Danalan Investments Limited v. Minister of National Revenue, [1973] CTC 251, 73 DTC 5209

Collier, J:—This is an appeal by Danalan Investments Ltd against reassessments issued by the respondent for the years 1962 to 1965 inclusive. Another appeal, Wendilee Investments Ltd v MNR was heard at the same time as this appeal. The issues in each case are the same, and it was agreed the evidence would apply to both appeals.

For the years in question, the Minister reassessed the two appellants (hereafter referred to as “Danalan” and “Wendilee”) on the basis they were companies associated with each other and a third company, Globe Paper Box Co Limited (hereafter referred to as “Globe Paper”).

The appellants had filed income tax returns on the basis they were not associated. The respondent, in his reassessments, levied penalties under subsection 56(2) of the Income Tax Act.* [1]

The onus of proof as to association under section 39 of the Act for the years 1962 and 1963 is on the respondent because the reassessments were issued beyond the four-year period as set out in section 46 of the Act. The respondent, for those two years, must show misrepresentation or fraud in the filing of the returns, or in supplying any information under the Act. The onus of proof for the latter two years that the reassessments are wrong is on the appellants. The onus of proving liability for the penalties assessed is on the respondent.

The appellants say that the beneficial ownership of the outstanding shares in the capital stock of these two companies were, at all relevant times, as follows:

The above persons are all related to each other and to one Benjamin Wainberg, with the exception of Irwin Levinson. Benjamin Wainberg, now deceased, was the father of Danny, Larry and Joan Wainberg and the brother of Samuel Morriss Wainberg (referred to in the pleadings and evidence as Saul Wainberg) and Annie Segall.

I shall refer to other family relationships later in these reasons.

The respondent’s position is that some, if not all, of the alleged shareholders in the two companies (with the exception of Danny and Larry) were not the true owners of the shares. The respondent contends that at all material times Benjamin Wainberg held directly or indirectly at least 55 shares of Danalan, 15 shares of Wendilee and 7 shares of Globe Paper.

Counsel agreed that the appellant companies were associated for the years in question if it could be shown that Benjamin Wainberg beneficially owned at least 6% of the shares in each of the two appellants.

Globe Paper was incorporated under the law of the province of Quebec on March 3, 1933. Danalan and Wendilee were incorporated under Quebec law on December 17, 1958.

The books of the two companies record the shareholdings as contended by the appellants. A number of share certificates in support of most of the holdings alleged were filed as exhibits on behalf of the appellants. Subsection 50(2) of the Quebec Companies Act provides that a share certificate shall be prima facie evidence of title of the shareholder to the shares mentioned in it. In my opinion the presumption created by the statute has been rebutted by the respondent. I find the respondent has proved, by a preponderance of evidence, that some of these alleged shareholders (sufficient to amount to at least 6%) were not the true owners of the shares, but were mere nominees of Benjamin Wainberg.

The respondent, in order to meet the onus on him, was forced to call as witnesses a number of the alleged shareholders named above. There was some risk in this procedure, because of the family relationships, but I have concluded, generally speaking, that these witnesses’ names and signatures in the records of the companies were manipulated by Benjamin Wainberg in an attempt to avoid the brand of association under section 39 of the Act.

I shall deal firstly with the evidence relating to Danalan. Allan Wainberg is shown as the holder of 49 shares from November 17, 1960 until November 20, 1963 when he transferred 39 of his shares as follows:

During the period November 17, 1960 to November 20, 1963 Allan Wainberg is shown in the minute book as a director and secretarytreasurer of the company. His signature appears on minutes authorizing a number of real estate transactions. In the early part of the period in question he was studying or practising dentistry. He said he was asked by his father to sign the documents he did, including the share certificates. He never paid any money for the shares even though they had a nominal value of $10 each. His original 49 shares were transferred to him from Irwin Levinson. He made no payment for the shares and when he transferred 39 shares as outlined above, he received no payment.

At an inquiry held pursuant to the Income Tax Act in October 1968 he testified that any shares held by him in Danalan were beneficially owned by Benjamin Wainberg, his uncle. He testified the signing of documents was done as a convenience to the family. He was never familiar with the number of shares which he held at any given time. In cross-examination, he said he did not understand the meaning of “beneficially owned” when he gave evidence on the inquiry. He may not have appreciated the exact legal meaning, but there is no doubt in my mind he knew that he had no control over these shares. The request for the use of his name came through his father from his uncle, and in my view it is a fair and logical inference to draw that his uncle was the true owner of the shares.

