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Citation: 2003TCC211
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Date: 20030403
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Docket: 2001-1835(IT)G
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BETWEEN:
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ABTAR SINGH BAINS,
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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
Rip, J.
[1] The appellant Abtar Singh Bains
appeals the following assessments:
a) for 1994, in which the Minister of National
Revenue ("Minister") denied the appellant's
deduction in computing income of an amount he was ordered to pay
by the British Columbia Supreme Court as damages for
deceit plus interest and special costs; and also added to the
appellant's income shareholder benefits conferred on him by
A.S. Bains Developments Ltd. ("Bains Co.");
b) for 1995 and 1996, in which the Minister added
to the appellant's income benefits conferred on him by Bains
Co.; and
c) for 1997 and 1998, in which the Minister did
not permit the appellant to carry forward any non-capital loss
from 1994 to 1997 and 1998 on the basis there was no non-capital
loss in 1994.
[2] Mr. Bains is the sole shareholder,
director and president of Bains Co. At all relevant times Bains
Co. was in the land development business and built residential
and commercial buildings in and about Victoria,
British Columbia. Bains Co. was Mr. Bains's investment
vehicle.
Payment of Damages
[3] Sometime in 1987 Mr. Bains, Dennis
Bristow and George Jerome discussed a business venture
involving the manufacture and installation of pay telephones.
Mr. Bristow owned a business named Interior Design
Management ("IDM"). IDM was a tenant in one of Bains
Co.'s buildings. In April 1987 Mr. Bains introduced
Mr. Ragbier Bhandar, whom he had known socially as a friend for
over 40 years, to Mr. Bristow. Mr. Bhandar was told of the
plans for the pay telephone business and was invited to invest in
the venture. The business, the "pay phone venture", was
to be carried on by a corporation and consist of manufacturing
pay telephones and installing them in favourable locations. A
corporation owning the pay phone business would be listed on a
stock exchange and it was hoped that soon after listing the
corporation would be "taken over" by another
corporation for a hefty profit to shareholders.
[4] Mr. Bristow informed Mr. Bhandar
that the business was "ready to go on the Vancouver Stock
Exchange but was short $150,000 or so". At trial,
Mr. Bains asserted that he "knew nothing about the
company"; Mr. Bristow was the knowledgeable person.
Mr. Bains insisted at trial that at the meeting in April
1987 he told Mr. Bhandar not to rely on him because he knew
nothing about the potential investment.
[5] Mr. Bains confirmed that Mr.
Bhandar was told that for an investment of $150,000 he would
receive a four per cent interest in the venture. He agreed that
Mr. Bristow estimated that the shares issued to
Mr. Bhandar in the yet to be incorporated company would be
worth over $2,000,000 once the company was listed and the shares
started trading.
[6] Mr. Bhandar asked Messrs.
Bristow and Bains what were their investments in the pay phone
venture. Mr. Bains told him, he recalled, that he invested
$380,000 in cash, Mr. Bristow's investment was
represented to Mr. Bhandar at $600,000. At trial,
Mr. Bains denied that he had informed Mr. Bhandar that he
invested $380,000. This was in direct conflict with his evidence
on discovery. In fact, neither Mr. Bains nor Mr. Bristow had
invested any money at the time. Mr. Bhandar agreed to invest
in the venture: he invested $134,000 between April and June 1987;
$435,994 between January and March 1988 and $674,868 during the
period from April to August 1988 for a total of $1,244,862.
Mr. Bains or Bains Co.'s first infusion of cash to IPC
was in about August 1988.
[7] On May 8, 1987, the corporation
later known as International Payphone Corp. ("IPC") was
incorporated according to the laws of British Columbia. The
controlling shareholders at time of incorporation were
Messrs. Bristow and Jerome. In February 1988
Messrs. Bains and Bhandar gained control of IPC.
[8] While Messrs. Bains and Bhandar
controlled IPC, a corporation was formed in West Virginia to
manufacture and install the pay phones. Mr. Bhandar took a
very active role in the U.S. Corporation, a wholly owned
subsidiary of IPC. Mr. Bhandar moved to West Virginia to
oversee the U.S. company's activities. I understand that to
the extent telephones were manufactured, the manufacturing was by
the U.S. Corporation in the United States. IPC maintained an
office in a building owned by Bains Co. in Victoria.
[9] The pay phone venture was not
successful. Mr. Bhandar lost his investment. Mr.
Bhandar sued Mr. Bains and Mr. Bristow in the
British Columbia Supreme Court for deceit claiming that Mr.
