Date: 19991022
Docket: 81-180-IT-O
BETWEEN:
NATHAN REIBER,
Appellant,
and
MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue is whether the Appellant was properly assessed for his 1974 taxation year for:
(a) Appropriations from Reiber Estates Limited
in the amount of $242,294.10 pursuant to section 15 of the Income Tax Act ("Act").[1] The Notice of Assessment included an amount in respect of a benefit arising from the use of a Florida condominium. However, that is not, according to statements at the hearing, included in this appeal. The Reply also sets forth a number of other amounts which were not contained in the Notice of Assessment. I am proceeding, therefore, on the basis that the only amount in issue is the sum of $242,294.10. Although other numbers were referred to at the hearing, no assessment other than the one appealed from was made.
[2] The Appellant was a lawyer in the City of Toronto until his resignation from the Law Society of Upper Canada in 1979 or 1980. He was president of a company known as Reiber Estates Limited ("Reiber Estates") and was, presumably, the principal, if not the only, shareholder.
[3] The Appellant testified that he had owned several boats, a 25 foot Chris-Craft, a 31 foot boat, and a 47 foot boat before the purchase of a boat referred to in this appeal known as the Rye-Bar IV ("Rye-Bar), a 60 foot Roamer. He said that he had originally intended to own the Rye-Bar personally. He said that one Harold Blatchley ("Blatchley") approached him respecting putting all boats into a company and going into the business of buying and selling boats. The Appellant testified that he caused Keystone Yacht Sales Inc. ("Keystone") to be incorporated in Florida, U.S.A.. He said that Reiber Estates, a 65 percent shareholder and Blatchley, a 35 percent shareholder, decided that Rye-Bar would be put into Keystone for resale. He then said,
... and we had bought other boats afterwards and put them in Keystone Yacht Sales and so it was buying and selling boats. It was like a business.
[4] The Appellant testified that he took delivery of the Rye-Bar in his name because he had to get a radio licence and said that in the United States, where the boat was located, a boat owner had to be a U.S. citizen in order to obtain a radio licence. He also said that if the owner was a corporation it must be controlled by a U.S. citizen.
[5] Appellant's counsel produced a photocopy of a document entitled TRUST ACKNOWLEDGMENT. That photocopy is dated June 21, 1974 and bears a copy of the signature of the Appellant. Attached to it was a photocopy entitled Combined Builder's Statement and Bill Of Sale and a Bill Of Sale bearing date the 16th day of May, 1974. The first of these two documents stated that:
IN CONSIDERATION of the sum of One Dollar ($1.00) and other valuable considerations, paid this 16th day of May, 1974, Chris-Craft Corporation of Pompano Beach, Florida, sole owner of the vessel described in the above "Builder's Statement" hereby sells and transfers the entire vessel to Bay Haven Marina of Holland, Mich.
[6] The second document, a photocopy of the Bill Of Sale, provided that in consideration of the sum of one dollar and other valuable consideration, Bay Haven Marina Inc. transferred all its right, title and interest in the vessel to the Appellant, showing a Toronto address.
[7] The TRUST ACKNOWLEDGMENT document reads as follows:
KNOW ALL MEN BY THESE PRESENTS: WHEREAS, NATHAN REIBER took title on the 16th day of May, 1974, to a certain Chris-Craft 60 foot vessel, as more particularly described in the Bill of Sale, a copy of which is attached hereto and expressly made a part hereof; and
WHEREAS, title to said vessel was taken by said NATHAN REIBER as Trustee for the entire use, benefit and interest of KEYSTONE YACHT SALES, INC., a Florida corporation.
NOW, THEREFORE, the said NATHAN REIBER does hereby acknowledge and declare that he took title solely as Trustee on behalf of said named corporate beneficiary; that he does not claim any right, title or interest in and to said vessel, and that he shall hold the same solely for the use and benefit of said corporation.
