Date: 20020312
Docket: 1999-4723-IT-G
BETWEEN:
620357 SASKATCHEWAN LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Amended Reasonsfor Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Prince Albert, Saskatchewan on February 18, 19, 20, 21 and 22, 2002. The Appellant called Larry Langeman, Canada Customs and Revenue Agency's ("CCRA") auditor on this file; Lyle Zuk, the lawyer for Madraga Distributors Ltd. ("MDL") in respect to its transactions with the Appellant ("620357"); Kari Madraga ("Kari"), the granddaughter of George Madraga, Sr. ("George, Sr."), the daughter of George Madraga, Jr. ("George, Jr.") a former parts employee of MDL and the current manager of 620357. The Respondent called Benedict Chow, an appraiser who was qualified as an expert. Respondent's counsel also read in excerpts from the examinations for discovery of George Madraga, Sr., sole shareholder of the Appellant and Garth Busch, the Appellant's chartered accountant.
[2] Paragraphs 2 to 14 inclusive of the Reply to the Notice of Appeal set out the particulars of the Respondent's position respecting the assessment under appeal. They read:
2. In relation to paragraph (a) of the Notice of Appeal, he states that the address provided by the Appellant is the address of "Madraga Speed 'N Sport", a business operated by the Appellant in the City of Prince Albert. This business was previously operated in the same premises by another corporation registered pursuant to the laws of Saskatchewan, Madraga Distributors Ltd. ("Madraga Distributors"). The business was formerly known as "Madraga's Deals on Wheels".
3. In relation to the first sentence of paragraph (b) of the Notice of Appeal, he denies that Appellant was assessed pursuant s. 18 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended ("the Act") as alleged, and states that Notice of Assessment 11747, dated September 21, 1998, was issued pursuant to s. 160(1) of the Act and s. 19 of the Saskatchewan Income Tax Act c. I-2, R.S.S. 1978, as amended ("the Saskatchewan Act"). He admits the remainder of paragraph (b) of the Notice of Appeal.
4. In relation to paragraph 1 of the Notice of Appeal, he admits that there was a written agreement between Madraga Distributors and the Appellant, dated October 17, 1997, which purported to sell machinery parts and snowmobile clothing to the Appellant for a total purchase price of $125,000.00 ("the Sale Agreement"). He otherwise denies all facts alleged in paragraph 1 of the Notice of Appeal.
5. Further, in relation to paragraph 1 of the Notice of Appeal, he states that there was a second written agreement between Madraga Distributors and the Appellant, dated October 17, 1997, which purported to consign other inventory of Madraga Distributors to the Appellant for purposes of public sale, with a portion of the proceeds of sale to be returned to Madraga Distributors Ltd. ("the Consignment Agreement").
6. The Deputy Attorney General states that the Sale Agreement, inter alia, purported to sell to the Appellant machinery parts and snow machine clothing, inventory possessed by Madraga Distributors as of the close of business on the 17th day of October, 1997, which inventory is enumerated in Schedule A of the Sale Agreement ("the Sale Inventory").
7. He says that the aggregate cost of the Sale Inventory is shown on Schedule A of the Sale Agreement as $329,073.30. The Sale Agreement provides for sale of the Sale Inventory from Madraga Distributors to the Appellant for a total price of $125,000.00.
8. The Deputy Attorney General states that the Consignment Agreement, inter alia, purported to transfer to the Appellant, for purposes of sale to the public, inventory possessed by Madraga Distributors as of the close of business on the 17th day of October, 1997, as enumerated in Schedule A of the Consignment Agreement ("the Consignment Inventory"). The Consignment Agreement obligates the Appellant to pay to Madraga Distributors Ltd. the value for each item of inventory as set out in Schedule A, and allows the Appellant to keep any amounts received in excess of said amounts.
9. By way of Notice of Assessment number 11747, dated September 21, 1998, the Minister of National Revenue (the "Minister") assessed the Appellant in the amount of $139,279.00 pursuant to section 160(1) of the Act and section 19 of the Saskatchewan Act.
10. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions of fact:
a) The facts admitted or stated above;
b) The Appellant is a Corporation, incorporated pursuant to the laws of Saskatchewan on May 13, 1997. The Appellant's sole Director and Shareholder is George Madraga Sr. ("George Sr.") of Prince Albert, Saskatchewan.
c) Madraga Distributors Ltd. is a Corporation, incorporated pursuant to the laws of Saskatchewan on November 3, 1986. Since October 25, 1993, the sole Director and Shareholder of Madraga Distributors has been George Alex Madraga ("George Jr.") of Prince Albert, Saskatchewan;
d) George Sr. is the father of George Jr.;
e) The Appellant and Madraga Distributors did not deal at arm's length at any relevant time;
f) Prior to October 17, 1997, Madraga Distributors possessed an inventory of recreational vehicles, parts, equipment, and clothing for purposes of sale at business premises located at 4189-2nd Ave West, Prince Albert, Saskatchewan.
g) On or about October 17, 1997, Madraga Distributors transferred its inventory of recreational vehicles, parts, equipment and clothing to the Appellant by way of the Sale Agreement and the Consignment Agreement ("the Transfer"). The total cost of the inventory transferred pursuant to the Sale Agreement and the Consignment Agreement was $928,528.06, the sum of the cost of inventory as set out in Schedule A of the Consignment Agreement and Schedule A of the Sale Agreement.
h) The cost of the inventory as set out in Schedule A of the Consignment Agreement and Schedule A of the Sale Agreement was the wholesale cost to Madraga Distributors, and was less then the fair market value of the inventory transferred.
i) The fair market value of the Sale Inventory and Consignment Inventory was a minimum of 15%, or $139,279.00, in excess of the cost of the inventory as set out in Schedule A of the Consignment Agreement and Schedule A of the Sale Agreement, and a minimum of $139,279.00 in excess of the amount the Appellant was obligated to pay for this inventory pursuant to the Sale Agreement and the Consignment Agreement.
j) The total of all payment made by the Appellant to Madraga Distributors for the Transfer was at least $139,279.00 less than the fair market value of the inventory transferred.
k) Upon receipt of the Consignment Inventory and the Sale Inventory, the Appellant carried on the same, or essentially the same business as Madraga Distributors Ltd. in the same business premises at 4189-2nd Avenue West in Prince Albert, Saskatchewan.
l) On October 17, 1997, Madraga Distributors was liable for taxes, interest and penalties pursuant to the Income Tax Act for its 1992, 1993, 1994 and 1995 taxation years in an amount not less than $329,210.83.
m) As a result of the Transfer, the Appellant is jointly and severally liable with Madraga Distributors in an amount not less than $139,279.00.
11. The Deputy Attorney General states that it raising Assessment 11747, dated September 21, 1998, the Minister failed to distinguish between the Sale Agreement and the Consignment Agreement with regard to the terms of payment. The Minister presumed that all of the inventory was transferred on the same basis as the provided in the Consignment Agreement, wherein the Appellant was responsible to pay Madraga Distributors the cost of the inventory as set out in Schedule A, and entitled to retain any amount received over and above the cost of the inventory. Therefore, in calculating the undervaluation, the Minister applied the 15% undervaluation, as set out in assumption 10(i) above, to the cost of all inventory transferred, or $928,528.06.
12. Notwithstanding the foregoing, the Deputy Attorney General states that a significantly greater undervaluation than assumed by the Minister occurred with respect to the Sale Inventory. The Sale Agreement transferred the Sale Inventory with an itemized cost of $329,073.30 for $125,000.00, which amount was, by itself, as least $139,279.00 less than the fair market value of the inventory transferred.
13. The Deputy Attorney General states that notwithstanding the manner of calculation of the amount of the liability of the Appellant, that as a result of the Transfer, the Appellant is jointly and severally liable with Madraga Distributors in an amount not less than $139,279.00.
B. ISSUE TO BE DECIDED
14. The issue in this appeal is:
a) Whether the Appellant is liable, pursuant to section 160 of the Act s. 19 of the Saskatchewan Act for assessment number 11747, dated September 21, 1998, in the amount of $139,279.00.