Bains and Mr. Bristow had purposely misled[1] him with respect to whether he
had invested any cash in the pay phone venture in order to induce
him into investing. The trial took five days. On
June 29, 1992, Lowry J. gave judgment in favour of
Mr. Bhandar. Mr. Justice Lowry concluded
". . . without hesitation, Mr. Bains
deliberately permitted Mr. Bristow to mislead Mr. Bhandar
about his and Mr. Bains' investment to induce
Mr. Bhandar to invest in the project. . . . Mr. Bristow
may have made the statements but Mr. Bains knew they were
untrue and would mislead Mr. Bhandar. His conduct was
dishonest . . ." Mr. Bhandar "was deliberately
deceived" by Messrs. Bains and Bristow.
Mr. Bhandar was awarded judgment in the amount of $569,994
with interest and costs.
[10] The action against Mr. Bains
personally was not the only litigation arising out of the pay
phone venture.[2]
[11] The action by IPC against Bains Co.,
Mr. Bains and Shirley Thompson, the "in house"
accountant for IPC, was to recover amounts of rent arrears from
money belonging to IPC. Apparently Messrs. Bains and Bristow
caused IPC to write cheques in aggregating $42,800 to IDM, Mr.
Bristow's company. These funds were contributed to IPC by
Mr. Bandhar. At trial Mr. Bains denied any knowledge.
The action by IPC was dismissed when Mr. Bains agreed to pay
$42,800 to IPC.
[12] The action by the Sidhu Estate was
brought on the same basis as Mr. Bhandar's action
against Mr. Bains and Mr. Bristow. Ms. Sidhu was
Mr. Bhandar's sister and she also invested in the pay
phone venture. As in Mr. Bandhar's action, Mr. Bains was
named as a defendant by the Estate in his personal capacity and
not as a director, officer or employee of Bains Co. Bains Co. was
not a party in the action.
[13] In the actions by Mr. Bhandar and
IPC, the trial judges preferred Mr. Bhandar's evidence
to that of Mr. Bains. Mr. Bains' testimony lacked
credibility. After observing both of these persons, I agree.
Mr. Bains was not a credible witness. I do not believe, for
example, that he did not induce Mr. Bhandar to assume that
he invested $380,000 in the pay phone venture. This denial
contradicts his evidence on discovery.
[14] Mr. Bains was questioned with
respect to Bains Co.'s 1989 financial statements. The
corporation's fiscal year end is August 31. On
August 31, 1988 Bains Co. had a loan receivable from
IPC in the amount of $239,000; on August 31, 1989, the
loan receivable was nil. It appears from Bains Co.'s
Statement of Operations and Deficit for the years ended August
31, 1988 and 1989, a loan of $1,121,405 to IPC was written off in
1989. Bains Co.'s Statement of Changes in Financial Position
for these periods does show a loan receivable to IPC of $239,000
for 1989. Mr. Bains explained that he did not know how to
prepare the statements. The statements were not audited but were
prepared by a chartered accountant. In any event, Bains Co.
claimed an allowable business investment loss of $747,603 on its
loan of $1,121,405 to IPC in filing its 1989 tax return. The
allowable business investment loss was denied by the tax
authority on the basis that the money loaned was not used in a
business carried on in Canada. A capital loss was recognized.
[15] Also, according to Bains Co.'s
balance sheet as at August 31, 1989, the corporation owned no
shares in IPC. According to IPC's share register prepared by
Ms. Thompson, Mr. Bains, who, on July 15, 1988,
subscribed for $4,376,604 shares of IPC for one dollar
transferred 2,971,485 shares to Bains Co. on November 30,
1988. (There are alterations on the share register which have not
been explained to my satisfaction. Mr. Bains said the
alterations are in Ms. Thomson's hand.) In
Mr. Bains' view, Bains Co. "was entitled" to
shares. There is no other explanation for this discrepancy.
Legal Expenses
[16] Mr. Bains was questioned whether he
deducted legal expenses of $25,000 from the $42,800 he agreed to
pay IPC. His answer was that he "can't say but it is
possible".
[17] In its 1994 income tax return, Bains
Co. included a Project Management Fee Statement of Business
Income and Expenses that reflected gross sales of $421,000, net
purchases of $569,994 and an interest expense of $359,006 for a
resulting business loss of $508,000. Mr. Bains could not explain
or describe the sales nor the purchases. He acknowledged that the
"net purchases" represented the amount of damages Bains
Co. paid to Mr. Bhandar in 1994; it was, he said, the payment of
a court order in the action by Mr. Bhandar against him and had
nothing to do with any project management fee. The interest
expense of $359,006 was the amount of interest allowed by the
court in the same action. Mr. Douglas Davies, who
prepared Mr. Bains' 1994 tax return, said he considered that
these funds were being "effectively paid back to Bhandar his
advance to IPC".