The said NATHAN REIBER does further acknowledge and agree that any income of proceeds received from or in connection with said vessel shall pass and enure to the benefit of said KEYSTONE YACHT SALES, INC.
IN WITNESS WHEREOF, said NATHAN REIBER has affixed his hand and seal this 21st day of June, 1974.
"Nathan Reiber" (seal)
NATHAN REIBER
STATE OF FLORIDA)
SS:
COUNTY OF DADE )
BEFORE ME, the undersigned authority, this day personally appeared NATHAN REIBER, to me well known to be the individual who executed the foregoing instrument on behalf of said corporation, who upon oath by me duly administered, acknowledged before me that he executed same for the purpose therein expressed.
IN WITNESS WHEREOF, I have hereunto affixed my hand and notarial seal at said County and State, this 21st day of July, 1974.
"Stanley Joel Levine"
NOTARY PUBLIC, State of Florida At Large
My Commission Expires: 11/16/75
[8] The Appellant did not remember when he signed it but said he had signed it at the office of his lawyer, one Stanley Joel Levine ("Levine") in Miami, that he left the documents at his office and
then when I came back I got them back and I just took them.
He had no recollection of what day he went back. He testified that the document was in the form of the copy produced when he obtained it. He stated that the date had been inserted in the document and that he had not done so. He assumed that it was either Levine or his secretary who had filled in the date.
[9] The Appellant testified that a cheque was issued from the Toronto-Dominion Bank either to the builder of the boat or to himself. He said that the cheque was not paid out of Reiber Estates or Keystone because it would have taken too long to clear. He stated that it was an advance to Keystone and was so reflected on the books of Reiber Estates. The boat was delivered in Holland, Michigan and ended up at Keystone docks in Miami. He said that the boat was registered in Canada with the Registrar of Shipping. He did not know whether it was in Toronto or in Ottawa. He testified that it was registered in his name and in response to a query as to why he didn't register it in his name in trust he said:
Well, being a trustee, if I put the name in trust they would want to know who owns the boat and as a trustee I didn't feel that I had to tell them who owns the boat because I am a trustee.
[10] He said that he had taken many real estate parcels in his name and many mortgages in his name acting as a trustee.
[11] The radio licence was also in his name. He said that the purpose of the boat was "to bring it down to Florida and try and sell it". He said that although it was insured in his name he did not tell the insurance company that he held the boat in trust.
[12] The Appellant said that two boats, strictly for charter, had been bought and sold since the acquisition of Rye-Bar IV. He said that they were in the names of two different corporations, being "Subchapter S Corporations" giving "corporate protection but you file your income tax on a personal basis." He then testified that the boat was sold under PURCHASE AGREEMENT dated November 6, 1978 for $325,000. He said that Keystone made a profit which was reflected in its income tax return. He said that the agreement did not show that the boat was owned by "Nathan Reiber In Trust" giving the reasons above stated. He said that the proceeds of sale would reduce the amount of shareholder loans from Reiber Estates. The Appellant said that one Howard Blatchley ("Blatchley") owned 35 percent of the shares of the company and that:
"he was buying boats, selling boats, repairing boats that we had purchased ready for sale."
implying that Keystone was not incorporated simply for the purpose of buying the Rye-Bar IV. Although the boat was used for personal purposes the Appellant said that he paid the expenses of fuel, dockage, et cetera.
