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Citation: 2004TCC42
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Date: 20040116
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Docket: 2001-2039(IT)G
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BETWEEN:
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RICK WALCHUK,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Miller J.
[1] The Appellant, Mr. Rick Walchuk, a
stockbroker by trade, invested as a partner in a restaurant in
Greece in the mid-1990s. Over a three-year period he poured over
$400,000 into this venture. The restaurant did not fare well and
ceased operations in 1998. Mr. Walchuk's position is that his
$413,000 investment in the partnership was an adventure in the
nature of trade and, therefore, fully deductible as a loss on
disposition on income account in 1998. The Respondent's
position is that Mr. Walchuk's partnership investment was
simply the acquisition of a capital interest in a partnership.
The Respondent allowed a $413,880 capital loss on the disposition
of the partnership interest as a result of the cessation of
operation of the partnership. I agree with the Respondent.
[2] At the outset of the trial, Mr.
McKenzie, acting for Mr. Walchuk, indicated that the appeals for
1996 and 1997 should be dismissed. These appeals related to
business losses of the partnership claimed by Mr. Walchuk which
according to Mr. McKenzie, Mr. Walchuk could not adequately
document. Similarly for 1998, Mr. McKenzie advised that for the
same reason, Mr. Walchuk was not arguing for the
deductibility of any operating business losses, but the sole
issue in this case was whether Mr. Walchuk's investment in
the partnership was on income or capital account. Mr. McKenzie
accepted the following assumptions put forward by the Crown:
14(b) on or about June 20, 1995, the
Appellant and an individual named Panagiotis Vassios
("Vassios") entered into a partnership agreement,
("hereinafter referred to as the Partnership");
(c) Vassios was not
a resident of Canada;
(d) the said
Partnership was to establish a restaurant named Ilion to be
located in Glyfada, Athens, Greece;
(e) the Appellant
and Vassios were to be equal partners in the Partnership;
(f) Ilio
Management of Restaurant and Catering Services, Anonymous Company
("Ilio AE") was a corporation incorporated under the
laws of Greece;
(g) Ilio AE was not
resident in Canada;
(h) Ilio AE operated
the restaurant Ilion;
...
(j) the
Appellant was not a shareholder of Ilio AE;
(k) the Partnership
was not a shareholder of Ilio AE;
(l) the
Appellant advanced funds totalling no more than $413,380 to the
Partnership throughout the 1996, 1997 and 1998 taxation
years;
...
(n) in 1998, Ilion
ceased operations and Ilio AE became insolvent;
(o) the Partnership
was dissolved in 1998 after Ilion ceased operations;
(p) the Appellant
acquired an interest in the Partnership (the "Partnership
Interest") when he entered into the Partnership with
Vassios;
...
(r) the adjusted
cost base of the Partnership Interest to the Appellant at the
time the Partnership was dissolved was $413,380;
(although Mr. McKenzie would not use the term
"adjusted cost base)
(s) the Appellant
disposed of his Partnership Interest when the Partnership was
dissolved;
[3] Mr. Walchuk described himself as a
high-risk broker. During the relevant years of 1995 to 1998, he
was employed by Yorkton Securities Inc. in Calgary. His clients
knew that Mr. Walchuk's philosophy was to seek large rewards
on a minority of investments which would more than offset losses
on the majority. Mr. Walchuk also invested in the market on his
own account. His 1996 to 1998 tax returns indicated gains or
losses on such trading were on income account. His 1996 return
also showed a capital loss of $30,000 on the disposition of
shares in the No Name Café, a Calgary restaurant. Mr.
Walchuk indicated this was reported as a capital loss because the
restaurant was intended to be a long-term investment. He
described this as akin to a dining club.
[4] With respect to the investment in
the restaurant in Greece, Mr. Walchuk was first approached by a
client of his, Mr. Panagiotis Vassios in late 1994, with the idea
of partnering in the Greek restaurant. Mr. Vassios had run a
restaurant in Canada for a number of years, but in 1993 retired
to Greece. He ran a slouvaki-pizza stand in Athens for a brief
period of time but was looking for something bigger. Mr. Vassios
advised Mr. Walchuk that two other people were interested in the
restaurant; one with some considerable restaurant background who
would contribute his expertise, and another who would help with
the financing. Mr. Walchuk first testified that the arrangement
was a partnership of the four individuals, though later indicated
that he really considered just himself and Mr. Vassios as
partners. There is no written agreement at the outset though in
1999 Mr. Walchuk requested, and received, the following from Mr.
Vassios (translated from Greek):[1]
Official Translation from Greek into
English
Exhibit "B"
INDIVIDUAL AGREEMENT
Date at Athens Tuesday, June 20, 1995, between Mr.
