Citation: 2007TCC635
Date: 20071019
Docket: 2006-921(IT)G
BETWEEN:
LAWRENCE J. LARAMEE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2705(IT)G
AND BETWEEN:
RONALD CASEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1] Mr. Laramee and Mr.
Casey put a substantial amount of money into a golf course development, hoping
for that elusive “hole-in-one”. Instead, they were unsuccessful and lost
everything that they put into the course. It is the nature of those losses at
issue before me – were they on capital account, and allowed as an allowable
business investment loss, as the Respondent contends, or were they on income
account on the basis that Mr. Laramee and Mr. Casey were engaged in an
adventure in the nature of trade, as the Appellants contend? The answer depends
on the characterization of the arrangement whereby Messrs. Casey and Laramee
lent money to a holding company, which in turn lent money to the golf course
companies owned by Messrs. Casey and Laramee.
Facts
Background
[2] Mr. Laramee has had
a number of business and employment experiences over the years. He spent nine
years with Chrysler, laterally as a maintenance superintendent. He left
Chrysler to become a private distributor for a glass business, but after a year
he realized that he could start his own glass distribution business. He carried
on that business successfully from the 1970s to 1989-1990, when he sold and
retired – briefly.
[3] In 1991, Mr.
Laramee got wind of Michelin looking to sell its facility in Kitchener. Around this time, Mr.
Laramee had met Mr. Casey and they teamed up on this Kitchener project. Mr. Laramee negotiated
with Michelin and with a Chinese delegation for a couple of years, which
resulted in a deal in 1993. Messrs. Casey and Laramee set up a company which
acquired the Michelin assets, sold equipment to the Chinese, retained some of
the real estate, sold other parcels, retained some rubber mixing equipment and
commenced a rubber mixing business under a new entity. Messrs. Casey and
Laramee eventually sold the rubber mixing business, along with one of the
larger former Michelin buildings. My impression was that Messrs. Casey and
Laramee did very well from this Michelin deal.
[4] Both Mr. Casey and
Mr. Laramee split their time equally between Canada and Florida. They enjoy golfing and
were members of the Conestoga Golf Course. In the late 1990s, Mr. Laramee and
Mr. Casey invested in mortgages, mainly private mortgages (approximately 20 or
so) and one large commercial mortgage to the Conestoga Golf Course, owned by a
Mr. Bill Zaduk. They looked for low risk mortgages. By 1998-1999, both
gentlemen were receiving some significant annual income.
[5] In 1997, Messrs.
Casey and Laramee set up Caslar Capital Limited (“Caslar”), a company which was
to serve as a holding company for an investment in Dari-Serve, a soft ice cream
company operated by Mr. Laramee’s wife. Caslar also invested, by way of loan,
in an entertainment software development business called Mondo-Live. Both these
investments appeared as investments in Caslar’s financial statements. Messrs.
Casey and Laramee had 50 shares each in Caslar, while a third-party, Mr.
Weber held four shares.
[6] Mr. Casey described
Mr. Laramee as the brains and he was the brawn in their business relationship.
Mr. Casey confirmed he first met Mr. Laramee in 1989-1990 when Mr. Casey was
running a machine moving business. Mr. Casey’s role in the Kitchener project was to “look
after people on the floor”. He confirmed Mr. Laramee’s explanation of the
substance of this project. Mr. Casey indicated that in the late 1990s, he
had a comfortable stock portfolio and was financially secure.
Crosswinds Golf Project
[7] In 1998, Mr. Zaduk,
the owner of Conestoga Golf Course, came across an opportunity to acquire 150
acres of farm property zoned appropriately for the development of a golf
course. He interested his young superintendent, Mr. Stevens, in the
project. Mr. Zaduk had a handshake deal with the owner of the project, Mr.
Ulrich, for buying the property at $900,000. This was, according to Mr.
Stevens’ testimony, well under the fair value of other properties for the
development of golf courses. Messrs. Zaduk and Stevens hired an engineering
firm, an environmental consultant and an agricultural assessor to conduct some
preliminary work on the property. There was some urgency to get municipal
approval before the possibility of a zoning change became a reality, precluding
a golf course development.
[8] Messrs. Stevens and
Zaduk approached Mr. Laramee in the spring of 1999 and advised him of the
potential golf course development, and inquired whether Mr. Laramee would be
interested in funding it. Mr. Laramee was interested in a quick, profitable
turn-around by putting up the money and selling out within four or five years.