[13] The Appellant filed unaudited financial statements of Reiber Estates for the periods ending August 31 in each of 1974, 1975, 1976, 1977, 1978 and 1979. A note to the financial statements for August 31, 1974 indicated an investment in Keystone Yacht Sales Inc. - Miami of $131 described by the Appellant as being for the shares of Keystone owned by Reiber Estates. Another note showed an advance to Keystone of $260,209 U.S. (being $253,939 Canadian). The Appellant said that no interest was charged on that loan. He also said no paperwork such as a promissory note or notes or any other documentation evidencing same was prepared. He stated that Blatchley had unlimited signing authority for Keystone. The Appellant reiterated that the purpose of that advance was to enable Keystone to buy the boat. The financial statements for subsequent years showed an advance to Keystone as follows:
1975 $258,525
1976 $275,485
1977 $316,644
1978 $363,716
1979 $ 78,963
1980 $ 33,911
[14] The 1978 statements show that Reiber Estates received $311,000 U.S. on December 1, 1978 but there was no explanation as to why the number of $363,000 remained owing to it. The Appellant testified that the reduction arose from the sale of the Rye-Bar IV.
[15] A document entitled U.S. Corporation Income Tax Return of Keystone for the period ending October 31, 1974 showed gross sales of $328,619.64 less Cost of Goods Sold in the sum of $278,327.50 yielding a gross profit of $50,292.14. The 1973 document shows no inventory at the beginning of the year and merchandise bought for manufacture or sale of $585,057.60 during the year. When asked what that inventory would be the Appellant replied:
I guess whatever we bought we sold.
He later said that it would be the "various boats" and that he didn't think that Rye-Bar IV was included in that.
[16] For the 1974 year, a document being a photocopy of Keystone's U.S. Corporation Income Tax Return showed gross sales of $430,870.45 and cost of goods sold in the amount of $343,733.81 producing a gross profit of $87,136.64. The Appellant testified that the Rye-Bar IV would be included in that inventory. The Appellant also testified that with respect to the 1974 taxation year the amount of $289,582.75 at the beginning of the year and the sum of $309,432.75 at the end of the year represented advances from Reiber Estates to Keystone. For the 1975 year the equivalent amounts were $309,132.75 at the beginning of the year and $356,604.50 at the end of the year. The Appellant also testified that from Keystone's 1976 tax return the loan from stockholders was $356,604.50 at the beginning of the year and was $384,925.07 at the end of the year. A copy of the return for 1977 showed Loans from Stockholders of $384,925.07 at the beginning of the year and $410,741.75 at the end of the year. He said that the latter figure still included the Rye-Bar IV. The 1978 return of Keystone shows Loans from Stockholders at the beginning of the year of $410,741.75 and at the end of that year the sum of $119,516.75. The Appellant stated that the big decrease was because the Rye-Bar IV was sold in 1978 and that loans were repaid to Reiber Estates.
[17] A portion of the transcript with respect to documentation reads as follows:
Q. Okay. Is there any reason why you never backed up this trust agreement with any kind of a mortgage or promissory note or any other documentation?
A. This is the way we did all our business. All our other companies, the same thing. It was not backed up by a note or anything else. Just advances to companies.
Q. And all of this was disclosed -- who did you disclose these transactions to?
A. To the accountants, both of them.
Q. And who were your accountants?
A. Springer -- at that time it was Springer, Chapman -- no, Springer Lucas & Company.
Q. Okay. And was Ambrose Lucas, was he one of the people that was involved in both your personal and Reiber Estates?
A. Yes.
Q. To your knowledge is he one of the people responsible for the preparation of all the books and records of Reiber Estates Limited?
A. Yes.
[18] On cross-examination the Appellant stated that he had applied for a radio license for himself in Canada and had not told the Canadian authorities that the boat was held in trust.
[19] The Appellant testified that a Declaration of Ownership by Individual Owner or Transferee identifying the Rye-Bar IV was signed by him but was in the handwriting of someone whose name he could not remember. He said that he filed it with the Canadian registration authorities to register the ship. In answer to a query from Respondent's counsel the Appellant read a portion of that Declaration as follows:
... I am a British subject. The above general description of the Ship is correct ... whose Certificate of Competency or Service is No. ____________ is the Master of the said Ship. I am entitled to be registered as Owner of 64 shares in the ship. To the best of my knowledge and belief, no person or body of persons other than such persons or body of persons as are by the Canada Shipping Act, qualified to be Owners of British Ships is entitled, as Owner, to any interest whatever, either legal or beneficial, in the said Ship. And I make this solemn Declaration conscientiously believing the same to be true.