Moses Nathan was related to Benjamin Wainberg by marriage. They had married two sisters. In his evidence-in-chief, he said he purchased the 6 shares in Danalan for $10 per share. He admitted he could not recall clearly the specific incident. He could not recall the equity value of the shares, and he made no investigation. On November 20, 1963 his 6 shares were transferred to Saul Wainberg. Moses Nathan could not recall receiving any money on the sale. He tried to give the impression that he had a real financial interest in Danalan, but I find his evidence unsatisfactory. On the inquiry, he testified that he had no financial interest at any time.

Saul Wainberg who on November 20, 1963, according to the records, became the owner of 15 shares in Danalan (9 from Allan Wainberg and 6 from Moses Nathan) said he was asked to become a shareholder by his brother Benjamin. He did not pay anything for the shares and testified to the effect that he did this as a convenience to his brother. His evidence is to the effect also that if Benjamin had wanted the shares transferred in any way, that would have been done. He said his sons David and Allan would have done likewise. He subsequently transferred his 15 shares to Joan Wainberg on February 15, 1965. He received nothing for the transfer, He could not even remember the circumstances of signing the transfer.

Lillian Wainberg, the wife of Saul Wainberg, according to the records, became the holder of 10 shares on November 20, 1963. This witness said her husband asked her to sign whatever documents were necessary, and she did just that. Her husband did not tell her anything about the transaction, and she personally neither paid nor received any money. In February of 1965 she transferred her 10 shares: to Joan Wainberg, the wife of Larry Wainberg. Here again, this was done at the request of her husband. None of these witnesses were ever given personal possession of the share certificates.

Mrs Annie Segall did not give evidence at the trial. She was the transferee of 10 shares from Allan Wainberg. It was agreed by counsel she need not appear at the trial; she would testify that she executed documents on the instructions of her husband. Apparently she had very little recollection of any transactions in which she is alleged to have been involved.

An affidavit was filed by Michael Garber, an advocate who, because of illness, was unable to testify at the trial. He deposed that during the year in question the minute books, stock ledgers and stock transfer books of Danalan and Wendilee were, from time to time, in the custody of his firm, and at such times all entries were made pursuant to instructions received from Mr Benjamin Wainberg.

From all the above evidence, I conclude that true or real ownership, as contrasted with registered ownership of the shares I have earlier described, was not in the witnesses who gave evidence but in Benjamin Wainberg.

I turn now to Wendilee. According to the records of this company, David Wainberg became the holder of 6 shares on November 22, 1960 and held them until November 20, 1963. David is the brother of Allan Wainberg and in 1960 was 20 years old. He did not appear at the trial. He is now a resident of Israel. It is obvious, from the evidence of his brother and his father, he became the holder of shares in the same manner as his brother Allan did in Danalan, and I make the same finding as I made in respect of Allan Wainberg. David was not the true or real owner of the shares. In my view the logical inference is that his uncle was the real owner.

Irwin Levinson, who was at one time the controller of Globe Paper, testified he purchased about 30 shares of Wendilee in 1958 and paid $10 per share. Prior to November 22, 1960 the records indicate that Levinson held 32 shares, Larry Wainberg 34 shares and Daniel Wainberg 34 shares. On November 20, 1960 it is recorded that Danny Wainberg transferred 17 of his shares to Levinson, 11 to Larry Wainberg and 6 to Daniel Wainberg.

There is no evidence that any money changed hands in these transactions. Levinson testified he disposed of his shares at a later date on the advice of Benjamin Wainberg. According to the minutes of Wendilee, he transferred his shares as follows:

I digress to point out those same minutes record David Wainberg as transferring his 6 shares to Josef Weinberg.

Levinson said that on the disposal of the shares he received more money than he had paid for them. He however kept no records of any kind. He said Benjamin Wainberg handled the transaction, and he did not negotiate with the buyers. He said payment came by cash or cheque from Benjamin Wainberg. I have considerable doubts as to the accuracy of other evidence given by this witness. I accept his evidence that he disposed of the shares standing in his name on the advice of Benjamin Wainberg, and that their disposal was handled by Benjamin Wainberg because that evidence is consistent with the evidence of other witnesses (to which I will make reference later), and it is con- sistent with the conclusion I have reached that Benjamin Wainberg was in fact the true owner of the shares.

Howard Nathan is the son of Moses Nathan and Annette Nathan. Annette Nathan was the sister-in-law of Benjamin Wainberg. He could not recall whether he paid anything for the shares he is alleged to have received, nor could he remember how many shares he acquired. At the inquiry under the Income Tax Act, he testified that, from a practical point of view, he did not consider himself to be the owner of those shares. He tried to tone down that statement on his evidencein-chief at this trial, but in my view his statement at the inquiry was the true state of affairs.