Panagiotis Vassios, business man, resident of Glyfada,
specifically at, 1 Giannitsopoulou Street on the first part and,
Mr. Rick Walchuk, businessman, resident of Canada, on the
second, agreed and entered into a joint agreement on the
following:
The above name parties have decided to enter into a joint
venture as equal partners, sole purpose of which will be the
establishment of a restaurant in which both parties will have a
50% interest, the name of which shall be "ILION"
to be located in Glyfada, at 1 Giannitsopoulou Street.
It is further agreed that both partners will equally share
profits and losses by 50% each.
After accepting and agreed on the above conditions, both
parties affix their signatures and received a copy of the present
document.
Signatures
(Signature ineligible)
[5] Mr. Walchuk sought advice from his
accountant as to how to structure this investment and was advised
to go the partnership route, rather than invest in shares, so
that he could deduct losses against his income account. Mr.
Walchuk testified that it was his intention to build the
restaurant up and then sell it, hoping to double, triple or
quadruple his investment. There was no business plan as such, nor
any pro formas or other projections. There was no written
agreement at that time with respect to his investment. Mr.
Walchuk indicated that he had no interest in being a long-term
owner of a restaurant, given restaurants' notoriety for
losses.
[6] Due to problems with the
contractor and licensing issues, the tapas-style restaurant did
not open until May 1996, several months later than projected. The
restaurant premises were leased under a nine-year lease. The
business was operated by Ilio Management of Restaurant and
Catering Services (Ilio). There was no evidence of the
arrangement between the partnership and Ilio. Indeed the
difficulty with this matter is that Mr. Walchuk is unable to
clearly explain the true legal nature of the arrangement, other
than he put money into a restaurant in Greece.
[7] By the time the restaurant opened,
Mr. Walchuk had forwarded approximately $50,000 to Mr. Vassios.
Mr. Walchuk was concerned that he personally could not afford to
continue this investment so he approached a couple of his clients
who agreed to take over 90 or 95% of Mr. Walchuk's position
for $50,000, the amount Mr. Walchuk had invested. On May 1, 1996,
Mr. Walchuk wrote to Regency Salvage Inc. (Regency), his
client:[2]
Regency Salvage Inc.
Cockburn Town
Grand Turk, TCI
Attn: Ervin Quelch
Dear Sir:
With respect to our discussions of your purchase of 90% of my
25% interest of Ilio Restaurants of Athens Greece.
1) Discussions
with the lawyer of Ilio have set the wheels in motion to
instieate [sic ]the transfer of shares to Regency.
2) Purchase
price of $50,000 CDN of which $27,500 CDN to be paid immediately
and the balance $22,500 CDN to be paid on or before May 31, 1996
interest free.
I trust this is satisfactory.
Yours truly,
"Rick Walchuk"
Rick Walchuk
[8] A subsequent correspondence
referred to a 95% interest in the 25% interest in Ilio. The
arrangement continued for only a few months. In
October 1996, Mr. Walchuk bought back his interest from
Regency for $162,500 to, as he put it, "keep his clients
happy". Mr. Walchuk testified that this represented the
amount Regency had put into the restaurant (including the $50,000
originally paid to Mr. Walchuk). Mr. Walchuk was not personally
able to come up with all of the funds and therefore approached
his employer, Yorkton, to lend him $112,500 to complete the
purchase. He has since repaid this amount. During the few months
of Regency's ownership, Mr. Walchuk himself injected an
additional $47,000 into the project.
[9] It was clear that by the end of
1996, the tapas-style restaurant was not working, so renovations
were undertaken to change the nature of the restaurant to one
more appealing to the Greek community. Mr. Walchuk continued to
pour money into the project. The parties agreed that the final
tally was approximately $413,000, though a schedule provided by
Mr. Walchuk to Canada Customs and Revenue Agency (CCRA) suggested
some confusion as to the accuracy of this amount.
[10] At some point, the other two original
participants in the restaurant had their interests diluted to
nothing, according to Mr. Walchuk. There is no written evidence
of how this actually occurred.
[11] The restaurant continued to struggle
and in 1998 Mr. Walchuk flew a prospective purchaser to Greece to
review the possibility of acquiring the restaurant. This did not
prove successful and the restaurant closed shortly thereafter.
