Vine Estate v. The Queen, 89 DTC 5528, [1990] 1 CTC 18 (FCTD)

The Associate Chief Justice:—The style of cause in this matter was amended by order of Giles, A.S.P. on September 11, 1989, unfortunately to reflect the fact that the plaintiff William J. Vine died on May 2, 1989 while judgment was under reserve. In these reasons, I refer to Mr. Vine as plaintiff or taxpayer.

This action is brought pursuant to subsection 172(2) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended, concerning the taxation for the years 1979, 1980, 1981 and 1982. During that period the plaintiff incurred losses in the operation of a Florida corporation of which he was the sole shareholder and which he met with funds from an Ontario corporation of which he was a majority shareholder. In reassessments, the Minister contends that the funds are appropriations pursuant to subsection 15(1) of the Income Tax Act, or in the alternative, are a deemed benefit under section 80.4. The Minister also disputes the taxpayer's right to deduct the Florida losses as business losses. The matter came on for hearing in London, Ontario on October 13 and 14, 1988.

Facts

The plaintiff had a half interest (1006 of 2007 shares) in an Ontario company called Carl Vine & Sons Ltd. (“Carl Vine Ltd."). The remaining shares were held by Helen Vine, the plaintiff's wife. The company operated a gas station in London, Ontario on premises owned by Shell of Canada and leased by Carl Vine Ltd.

In 1978 Mr. Vine borrowed $40,000 from a bank and incorporated, in Florida, U.S.A. a company called W.J.V. Inc. which owned and operated a car rental franchise (with Holiday Rent-A-Car) and a service station (with Chevron Gas). The shares of W.J.V. Inc., 100 in all, were held by Mr. Vine. He acquired the 100 shares on July 19, 1978. W.J.V. Inc. was managed by a Gary Wyant, a Canadian business acquaintance of Mr. Vine, who lived in Florida.

Helen Vine testified that the plaintiff had always been interested in establishing a business which would be owned by them in contrast to the leased operation in London. In particular, the plaintiff was interested in establishing such a personally owned enterprise in Florida. She had a number of calendars on which she recorded many events involving the Florida trips and transactions and testified that Mr. Vine often went to Florida first to establish the business and later to help operate it. By December 1981, however, Mr. Vine was so ill with ulcerated colitis and phlebitis that he was taken to hospital and remained off work until the end of March 1982. Finally, in 1982 the Vines sold the business since they could no longer afford to take the losses. They had already mortgaged their house twice and they had borrowed money from family in order to keep the business afloat.

Although Mr. Vine was too ill to give evidence personally in court, excerpts from his answers given at discovery were read into the transcript at trial. Some of them are set out below.

39. Q. Have you ever bought or sold other businesses?

A. Well, W.J.V. Inc..

47. Q. And what was your intention in looking at that business?

A. Well, I wanted a business for myself. Where I am now, they could kick me out next—you know, when the lease comes up I've got nothing really to sell. I've always wanted a business that I could build up and sell type of thing.

48. Q. What do you mean sell? Sell when?

A. Well to make money I guess is the, you know. Just to get a company viable build up its net worth and so forth and sell it.

49. Q. After what period of time?

A. No specific period of time.

50. Q. Was it your intention to set up a business, operate it for the profit and then on retirement sell it?

A. It just depends, if the price was right it could go next year, it could go two years, or whatever.

199. Q. ... What were the purposes of these advances [in 1982, 1983,

1984] by you to W.J.V. assuming such advances were made?

A. Well, to try to keep the company solvent I guess. As I told you before, I was trying to sell the company. I was hoping I'd have a good year and get out type of thing, you know.

Excerpts of transcript from the discovery of J.M. Wilkie were also read in. Mr. Wilkie was a Revenue Canada official involved in the reassessment of the plaintiff. The relevant exchanges are set out below.

41. Q. What facts or evidence does the defendant or do you rely on in support of the allegation that the plaintiff did not acquire his 100 per cent interest in W.J.V. Inc., with the intention of making W.J.V. Inc. profitable and then selling the plaintiff's interest in W.J.V. Inc. at a profit. What evidence do you rely on in support of denying that allegation?. . .

[brief exchange of remarks]

42. Q. That's correct. What evidence or facts do you rely on or did you put up to lead you, or the defendant, to that conclusion?

A. One item that he did claim interest expense on his personal return against investment income so he was showing it as investment income rather than he invested in shares in a U.S. company. So any profit that would come back would have to come back as a profit on the sale of dividends or whatever to be taxed.