He expressed no interest in actually running a golf course. Mr. Casey
testified in a similar vein: he felt he would be in and out in three years. His
intention was to sell and make money. He did not want to leave his money in for
the long term, as he believed it would take too long to recoup. He wanted to
sell at the earliest possibility.
[9] In June 1999, Mr.
Laramee met with his lawyer, Mr. Moon, who testified that, after his
discussions with Mr. Laramee, he drew up a Memorandum of Understanding. The
Memorandum of Understanding (“Memorandum”), was signed by Mr. Laramee, Mr.
Casey, Mr. Zaduk and Mr. Stevens, although Mr. Stevens testified that the
“Project Structure Plan” attached to the Memorandum was not the document he recalled
having seen at the time of signing the Memorandum. He did not produce a copy of
what he felt he had seen. Mr. Stevens felt the Project Structure Plan did not
actually reflect his understanding that the golf course was to proceed on an
ownership basis of a quarter interest each for Laramee, Casey, Zaduk and
Stevens.
[10] The Project
Structure Plan was described as a proposal for the acquisition and development
of a golf course known as the Crosswinds Golf & Country Club. The golf
course was to be built and operated by one company, Crosswinds Golf Course
& Country Club Ltd. (“Golfco”); the real estate was to be owned by a second
company, Crosswinds Properties Ltd. (“Propertyco”) and leased to Golfco.
Messrs. Laramee and Casey were to arrange for all the financing, both
personally and from the bank. Caslar was intended to be the vehicle for
funnelling money into the golf course development. It was to grant a mortgage
on the acquisition of the real estate. One term of the Memorandum required that
all aspects of the development of the golf course would be subject to
Messrs. Laramee and Casey’s approval as long as they directly or
indirectly provided financing. Mr. Moon pointed out, given that Messrs. Laramee
and Casey were providing all the financing, they should have complete control.
Mr. Laramee emphasized this control was important to put him in a position
to force a sale whenever appropriate.
[11] The Memorandum also
dealt with the terms of financing. The Caslar mortgage was to be interest-free
for the earlier of two years or until the golf course was generating revenue,
after which interest would accrue at 14%. Mr. Laramee was clear he never
expected to get interest. The terms were set up to encourage a sale as soon as
possible. He recognized there was no way for the golf course to pay interest
during development. Only on a sale did he anticipate getting any accrued
interest.
[12] The Memorandum also
called for Messrs. Laramee and Casey to arrange development financing. Any
development funds supplied by Messrs. Laramee and Casey would be on a demand
basis at 10% interest. The Memorandum included the following provision:
Once the golf course is operational, term
financing on conventional terms will be sought and the development financing
will be returned.
Mr. Laramee stated the development financing would be
retired once the golf course was sold. The Memorandum also described the
security to be provided:
General Security Agreement, Assignment of Lease, Cross Guarantees,
Mr. Laramee knew the security would have to be pledged
to the bank. He arranged for the Toronto-Dominion Bank to provide an initial $6
million loan, with an additional $1.2 million bump, as he called it. Messrs.
Laramee and Casey arranged for all the money to flow through Caslar, whether
from themselves or the bank. Mr. Laramee described Caslar as simply a funnel
for the funds. He and Mr. Casey were consistently adamant that Caslar had no
role as investor or otherwise in the golf course. It was simply a conduit of
funds.
[13] The Memorandum
described Mr. Stevens’ role as General Manager. Neither he nor Mr. Zaduk were
expected to put up any money. The corporate structure was described as an equal
quarter-share in both companies to be held by Laramee, Casey, Zaduk and
Stevens, though both Mr. Zaduk and Mr. Stevens had restrictions on their
interests. Mr. Zaduk’s shares were to be held in trust until Messrs. Laramee
and Casey had been repaid in full, and until then Mr. Zaduk could not vote
the shares. Mr. Stevens’ shares were also to be held in trust on the same
terms, with the additional provision that they would only be released six
months after the golf course was generating revenue, and provided Mr. Stevens
remained an employee of the golf course. Shares were issued on the basis of
this quarter-interest each.
[14] The Memorandum also
described terms of the proposed Shareholder Agreement, which included:
If a shareholder sells shares, the shares
of both companies must be sold together and may not be sold separately, unless
the other shareholders agree.
No shares may be sold or offered for sale
for a period of three years.
…
If the shareholders receive a third party
offer to purchase all the shares of the entire company, and one or more
shareholders are prepared to accept the offer, the other shareholders may match
the offer under the right of first refusal, and if they do not do so they will
be obliged to sell to the third party.