The company, which operated the restaurant, became insolvent. As
Mr. Vassios put it in a letter to CCRA of December 1999:[3]
Mr. Walchuk was my partner in a restaurant located in Athens,
Greece. The corporate name of my company was Ilio AE.
I hereby swear that Mr. Walchuk's funds were invested in
this business and used in the day to day operations.
Due to the insolvency and closure of this company the
accountant has not been paid and therefore will not release the
financial statements until he is paid.
[12] During the life of the partnership with
Mr. Vassios, Mr. Walchuk went to Greece 30 to 35 times. There is
little evidence of what he did on these numerous occasions. For
the years 1996 to 1998, Mr. Walchuk reported business losses from
this business in amounts of $77,700, $104,300 and $48,085,
respectively. He did not report a business loss from the
disposition of his partnership interest on the closure of the
restaurant. In his initial objection of March 20, 2000 he
indicated:[4]
I object to the reassessment of my 1998, 1997 and 1996
returns.
I object for the following reasons:
1. I was in
business in a restaurant in Greece and have proved by cancelled
cheques that I was in business. My business loss has been
disallowed.
The business loss Mr. Walchuk was referring to was the
restaurant's operating loss, not the loss from disposition of
the partnership interest on closure, of which there was no
mention.
[13] The issue is whether Mr. Walchuk's
loss of $413,880 on the disposition of his partnership interest
is on income or capital account. Mr. McKenzie suggested the only
question that has to be answered in resolving this issue is why
did Mr. Walchuk make this investment. His answer of course is
that Mr. Walchuk made this investment for one reason only - to
resell as soon as possible at a profit. Clearly, therefore,
according to Mr. McKenzie, on income account. Any confusion as to
the nature of the investment, according to Mr. McKenzie is
immaterial. This, I suggest, puts too great an emphasis on Mr.
Walchuk's stated intention after the fact, without a more
elaborate review of all the circumstances and Mr. Walchuk's
whole course of conduct. I therefore analyze the matter on the
following basis.
[14] Was this property, the partnership
interest, held as an investment or as an adventure in the nature
of trade? In answering that question, it is necessary to consider
the following:
(i) What was the nature of the
property?
(ii) What was Mr. Walchuk's
intention?
(iii) What was the nature of Mr.
Walchuk's business?
(iv) What other circumstances suggest
the disposition of the business was a scheme of Mr. Walchuk's
for profit making?
Nature of Property
[15] The property at issue in these appeals
is Mr. Walchuk's partnership interest. Mr. McKenzie made the
valid point that such an interest is property, and any property
is capable of being capital or inventory. He referred to several
cases, dealing with shares, licenses and other forms of property
being found to be on income account. I wish only to address his
reliance upon Martin Taiger v. M.N.R.,[5] which was the one case
that dealt with a partnership interest. The interest held by
Taiger was a 45% partnership or undivided ownership
interest in a lot of land. That interest, along with the other
55%, was reconstituted amongst new partners by way of a transfer
of a 60% undivided interest in the real property to six new
owners. It was argued that was simply a reconstruction of the
partnership and nothing had been disposed of justifying the
imposition of any tax. The Tax Appeal Board concluded that:[6]
I have reached the conclusion that the transaction (upon which
the appeal turns) constitutes a dealing in real estate and the
profit derived is taxable. ...
Given this finding, I do not accept this case as any authority
for the proposition that a partnership interest was sold on
income account. It was the real property that was sold. Mr.
McKenzie has referred me to no other case where a partner has
successfully claimed a disposition of a partnership interest on
income account. I do not conclude this is not possible, but the
circumstances must be clearer than Mr. Walchuk's. A
partner, by nature, carries on business with a view to profit,
not from resale, but from the ongoing business. That is the
nature of a partnership interest. For income tax purposes the
partnership interest is treated as capital property, separate
from the assets of the partnership. The Respondent raised several
cases simply confirming this basic point (D & B Oilfield
Contracting Ltd. v. M.N.R.; Mihelakos v. R.,
Stursberg v. M.N.R.; M.N.R. v. Strauss; and
Marion Estates Ltd. v. M.N.R.).[7]
[16] The partnership unit may have some
similar characteristics to a share in that it too constitutes
something which, by its nature is an investment, and not itself,
an ordinary transferable widget. However, to overcome the normal
status of a partnership unit as capital property is a more
onerous task than doing likewise for shares, simply due to the
nature of the structure. There are ready markets for shares. The
owner of the share is not coincidentally the owner of the
business' underlying assets. The partner, however, is both
the owner of the capital property, the partnership interest, and
the owner of the underlying assets, the business itself. This is
only to indicate that to claim there are two businesses there
must be compelling, convincing evidence that the dealing with the
one - the partnership unit - is distinct and separate from the
dealing with the other. I have not been convinced that Mr.