[brief exchange of remarks]

44. Q. What else, if anything, Mr. Wilkie?

A. If anything, probably my discussion with Mr. Vine when I got into

the subject in the first place. He said basically, . . .

45. Q. When was that discussion?

A. Sometime in 1983 I would think, November, probably during the week of the initial audit.

46. Q. Who said . . .

A. He said he had always wanted to own a business. I think he referred to . . . he'd just had a bad experience with the Richmond Street part of the garage where Shell Canada or whoever it was he franchised for said we don't want this any more, so in other words, he ended up with the one service station that he was now operating. He said he wanted to have a business that he could operate in his own name, in other words, he wanted, and I understood, he wanted a continuing type business that he could—the impression he left with me at that time was that he wanted a business that was his, his alone, in other words. I’m the boss, Shell can’t sell me out down the road, or Holiday or whoever it is. I can build up something that I've got equity in so that some day I can become, retire or whatever and have something. That conversation is why—this was where I formed the opinion that he wanted to form a business to be a going concern.

Mrs. Vine, in her testimony-in-chief at trial, also spoke of her husband's intention regarding W.J.V. Inc..

Q. What was the initial impetus, do you recall why he did it (set up

W.J.V. Inc.); do you have any personal knowledge of that?;

A. Even though Bill ran Carl Vine & Sons business he always felt that it was something that was handed to him, even though it wasn't, we did buy it from his father and brother, but he wanted to start and run a business of his very own. He needed somehow or other to prove that he could do it.

Q. . . .What opinions did you have, why did you get into this, you, Helen Vine, of your own personal knowledge?

A. Because I wanted Bill to have what he wanted.

Q. Were you able to ascertain . . .

A. He really wanted a business of his own that he started and he hoped to . . .

Q. What were [sic] going to do, what was your objective in doing this business, what were you going to do?

A. We just wanted to have it and make some money and sell it for a profit.

The plaintiff contends that from 1978 to 1984 Mr. Vine put in about $300,000 into W.J.V. Inc. Some of the money came from his own pocket and some from Carl Vine Ltd., hence the reassessments for appropriations. Mr. Gregg Lowry was the accountant for Carl Vine Ltd. and for Mr. Vine for most of the period involved and went through the account ledgers during his testimony. Many figures were mentioned in evidence, varying depending on the source, but I find that the final tally comes to this, based on Mr. Lowry's testimony and the account ledger:

The $5,185.44 is to be deducted from the $19,703.84 since some personal expenses (that is, out-of-pocket expenses incurred by Mr. Vine when doing activities related to W.J.V. Inc. such as travel to Florida and telephone bills) were already accounted for in the sums advanced by Carl Vine Ltd. With a $4,000 adjustment, which appeared in the accounts kept by Mr. Lowry, the total money expended into W.J.V. Inc. was $300,194.72.

It is common ground that for the period in question, 1979 to 1982, the total of the money sent to W.J.V. Inc. by Mr. Vine and Carl Vine Ltd. is $255,568.19. This lower figure arises since the 1978 sums invested by Carl Vine Ltd. ($2,999 and $16,546) were not part of the reassessments, nor was the $25,480.99 of interest paid, which Mr. Vine had already deducted.

In addition to the financial difficulties, Mr. Vine’s health was also suffering. Dr. John B. Walker, a medical practitioner in London, Ontario, first saw Mr. Vine as a patient in 1980. In early 1981 Mr. Vine developed ulcerated colitis so severely that he had to be admitted to hospital. Ulcerated colitis is not fully understood by medical science, but the consensus is that it has some basis in serious stress. Mr. Vine told the doctor that he was suffering some business problems in Florida. Dr. Walker said that Mr. Vine did not suffer from ulcerated colitis before this time and formed the opinion that the business problems caused stress which was an underlying factor that led to the development of the condition of Mr. Vine.

The doctor also gave evidence that the plaintiff suffered a stroke in September 1987. The stroke left Mr. Vine with neurological impairment, and he was, at the time of trial in October 1988, still impaired to the extent that he was unable to give evidence in person.

Mr. Lowry also went through the balance sheets for W.J.V. Inc., based on tax returns filed by W.J.V. Inc. with the American I.R.S. Mr. Lowry determined the accumulated operating losses of W.J.V. Inc. for 1979 were about $20,164 (U.S.); at the end of 1980 they were $49,470. By March 1981 accumulated operating losses totalled $66,128 (U.S.) and in 1982 the tax return indicated accumulated operating losses of $73,929 (U.S.). By September 1983 W.J.V. Inc. had no operating assets. It did have some cash in a Florida bank, about $4,296, and it went to the bank to help pay off a $25,000 loan which Carl Vine Ltd. had guaranteed.