[3] Subparagraphs 10 b), c), d), e), f), g) and k) were not refuted by the evidence. Respecting subparagraph k), while 620357 carried on the same business as MDL, except that it stopped selling boats and consignment used cars, after October 17, 1997, it did so without the financial restraints that were on MDL before October 17, 1997. Respecting subparagraph b), George, Sr. resides at Yellow Creek, Saskatchewan.
[4] At the outset of his evidence, the Appellant's counsel called Larry Langeman, CCRA's auditor on the file as a hostile witness. He testified that he helped to prepare the material for this assessment. However he also testified that the actual assessment was done by the Director of Taxation at the Saskatoon District Office. Appellant's counsel took objection to the assessment on the basis that Mr. Langeman had made it. On the basis of Mr. Langeman's testimony, the assessment was made by the Director of Taxation in the Saskatoon District Office and she is authorized to do so pursuant to subsection 900(2) of Part IX of the Income Tax Regulations.
[5] The other issue in this assessment is whether the assets transferred on October 17, 1997 by MDL to 620357, related corporations, were transferred at fair market value for the consideration paid by 620357, namely, $125,000. There are two agreements in issue:
1. Exhibit A-1, the consignment agreement, in which MDL consigned its "whole goods", namely snowmobiles, all-terrain vehicles, recreational water vehicles and trailers to 620357 on the condition that 620357 pay off the 100% financing of their cost to MDL. There was no other consideration. This consisted of 121 units with a total cost of $599,454.76.
2. Exhibit A-2, the sale of parts, clothing and accessories, the goods which MDL sold to 620357 for $125,000. They are described in Schedule A to Exhibit A-2 as having a cost of $329,073.30.
[6] Exhibits A-1 and A-2 contained the inventory of MDL's business, which was essentially a Polaris dealership. Other deals occurred at about the same time, namely:
1. October 17, 1997 - George Madraga, Jr. (owner of MDL) transferred the dealership building to his father George Madraga, Sr. (owner of 620357) for $150,000 to be paid over a period of years. (George, Sr. already owned the land.) Except for the downpayment and one instalment which George, Sr. paid by mistake, this was offset against debts owed by George, Jr. to George, Sr..
2. On about October 14, 1997 620357 acquired the Polaris franchise (which it registered as "Madraga Speed 'N Sport") directly from Polaris for a fee of about $10,000. (R-4, Tab 36). George, Sr. had been the original Polaris dealer at his John Deere dealership in Yellow Creek, Saskatchewan and when he went out of business George, Jr. and Stanley Madraga (George Sr.'s brother) incorporated MDL and obtained the Polaris dealership in question at Prince Albert, Saskatchewan, which they called "Madraga's Deals on Wheels".
3. On October 17, 1997 620357 took over MDL's retail fixtures, cash register, counters tools, computers and computer system, signs and equipment, all of which had a cost in excess of $130,000, without any fee or agreement and stepped into the premises in the place of MDL. The staff remained essentially the same but George Sr.'s granddaughter, Kari, who is George, Jr.'s daughter, became the manager. George, Jr. has the big corner office in the building at present.
4. George. Jr. had bought out Stanley's shares in MDL for $35,000 which George, Sr. lent to George, Jr. in about April, 1993. But there was a large holdback from Stanley while a CCRA audit was completed. Eventually Stanley sued George, Jr. and MDL on the basis that MDL and George, Jr. had defrauded Stanley and for the balance of the $35,000. George, Jr. bought Stanley's lawsuits from Stanley for $40,000. They consisted of judgment debts of $40,502 against George, Jr. and $121,951.70 against George Jr. and MDL. Stanley's lawsuits occurred at about the time George, Jr. was convicted of tax evasion on March 14, 1996.
5. George Sr. bought George Jr.'s farmland on payments over time. This deal is the subject of litigation by both George, Jr.'s wife under The Matrimonial Property Act, for one half, and by CCRA.
All of these transactions have resulted in various offsets. As a result except for the one payment which George, Sr. paid to the Trustee in Bankruptcy of George, Jr. by mistake, George, Sr. has not paid out any other funds than those specified.