[20] The Appellant testified that he understood the concept of beneficial interest and stated again that Keystone had the beneficial ownership of the Rye-Bar IV. The following exchange reads:
Q. So when you state that no other person is entitled to any interest whatever, either legal or beneficial, that is not true; correct?
A. The way you put it, it's not true.
Q. And this is a solemn declaration, sir, that is being made conscientiously believing the same to be true on the 14day of May, 1974?
A. That's what it says.
Q. And that's your signature there you've already identified?
A. Yes.
[21] The Appellant then said that he did not have to divulge on the Bill of Sale that he was a trustee and affirmed that in the declaration of ownership he stated that he was the owner and no one else had a legal or beneficial interest. He also said that the insurance on the yacht indicated that he was the owner.
[22] The Appellant then testified that the Trust Acknowledgment was kept by Mr. Levine, his solicitor in Florida. When asked by Respondent's counsel whether he was aware that she and Revenue Canada had, during the course of the litigation, asked for production of the original Trust Acknowledgment he stated that he had been looking for it as well. He said he had no reason to dispute the suggestion that no one from the Respondent's side had ever seen the original of that document. The Appellant said that he could not remember when he received a copy of the Trust Acknowledgment from Mr. Levine. He stated that he thought he had given the copy to his accountants in Toronto.
[23] On re-examination the Appellant said that as far as he was concerned there was no significance in registering the Trust Acknowledgement. He also stated that to his knowledge all the transactions were recorded in the books and records of Keystone and Reiber Estates. The Appellant also said that he had given no indemnity with respect to his trusteeship.
[24] Ambrose Lucas ("Lucas") testified that he was the accountant for Reiber Estates and prepared accounting and personal income tax returns for the Appellant. He testified that Reiber Estates advanced money to Keystone. He stated that
the records ... are written up by a bookkeeper in our office, the records are then given over to one of the accountants in our office and then -- who prepares the financial statement, and then the working papers and the financial statements are given to me for review ...
[25] With respect to the amounts said to have been loaned by Reiber Estates to Keystone, Lucas said that they were advanced to a limited company in Florida as a loan receivable and that no interest was charged on them. He stated that all the advances over the years would be backed up by cheques and bank statements and that the books were written up by their bookkeeper who had the original documents. He also said that if the advance was repaid there would be a bank deposit and that would be recorded in the books.
[26] On cross-examination Lucas said that he took his instructions from the Appellant in regard to the affairs of Reiber Estates and that he had not performed an audit. He said it was the accountant in Florida who provided any and all information concerning Lucas' task of matching the books and records of Keystone to Reiber Estates. He stated that he did not remember the Trust Acknowledgment in any way. He also said that if there were any questions they would be directed to the Appellant. On re-examination he said that he would have the original books of entry as well as cheque stubs and that the records were written up from scratch, a trial balance was prepared, a general ledger was prepared and then the financial statements were prepared with schedules to back them up.
[27] One Andre A. Verschoore, an official of Revenue Canada then gave evidence. He stated, in answer to questions posed by Respondent's counsel that he could not remember whether he had seen the Trust Acknowledgment prior to a trip to Florida to investigate certain tax matters concerning the Appellant. He testified that Mr. Levine had produced a file folder containing documents which he described as having been kept in a normal way. He then said:
... the oldest were at the bottom, the oldest-dated, and as time goes on the more current -- the last documents in there would be the more current dates. I believe it was the third document down was this trust agreement, which was dated in '94.
