Indexed as:

Frank Willis Service Centres Ltd.

 v. Canada (Minister of National Revenue - M.N.R.)

Frank Willis Service Centres Limited, Appellant,

v. The Minister of National Revenue, Respondent

[1992] T.C.J. No. 454

[1992] A.C.I. no 454

Action No. 90-3591(IT)

 Tax Court of Canada

 London, Ontario

Bonner T.C.J.

Heard: June 23-24, 1992

 Judgment: June 25, 1992

(10 pp.)

Income tax -- Corporations and shareholders -- Wholly-owned corporation -- Whether corporation beneficially owned business.

The taxpayer corporation appealed from an assessment by the Minister of capital gains realized when the corporation sold real estate. The taxpayer appealed to the Tax Court of Canada on the basis that it was not the beneficial owner of the property disposed of because the controlling shareholder of the corporation had instructed his solicitor, at the time the property was acquired, to take title in his and his wife's names.

HELD: Appeal dismissed. The Court found that even though the controlling shareholder testified that the solicitor had not followed his instructions when the property was acquired, and even though it was suggested that the taxpayer had not given any consideration for the property when it was put in its name, on the balance of probabilities, the corporation was the beneficial owner and therefore it had been assessed correctly in relation to the capital gain realized on the sale of the property.

STATUTES, REGULATIONS AND RULES CITED:

Income Tax Act, S.C. 1970-71-72, c. 63.

R.G. Colautti, for the Appellant.

J. Tremblay, for the Respondent.

BONNER T.C.J. (Orally):

THE REGISTRAR: This sitting of the Tax Court of Canada is now resumed, the Honourable Judge Bonner is Presiding. The first matter will be the oral reasons for judgment in the case of Frank Willis Service Centres Limited versus the Minister of National Revenue.

HIS HONOUR: This is an appeal from an assessment of income tax for the 1988 taxation year of the Appellant corporation. On assessment the Respondent included in income a taxable capital gain which he found to have been realized on the disposition of a service station property in Windsor, Ontario. That assessment rested on a finding or an assumption made by the Respondent that the Appellant was the beneficial owner of the property disposed of. That finding was challenged by the Appellant, which asserted that the property was not owned by it in 1988 or at any time.

The property was acquired pursuant to an agreement of purchase and sale dated September 16, 1976 between Michael Bezaire, as vendor, and Frank Willis as purchaser. From the time of closing of the purchase in December of 1976 until the sale in 1988, the property was used and occupied by the Appellant as the site of an automotive service station. Frank Willis, sole shareholder of the Appellant, stated in evidence that he wanted the property to be his nestegg and that accordingly he instructed his solicitor, Arthur Weingarden, that title was to be taken in the name of himself and his wife. Mr. Weingarden testified that he had been given those instructions and he produced a photocopy of notes which he made at the interview, the original interview with Mr. Willis. Those notes say:

"1. Take title in name of husband and wife. 2. Lease back 12 % net net."

The purchase closed and the deed to Mr. and Mrs. Willis as joint tenants was registered on December 10, 1976. Two mortgages were assumed on the purchase, one in favour of Chobern Investments and another in favour of Clarence Bezaire. An existing third mortgage was discharged at or about the time of closing. The funds required to close were furnished, according to Mr. Weingarden's trust ledger, out of $13,153.35 deposited with the law firm by Mr. Willis.

Mr. Willis gave evidence as to the source of the $13,153.35. He said that the funds came from one or more of three savings accounts belonging to himself and his wife. I formed the impression that his evidence on this point was more a reconstruction of what he now thinks must have happened than recollection of what did in fact happen, but Mr. Willis may well have been right. However, what is not clear on the evidence is whether the funds paid to Mr. Weingarden were or were not advanced to the Appellant corporation by Mr. Willis. During the fiscal period in which the property was acquired, the Appellant's indebtedness to its shareholder increased by $12,416.84, an amount not greatly different from the amount paid into the solicitor's trust account. Mr. Willis was unable to offer any explanation for the increase in the liability to shareholder except, and I quote, "It was probably monies I put back in the company." The Appellant failed to produce the company's general ledger and offered no explanation for that failure.

Mr. Weingarden drew up a lease for the property dated September 29, 1976 from Mr. and Mrs. Willis to the Appellant. The photocopy of the lease produced in evidence was not executed by any of the parties. No corporate minute authorizing entry into the lease was produced. Although Mr. Willis testified that he believed that he and his wife had executed the lease, he did not appear to have any clear recollection on the point. No reference to any lease was made in the copy of the reporting letter from Mr. Weingarden to Mr. Willis, which was put into evidence. No rent was ever paid by the Appellant, nor was any receipt of rent reported by Mr. Willis in his tax returns. The evidence falls far short of establishing that the Appellant's twelve year occupancy of the property was qua tenant.