[7] On March 14, 1996 George, Jr. was convicted of income tax evasion respecting $208,152.99 in unreported income he had taken from MDL. Simultaneously MDL was convicted of understating its income by $170,797.42 (Exhibit R-1, Tab 80). These convictions were confirmed March 25, 1998 on appeal and fines were levied. George, Jr. made an assignment in bankruptcy.
[8] Respecting the transaction of October 17, 1997, George, Sr., the officer of 620357, was asked question 961 in the Examination for Discovery:
Ms. Lee: All right. So then Mr. Madraga what brought about the thought or the idea that you would take over the store?
A: What got -- well, George would have had nothing, you know, and Kari the same thing, so I felt, you know, to take it over. Now the accountant said it's profitable, making profit, so I took on the risk condition.
[9] Kari is now about 30 years old. She began working in the parts department of MDL in about 1993. She has a high school education and attended university for about three years. She testified that in recent years she has kept books for 620357, but on examination-in-chief it was apparent that she did not understand some of the 620357 computer printouts that she was reviewing. She testified that she is the manager of 620357 and that her father, George, Jr. is a salesman there. George, Jr.'s large office at the front of 620357's premises appears to be much larger and better situated then Kari's.
[10] Kari testified that MDL's chief franchise supplier was Polaris Industries Ltd. ("Polaris") a snowmobile, all-terrain vehicle and water vehicle manufacturer, and its Polaris financier was Deutsche Financial Services ("Deutsche"). By the end of fiscal 1996, MDL was under assessments from CCRA for the years which resulted in this assessment on 620357. Kari testified that as a result MDL's business was reduced "terribly". However MDL's financial statement for the years ending August 31, (Exhibit R-4, Tab. 16) shows sales in 1997 of $4,177,903 and sales in 1996 of $4,869,065. Moreover MDL had a loss of income from operations in 1996 of $111,598 and positive income in 1997 of $128,881. MDL's gross profit before operating expenses in 1996 was $573,666 and in 1997 was $742,048. Kari is not believed.
[11] There are other reasons for not believing Kari. She was an argumentative and evasive witness. It was apparent that she thought this behaviour was smart. She was also established to be untruthful when she was required to back up her statements. In particular, she testified that Revenue Canada had seized MDL's bank account in 1995. In fact, only documents had been seized by Revenue Canada in 1995 and there was no seizure of any other property by Revenue Canada in 1995.
[12] Kari also testified that in 1996 Polaris' district manager supervised a parts and equipment return from MDL to Polaris on an exceptional basis and credited MDL's outstanding account with $100,000. In 1997:
1. Polaris demanded a $100,000 guarantee from George, Sr. and a letter of credit to continue dealing with MDL. George, Sr. refused this.
2. Deutsche demanded guarantees from George, Sr. and his wife, and a mortgage on their land, to continue dealing with MDL. George, Sr. would not do this.
As a result, in early July, 1997 all credit to MDL was cut off completely and it was on cash in advance or cash on delivery with all except a few small local suppliers.
[13] By this time MDL was appealing assessment from the Respondent under the Income Tax Act for 1992, 1993 and 1994. The total owed by MDL at October 17, 1997 for taxes, interest and penalties was $339,210.82.
[14] On October 17, 1997 MDL:
1. Consigned its whole goods - trailers, all-terrain vehicles and snowmobiles to 620357 at cost to be paid as sold pursuant to its financing agreement with Deutsche.
2. Sold its clothing, parts and accessories to 620357 for $125,000 which was paid by 620357's cheque dated November 7, 1997.
[15] At the same time, without any written agreement, 620357 took over the staff (including George, Jr.), equipment, signs, tools, computer system, location and premises of MDL in Prince Albert all as a going concern without charge. 620357 had no written lease of the premises and was a tenant of its owner, George, Sr. in the building and land. There is no evidence that there was any agreement or term respecting 620357's occupancy of the premises, but it paid the property taxes, the utility bills and maintained the premises. The owner of MDL remained George, Jr., now an employee of 620357. 620357 carried on the continued business.