I referred earlier to the evidence of Moses Nathan, and my comments in respect of Danalan apply to his so-called shareholdings in Wendilee. His wife, Annette Nathan, testified that she did not know whether she was ever a shareholder of Wendilee. She said any documents she signed were executed at the request of her husband. So far as she was concerned, no money ever changed hands in respect of the so- called acquisition or sale of shares in this company.

I have also dealt with the evidence of Saul Wainberg, and my comments apply equally to the transactions in Wendilee in which his name appears.

Josef Wainberg was a cousin of Benjamin Wainberg. He came to Canada in 1957 and subsequently worked for Globe Paper. He said he was at one time a shareholder of Wendilee, but he did not know at the date of trial whether he was still a shareholder. The records show a transfer of 10 shares from him to Loralynn Wainberg on February 15, 1965. He did not pay any money for any shares and kept no records. I think the significant point of his testimony is that he stated Ben Wainberg requested him to dispose of the Wendilee shares, yet he received nothing on that disposition.

I need not repeat my earlier comments and conclusions in regard to Danalan (page 255). They apply equally to Wendilee.

The respondent, in my view, has shown for the years 1962 and 1963 that the appellants have made misrepresentations in the filing of their returns or in supplying information required under the Act. If the true state of affairs had been disclosed, then schedules or lists showing in detail “associated companies” ought to have been submitted with the returns filed. The appellants have declared these schedules or lists not to be applicable. They were applicable. I find the companies through their agent Benjamin Wainberg made misrepresentation for those two years, entitling the respondent to reassess beyond the four-year period, and that the reassessments are correct.

For the years 1964 and 1965 the appellants have not met the onus of showing the reassessments, in so far as they deem the companies to be associated, were wrong. Actually, the respondent, by his own evidence, has to my mind demonstrated that these companies were in fact associated.

I turn now to the imposition of penalties under subsection 56(2).* [2] In my opinion, they were validly imposed, and the respondent has met the onus of proof in that regard. The appellants here knowingly omitted to disclose information as to the association of the companies, which if it had been disclosed would have resulted in higher tax. Companies can only act through their officers, directors, servants, or agents. In the close-knit family relationships that existed here, the officers and agents of these companies must have known the true situation and ought to have disclosed it in the manner. required.

Counsel for the appellants made a further specific submission as to the penalty for the year 1965. In that year, Benjamin Wainberg, according to the records of Globe Paper, transferred 10 preferred shares to each of his two daughters-in-law and his son-in-law. The minutes of the directors record that in December of 1966 the two daughters-in-law transferred these shares to others. The respondent issued assessments in 1967 against the appellants taking the position the companies were, by reason of the transfer in 1965, associated with Globe Paper in that year. The assessor from the Department of Revenue, discussed these assessments with Benjamin Wainberg. He testified that Mr Wainberg, who otherwise seemed quite knowledgeable about financial and tax matters, expressed surprise that transfers of preferred shares, as opposed to common shares, might bring about the result of association under section 39. Apparently, as a result of that discussion, a minute of a directors’ meeting was passed cancelling these earlier transfers on the grounds that they had been done by the companies’ solicitors in error. The minute relates that Benjamin Wainberg had, in 1965, consulted his attorneys as to whether he could make a gift of preferred shares to his daughters-in-law and to his son-in-law; that the attorneys had misconstrued the memo asking for advice as instructions to make the transfer. The minute goes on to record that gift tax returns filed in 1966 wrongly included these gifts of 1965. A letter was submitted to the assessor, with these revised minutes. I digress again to point out it is noteworthy that Benjamin Wainberg dealt with the assessor in respect of these matters, even though he allegedly owned no shares in the appellant companies. Danny in Danalan and Larry in Wendilee held. the largest number of shares in those companies, but they did not have any part in these discussions. This only serves to confirm my view that Benjamin Wainberg was the true owner of shares in the appellant companies, sufficient in number that the result of association follows. Counsel submits the penalty for 1965 should be disallowed be- cause the Globe Paper transaction was an innocent one, and there was therefore no omission made knowingly, or by reason of gross negligence, in the 1965 returns. The respondent’s position is that the penalty was assessed on the same grounds as the penalties assessed for the other years, and not arising from the preferred share transfers. In my view, the respondent’s position in that respect is the correct one.

The appeals are dismissed with costs. These reasons will apply in the Wendilee appeal.