[28] He then agreed with counsel's suggestion that it was '74. He stated that documents were built up in the folder from 1974 but that the Trust Agreement was third down from the top, Verschoore having stated that that file ended in 1978 or 1979. In this regard he said,
When I first looked at it what really struck me, it was out of place for a built-up file. I figured it should have been at the top. The document looked too new to be that high in the file. When you looked at the rest of them they were quite aged, you know, for -- it will age that much, and right away it struck both Mr. Callsen and I. We just -- as we walked out, said "Did you notice," or "I noticed", and we both said the same thing. "What's that file doing at the top? It looks too new". Or that document. It struck us both at the same time.
[29] He then said that Mr. Levine did not have the original and that Mr. Levine had told him that Mr. Reiber would have signed it. Mr. Verschoore then testified that Revenue Canada wanted the original to have it submitted for forensic examination in order to have the document dated. It was never produced to Revenue Canada
[30] He also testified that Revenue Canada attended at the Keystone offices and that there was a folder type file in which the Trust Acknowledgment was probably the top document in the file. He said that it "seemed to be out of place again" and that below it were documents relating to repairs to the boat, et cetera, dating back to 1974. He then said that he could not recall whether he had asked for the original of the trust agreement. He testified that at the time of the purchase of the boat, Mr. Reiber had made a downpayment of $30,000 and then there was a transfer from a corporate account to Mr. Reiber of two hundred and some odd thousand dollars.
[31] Mr. Verschoore said that he thought the boat was Mr. Reiber's personal boat because of the payment by him personally, the transfer from the company to him personally and
... we talked to several people at ... that told us it was Mr. Reiber's boat including the purchaser of the yacht in 1978, Mr. Haggerty.
He referred to the Purchase Agreement dated November 6, 1978 between Nathan Reiber and Max Haggarty.
[32] With respect to Canadian registration of the boat he said,
I believe we have some documents of that.
He also said that he had seen the "Declaration of Ownership by an Individual Owner or Transferee" and that it had a bearing on his conclusions. He stated that he expected the name of the registered owner to be Keystone and that the sale document was significant in forming his conclusions. When asked about an application for a radio licence he said:
We did get some documents. I'm not sure what they were.
[33] A document entitled Application for a Licence to Install and Operate a Transmitting and Receiving Station on Board a Ship Registered or Licenced in Canada was produced. In respect of a question as to whether he had received other documents in regard to this application for a radio licence he replied, "I believe so. I can't be sure". This was followed by:
Q. And in whose name were they all?
A. Everything was in Mr. Reiber's name.
[34] He also said that the companies who insured the boat were Canadian companies, stating that the insured was Nathan Reiber.
[35] Mr. Verschoore said that he did not recall ever seeing any U.S. tax returns of Keystone. With respect to the financial statements of Reiber Estates, when he was asked by Respondent's counsel if during meetings with the accountants the financial statements of Reiber Estates were "raised" he responded:
I can't recall to be honest with you.
[36] After a line of questioning respecting Keystone and Reiber Estates Mr. Verschoore said that:
Well, some of the money came directly from Reiber Estates. For instance, the downpayment or the final payment of the boat and after that any repairs or anything else would actually be advanced to Keystone and they would pay the bill.
In response to a suggestion from Respondent's counsel that the appropriations were from both companies he replied:
That's correct.
[37] Mr. Verschoore's evidence was vague respecting financial statements, visits at Mr. Levine's office and at Keystone's office. The following exchange on cross-examination underlines same:
Q. You said that during the investigation you were not aware of the shareholder advances from Reiber Estates to Keystone Yachts?
A. Well, I'm referring to the ... okay ... this investigation started with a lead, all right, and I say information came in about not related to the boat. It was to do with other false contracts which Mr. Reiber was involved with and we didn't do nothing about the boat at that time so that's ... yeah. What did you ask me?
[38] Further evidence indicated that Mr. Verschoore had made no enquiries as to boat registration procedure and sought no legal advice with respect to the legal significance of a trust. In response to a query as to whether he understood the difference between legal and beneficial ownership he replied:
Not really.