W.J.V. Inc. sold the car rental franchise to an American company in September 1982, for about $50,000 (U.S.). The money went to pay off the current operating debts of W.J.V. Inc., and chattel mortgages on the cars, after which only $10,000 of the purchase price remained, and was sent to Mr. Vine in the autumn of 1983. That $ 10,000 then went to the bank, to help pay off the loan. In its 1983 financial statement, there is an indication that Carl Vine Ltd. was still liable for the balance of the bank loan, to the sum of $22,800 (U.S.).

The gas station was also sold, in September 1983, for $15,752 (U.S.). Of that, $6447.79 remained after various expenses and was paid into escrow. Mr. Vine was indebted to Chevron for $8,663.12, and he paid $5,859.40 of the $6,447.79 to Chevron. W.J.V. Inc. was involuntarily dissolved, by operation of Florida law, on November 10, 1983.

The notices of reassessment, dated April 12, 1984 added a total of $111,350 to Mr. Vine's income, by adding the following sums to the total income of the taxpayer, styled “Appropriations from Carl Vine & Sons Ltd. Re Advances to W.J.V. Inc”:

For 1981 and 1982, amounts of $99 and $2,783 respectively were added as "Interest Benefit Re Debt owed to company". The plaintiff objected to the reassessments in July 1984 and the Minister sent a notice of confirmation on September 10, 1985, maintaining that the additions to Mr. Vine's income were proper under subsection 15(1) and section 80.4 of the Income Tax Act.

Questions

Three questions arise: (1) was there an appropriation by Mr. Vine of funds belonging to Carl Vine Ltd., for which he can be taxed under subsection 15(1); (2) is it proper to add a deemed benefit under section 80.4; (3) can Mr. Vine deduct any of the amounts expended by or imputed to him?

Law

1. Appropriation under subsection 15(1) or subsection 56(2)

A. Subsection 15(1)

The germane part of subsection. 15(1), at the relevant time read:

15.(1) Appropriation of property to shareholder.—Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

[. . •]

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

It was not contended that the case here met any of the exceptions of subsection (1).

Counsel for the plaintiff relies heavily on The Queen v. Ginter, [1977] C.T.C. 418; 77 D.T.C. 5274 (F.C.T.D.) in which the taxpayer bought land, buildings and equipment from a brewery, incorporated a company (Uncle Ben’s) and leased the assets to the company. He owned the shares of the company. Uncle Ben's had to add a building to hold fermentation tanks, at a cost of $50,000. The money came from other companies owned by the taxpayer. The Minister assessed the taxpayer with an additional benefit of $50,000 under paragraph 8(1)(c), now paragraph 15(1)(c). It was held that the building was not a benefit to the taxpayer, since it was useful only to the company while it remained at its present location. The company was in fact in the process of moving to a new location, and the building would have been demolished to extricate the fermentation tanks. The assessment against Mr. Ginter fell, since he received no taxable benefit. Mr. Justice Collier said, at page 423 (D.T.C. 5278):

In my view the defendant [taxpayer] here has shown, for the reasons I have outlined above, the value of his reversionary interest was not increased by the addition of the structure used to house the fermentation tanks.

It is not disputed the amount spent on the construction of the addition ($50,634.05) was, at the time, worth that much to Uncle Ben's. But it is clear on the evidence, in my opinion, it had no value to the landlord, then or afterwards.

Mr. Justice Collier at 419 (D.T.C. 5275) of Ginter states:

In respect of para. 8(1)(c), the question of benefit or no benefit, and the value if any, is primarily a question of fact. [citing Kennedy v. M.N.R. [1973] F.C. 839, per Jackett, CJ at 843; [1973] CTC 437 at 440; 73 DTC 5359 at 5361.

Youngman v. The Queen, [1986] 2 C.T.C. 475; 86 D.T.C. 6584 (F.C.T.D.) involved a taxpayer who lived in a house built for him and his family by a company in which he was the controlling shareholder. The Court held that the taxpayer had received a taxable benefit from the company, the measure of which was the company's equity in the property, that is, the cost of acquiring the luxury home. Regarding paragraph 15(1)(c), on which the assessment was based, McNair, J. states, at 479 (D.T.C. 6587):

There is no definition of “benefit” or “advantage” in the Act and the words are thus capable of the broadest possible interpretation. Nor is there any simple, prescribed formula for resolving any question of shareholder benefit within the meaning of paragraph 15(1)(c). Essentially, each case must be decided on its own particular facts.

