Guy Tremblay:—This case was heard in Montreal, Quebec, on May 29, 1980.
1. Points at Issue
1.1 Based on the Notice of Appeal the points are:
(a) Whether the amount of $16,610 received by the appellant in 1975 from Green Acres Sod Farms Ltd (hereinafter called the company) is a bonus (as the respondent contends), or a part of the purchase price of the appellant’s shares in the company (as the appellant contends);
(b) whether the sum of $4,591.15 paid by the said company to the Department of National Revenue to pay the tax of the appellant is income for the appellant.
1.2 From the application filed by the respondent in virtue of subsection 174(3) of the Act:
At the presentation of the application in March 1980 made by the respondent to join Green Acres Sod Farms Ltd and Orlando Foglietta (hereinafter called the third parties), concerning the year 1975, the Board allowed the consent of the third parties. The application, however, included a common question to be debated among the parties including the third parties. This common question reads as follows:
Whether the amount of $16,610 paid by Green Acres Sod Farms Limited to the appellant, on the 30th of January, 1975, was in consideration of the shares transferred to Mr Orlando Foglietta with the consequence that:
(i) this amount would constitute a capital payment in the appellant’s hands and would therefore be taxable as a capital gain pursuant to sections 3, 38 and 39 of the Act;
(ii) this amount would have been paid by the company for the benefit of a shareholder, namely Mr Orlando Foglietta, the deduction of which would be prohibited since this expense would not have been incurred by the company for the purpose of gaining or producing income and the deduction of this amount would therefore be prohibited pursuant to section 18(1)(a) of the Act;
(iii) the amount would constitute a benefit or advantage conferred on Mr Orlando Foglietta shareholder of the said company and purchaser of the appellant’s shares, pursuant to sections 15(1)(c) and/or 56(2) of the Act;
Or whether this amour: of $16,610 paid by the company Green Acres Sod Farms Limited to the appellant, on January 30, 1975, was paid on account of salary or as a bonus with respect to the appellant’s employment with the said company with the consequence that:
(i) this amount would constitute taxable income from employment received during the 1975 taxation year by the appellant as salary or other remuneration pursuant to section 5 of the Act;
(ii) this amount would be properly deductible by the company as an expense incurred by it during its 1974 and 1975 taxation year for the purpose of gaining or producing income pursuant to section 18(1)(a) of the Act.
1.3 However, the point concerning the $4,591.15 is not part of the above common question. This was also heard before the Board.
2. Burden of Proof
On the common question, the appellant and the third parties have the burden of proof to contradict the issued reassessment in the case of the appellant, and the deemed reassessment in the case of the third parties. On the point of the $4,591.15, the appellant has the burden of proof and must contradict the assessment.
3. The Facts
A. Concerning the common question: $16,610
3.01 The appellant and the third party Orlando Foglietta (hereinafter called Orlando) were, until January 1975, the two shareholders (50% each) of the company incorporated in 1957.
3.02 The main object of the company is:
to purchase, cultivate and improve grasses of all kinds for re-sale to landscapers, municipalities and others.
as it appears from the letters patent (Exhibit A-4).
3.03 In January 1974, a certain event occurred which provoked a conflict of personality, disagreement in management, and consequently the decision of the appellant to sell his shares or to liquidate the company.
3.04 According to Orlando, some time in August or September, the appellant offered his shares to him for $90,000, giving him 10 days to accept. Orlando, however, was in no financial position to accept.
After many discussions, lasting until the end of January, after meetings with a lawyer, the appellant finally accepted the offer of Orlando.
The offer dated January 31, 1975 (Exhibit A-1) reads as follows:
Dear Mr Maioni:
On behalf of myself and an associate, I hereby offer to purchase the 1,999 common shares of the above Company registered in your name and the one common share of your company registered in the name of Nicholas Maioni for a price of $175,000 to be paid cash on acceptance of this offer and upon the further terms and conditions contained in this letter, namely:
1. The seller shall be entitled to withdraw from the Company his share of the “Bonus Payable” on this date the amount of $16,610.
2. The seller shall be liable for 50% of reassessment only of corporation tax payable on income for 1974 and any preceding years. Any tax reassessment levied that will appreciate the assets shall not be shared by the seller. Apart from said reassessment liability, the seller will not be responsible for any further obligations with respect to buyer or the Company.
3. The seller will not directly or indirectly enter into the sod or sod farm business for a period of 5 years in the Province of Quebec nor assist any producer located elsewhere to compete with the Company within the Province of Quebec.