[18] In 1990, Bains Co. claimed an allowable
business investment loss of $97,410. IPC became insolvent in
1989. It is not clear from Bains Co.'s Statement of Allowable
Business Investment Losses for 1990 whether the loss was on
account of shares it owned in IPC or loans to IPC. Bains
Co.'s Statement of Operation and Deficit for the year does
reflect that Bains Co. wrote off a loan of $97,410 to IPC in its
1990 fiscal year. Mr. Bains appears to suggest that if Bains Co.
incurred a business investment loss, then so did he.
Argument and Analysis
[19] Mr. Bains' positions in these
appeals are as follows:
a) Mr. Bains promoted the
pay phone venture as director of Bains Co. and not in his
personal capacity. Mr. Bains was defending himself against a
claim, which arose as a result of his duties as "an
employee, officer or director" of Bains Co. Any amounts in
issue that Bains Co. paid to him were reimbursements of amounts
incurred by him as director of Bains Co. Thus, no
shareholder's benefit was conferred on him by Bains Co. The
appellant also submits that the legal expenses incurred by Bains
Co. for the years 1994, 1995 and 1996 in the amounts of $84,321,
$44,449 and $57,350, respectively, are deductible expenses
incurred by and for Bains Co. and not a taxable benefit to
him.
b) Mr. Bains testified that
Mr. Bhandar "claimed tax deductions for a portion of
his investment" in IPC. He revealed he saw
Mr. Bhandar's tax return for 1988 or 1989 that was
prepared by Ms. Thompson. Accordingly, since Mr. Bains
"reimbursed" Mr. Bhandar in 1994 for his losses in
the pay phone venture, he "stepped into the shoes" of
Mr. Bhandar and is therefore in the same position as
Mr. Bhandar as to the tax deductibility of amounts advanced
by him to Mr. Bhandar for tax purposes; in other words,
Mr. Bains ought to be allowed to deduct the amount of
"$929,000 expended by [him]" in 1994 as a non capital
expenditure.
c) The appellant argues that as
he is entitled to carry forward his non-capital loss in
1994 to 1997 and 1998.
[20] Lowry J, of the Supreme Court of
British Columbia[3]
found that Mr. Bains was liable in damages to
Mr. Bhandar and awarded Mr. Bhandar judgment
against Mr. Bains. This, appellant's counsel argued, is
similar to what transpired in McNeill v. Canada[4] where the
Federal Court of Appeal, relying on the reasoning of the Supreme
Court in 65302 British Columbia Ltd. v. Canada,[5] held that if a fine or
penalty for breach of a law is deductible because nothing in
paragraph 18(1)(a) of the Income Tax Act
("Act") precludes it, it follows that court
ordered damages for breach of contract should also be
deductible.
[21] In McNeill, supra,
the appellant agreed in an agreement of sale of his
accounting practice not to practice in a certain area for five
years. When the purchaser terminated the contract in the first
year on the basis that the appellant failed to provide certain
services provided for in the agreement, the appellant set up
practice outside the restrictive covenant area, but provided
services to clients within it. In 1994 the B.C. Supreme Court
found the appellant in breach of the restrictive covenant and
ordered him to pay damages in the amount of $405,908.
Boyd J. held that "the damages are the result of
blatant and continuous breach of the agreement". The
appellant deducted that amount in 1994 pursuant to paragraph
18(1)(a) of the Act. This Court held that the
appellant's actions were carried out for the purpose of
keeping his clients and business. The Court of Appeal thus held
that the damages were incurred to produce income and therefore
deductible in computing income.
[22] Mr. Johnson, appellant's
counsel, argues that in both McNeill and the case at bar,
claims were for damages arising out of a breach of contract, both
are as a result of the deliberate steps found to be taken by each
of these individuals giving rise to the damage claims. Counsel
acknowledges that while Mr. McNeill's expenditure was a
cost of doing business, Mr. Bains' expenditure is
somewhat different. Mr. McNeill's damages were the aggrieved
party's loss of profits due to Mr. McNeill's behaviour.
The damages Mr. Bains paid to Mr. Bhandar were not loss of
profits but loss of capital.