At 481 (D.T.C. 6569):

The words of paragraph 15(1)(c) of the Act are capable of the broadest interpretation and this applies perforce to the words "the amount or value thereof" as used therein. In fact, the word "amount" is substantially defined by subsection 248(1) to mean "money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing”. Taken in context, the words amount and value appear to be used synonymously and interchangeably. According to standard dictionary usage, the word “value” standing alone is generally taken to mean the material or monetary worth of a thing or the fair equivalent thereof.

In Century 21 Ramos Realty Inc. v. The Queen, [1987] 1 C.T.C. 340; 87 D.T.C. 5158 (Ont. C.A.), the Ontario Court of Appeal discussing paragraph 15(1)(b) writes, at 348 (D.T.C. 5164):

It is thus only the "amount or value" of the property appropriated to or for the benefit of the shareholder that must be included in computing the income of the shareholder for the taxation year.

At 349 (D.T.C. 5165) the Court says this about the meaning of the word "appropriate":

The Income Tax Act does not define the word “appropriate”. It is, however, a common English word. The Shorter Oxford English Dictionary gives the following definitions: "1. to make over to any one as his own; . . . 2. To take for one's own, or to oneself. . .".

In Boardman v. The Queen, [1986] 1 C.T.C. 103; 85 D.T.C. 5628 (F.C.T.D.) Strayer, J., in discussing the meaning of "benefit" under subsection 56(2) and subsection 245(2) said “it is irrelevant that in economic terms he was worse off by virtue of the reduction in the value of the assets of the company of which he owned virtually all of the shares.” In that case, assets of the taxpayer's company had been given to his ex-spouse as part of the separation settlement and the amount was taxed as a benefit to the taxpayer.

Guilder News Co. (1963) Ltd. v. M.N.R., [1972] F.C. 1374; [1973] C.T.C. 1; 73 D.T.C. 5048 (F.C.A.) involved a company and its sole shareholder. The shareholder sold shares in other companies to the company in 1962 and bought them back in 1964 for the same price, which was less than their value at the time of the sale back to the shareholder. The Minister reassessed, on the basis that a benefit had been conferred on the shareholder. Jackett, C.J. said, at page 7 (D.T.C. 5052): “It is important to have in mind that the question of 'benefit' or no ‘benefit’, in a case such as this, must be determined as of the time immediately after the sale.”

In Reid v M.N.R., 26 Tax A.B.C. 321 (T.A.B.); 61 D.T.C. 263; the Chairman, Mr. Snyder, discussed the interpretation of subsection 8(1), the predecessor to the present subsection 15(1). Specifically referring to paragraph (c), he said at 327 (D.T.C. 267) the benefit "must be real, present and measurable to be taxed and the measurement of the benefit will be a question of reasonable proof".

B. Subsection 56(2)

Although little argument was directed toward this aspect of the case, counsel agreed that the principles involved were correctly stated in The Queen v. McClurg, [1988] 1 C.T.C. 75; 88 D.T.C. 6047 (F.C.A.). Counsel for the plaintiff reiterated his argument that this section did not apply any more than did subsection 15(1), because there was no "benefit" to Mr. Vine.

Section 56(2) at the relevant time read:

56.(2) Indirect payments.—A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.

The Court of Appeal in McClurg quotes Cattanach, J. in Murphy v The Queen, [1980] C.T.C. 386; 80 D.T.C. 6314 (F.C.T.D.) for the elements required for the operation of subsection 56(2). They are reproduced here, as quoted in McClurg at 79 (D.T.C. 6050):

In Murphy v The Queen, supra, Cattanach, J. identified the elements required to be present for the subsection to apply, in the following way:

To fall within subsection 56(2) each essential ingredient to taxability in the hands of the taxpayer therein specified must be present.

Those four ingredients are:

(1) that there must be a payment or transfer of property to a person other than the taxpayer;

(2) that the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer;

(3) that the payment or transfer be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer wished to have the benefit conferred, and

(4) that the payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person.