[16] The sales agreement of the parts, clothing and accessories attached a list of parts showing a cost of $329,073.30 (Exhibit A-2, Schedule A). The agreement states specifically that they "have accepted the appraisal" of a Mr. Moberly. However that appraisal had two figures, neither of which is in evidence. Neither figure was chosen by the parties as the consideration. Although Mr. Moberly apparently calculated an adjustment for outmoded inventory, the parties to the agreement subtracted a much larger sum to arrive at the $125,000. The result is that MDL and 620357, by their own agreement did not accept either of the numbers Mr. Moberly calculated as fair market value based on two methods of appraisal. They had ordered Mr. Moberly's appraisal through their chartered accountant or a lawyer.
[17] For these reasons the $125,000 figure is not accepted as the fair market value. The only figure which 620357 has established as an alternative is the cost of $329,073.30. Kari described that figure as flawed because it is the result of a computer print-out done on the 30th of October, 1997, at which time, Kari alleged, the inventory included some goods for which 620357 had paid. However the parties (each headed by owners experienced in the business) to the agreement at the time were each advised by their own lawyers, and did not correct or change that figure for reasons which only they know. As a result, the Court accepts these goods and that cost as being true and correct at that time.
[18] Kari did a number of calculations with the aid of 620357's and its lawyer's staff in the two weeks before the hearing and prepared statements respecting those calculations. On the morning of February 19, Respondent's counsel objected to them being used in evidence. After argument, the following order was made by the Court:
This is a ruling on the overriding objection by counsel for the Respondent in this matter for the conduct of the examination of Kari Madraga, which we are advised by the Appellant solicitor will include reference to or submission as Exhibits of documents prepared by Kari as the manager of 620357, and in part arising from the fact that before 620357 took over the operation of the business from Madraga Distributors Ltd. she was a parts person in Madraga Distributors Ltd. In making this ruling, I am aware of the fact that this litigation began in 1999, and that there have been extensive Discoveries of parties respecting this proceeding. Having said all of that, as a preliminary, I'm going to read from Rule 89 of the Rules of General Procedure of this court.
89 (1) Unless the Court otherwise directs, except with the consent in writing of the other party or where discovery of documents has been waived by the other party, no documents shall be used in evidence by a party unless
(a) reference to it appears in the Pleadings, or in a list or an affidavit filed and served by a party to the proceeding,
(b) it has been produced by one of the parties, or some person being examined on behalf of one of the parties, at the examination for discovery, or
(c) it has been produced by a witness who is not, in the opinion of the Court, under the control of the party.
I can take it from what the Crown counsel has said that she will not be consenting to any of the documents which are proposed to be entered through Kari Madraga. I am also finding that throughout all of these proceedings, Kari Madraga was under the control of the Appellant for the purposes of Rule 89. I am further interpreting (in the circumstances of this case exclusively) that Kari, who I have heard and learned to some extent or to an extensive extent from Kari herself in testimony yesterday, prepared the documents that are proposed to be presented in the last several days, more or less extending over the past two weeks.
In the circumstances of this case, which began in this court in 1999, it is apparent to me that the documents in question could have been prepared by Kari at any time in the last, more or less two years, and actually possibly three years given the dates involved in the beginning of this case.
And on that basis, I am going to allow Kari to continue to testify, but she will not be able to use the documents prepared and proposed to be submitted either to refresh her memory or to submit them in evidence. I accept what the Crown counsel has said, with the references she has made, that she made extensive inquiries about this. I am aware of the fact that the material that Kari proposes to present relates to a hiatus of dates which were discussed extensively by Mr. Sanderson in argument, essentially between the period August 29 and October 30, 1997, and to some considerable extent thereafter relating to the subsequent sale of parts which are in question. In my view, all of these matters could have been documented long ago for the purposes of this hearing, and for the purposes of Rule 89, should have been documented long ago.
And on that basis, I make the ruling.
