18,000, out of which she paid $3,000 in cash which she had received as a wedding present, the balance being payable by monthly instalments. In 1957 she sold her house and moved with her children to New York City where she took up residence in an apartment on Fifth Avenue. From then on, her husband, who had retained a small apartment for himself in Montreal, was to commute between Montreal and New York every week while she, herself, would come to Montreal occasionally.

Out of the proceeds of the sale of her house, in 1957, the appellant gave her husband $20,000 which he invested in a newly constituted corporation, Francine Company, of which she became the sole beneficial shareholder and the president. Charles Salkaly, at the time, was controlling and managing many corporations in Montreal and, at least in so far as administrative control was concerned, Francine Company was only added to the others. From 1958 until 1961 the day-to-day operations of the business were undoubtedly left to him, even though the minutes of the meetings of its directors and shareholders as well as its official reports were all certified and signed by the appellant, as president.

Among the other corporations controlled and managed by Charles Saykaly was one Balfour Corporation Limited. The appellant herself was formally employed as assistant manager by that company, her salary being $5,200 annually according to her personal income tax returns. Some of the aforementioned irregularities discovered by officials of the Department in 1966 were concealed behind business transactions entered into between Balfour Corporation Limited and the appellant’s company: false or fictitious invoices were sent and charged to Francine Manufacturing Company Limited by Balfour Corporation Limited, which resulted in overstatements of the former’s purchases of material permitting overpayments to the latter.

These irregularities, incidentally, were only part of the many disclosed by the Department investigators in the management of Mr Saykaly’s own businesses as well as in the business he was administering for his wife; shortly thereafter all of them, including Francine Company, went into bankruptcy.

In these years 1958 to 1961 the appellant, who was as aforesaid residing in New York, had a checking account at the Chemical Bank New York Trust Company, which she was using to cover part of her expenses and in which her husband used to deposit sums of money. Her husband had also a bank account at the same institution in New York, which served to pay expenses of the family such as rent, telephone, etc, in addition to the one he had kept in Montreal. It was established by the investigators of the Department of National Revenue that during the year 1961 only, funds to the amount of $37,391.16 were transferred from Mr Saykaly’s Montreal bank account directly to the appellant’s bank account in New York, independently of the transfers of funds amounting to approximately $64,700 the husband had made from his account in Montreal to his own account in New York. The investigators were even able to positively identify funds extracted from Francine Company and trace them to the husband’s Montreal bank account, from which they had been transferred to either the latter’s or his wife’s bank account in New York.

Those are the undisputed facts on which the respondent based his reassessments.

The appellant’s defence before this Court is the same as the one she relied on before the Board. It is based on two allegations. First, she contends that she never appropriated herself the proceeds of the fictitious payments made by Francine Company nor did she derive any direct benefit therefrom. Second, she asserts that the management of her business was left entirely to her husband and she was not aware of anything that was being done about it. All the documents she signed with respect to the affairs of the company, and even her personal income tax returns, were prepared by her husband or by her husband’s lawyer or accountant and handed over to her for signature. Since she was placing her trust in her husband and had herself no business experience whatsoever, she always complied and signed the documents without asking any questions as to their true meaning. Both allegations were rejected by the Member of the Tax Appeal Board who heard the appeal.

I am unable to disagree with that finding as to the first of the two allegations. The evidence adduced by the respondent, which I have reviewed with great care, is too consistent to be put aside by the simple statement of the appellant that her husband was just supporting her. As already explained, during the years when the appellant was residing with her children in New York, most expenses of the family were paid by her husband out of a bank account he had in his own name, in New York. And yet, in the year 1961 only, funds to the amount of $37,391.16 were transferred from Mr Saykaly’s Montreal bank account to the appellant’s personal bank account, and some of these funds could be identified as funds extracted from Francine Company. The respondent could not, in the circumstances, be more specific and in the absence of any valuable explanatory factor or proof to the contrary, the inference that the appellant derived direct benefit from the proceeds of the fictitious payments and for the whole amounts of these payments cannot be escaped. The Minister could rely on subsection 8(1) of the Act for his reassessments, as that subsection then read as follows:

8. (1) Where, in a taxation year,

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction.

(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on -a shareholder by a corporation

otherwise than

[exceptions (i), (ii) and (iii) not relevant]

the amount or value thereof shall be included in computing the income of the shareholder for the year.

The appellant’s second allegation, however, must be dealt with quite differently. I am more inclined to believe in its truthfulness than was Mr Davis of the Tax Appeal Board. The evidence adduced before me at the trial, which was given by the appellant’s son and by her former husband’s legal counsel and auditor, certainly failed to prove that Charles Saykaly had been given a formal power of attorney to act in his wife’s name, but nevertheless it gave some weight to the appellant’s testimony in that respect. The management of her business was certainly left to her husband and she, herself, was not responsible for the wrongdoings which were committed. I am ready to believe her when she says she was not aware of what was going on with her company. I do not think, however, that my disagreement with Mr Davis on that point could lead me to a conclusion different from that he finally reached.

It is to be first noted that the point may have a certain bearing only as regard the question of whether, despite the expiry of the 4-year period prescribed in paragraph 46(4)(b) of the Act, the Minister could proceed in 1966 with reassessments for the years 1958 and 1959. I said that in my view the funds of Francine Company up to the amounts represented by the fictitious overpayments had been appropriated for the benefit of the appellant and had actually been paid to her. It follows that, in not declaring these amounts in computing her income for the years 1958 and 1959, the appellant made a “misrepresentation” within the meaning of paragraph 46(4)(b) of the Act. I think that her “misrepresentation” was innocent, she not being aware of it, but it has been held repeatedly that a “misrepresentation”, though innocent, justifies the Minister in proceeding with a reassessment at any time (MNR v M Taylor, [1961] CTC 211; 61 DTC 1139; MNR v L H Appleby, [1964] CTC 323; 64 DTC 5199; MNR v Foot, 66 DTC 5072) as long as, according to Mr Justice Pratte’s decision in MNR v Bisson, [1972] CTC 446; 72 DTC 6374, the error committed by the taxpayer could be attributable to negligence on his part. It is obvious that a normally wise and cautious taxpayer would not have acted the way the appellant did. She claims that her behaviour was understandable, that it is normal for a wife to obey and trust her husband, “which is a rule of public social order” adds her counsellor. I do not think that the so-called rule could prevail over the basic rules of normal prudence so as to allow a married woman to go into business with her husband, and then keep on signing official papers as president of a company, accepting a salary as general manager of another, drawing personal cheques for many thousand dollars on a bank account supplied by income derived from business operations in which she is officially involved, and finally attesting personal income tax returns, without even bothering to look into what is going on or to try to understand what she is asked to certify. If such behaviour is socially understandable, which I doubt, it is certainly not excusable legally.

For these reasons, I think that the reassessments could be issued notwithstanding paragraph 46(4)(b) of the Act and that they were well founded in fact and in law. The appeal must therefore be dismissed. The respondent is entitled to his costs.