At page 390 (D.T.C. 6318) of the report, Justice Cattanach set forth what was, in his view, the purpose for which the subsection was enacted:

As I appreciate this difference in language between the two subsections it follows from the purpose to be accomplished by each. Subsection 56(2) is to impute receipt of income to the taxpayer that was diverted at his instance to someone else. It is to cover cases where the taxpayer seeks to avoid the receipt of what in his hands would be income by arranging to transfer that amount to some other person be wishes to benefit or for his own benefit in doing so. Apart from any moral satisfaction the practical benefit to the taxpayer is the reduction in his income tax.

2. Benefit under subsection 80.4

Subsection 80.4(2) has the effect of deeming a benefit to a taxpayer who becomes indebted to a company in which he is a shareholder. Section 80.4 was amended several times in the years 1979 to 1982, but for the present case the only relevant part is subsection (2) (re-enacted S.C. 1980-81-82, c.140, s. 44) which provided:

80.4(2) Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) was

(a) a shareholder of a corporation,

(b) connected with a shareholder of a corporation, or

(c) a member of a partnership, or a beneficiary of a trust, that was a shareholder of a corporation,

and by virtue of such shareholding that person or partnership received a loan from, or otherwise incurred a debt to, that corporation, any other corporation related thereto or a partnership of which that corporation or any corporation related thereto was a member, the person or partnership shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which

(d) the amount of interest for the year on all such loans and debts computed at such prescribed rates as are in effect from time to time during the period in the year that the loans and debts were outstanding

exceeds

(e) the amount of interest for the year paid on all such loans and debts not later

than 30 days after the later of the end of the year and December 31, 1982.

The amount of interest is deemed to be a benefit to the taxpayer which must be included in the shareholder/taxpayer's income by operation of subsection 15(9), which states:

15.(9) Deemed benefit to shareholder by corporation.—Where an amount in respect of a loan or debt is deemed by section 80.4 to be a benefit received by a person or partnership in a taxation year, the amount thereof (other than any amount to which subsection 6(9) or paragraph 12(1)(w) applies) shall be deemed for the purposes of subsection (1) to be a benefit conferred in the year on a shareholder.

This wording of subsection 15(9) was enacted by S.C. 1980-81-82, c. 140, s. 7(4).

In Tick v. M.N.R., [1972] C.T.C. 137; 72 D.T.C. 6135 (F.C.T.D.) the taxpayer had several companies of which he was sole shareholder. The money that those companies earned was put into his personal bank accounts, from which the taxpayer drew sums for personal uses. The money so withdrawn was added to the taxpayer's income by the Minister, under subsection 15(2), as a shareholder loan. The taxpayer admitted that he treated the accounts as his own, drawing out money that belonged to the companies. The evidence showed that the taxpayer only deposited some $38,000 into the account but withdrew some $76,000. Mr. Justice Heald, the trial judge, wrote at page 143 (D.T.C. 6141): “I have the firm opinion that this circumstance is corroborative of the [Minister's] contention that these moneys were loans by the companies to the appellant." He concluded, at page 144 (D.T.C. 6142), that the taxpayer withdrew sums belonging to the companies and used them for personal purposes unrelated to the business of the companies— "Surely, this is a loan from these corporations."

3. Adventure in the nature of trade or capital account

In Hillsdale Shopping Centre Ltd. v. M.N.R., [1981] C.T.C. 322; 81 D.T.C. 5261 (F.C.A.), the taxpayer had acquired some land in a plan to develop a shopping centre. The plan fell through, and the land was expropriated. The taxpayer received compensation for the land and treated it as a non-taxable capital receipt. The Minister assessed tax on the compensation, viewing it as income from an adventure in the nature of trade. The Court of Appeal, like the trial judge, saw that the taxpayer had two intentions in acquiring the land : to develop the shopping centre or to dispose of the land at a profit. As in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384; 60 D.T.C. 1270 (S.C.C.), this was enough to make the compensation income from an adventure in the nature of trade and taxable. The Court of Appeal said that:

the question as to whether the activity of the taxpayer amounted to a business or an adventure in the nature of trade is one of fact. It must be resolved according to what the trier of fact finds to have been the intention with which the property was acquired to be arrived at by inferences to be drawn from the attendant circumstances. (at 5264 (D.T.C.))