[19] Mr. Chow's figure of $329,000 as the fair market value of the goods sold by MDL to 620357 as described in Schedule A to Exhibit A-2 is accepted as correct. Mr. Chow allowed for a 2.4% calculation for obsolete or depreciated goods within that stock. However he also calculated that subsequent price increases respecting the stock would make up for this over time; on the evidence before the Court respecting the Appellant's pricing practices that is correct. Kari testified that on her review of the stock in the two weeks before this hearing, $64,900 worth was still in the stock as of February, 2002. There are a number of problems respecting the use of Kari's figures: the first is Kari's own credibility; she had a habit of making statements like this in her testimony which she could not back up. The second is to determine any basis for her figure: many of 620357's mark up's of these goods were 100% others ranged from about 60% up. Based on Kari's conduct in this hearing, even if she were right, the $64,900 would be a retail figure and not cost. Finally, in cross-examination it was established that Kari would use the parts number of an identical part to state that it was a duplicate entry, even though the parts statement itself would show the second part in a separate location. For these reasons, Kari is simply not believed. The Court does not place any reliance at all on her testimony. Her figure of $64,900 is rejected outright. There is no evidence accepted which contradicts Mr. Chow. The fact that 620357 and MDL accepted $329,073.30 as the cost of the itemized list of goods transferred as of October 17, 1997 with full knowledge of those goods at the time confirms both the fact that those were the goods transferred and the actual cost of those goods.
[20] The result of the figures which the Court accepts as correct respecting MDL's sale of parts, clothing, accessories to 620357 on October 17, 1997 and described in Exhibit A-2 is as follows:
1. Fair market value $329,000
2. Less consideration paid by 620357 $125,000
3. Amount of inventory
transferred by MDL to
620357 for which it paid less
than fair market value $204,000
[21] Benedict Chow also calculated that the consignment of "whole goods" - snowmobiles, all-terrain vehicles, water vehicles and trailers - described in Exhibit A-1 and consigned by MDL to 620357 for no consideration represented a fair market value transfer from MDL to 620357 of $11,000, net. The transaction was that 620357 would pay off the 100% financing MDL incurred for these units as they were sold and would keep any profit. There is no evidence summarizing 620357's profit or loss on these units. Nor is there any evidence of the fair market value of such a transaction, except Mr. Chow's. However, Kari testified that MDL had accepted second-hand vehicles for sale on consignment at a fixed agreed selling price from the consignor for a fee of $100 per unit for 90 days on their lot. 121 units were the subject of this consignment agreement. At a $100 fee each, that works out roughly as a confirmation of Mr. Chow's figure of $11,000. As a result Mr. Chow's figure of $11,000 is accepted by the Court.
[22] For these reasons, the appeal is dismissed. The Respondent is awarded party and party costs.
[23] Finally, at the close of argument Appellant's counsel advised the Court that Garth Busch's chartered accounting firm has requested that it be remunerated for the hours which it incurred respecting Mr. Busch's examination respecting this proceeding. This is simply part of the cost a professional might incur in acting on a deal like this. It is a cost that the accounting firm must bear just as a good citizen who testifies in court may incur a personal cost associated with doing his duty.
Signed at Ottawa, Canada, this 12th day of March, 2002.
"D. W. Beaubier"
J.T.C.C.
COURT FILE NO.: 1999-4723(IT)G
STYLE OF CAUSE: 620357 Saskatchewan Ltd. v. The Queen
PLACE OF HEARING: Prince Albert, Saskatchewan
DATE OF HEARING: February 18, 19, 20, 21 and 22, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge D. W. Beaubier
DATE OF AMENDED
JUDGMENT: March12, 2002
APPEARANCES:
Counsel for the Appellant: James Sanderson, Q.C.
Counsel for the Respondent: Elaine Lee
COUNSEL OF RECORD:
For the Appellant:
Name: James Sanderson, Q.C.
Firm: Sanderson, Balicki, Popescul
Prince Albert, Saskatchewan
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-4723(IT)G
BETWEEN:
620357 SASKATCHEWAN LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 18, 19, 20, 21 and 22, 2002
at Prince Albert, Saskatchewan,
by the Honourable Judge D. W. Beaubier
Appearances
Counsel for the Appellant: James Sanderson, Q.C.
Counsel for the Respondent: Elaine Lee
AMENDED JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is dismissed in accordance with the attached Reasons for Judgment.
The Respondent is awarded part and party costs.
This Judgment and Reasons for Judgment are issued in substitution for the Judgment and Reasons for Judgment dated March 11, 2002.
Signed at Ottawa, Canada, this 12th day of March, 2002.
|
"D. W. Beaubier" |
J.T.C.C.