[15] When a draft
Shareholder Agreement was actually presented by Mr. Laramee, in Mr. Moon’s
office, to Mr. Zaduk and Mr. Stevens, they refused to sign, as they felt it did
not reflect the deal they had envisaged. Mr. Laramee and Mr. Casey were
effectively left to go it alone. At this point, they were 50–50 shareholders in
each of Golfco and Propertyco.
[16] The development of
the course proceeded on a fast-track basis, as Mr. Laramee and Mr. Casey
wanted it in a saleable condition as soon as possible. Sod was put in place
instead of seeding, mature trees were planted and club house construction
started immediately. Messrs. Laramee and Casey injected $2,755,850 and
$4,061,491, respectively, through Caslar into the golf course development. The
Toronto-Dominion Bank advanced the initial $6 million and then some bump.
[17] The funds were lent
by Messrs. Laramee and Casey to Caslar and formal loan agreements were entered
into at a 6% interest rate, and a term of the earlier of June 30, 2005 or the
sale of the golf course. Caslar, in turn, entered a loan agreement with each of
Golfco and Propertyco, to provide development funds to Golfco and a mortgage to
Propertyco. The interest rate on the development funds was 10% calculated and
compounded monthly, to be accrued and compounded until July 2002 or “when
revenue is first received from the operation of the golf course”. The loan to
Propertyco was interest free for two years, or until rental revenue was first
received; thereafter interest was 14%. The loan became due and payable if title
was transferred.
[18] Both Mr. Moon and
Mr. Webb, Mr. Laramee’s accountant, confirmed their understanding of Mr.
Laramee’s and Mr. Casey’s intention to get a quick return on their money.
[19] Although not quite
operational, the course held a tournament in the late 2001 season. Liens
however had been filed against the property. By September 2001 the funds
had dried up. By December 2001, the Toronto- Dominion Bank took steps to
recover its loan. In early 2002, the golf course was sold to a third party and
the Bank was paid out in full. There was no money, however, to repay any of the
monies advanced by Messrs. Laramee and Casey through Caslar. In their 2001
income tax returns, they claimed a business loss which was denied by the
Respondent, allowing instead an allowable business investment loss.
Issue
[20] Are Messrs. Laramee
and Casey entitled to deduct $2,755,850 and $4,061,491, respectively, as
business losses in computing their 2001 income? The questions to be answered in
deciding this issue are as follows:
(a) Did
Mr. Laramee and Mr. Casey acquire shares in Golfco and Propertyco as an
adventure in the nature of trade?
(b) If
so, was the financing, through Caslar, part of that adventure as an incidental
outlay?
Analysis
[21] The Appellants’
position is that there was an adventure consisting of the development and sale
of a golf course. The advances made by Mr. Laramee and Mr. Casey were an
incidental outlay to such adventure, and consequently, deductible as business
losses. The Respondent’s position is, firstly, that there was no adventure in
the nature of trade as the Appellants had not proven it was their initial
intention to sell at a profit. If there was an adventure, it was the
acquisition of the shares of Golfco and Propertyco; the advances by
Mr. Laramee and Mr. Casey to Caslar were not incidental to that
adventure, but represented a normal injection of capital into their holding
company for investment purposes.
Adventure in the Nature of Trade
[22] An adventure in the
nature of trade must involve a scheme of profit-making. As put by the Supreme
Court of Canada in Friesen v. The Queen:
The first requirement for an adventure in the nature of
trade is that it involve a “scheme for profit-making”. The taxpayer must have a
legitimate intention of gaining a profit from the transaction.
I am satisfied that the profit,
from Mr. Laramee and Mr. Casey’s perspective, was to be derived from a quick
turn-around sale of the golf course project. As the course was held through
their ownership of shares in Golfco and Propertyco, I find such shares were
trading assets.
[23] The Respondent
argues that none of the documents in connection with the golf course project
indicate any intention on the part of Mr. Laramee and Mr. Casey to flip
the golf course at the first opportunity. The Memorandum talks in terms of the
acquisition and development of the golf course; the draft Shareholder’s
Agreement makes no mention of selling. I do not find this persuasive, given the
testimony of Mr. Laramee and Mr. Casey, both of whom I found to be credible and
straightforward. I also find that their lawyer, Mr. Moon, and their
accountant, Mr. Webb, support their version of their intent. I am satisfied
neither Mr. Laramee nor Mr. Casey had any intention of running a golf course.
They were both comfortably off, with steady retirement income. Their interest
in the golf course was entirely to profit on sale. This was consistent with the
steps taken to fast track the development of the course for a quick sale.
[24] Further, neither Mr.