In Becker v. The Queen, [1981] C.T.C. 184; 81 D.T.C. 5129, rev'd [1983] C.T.C. 11; 83 D.T.C. 5032 (F.C.A.) the taxpayer acquired a faltering lumber company in 1963 and set about to improve its prospects. He spent about $434,000 in advances and loan guarantees over the years, but the company folded in 1976. The taxpayer sought to deduct the $434,000 as a business loss in 1976. The trial Judge held that the loss was on account of capital and not deductible. On appeal, the deduction was allowed. The Court of Appeal took the view that the taxpayer had acquired the business with the intention to make it profitable and to sell it for a profit, bringing it within the conception of an adventure in the nature of trade. The Court of Appeal states at 14 (D.T.C. 5035):

The appellant (taxpayer] did not say that he intended to sell the business "eventually", thereby implying that his immediate or motivating intention in purchasing it was to retain it for the purpose of earning income. He said that he could not keep the business and that he never intended to recover his investment by income from the business.

The loss was therefore deductible in computing income for 1976.

Tobias v. The Queen, [1978] C.T.C. 113; 78 D.T.C. 6028 (F.C.T.D.) involved a taxpayer who was on a quest for hidden pirate treasure. The taxpayer explored Oak Island, N.S. in the hope of uncovering buried treasure, incurring expenses from 1962 to 1970. He gave up the hunt in 1969 and sought to deduct the sums expended in 1962 through 1970 as business expenses. The Minister disallowed the deductions. Mr. Justice Cattanach expressed the opinion at page 127 (D.T.C. 6036) that “if the plaintiff's project had been crowned with success the positions of the respective parties to this litigation would have been exactly the reverse to the positions taken here." The Court concluded that the money spent was for the purpose of gaining income and not on account of capital. Therefore deductions could be made, either in the years the expenses were actually incurred, against any income, or in 1969, the year the project was abandoned, since

[u]ntil the search leads to the discovery of a treasure there is nothing from which to deduct the costs of the search from to ascertain the profit on its realization. [at 134 (D.T.C. 6041)]

Similarly for the present case, if Mr. Vine were engaged in an adventure in the nature of trade, it would take a sale of W.J.V. Inc. before the costs involved could be deducted.

In Chaffey v. M.N.R., [1978] C.T.C. 253; 78 D.T.C. 6176 (F.C.A.) the tax- payer was a shareholder in a company to which he advanced money so it could meet its expenses. The company was unsuccessful and the taxpayer sought to deduct the loss suffered as a business expense. The trial judge held that the outlays of money to the company were capital outlays, for the purpose of providing the company with working capital and were thus a capital loss. The trial judge did note that he had at times thought the outlays might have been incurred as part of an adventure in the nature of trade, and some evidence supported that view, but on the whole he concluded that the taxpayer was not involved in an adventure in the nature of trade so the outlays were ones of capital. The Court of Appeal also acknowledged the uncertainty involved in determining whether an adventure in the nature of trade was involved, but held that there was evidence on which the trial judge could have reached the conclusion he did in fact take.

Hiwako Investments Ltd. v. The Queen, [1978] C.T.C. 378; 78 D.T.C. 6281 (F.C.A.) was put to the Court in the present case to assist in distinguishing losses of capital from those of business. The issue there was whether the profit realized from a sale of a profit-producing property was a profit from a business or not. The Court of Appeal decided that the sale was not an adventure in the nature of trade, because there was no evidence at all that would support such a contrary conclusion. There was no evidence that the taxpayer had made the purchase with a view to re-sell at a profit.

Stewart and Morrison v. The Queen, [1972] C.T.C. 73; 72 D.T.C. 6049 (S.C.C.) was relied on for the proposition that money advanced by a Canadian parent company to a U.S. subsidiary company to provide working capital to the subsidiary are capital losses to the Canadian company. The subsidiary was to carry on business and be a "source of income and profit” for the parent on an on-going basis.

In McLaws v. M.N.R., [1972] C.T.C. 165; 72 D.T.C. 6149 (S.C.C.) the sole shareholder of a company guaranteed a loan for his company and made payments to the bank in settlement of that guarantee. He tried to deduct the sums paid in computing his income tax. The Supreme Court held that the sums were not deductible. In that case, the business was a source of income for the taxpayer, and he was attempting to keep it alive so it could provide income to him on a continuing basis. The Supreme Court considered a number of cases, including M.N.R. v. Freud, [1969] 1 S.C.R. 75; [1968] C.T.C. 438; 68 D.T.C. 5279 (S.C.C.) which it described in these terms:

In Freud the outlay was to develop a prototype sports car and to sell it. It was a single transaction and Freud had no intention of continuing the undertaking by manufacturing or selling cars. The venture from its inception was not for the purpose of deriving income from an investment but for the purpose of making a profit on a sale of the prototype. This Court held that it was a venture in the nature of trade. [McLaws at 170 (D.T.C. 6153)]