4. You, the seller, represent to the best of your knowledge that the balance sheet, statement of source and application of funds and statement of earnings prepared as at December 31, 1974 and certified by Messrs Mallette & Cie, the auditors of the Company and attached hereto, present fairly the financial position of the Com- pany as at that date and in a manner consistent with preceding years and that such statement represents a true statement of all receivables arising from the business and that the liabilities represent a true statement of all liabilities arising from the business and further that since the date of said statements there has been no liabilities incurred on behalf of the Company other than normal operating expense.
5. For purposes of information Mr Dominic Girolamo has associated himself with me for this purchase herein proposed.
If the foregoing meets with your approval, please sign the enclosed copy in the space provided whereupon it shall be deemed to constitute an Agreement of Sale of your interest in the Company above-mentioned.
Yours truly,
(Signed)
Orlando Foglietta
Accepted:
(signed)
Gabriel Maioni
3.05 This offer was received and accepted by the appellant in Orlando’s lawyer’s office on January 31, 1975.
The same day, the appellant received a cheque (Exhibit TP-1) in the amount of $16,610 on the back of which, one can read “Bonus payable”. This refers to the 1st numbered paragraph of the offer in Exhibit A-1.
3.06 The offer (Exhibit A-1) refers, in the fourth numbered paragraph, to financial statements of the company prepared as at December 31,1974 and certified by the accounting firm Mallette & Cie. They were filed as Exhibit A-2, and dated January 14, 1975. In the balance sheet one can read in the currrent liabilities “Bonus payable $33,220”.
3.07 In the minutes of a meeting of directors of the company on February 25, 1975 (Exhibit A-5) it can be read:
Considering that Mr Orlando Foglietta offers to reimburse $35,000 of his salary for the year 1974.
Be it resolved that an amended financial statement for the year ended December 31, 1974 be prepared and the necessary fiscal returns be amended (T-2, C-16, T-4 and TP-4) accordingly.
A request will be made that an amended financial statement be audited.
3.08 The said amended financial statement filed as Exhibit A-3, shows in the balance sheet that there is no more “bonus payable” in the current liabilities. In the current assets, however, one can read “advance to a director $1,780”.
In the expense of the statement of earning there is $35,000 less than in the former statement (Exhibit A-2). The “earning before income tax” shows $35,000 rather than nothing in the former statement.
3.09 Orlando explained that this decision to reimburse $35,000 of salary to the company was to give more liquidity to the company.
3.10 According to William Abdalla, CA, who testified as an expert, the balance sheet in the amended financial statement shows that the “bonus payable” has been cancelled, and that Orlando has taken on his personal responsibility the total amount of $33,220. This amount indeed seems to have been debited (or credited) against the $35,000 and the remaining $1,780 as “advance to a director” in the current assets.
3.11 This interpretation seemed to support the appellant’s version to the effect that the amount of $16,610 was not given as “bonus payable”, but as part of the sale of the shares. The fair market value of the sold shares indeed was not $175,000, according to him but $197,735. The third parties’ counsel objected to any evidence contradicting the accepted offer (Exhibit A-1) on the basis of article 1234 of the Civil Code of the Province of Quebec. The evidence was permitted under the reserve of the later decision concerning the objection.
3.12 On one hand the appellant said that the amount of $197,735 was the result of the verbal agreement preceding the written agreement $175,000, plus half of the working capital on December 31, 1974, $22,735 ($45,470 + 2). The appellant said that on January 30, 1975, Orlando phoned him: “take it or leave it”.
On the other hand, Orlando said that the offer (Exhibit A-1) was drafted by the appellant. Orlando said that the “bonus payable” was also decided by the appellant. In the “Journal” the entry of the “bonus payable” was in the appellant’s handwriting. Orlando also said that the appellant who was the president of the company decided by himself to give a bonus when he thought it was time to have a bonus.
3.13 Concerning Orlando’s decision to reimburse $35,000 of salary, Mr Mallette said that the amended balance sheet gives the same final accounting result as if the “bonus payable of $33,220” had been maintained in the current liabilities and that an “advance to a director” of $35,000 had been included in the current assets.
3.14 Mr Mallette, confirming Orlando’s testimony, said half of the bonus payable of $16,610 was not cashed by Orlando in 1975, but applied against the debt of $35,000. The balance due less $1,780 was paid on October 17, 1975 to the company by Orlando.
3.15 Both the appellant and Orlando had received an amount of $1,780 in January 1975.
3.16 In filing his 1974 income tax return, the appellant calculated his capital gain on the sale of the shares on the basis of a total consideration of $191,610 ($175,000 + $16,610) rather than the stipulated consideration of $175,000. The amount of $16,610 was not included as income, but as “bonus”.
The respondent by reassessment on August 24, 1978 calculated the capital gain on $175,000, and included the amount of $16,610 as income.
B. Concerning the amount of $4,591.15
3.17 No taxes (Federal or Quebec) were withheld by the company on the amount of $16,610, nor on the amount of $1,780 paid in January 1975.