Laramee nor Mr. Casey had any experience in running a golf course. Indeed, Mr.
Casey was adamant that the headache of operating a golf course would be
completely unwelcome, especially as he did not see recouping what he put into
the project from the operation of the course, but only from a speedy sale.
[25] The profit-making
scheme, the Appellants’ intention and their lack of experience in running a
golf course all point to a conclusion that the shares of Golfco and Propertyco
were acquired as trading assets, not as a long term investment of a capital
nature.
Financing Arrangements
[26] The more difficult
issue is whether the lending of money to Caslar for lending on to Golfco and
Propertyco was part-and-parcel of the adventure in the nature of trade, or as
put by Justice Robertson in the decision of Easton v. The Queen, an incidental
outlay. It is worthwhile to review the Easton
decision. In Easton the
issue was whether an amount paid by a shareholder as a guarantor on funds
borrowed by the shareholder’s company was on capital or income account. The
Federal Court of Appeal accepted that the property in question, real estate,
was not purchased just for investment purposes. However the Court went on to
state:
As a general proposition, it is safe to conclude that an
advance or outlay made by a shareholder to or on behalf of the corporation will
be treated as a loan extended for the purpose of providing that corporation
with working capital.
…
As the law presumes that shares are acquired for investment
purposes it seems only too reasonable to presume that a loss arising from an
advance or outlay made by a shareholder is also on capital account.
…
There are two recognized exceptions to the general
proposition that losses of the nature described above are on capital account.
…
The second exception is found in Freud. Where a
taxpayer holds shares in a corporation as a trading asset and not as an
investment then any loss arising from an incidental outlay, including payment
on a guarantee, will be on income account. This exception is applicable in the
case of those who are held to be traders in shares. For those who do not fall
within this category, it will be necessary to establish that the shares were
acquired as an adventure in the nature of trade. I do not perceive this “exceptional
circumstance” as constituting a window of opportunity for taxpayers seeking to
deduct losses. I say this because there is a rebuttable presumption that shares
are acquired as capital assets: see Mandryk v. The Queen, 92 DTC
6329 (F.C.A.) at 6634.
[27] This case deals with the second exception. In Easton, the Appellants were unable to
convince the Court that the shares were held as trading assets.
[28] Justice McArthur applied the principles in Freud,
referred to in Easton, in the case of Greenberg v.
Canada,
to find that loans made by Mr. Greenberg to Zynex Systems Inc. were on income
account. Justice McArthur found that Mr. Greenberg made the loans in the
ordinary course of his business, and also
found that the Zynex shares were held as trading assets. He
commented:
Had Zynex redeemed its debt to the Appellant, and had the Appellant
sold his founder's shares, the interest and the profit on the sale of those
shares would also have been taxable on income account.
[29] The Appellants also rely on the Federal Court of Appeal
case of Becker v. The Queen,
a case in which the Appellant acquired shares in a company and also lent money
to the same company. The Court held that the purchase of shares and subsequent
financing constituted an adventure in the nature of trade.
[30] The question is really what constitutes an incidental outlay.
Are the loans made by Messrs. Laramee and Casey to Caslar an outlay incidental
to their acquisition of the trading assets, the shares in Golfco and
Propertyco?
[31] The distinction between the cases cited and the facts
of Mr. Laramee’s and Mr. Casey’s venture are that Mr. Laramee and Mr. Casey did
not lend money to the company whose shares they held; they lent money to
Caslar, a holding company. Does this impact on the nature of the monies put
into the golf project? No says the Appellant; yes says the Respondent.
[32] Had the shares been sold, the sale of shares would have
yielded income to Messrs. Laramee and Casey. But what would have happened to
the loans? Presumably, the new owner would have re-financed the debt owed to
Caslar. So Caslar would have received the return of the principal plus accrued
interest. Caslar then would have been in a position to repay to Messrs. Laramee
and Casey their loan. But the interest arrangements in the loan agreements were
such that there would have been a significant difference between what Caslar
would have received from Golfco and Propertyco, and what Caslar would have been
liable to repay Messrs. Laramee and Casey. This brings into question Mr.
Laramee’s assertion that Caslar was simply a funnel, that indeed there was
never any intent that Caslar would profit. The loan documents demand that
Caslar receive more than it has to pay. This is simply not the same as the Freud
or Becker situations. As Justice Robertson noted in Easton:
He succeeded because he was able to convince the Supreme
Court that the outlay (loss) should receive the same tax treatment as would any
profit or loss arising on the disposition of his shares. In other words, if a
shareholder can establish that his or her shares were acquired as trading
assets, and not for investment purposes, then any loss arising from an advance
or outlay made by the shareholder to or on behalf of the corporation, including
payments on a guarantee, will also be taxed on income account. In my view this
is the true import of Freud.