In Racine, Demers and Nolin v. M.N.R., [1965] 2 Ex. C.R. 338; [1965] C.T.C. 150; 65 D.T.C. 5098 (Exch. Ct.) the taxpayers bought a business, ran it as a going concern for a short time and then sold it for a profit. The Minister taxed the profit on the sale as income from a business. Noël, J. made a number of comments that are relevant to the present case. At 5100-5101 (D.T.C.):

[A] business can be bought and sold in the course of a business of buying and selling businesses or in the course of an adventure in the nature of trade and in the occurrence, a profit realized at the end of the resale of such a business would be a profit arising from this business or from the vendor's adventure in the nature of trade.

At 5103:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in his mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital. Generally speaking, a decision that such a motivation exists will have to be based on inferences flowing from circumstances surrounding the transaction rather than on direct evidence of what the purchaser had in mind.

Noël, J. held that the taxpayer had intended to run the company indefinitely as a going concern and had not acquired it with intent to resell at a profit. The evidence showed no secondary intent that could support a finding that the taxpayers were involved in an adventure in the nature of trade, so their profit on the resale of the business was a non-taxable capital gain. In short,

If in accomplishing these things (instilling new life into the business and increasing its market value) the appellants (taxpayers) had as one of their motivations the idea of reselling the business at a profit, this profit would be taxable. If, on the other hand, as I decide it, they accomplished these things in the course of executing their avowed intention of operating the business indefinitely, the profit arising from the sale which they made under the circumstances is not taxable.

In Cull v. The Queen [1987], 2 C.T.C. 63; 87 D.T.C. 5322 (F.C.T.D.) the taxpayer bought shares of a company (Simlac) that was involved in developing some real estate, and helped guarantee a bank loan made to the company. The plan failed, so the taxpayer sought to deduct the cost of the shares and the payments to the bank made over the years as business losses. The shares were held to be not merely of the usual investment character, but acquired for the purpose of making a profit from the land owned by the company, by having the company sell the property or by having the shareholders sell their shares. Since, as stated by Reed, J., any profit would have been taxable as income, the loss should be treated as a business loss. Madame Justice Reed sets out, at 68 (D.T.C. 5326) this quotation from Freud, supra:

. . .the principles to be applied in cases when a profit is obtained must be followed when a loss is suffered. Fairness to the taxpayers requires us to be very careful to avoid allowing profits to be taxed as income but losses treated as on account of capital and therefore not deductible from income when the situation is essentially the same.

On page 69 (D.T.C. 5326), Reed, J. says:

Having found that the loss sustained by the (taxpayer) with respect to the shares resulted from an adventure in the nature of trade, the advances should carry the same characterization.

I do not accept the defendant's (the Crown's) argument that the decisions in Stewart and Morrison Ltd. v. M.N.R., [1972] C.T.C. 73; 72 D.T.C. 6049 (S.C.C.) and Meisels Investments Ltd. v. The Queen, [1985] 1 C.T.C. 9; 85 D.T.C. 5029 (F.C.T.D.) are applicable. The provision by the partnership of advances to the company to keep the venture alive must be regarded as part and parcel of the venture.

Finally, Reed, J. deals with an argument which was at one time alluded to by the Minister in the present case. The Crown referred to the fact that the partnership financial statements described the Simlac shares as investments. She rejected that argument, concluding that the description in the financial statements cannot override the conclusions which arise from the facts as a whole.

Mandryk v. Canada, [1989] 1 C.T.C. 162; 89 D.T.C. 5062 (F.C.T.D.) reiterates the principle that it is possible for a taxpayer to acquire shares for purposes "other than a capital investment", citing Cull, supra, as another example.