3.18 In June, the company through its lawyer asked the appellant to pay the amount of $4,591.15 (Exhibits R-5 and R-6). The appellant said he ignored the letters.
3.19 The company in November 1975 paid to both departments of Revenue (Federal and Quebec) the total amount of $4,591.15 and the company sued the appellant to recuperate the money. The case is not yet settled in civil court.
3.20 The respondent by reassessment on August 24, 1978 included the amount of $4,591.15 in the income of the appellant.
C. Notice of Appeal
3.21 In November 1978 the appellant filed his Notice of Appeal before the Tax Review Board.
4. Law— Precedent Cases—Comments
4.1 Law
The main sections of the Income Tax Act referred by the parties are 3, 5, 6,153(1) and (3) and 56(2). They will be quoted if necessary in the comments.
4.2 Precedent Cases
The following precedent cases were referred to by the parties:
A. Concerning the point of common question
1. Hugh Knox Limited v MNR, [1973] CTC 2053; 73 DTC 50;
2. MNR v Estate of Donat Beaupré, [1973] CTC 316; 73 DTC 5255;
3. William Richard Kay v MNR, [1971] Tax ABC 363; 71 DTC 285;
4. Harry Pike v MNR, 26 Tax ABC 195; 61 DTC 202;
5. Gunter Gahrns v The Queen, [1978] CTC 651; 78 DTC 6436.
B. Concerning the tax withheld and paid
6. The Queen v Fred E Poynton, [1972] CTC 411; 72 DTC 6329.
4.3 Comments
A. Concerning the common question
4.3.1 One of the main points during the trial was the continuous objections of the third parties’ counsel to the appellant’s evidence against the accepted offer (Exhibit A-1). In fact, the Board did not maintain the objections during the trial and took it under advisement mainly because of the image given by the amended balance sheet (para 3.10 and 3.11) as confirming the appellant’s contention to the effect that the amount of $16,610 was given as part of the consideration of the sale of the shares rather than as a bonus. This could be considered as a commencement of proof in writing.
4.3.2 In studying the evidence concerning the decision to reimburse the $35,000 of salary for 1974 (para 3.07), Orlando’s reasons in making that decision (para 3.09), the testimony of Mr Mallette (para 3.14), that Orlando had not cashed the bonus, but had applied it against the debt of $35,000, and the payment of the balance in October 1975 to the company, the Board must conclude that the preponderance of the evidence is to the effect that the bonus has not been cancelled by the company, that in fact both the appellant and Orlando had received it. (Even if Orlando has not cashed it, he has used it in deducting the debt of $35,000.)
The Board understands the appellant to have believed that the amended financial statement confirmed his thesis. However, the greater part and the substance of the evidence is to the contrary.
4.3.3 Without any other commencement of proof in writing, how may the appellant contradict the accepted offer (Exhibit A-1)?
A gratuitous verbal denial cannot reverse the burden of proof especially when the main evidence is a written contract. A court cannot decide that such evidence is reversed only on the credibility of a witness.
MacKay, J of the Federal Court of Appeal in Decker Contracting Ltd, [1978] CTC 838; 79 DTC 5001, said at pages 848 and 5007:
The trial Judge’s conclusions are based on the inference which he drew from the uncontested facts and his view as to the credibility of the witnesses and should not be lightly interfered with by an appellate Court. In doing so in this case I rely on the statement of Lord Wright in Powell and Wife v Streatham Manor Nursing Home, [1935] AC 243 at 267 where he said:
‘“ . many, perhaps most cases, turn on inferences from facts which are not in doubt, or on documents: in all such cases the appellate Court is in as good a position to decide as the trial judge.”
and the observations of O’Halloran, JA, in the case of Faryna v Chorney, [1952] DLR 354 at 357 and 358, he said:
“If a trial Judge’s finding of credibility is to depend solely on which person he thinks made the better appearance of sincerity in the witness box, we are left with a purely arbitrary finding and justice would then depend upon the best actors in the witness box. On reflection it becomes almost axiomatic that the appearance of telling the truth is but one of the elements that enter into the credibility of the evidence of a witness . ..
. . . A witness by his manner may create a very unfavourable impression of his truthfulness upon the trial Judge, and yet the surrounding circumstances in the case may point decisively to the conclusion that he is actually telling the truth . ..
The credibility of interested witnesses, particularly in cases of conflict of evidence, cannot be gauged solely by the test of whether the personal demeanour of the particular witness carried conviction of the truth. The test must reasonably subject his story to an examination of its consistency with the probabilities that surround the currently existing conditions. In short, the real test of the truth of the story of a witness in such a case must be its harmony with the preponderance of the probabilities which a practical and informed person would readily recognize as reasonable in that place and in those conditions . . .
