Precision Automotive Company Limited v. Minister of National Revenue, [1972] CTC 2349, 72 DTC 1283

A J Frost:—This appeal is from an income tax reassessment dated March 3, 1970 (varying a previous reassessment dated September 19, 1968) wherein a tax of $15,507.50 was levied in respect of the appellant’s 1964 taxation year, and was heard at Toronto, Ontario on October 25 and 26, 1972 by the Tax Appeal Board as it was then constituted.

The appellant company was incorporated under the laws of the Province of Ontario and has carried on the business of rebuilding and sale of automotive parts since 1956. The said taxation year commenced April 1, 1963 and ended March 31, 1964. At the hearing it was agreed by counsel for the parties that the appeal of Samuel N Shapiro, the controlling shareholder of the appellant company, would be heard at the same time on common evidence.

As at March 31, 1964 the balance sheet of the appellant company shows in summary form the following position:

ASSETS:

Sundry assets				$490,766.36
LIABILITIES:
Current debts (including
outstanding cheques)				267,738.40
Shareholders’ loans				48,252.44
CAPITAL:
Authorized	Issued
12,988	6 common shares
	P.V. $1.00	$	6.00
36,000	— class A Pfd.
1,000	1002 class B Pfd.
	P.V. $1.00		1,002.00
		$ 1,008.00
Earned Surplus		173,767.52		174,775.52
				$490,766.36

The balance sheet was audited and certified correct by Mintz and Mintz, Chartered Accountants. Saul Mintz did the senior work and, as a partner of the firm, was responsible for the balance sheet certificate.

At all relevant times during the 1964 taxation year, the issued class B preferred shares were held as follows:

167 shares — Saul Mintz

167 shares — Ernest Dicker

1 share — Ettie Wosnick as nominee for Saul Mintz

1 share — Sari Dicker as nominee for Ernest Dicker

666 shares — Samuel N Shapiro (if not in his name, beneficially owned)

1002 total shares authorized and issued

For several years Messrs Shapiro, Mintz and Dicker had worked closely together in directing the affairs of the appellant company and, for all practical purposes, constituted a board of directors, although -neither Mintz nor Dicker were in fact appointed directors, preferring to work through Ettie Wosnick and Sari Dicker as nominees. In accordance with a long-established practice, the three directors caused amounts to be credited to their shareholder loan accounts for services rendered. These amounts were approved by the official board of directors of the company and charged to its earnings, and T4 slips were issued accordingly. What happened in the 1964 taxation year was no different from the practice followed in previous years. At the end of the 1964 taxation year, the accounts of Mintz and Dicker reflected the following credit balances:

which balances formed part of the item designated on the balance sheet as shareholders’ loans and amounting to $48,252.44.

Sometime in 1964 or early 1965, serious differences developed between Shapiro, Mintz and Dicker, and it was decided to break up their long-established working arrangement, the details of which are not relevant to any question in issue before the Board.

As a result of their personal disagreements, Saul Mintz, Ernest Dicker, Ettie Wosnick, and Sari Dicker agreed to transfer their holdings of preferred shares to Samuel Shapiro, and it was further agreed that the amounts owing by the appellant company to Saul Mintz and Ernest Dicker would be assigned by them to Samuel Shapiro. On October 29, 1965 the transfer of shares was registered and, at a later date, the indebtedness was transferred by journal entry to the account of Samuel Shapiro by the new auditor, Mr Frank Risman, a chartered accountant. Mr Risman was apparently well acquainted with the details and made the necessary entries on the books of the appellant.

Although the story is uncomplicated, negotiations relating to the sale of the shares and the assignment of the loans took many months. Many documents were prepared. The evidence adduced indicated that the first few drafts prepared by Mr H F Goulding, QC were unacceptable to Mintz and Dicker as they showed the true balances owing to them, which they wanted assigned for the sum of $1 for the obvious purpose of avoiding the incidence of taxation. The final documentation split the deal into two parts, resulting in two agreements, one covering the purchase of the shares and the other the assignment of the amounts owing by the appellant company to Mintz and Dicker. The second document was referred to throughout the hearing as the secret or escrow document. The secret agreement assigned the balances in the sum of $9,246.14 owing to Mintz and Dicker for the sum of 1.:

The question before the Board is whether the amounts credited by the appellant company in its 1964 taxation year to the accounts of Mintz and Dicker represent income in their hands under the appropriate provisions of the Income Tax Act or are in fact meaningless bookkeeping entries.

The Board accepts the treatment of entries reflected in the books of account by Saul Mintz, CA and Frank Risman, CA as being true and correct, both having dealt with them at different times. It cannot give much weight to the testimony of Mr Mintz, the former auditor of the company, with respect to what transpired during the protracted negotiations following his discharge. The Board is inclined, however, to accept the testimony of Mr Goulding at full value. Under relentless and merciless cross-examination, Mr Goulding’s testimony remained clear and unequivocal and left no doubt whatsoever in the mind of the Board that the secret document was filled with deceptions and untruths, a fact which, in the opinion of the Board, reflects on the credibility of both Mintz and Dicker.

Having considered all the evidence as a whole, I find both in fact and in law that the amounts paid or credited to Mrs Wosnick and Mrs Dicker were in fact earned by Mintz and Dicker, and that the $10,000 in bonuses ($5,000 each) credited to Mintz and Dicker on the books of the appellant company was for services rendered, pursuant to an understanding between the three principal shareholders; and that the sum of the balances standing to the credit of Mintz and Dicker as of March 31, 1964 was $9,246.14, which amount was part of the $130,000 paid to Mintz and Dicker in the final settlement. In transferring the said credits to Shapiro, no benefit was conferred on him by the company within the meaning of section 8 of the Income Tax Act.

I further find as a fact that the escrow or secret agreement, wherein loans payable to Mintz and Dicker were settled for $1, did not reflect what really happened and was obviously designed to confuse and distort the incidence of taxation payable on the bonuses recorded on the books of the appellant company for its 1964 taxation year to the credit of Saul Mintz and Ernest Dicker.

Appeal allowed in full.

Appeal allowed.