Walchuk's dealing with his partnership interest was such that
its nature was converted from the normal nature of capital
property to inventory.
Intention
[17] Mr. Walchuk stated it had been his
intention from the outset to build up the restaurant and resell
it at a profit. This statement must be assessed in light of all
the circumstances of the investment, and particularly what Mr.
Walchuk actually did at the time and following. Once reviewed in
that light, I have serious reservations as to the veracity of Mr.
Walchuk's stated intention.
[18] There is no question that Mr. Walchuk
carried on a business in some arrangement, which the parties have
agreed was a partnership arrangement. Mr. Walchuk sought
professional advice at the outset and followed that advice to not
invest in shares of a Greek company that would run a business,
but to directly be a partner in the restaurant. Curiously, the
business appears to have still been run by a company, and there
is no evidence as to the arrangement between the operating
company and Mr. Walchuk's and Mr. Vassios' partnership.
Somehow, however, Mr. Walchuk and Mr. Vassios were to share the
profits and losses of the restaurant business. I am not going to
guess at whether there was an agency or maybe even a management
contract. I am satisfied that Mr. Walchuk believed he was a
partner in the restaurant business, and the minimal documented
evidence supports that finding. The point is that Mr. Vassios and
Mr. Walchuk intended to, and in fact did, as the very
definition of a partnership demands, carry on a restaurant
business with a view to profit. Mr. Walchuk attempted to deduct
his business losses in 1996, 1997 and 1998 as a partner in the
restaurant business. What he owned, however, was a partnership
interest. It is critical to view Mr. Walchuk's stated
intention in light of a very real intention to carry on a
restaurant business for profit.
[19] Mr. McKenzie acknowledges that it is
not the restaurant business itself, but the acquisition and
disposition of the restaurant business though the purchase and
sale of a partnership interest that is the adventure in the
nature of trade. But, he claims, Mr. Walchuk, the partner, only
carried on the restaurant business in common with Mr. Vassios
with a view to profit from the business, so that he could enhance
the value of the business to resell the partnership interest at a
profit. Viewed in this light, every proprietor or partner of a
new enterprise runs the risk of a disposition of the business
being on income account, as every such entrepreneur intends to
enhance the value of his or her business.
[20] I turn now to the specifics of the
business to see if Mr. Walchuk's intention re his partnership
interest was so different from any partner in a fledging
partnership. First, who were Mr. Walchuk's partners?
They were Mr. Vassios and at least one other with an extensive
restaurant background. Were these individuals in for the long
haul or a quick enhancement and flip of the business? We do not
know. Neither testified. Mr. McKenzie wants us to infer that
because Mr. Vasious retired to Greece, he would not want to run a
restaurant over the longer term. It is an equally, if not a more
viable inference, that the restaurant would provide an ongoing
income to Mr. Vassios. He ran a restaurant in Canada for several
years. Indeed, the evidence was that he has since returned to
North America and continues to run a restaurant.
[21] Mr. Walchuk went to Greece 30 to 35
times over the life of the restaurant. Mr. McKenzie suggested
this is evidence of someone intent on enhancing the value of his
property for future sale. I simply do not accept that thesis,
especially as Mr. Walchuk offered no explanation as to the nature
of his many visits. The fact is Mr. Walchuk was a partner in a
restaurant business and clearly spent some considerable time
physically present at the business. That does not tip the balance
in favour of an intention to enhance the value more than an
intent to simply assist as a partner in carrying on the business.
The obvious dilemma I am faced with is that actions taken by Mr.
Walchuk in connection with the business can support an intention
to carry on the restaurant business with a view to profit equally
with an intention to enhance the value of the business with a
view to resell at a profit. In both cases, the owner wants to
make the business profitable.
[22] This is not however like the situation
in the case of Becker v. R.,[8] which Mr. McKenzie relied upon.