There is high authority to support the foregoing, namely, a case in the House of Lords in 1935 to which Lord Greene, MR referred in Yuill v Yuill, [1945] P 15, and described it as inadequately reported. The case was Hvalfangerselskapet Polaris A/S v Unilever Ltd (1933), 46 L1 L Rep 29. In that case the trial Judge had disbelieved material witnesses and found that their evidence was invented on the spur of the moment.
In the Court of Appeal Scrutton, LJ, giving the leading judgment said the trial Judge had seen the witnesses and heard the conflicting testimony and because of that it was impossible for the Court of Appeal to interfere with the trial Judge’s finding on credibility. But the House of Lords did interfere. It said that the strictures cast by the trial Judge on the two witnesses were unjustified and that the evidence of these two witnesses ought to have been received. The House, Lord Atkin presiding, came to that conclusion because it was satisfied that the evidence of the witnesses disbelieved by the trial Judge was entirely consistent with the probabilities and the business conditions proved to be in existence at the time.
Commenting on the Unilever case in Yuill v Yuill, Lord Greene said that it showed how important it is that a trial Judge’s impressions on the subject of demeanour should be carefully checked by a critical examination of the whole of the evidence, and added that, if the trial Judge in the Unilever case had done so, as was done in the House of Lords, then he could not have disbelieved the witnesses as he did.”
4.3.4 In general, the evidence at the trial (not all described in the Facts) shows that on many points Orlando and the appellant contradict their mutual testimony. However, one aspect of Orlando’s testimony was not contradicted by the appellant. It is the affirmation concerning the offer of the appellant of the amount of $90,000 in August. Less than six months later he accepted a $175,000 tender by written agreement. It is difficult to believe his verbal contention that the amount was $191,610.
4.3.5 Considering the greater part of the evidence, the Board must answer in the negative to the first part of the question and in the affirmative to the second part of the question: the amount of $16,610 paid by the company is taxable income from employment in the hands of the appellant. The same amount is deductible by the company as an expense.
4.3.6 Concerning the question, the Board, on an application made by the respondent at the beginning of the trial, accepted in the judgment rendered by the Board March 10, 1980, joining the third parties, to add: “1974 and’’ before the figure “1975’’ in the 6th line of the 5th paragraph of the said judgment, and add an “s’’ after the word “year” in the same line. This amendment was made in the case where the company would have incurred the expense in 1974. This amendment changes also the second part of the question which must be read (as it is corrected) in subparagraph (ii) “1974 and 1975 taxation years”.
B. Concerning the amount of $4,591.15 (para 3.17 to 3.20)
4.3.7 The facts are not in dispute
Subsection 56(2) referred by the appellant must be quoted:
(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.
The appellant said he did not give his consent to the payment. In the Board’s opinion, this section cannot apply in the present case. The company did not need the appellant’s consent. It had the obligation to obey the Act as provided in subsections 153(1) and (3):
153(1) Every person paying
(a) salary or wages or other remuneration to an officer or employee,
(b) a superannuation or pension benefit,
(c) a retiring allowance,
(d) an amount upon or after the death of an officer or employee, in recognition of his service, to his legal representative or widow or to any other person whatsoever,
(d.1) an amount as a benefit under the Unemployment Insurance Act, 1971,
(e) an amount as a benefit under a supplementary unemployment benefit plan,
(f) an annuity payment,
(g) fees, commission or other amounts for services,
(h) a payment under a deferred profit sharing plan or a plan referred to in section 147 as a revoked plan,
(i) an adult training allowance under the Adult Occupational Training Act,
(j) a payment out of or under a registered retirement savings plan or a plan referred to in subsection 146(12) as an “amended plan”, or
(k) an amount as, on account or in lieu of payment of, or in satisfation of, proceeds of the surrender, cancellation or redemption of an income-averaging annuity contract,
at any time in a taxation year shall deduct or withhold therefrom such amount as may be prescribed and shall, at such time as may be prescribed, remit that amount to the Receiver General of Canada on account of the payee’s tax for the year under this Part.
(3) When an amount has been deducted or withheld under subsection (1), it shall, for all the purposes of this Act, be deemed to have been received at that time by the person to whom the remuneration, benefit payment, fees, commissions or other amounts were paid.
In the Board’s opinion it is obvious that the said amount of $4,591.15 is “deemed to have been received at that time” in 1975 by the appellant who was a former employee of the company which paid the amount of tax concerning salary and bonus paid at the beginning of the said year.
5. Conclusion
The appeal of Gabriel Maioni is dismissed and no reassessment must be issued in regard to the third parties concerning the amount of $16,610 involved in the present case in accordance with the above Reasons for Judgment.
Appeal dismissed.