Starting with the financial statements for the fiscal year ending April 30, 1977, the Appellant showed the land and building as part of its fixed assets. This, counsel for the Appellant characterized as a mistake. The 1977 and 1978 financial statements were prepared by Mr. Cox, a bookkeeper. Mr. Cox was not called as a witness and it was not suggested that he was unavailable. This failure weighs heavily against the Appellant, which bore the burden of establishing on a balance of probabilities that it was not the beneficial owner of the property.

The Appellant in its tax returns for 1977 and for all subsequent years up to 1978, when the results were restated, consistently claimed and was allowed capital cost allowance in respect of the cost to it of the building and additions thereto. It paid and expensed all repairs, maintenance, taxes and mortgage interest relating to the property.

Evidence was given by Peter Roth, a chartered accountant, who in 1978 took over responsibility from Mr. Cox for the preparation of the Appellant's financial statements and tax returns. He stated that he discovered in 1980 for the first time that the financial statements might have wrongly shown the Appellant as owner of the property. The matter arose when he was reviewing the statements with Mr. Willis and the latter stated that he couldn't understand why the property was shown as an asset on the company's books. Mr. Roth testified that he had no documentary evidence supporting the Willis assertion of ownership, that the tax consequences of leaving matters alone were not materially different, that the cost of correcting the financial records would impose a financial burden on Mr. Willis, and so the previous reporting practices were continued until after the disposition of the property many years later.

That explanation, if true, is a breathtaking admission of irresponsibility for a chartered accountant to make. I pause to observe that Note 4 to the Appellant's 1988 financial statements, Exhibit A-22, reads in part, and I quote:

"The comparative figures previously reported in the financial statements of the company for the year ended April 30, 1987 have been restated to remove the land, building and depreciation thereon and related mortgage payable which upon the sale of these assets, ..."

and I emphasize those five words:

"... were found to be those of the Shareholder and his Spouse, not of the company."

This certainly casts doubt on the story told as to the discovery in 1980 of the supposed error. I find that Mr. Roth's shifting stories are wholly unworthy of credit and, I might add, unworthy of a member of his profession.

Before dealing with the arguments of counsel, I will note that a very heavy burden rests on those who, when they find it to their advantage to do so, shift their factual ground and assert that their previous representations were false. I do not say that the normal burden of proof on the balance of probabilities changes, but rather I say that the evidence of persons who find themselves in that position will be viewed with very healthy scepticism. I note as well the rule of evidence that any unexplained failure to bring forward a witness or a document capable of shedding light on the issues will give rise to the presumption that the witness or document which was not produced would have been damaging to the party who failed to call the witness or produce the document. Here I note that the Appellant, who bore the overall burden of proof, failed without reason: (a), to produce the company's ledgers and records pertaining to the increase in the 1977 fiscal period in liability to shareholder; (b), to produce the company's minutes, if any, authorizing execution of the leases; and (c), to call Mr. Cox.

Counsel for the Appellant argued that in determining tax liability the Court must accept the true legal consequences of the transactions which took place and must not act on erroneous bookkeeping entries. I agree that erroneous bookkeeping entries are not, by themselves, a foundation for tax liability, but in the context of this case the question remains whether entries reflecting beneficial ownership of the property by the Appellant did or did not correctly reflect the facts.

Counsel argued next that in the circumstances there could be no resulting trust in favour of the company because it was not the common intention of the parties at the time of the transaction, that is to say at the time of the purchase of the property, that the company advance monies in the character of a purchaser of the property. In this regard Mr. Colautti placed particular emphasis on the evidence of Mr. Weingarden and Mr. Willis as to the discussion regarding how title should be taken and the decision that Mr. and Mrs. Willis should own the property. He argued as well that there could be no finding of a resulting trust because there was no evidence that the company paid any money, any of the purchase money at all.

In my view the company has failed on the balance of probabilities to show that it was not the beneficial owner. I do not accord Mr. Willis' statements as to his original intention much weight because they are in conflict with the representations made by him in his tax returns extending over a period of almost twelve years. I do not regard Mr. Willis as an innocent and unsophisticated victim of bad accounting advice who failed to understand that he was making false representations in signing the company's tax returns.

The original instructions to Mr. Weingarden as to title are just that, they are instructions as to how legal title was to be taken. Legal and beneficial title need not rest in the same person. It certainly has not been shown that the company did not put up the $13,153.35 needed by it to close the purchase.

It is significant that no lease was shown to have been executed and that no reference to any lease was made by Mr. Weingarden in his reporting letter. It is likely that there was no lease because the Appellant was intended to occupy as beneficial owner. The reliable evidence is consistent with the conclusion that by the time the purchase was closed a decision had been made that the Appellant would buy, hold and occupy the property using money borrowed from Mr. Willis to pay the initial outlays.

I therefore cannot find that the Appellant was not from the outset the beneficial owner of the property.

No question of estoppel then arises, because it has not been shown that the Appellant misrepresented the facts when it asserted that it was owner.

For the foregoing reasons, the appeal will be dismissed.