In Becker, the Appellant acquiredshares in a lumber
company that was in financial difficulties, with an intention
proven at that time, to transform a failing enterprise into a
profitable one and then sell it as soon as possible. Justice
LeDain of the Federal Court of Appeal distinguished
Becker[9]
from Irrigation Industries Ltd. v. M.N.R.[10] as follows:
It appears from the foregoing passages in the reasons of the
Trial Judge that he was distinguishing between the immediate or
motivating purpose of the appellant and what the appellant
intended to do 'eventually', and that he considered the
decision in Irrigation Industries reflected this
distinction. In my respectful opinion that was a misunderstanding
of the judgment in that case. In Irrigation Industries it
was clear that the shares were purchased with the intention of
selling them for a profit as soon as possible, but the majority
held that this was not sufficient by itself to give the
transaction the character of trade. An important difference
between Irrigation Industries and the present case is that
the BCP venture did not simply involve a purchase of shares with
an intention to resell them for a profit, but the purchase of a
business with the intention of transforming it in order to turn
it into a profitable enterprise.
...
... In my opinion, if the appellant's testimony is to be
taken as credible, and it cannot be treated otherwise by this
Court in view of the position taken by the Trial Judge on the
question of credibility, there is only one conclusion that can
properly be drawn from it, and that is, that it was the
appellant's intention, upon changing the nature of BCP's
business and making it profitable, to sell it as soon as possible
for a profit.
[23] Two important considerations arise from
Becker; first, the Appellant's stated intention of
resale at a profit must be taken as credible, and second the
intention must be to transform the business. Bear in mind also,
Becker deals with shares.
[24] With respect to the first point, I have
doubts of Mr. Walchuk's credibility regarding his stated
intention due to the following:
- no evidence at the
time of his initial investment of such stated intention;
- entering the
partnership with a couple of restauranteurs;
- lack of
corroboration from Mr. Vassios;
- lack of
corroboration from any representative of Yorkton;
- lack of
corroboration from any representative of Regency;
- lack of
corroboration from Mr. Walchuk's accountant;
- lack of reporting
the business loss from the closure of the business in his 1998
return; and
- lack of any
mention in his initial objection of this issue.
[25] With respect to the second point, this
was not a case of taking over a failing business and turning it
around. This was a case of starting a restaurant business. There
was no transformation going on - there were just the usual hopes
and expectations of a new business that it would succeed. There
is nothing extraordinary to suggest the intention went beyond
what is normal in a new enterprise.
[26] For these reasons, I do not accept that
Mr. Walchuk had an intention, any different from any partner in a
new enterprise, that would turn an investment into an adventure
in the nature of trade.
Nature of Mr. Walchuk's business
[27] As a broker in high-risk investments,
who reported trades in securities on income account, does Mr.
Walchuk deserve similar treatment for this similar high-risk
investment? I do not believe so. In reviewing his 1996, 1997 and
1998 returns, there is no indication that any of the trading
income or losses derived from dealing with partnership units.
Further, the only investment in a restaurant, other than Ilion,
was in 1996 in shares of the No Name Café. This
disposition was reported on capital account, as according to Mr.
Walchuk, it was intended to be a dinner club for a long-term
duration. I am not swayed that trading in shares is sufficient
background to conclude that entering a restaurant business in
partnership with a restauranteur client constitutes trading in
partnership units.
Any other circumstances
[28] Mr. McKenzie raised the following
circumstances to indicate this was an adventure in the nature of
trade:
-
it would be difficult for Mr. Walchuk to monitor an ongoing
business in Greece in the long term.
Given Mr. Walchuk's frequent trips to Greece, this does
not hold water.
-
if Mr. Walchuk had been interested in the business in the long
term, he would have sought more documentation by way of business
plans, pro formas, etc.
This does not appear to be Mr. Walchuk's modus
operandi. He attempted to deduct considerable sums with no
supporting documents. He sold his interest on the basis of a
handwritten note. His schedule summarizing monies into the
partnership was suspect. He ultimately invested over $400,000
with virtually no documentation. My overall impression is that
diligence and documentation were simply not important to Mr.
Walchuk. It had nothing to do with a long term versus quick flip
intention.
-
the return of Mr. Walchuk's capital was entirely dependent on
a sale of the business.
There was no evidence of financial projections to support this
contention: this was at best conjecture. Certainly, at the time
of the initial $35,000 investment, there was no evidence
suggesting it was anyone's, including Mr. Walchuk's,
belief that a sale of the business was the only way to recover
his investment.
[29] In conclusion, there was only one
business Mr. Walchuk was involved with - the restaurant business
in Greece. Its disposition by insolvency was a capital
disposition. He did not adventure in partnership units. The case
is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, the 16th day of January, 2004.
Miller J.
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