CONCLUSION:
[39] Obviously, the Appellant's credibility is elastic. His evidence was sometimes quite vague and his manner evasive even though the relevant events took place somewhere between 1974 and 1979.
[40] His failure to produce the original Trust Acknowledgment and the total absence of any attempt to explain its non-production fosters suspicion about the actual date of preparation.
[41] The fact that the Appellant registered the boat and obtained a radio licence in his own name for the reasons outlined is consistent with either of his two different positions being accepted, namely,
1. That he owned it personally (Declaration of Ownership by Individual Owner or Transferee produced in evidence not by the Appellant but by the Respondent), and
2. That he owned it on behalf of Keystone (Trust Acknowledgment certified by his lawyer, Levine, to have been executed "upon oath by me duly administered").
[42] The fact that the Appellant stated at the trial, under affirmation and under cross-examination, that his statement in the Declaration was untrue clearly indicates the level of his ethic and reliability. Add to this the fact that Levine was not called to shed any light upon the missing Trust Acknowledgment and that Blatchley was not called with respect to the fact of a loan made by Reiber Estates to Keystone or with respect to the Trust Acknowledgment. Appellant's counsel, his son, attempted to minimize the import of that document by saying:
The registration of this boat is nothing more than an administrative function.
[43] His counsel also, in an effort to show why the radio licence had to be procured in Canada, produced a photocopy of "regulations ... from the Federal Communications Commission" from the "1995 Edition" saying "that nobody was able to find the actual regulations that were in force at the time".[2] He read part of section 80.15 to the Court, namely:
A station licence for a public coast station or an Alaska public fixed station cannot be granted or held by an alien in a foreign government...
This transparent, non-applicable irrelevancy (there was no evidence that the Appellant applied for any such station) was followed by counsel's statement that,
there's not a scintilla of evidence to negate the Trust Agreement, the Trust Acknowledgment.
That statement completely ignores the questionable accuracy of its contents.
[44] In spite of all the foregoing, the question to be decided is whether, in 1974, there was an appropriation by Reiber Estates in the amount of $242,294.10 under section 15 of the Income Tax Act. It is noted that neither counsel referred to this section in submissions. That section provides that where a corporation's funds have been appropriated in any manner to or for the benefit of a shareholder otherwise than in certain specified fashion, the amount or value thereof shall be included in computing the income of the shareholder for the year.
[45] The unaudited financial statements of Reiber Estates for the periods ending August 31, 1974 to August 31, 1979, unchallenged by the Respondent, were introduced. They show an advance to Keystone as at August 31, 1974 of $253,939, the amounts of same in subsequent years being set forth above. This amount was reduced on December 1, 1978, and according to Appellant's testimony, such reduction arose from the sale of the Rye-Bar IV by Keystone and a payment from Keystone to Reiber Estates. The accountant, Lucas, described his office's accounting procedures, having been backed up by cheques and bank statements et cetera.
[46] In addition, copies of U.S. corporation income tax returns of Keystone for 1974 and subsequent taxation years, although without specifics as to amounts paid, show a reduction in loans from stockholders in 1978 in an amount in excess of the loan initially said to have been made by Reiber Estates to Keystone.
[47] In the respect of that evidence, without any suggestion from Respondent's counsel about the validity of those documents having been prepared on a timely basis for the years described, I am persuaded that their contents indicate that an amount of at least $242,294.10 was advanced from Reiber Estates to Keystone in 1974 and was later repaid. The manner in which this was done, including the lack of appropriate documentation, and with questionable documentation, although professionally and ethically bereft, cannot alter the fact that the above documents support the contention of loan and repayment. The result of this is that no benefit was conferred by Reiber Estates on the appellant in 1974.
[48] That being the only issue outstanding, the appeal is allowed. In the circumstances, no costs are awarded.
Signed at Ottawa, Canada this 22nd day of October, 1999.
"R.D. Bell"
J.T.C.C.