[23] Appellant's counsel submits that if
Mr. Bhandar was permitted to deduct his losses in
the pay phone venture, then so should Mr. Bains.[6] He refers to the
reasons of Lowry J.[7] that damages recoverable for deceit "will serve
to return the innocent party to the position he would have been
in if the misrepresentation upon which he relied had not been
made". Counsel concludes from this comment that
Mr. Bains must assume the position of Mr. Bhandar as to
the advancement of funds to the pay phone venture. Counsel
declares that, "with the payment of the damage award,
[Mr. Bains] steps into the shoes of Mr. Bhandar
and the issue of whether the funds were expended for the purposes
of earning an income and therefore are deductible have to be
determined at the time Mr. Bhandar advanced his
funds".
[24] I cannot agree that by paying damages
to Mr. Bhandar, Mr. Bains, in effect, adopts
Mr. Bhandar's tax position. Mr. Johnson was unable to
provide me with any authority for this position and I think none
exists. Whatever Mr. Bhandar's tax position is
with respect to money he invested with IPC, is irrelevant to the
appeals at bar. I am not interested in Mr. Bhandar's tax
returns.
[25] If Mr. Bains stepped into Mr.
Bhandar's shoes on paying damages to Mr. Bhandar, he
simply repaid Mr. Bhandar the capital Mr. Bhandar invested in the
pay phone venture and IPC. It may well be that on payment of
damages to Mr. Bhandar, Mr. Bains was subrogated in any
creditor rights Mr. Bhandar may have had against IPC. Assuming
this is so - and there is no evidence - Mr. Bains was ordered to
pay the damages in 1994 when IPC was insolvent and may have
ceased to exist.
[26] Also, if Mr. Bhandar owned shares in
IPC which, according to IPC's share register, he did, he
retained ownership of the shares when he received the payment for
damage from Mr. Bains. Mr. Bains did not become the owner of Mr.
Bhandar's shares in IPC. And there is also no evidence that
Mr. Bhandar assigned his interest to Mr. Bains in any loans to
IPC. In such circumstances it cannot be said that Mr. Bains laid
out the money representing the damages for the purpose of gaining
or producing income from property that may be shares or loans to
IPC.
[27] Mr. Bains was not carrying on a
business when he and Mr. Bristow met with Mr. Bhandar
to promote the pay phone venture. There is no evidence that
Mr. Bains' efforts to obtain Mr. Bhandar's money by
deception was paid of a business then carried on by him or a
venture in the nature of trade. There is no evidence before me as
to Mr. Bains' true purpose or intent in causing
Mr. Bhandar to invest in the pay phone venture. Was it for a
bona fide investment or for something else? The damages
paid to Mr. Bhandar by Mr. Bains represented a personal expense
of Mr. Bains within the meaning of paragraph 18(1)(h)
of the Act. As such, it is not deductible in computing Mr.
Bains' income in 1994 and he had no non-cpaital loss in 1994
when he was compelled to pay the damages after the Court of
Appeal confirmed the judgment of Lowry J. There is no non-capital
loss carry-forward to 1995 and 1996.[8]
[28] Iacobucci J., acknowledged that if a
fine is not incurred for the purpose of gaining or producing
income, it cannot be deducted. He also cautions
that a breach could be so egregious or repulsive that the fine
subsequently imposed could not be justified as being incurred for
the purpose of producing income[9] . . .
[29] I have found that the damages paid by
Mr. Bains were not incurred to gain or produce income. However,
even if I erred in so concluding, the actions of Mr. Bains
in usurping money out of Mr. Bhandar is the egregious or
repulsive breach that Iacobucci J. states could not be justified
as being incurred for the purpose of producing income.
[30] As far as the legal fees paid by IPC
are concerned, there is no evidence that Bains Co. authorized
Mr. Bains as an officer, employee, or director to do what he
did as its agent. Further, Mr. Bains' acts were ultra
vires the powers of a director of a British Columbia
corporation. There is no evidence that Bains Co. incurred the
legal fees to defend its trade practices, its business reputation
or anything to do with its business as a going concern nor did it
incur legal expenses to defend an employee, officer or director
for having committed an illegal or wrongful act in the course of
carrying on its business. Lowry J. cited Mr. Bains'
disreputable conduct. He did not suggest that Bains Co. was
involved. Bains Co. was not a defendant in the action. I do not
believe Mr. Bains when he states that he was acting in his
capacity as director when he committed the deceitful actions for
which he was personally liable in damages. The legal fees paid by
Bains Co. were for the benefit of Mr. Bains and ought to be
included in his income for each of the years 1994, 1995 and
1996.
[31] The appeals are dismissed with
costs.
Signed at Ottawa, Canada, this 3rd day of April 2003.
J.T.C.C.
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