Conclusions

In the final analysis, despite every sympathy for the taxpayer, there is a basic principle of corporate and tax law that leaves him with a difficult if not impossible burden to discharge. It is that corporations have an identity independent from their shareholders and obviously separate and independent from each other. The fact that the shares in one or more corporations are owned by the same shareholder or shareholders cannot destroy that independent identity. There probably were several approaches to the Florida enterprise that would have facilitated a better tax result for the plaintiff, but people do not plan these ventures with losses in mind. In almost every newly-established enterprise, losses are never contemplated, much less tax consequences, and Mr. Vine was no exception especially since it was his desire to establish a corporate structure in Florida different from his experiences in London. Nevertheless, the basic reality is that the losses in one corporation cannot be set off against the gains in another except as here where the money is deemed to flow through the hands of the shareholder taxpayer. Most of the argument on the issue of appropriation related to subsection 15(1), and although it is not necessary to express an opinion either way, subsection 56(2) might also be applicable. It should be noted that the Minister did not appear to rely on subsection 56(2) in the reassessments, and cited only subsection 15(1) and section 80.4 in the notice of confirmation. In any event, the sums advanced to W.J.V. Inc. by Carl Vine Ltd. must be considered as income in the hands of Mr. Vine, as “funds of a corporation appropriated for the benefit of a shareholder" (to paraphrase paragraph 15(1)(b)) or “a payment made pursuant to the direction of a taxpayer to some other person for the benefit of the taxpayer as a benefit the taxpayer desired to have conferred on the other party" (to paraphrase subsection 56(2)). Either section has the effect of adding the advances from Carl Vine Ltd. to W.J.V. Inc. as income taxable in the hands of Mr. Vine. This is so, no matter how the moneys appeared in the books of either company.

While counsel for the plaintiff argued strongly that there was no benefit because of the ultimate decrease in value of Mr. Vine and his companies; and that the concept of "benefit" should encompass such factors as Mr. Vine's health, I cannot accept his argument. The concept of benefit, for income tax purposes, relates only to the fiscal, not the physical, state of a taxpayer. While the deterioration of Mr. Vine's physical condition is most unfortunate, and may well have been caused by his dealings with W.J.V. Inc., no tax relief is available for it. Subsection 15(1) adds "the amount or value" of a benefit to the income of a taxpayer, and, as can be seen in Youngman, Century 21 Ramos Realty, Board man and Reid, all supra, the concept of “benefit” is limited to monetary considerations.

As for the ultimate decrease in value suffered by Mr. Vine, it is irrelevant, as noted in Boardman and in Guilder News. The taxation is based on monetary benefits, which here is the money advanced by Carl Vine Ltd., calculated at the times of appropriation. The value of such benefits is simply the absolute value of the money, some $130,000.

There is also the question of whether the amounts of $99 and $2,873 should be added to Mr. Vine's income. While Tick, supra, is not identical, the overall effect is similar. The appropriations can be considered to be a loan or a debt incurred by Mr. Vine to Carl Vine Ltd., so those two sums of deemed benefit, under section 80.4 and subsection 15(9) as they read in the years in question, could be deemed to be a benefit under subsection 15(1) to Mr. Vine and must also be included in computing his income tax.

At the same time, there is ample evidence and law to support a finding that Mr. Vine was involved in an adventure in the nature of trade. Such a determination is a question of fact, as said by the Court of Appeal in Hillsdale and Becker, supra, and I find as a fact that Mr. Vine intended and tried to set up a business that he could sell for a profit in the future. Mr. Vine himself said so in his discovery, and his statements were corroborated, in so far as they could be, by the answers given by Mr. Wilkie in his discovery and by Mrs. Vine in her testimony at trial, which I accept completely. Mr. Wilkie took the opposite view, but it is well known that the distinction can be a difficult one to make, as was expressed in Chaffey, supra. The lack of a specific time set for resale does not detract from the possibility of resale; obviously the resale of W.J.V. Inc. would wait until there was a buyer at an acceptable price.

In view of this conclusion, it is irrelevant whether the money sent to W.J.V. Inc. was used to cover its operating costs or not. The money spent by him, and the amounts imputed to him, are losses suffered in the course of his adventure in the nature of trade. He was trying to create a company that he could sell and thus produce income, so his losses are deductible in computing his income tax. On this aspect I am much persuaded by the words of Reed, J. in Cull, quoted above. Furthermore, following Tobias, supra, the losses are deductible both in the years incurred and in the year the adventure came to an end, which was 1983, when the company was dissolved. The losses may be carried forward or back as permitted by the Act.

The present case differs from Stewart and Morrison because in that case. the money spent to provide operating capital was for the purpose of keeping the U.S. subsidiary alive as a continuing source of income and profit for the parent. Here, Mr. Vine was attempting to create a company with a business that he could sell at a profit, not a company that would provide him continuing income. The money advanced was, as expressed by Reed, J. in Cull, “to keep the venture alive [and] must be regarded as part and parcel of the venture."

In conclusion, the reassessments are vacated and the case is sent back to the Minister for redetermination of the plaintiff's income tax return for the years 1979 to 1982 inclusive, on a basis not inconsistent with these reasons. Success on this issue is sufficient to entitle the plaintiff to costs.

Appeal allowed in part.