Justice
Robertson’s comments are clearly directed at loans from the shareholder to the
corporation, not to a holding company as an intermediary.
[33] Had Mr. Laramee and Mr. Casey injected their funds
directly into Golfco and Propertyco, then, given my finding that the
acquisition of shares in Golfco and Propertyco was an adventure in the nature
of trade, I would have had no difficulty applying the Freud and Easton
principles to find the lending of money in such case was an incidental outlay
of their adventure. But to reach that same conclusion, when funds are channeled
through a separate legal entity, which is not acting as an agent, but clearly
creating its own rights and responsibilities, especially a company with a
shareholder other than Messrs. Laramee and Casey, requires me to pierce the
corporate veil and effectively ignore the very existence of Caslar. The
Appellants argue they are not requesting a piercing of the corporate veil, but
are simply asking me to consider the totality of the circumstances surrounding
the use of the companies: they refer to Caslar as simply a red herring. I
disagree.
[34] In requesting a common sense, practical approach, the
Appellants cited Chief Justice Bowman’s comments in Truscan Realty Ltd. v.
The Queen:
The conclusion
must be based upon “a commonsense appreciation of all the guiding features…” (M.N.R.
v. Algoma Central Railway, 68 DTC 5096), and upon “the practical and
commercial aspects [of the transaction] (Her Majesty the Queen v. F.H. Jones
Tobacco Sales Co. Ltd.), 73 DTC 5577, and upon “what the expenditure is
calculated to effect from a practical business point of view rather than upon
the juristic classification of the legal rights, if any, secured employed or
exhausted in the process”. (Hallstroms Pty Ltd. v. Federal Commissioner of
Taxation (1946), 72 C.L.R. 634).
I
am wholeheartedly in favour of common sense (an ardent fan even), and indeed
consider it a judge’s most valuable tool. I recoil at the suggestion that as a
judge, I am enslaved to the juristic classification of legal rights. Yet
surely these are not mutually exclusive concepts, but can and must operate in
balance. It is that balancing act that is the judge’s challenge.
[35] Yes, the economic realities are that Messrs. Laramee
and Casey lost their money. Their acquisition of Golfco and Propertyco shares
was an adventure in the nature of trade. Why should monies put indirectly into
the “project” not be considered part of that adventure, given that had they
been put in directly they would be considered part of the adventure; or put
another way, why should the introduction of an intermediary affect the nature
of the monies from being on income account to being on capital account? Because
the payment is no longer incidental to the share purchase: it is a separate
loan transaction to a third party, Caslar, in which Messrs. Casey and Laramee
are not the only shareholders, and which in turn makes a commercial loan to the
project with the profit being solely the interest earned thereunder. The outlay
is simply not incidental to the purchase of the company’s shares as it is not
made to the company. The fact Mr. Laramee and Mr. Casey only owned 100 of the
104 outstanding shares in Caslar certainly influences my decision. I cannot
ignore Mr. Weber, or presume that he is part of Mr. Casey’s and Mr. Laramee’s
adventure.
[36] I find that Caslar’s loan to Golfco and Propertyco is
simply a capital investment and not incidental to Mr. Laramee’s and Mr. Casey’s
adventure in the nature of trade: it will return the principal plus interest –
period. Its income is simply the determinable, calculated difference between
the terms of borrowing and the terms of lending. There is nothing exceptional
about this loan; if it had been repaid, Caslar would have received considerably
more interest than it would have had to pay to Mr. Laramee and Mr. Casey and
would have paid tax on that difference. The resulting after-tax profit would
have been available for distribution to all common shareholders, not just Mr.
Casey and Mr. Laramee. There is nothing so extraordinary about these loan
arrangements to shift them from being on capital account to being on income
account. As stated in Freud:
It is, of course, obvious that a loan made by a
person who is not in the business of lending money is ordinarily to be
considered as an investment. It is only under quite exceptional or unusual
circumstances that such an operation should be considered as a speculation.
[37] The Appellants chose to arrange their affairs in the
manner they did on the advice of their professional advisors. It was not
suggested that anyone was thinking in terms of catastrophic loss in providing
such advice. The use of Caslar may have been for convenience, but the result of
such arrangement has been to deny Mr. Laramee and Mr. Casey the ability to
fully deduct their economic loss. The appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 19th day of October, 2007.
“Campbell J. Miller”
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