Roxon Property Management Ltd. v. MNR, 88 DTC 1306, [1988] 1 CTC 2512 (TCC)

Taylor, T.C.J.:— These are appeals heard in Toronto, Ontario, on March 22, 1988, against income tax assessments for the taxation years 1979, 1980, and 1981, since the Minister of National Revenue disallowed the claim of $301,757 as an “allowable business loss’, and substituted therefore its allowance as a "capital loss". The notice of appeal read as follows:

A. FACTS

1. Roxon Property Management Limited ("Roxon") disposed of a loan receivable from Mutual Street Investments Limited.

2. The loss on the disposition was treated as an allowable business investment loss.

3. Revenue Canada, Taxation is treating this as a capital loss. Revenue Canada, Taxation is taking the position that the disposition was a series of non-arm's length transactions.

4. As a "question of fact”, we believe that all taxpayers involved were dealing at arm's length.

For the Minister, the reply to notice of appeal set out this situation:

— The Appellant's common shares were equally held by four shareholders, of whom two were Blake Wallace and Robert Foster, prior to December 17, 1979;

— Wallace and Foster owned or controlled 1,114 of the 1,245 issued Class B shares of the Appellant, as of December 11, 1979;

— the Appellant owned all of the shares of Mutual Investments Ltd. ("M.I.L."), prior to December 17, 1979;

— M.I.L. owned a property in the City of Toronto known as 55 Mutual Street, prior to December 17, 1979;

— M.I.L. owed the Appellant $301,757 on December 17, 1979, as reflected in the loan account;

— on December 5, 1979, Wallace and Foster incorporated 433152 Ontario Limited, each owning 50% of the issued common shares;

— on December 17, 1979, the Appellant sold all of the shares of M.I.L. to Wallace for $1.00;

— on December 18, 1979, Foster acquired all of outstanding shares of the Appellant;

— on December 19, 1979, M.I.L. sold the property at 55 Mutual Street to 433152 Ontario Limited for $600,000; M.I.L. used the $600,000 to pay off the mortgages on the property and $135,138.55 of its indebtedness to the Appellant;

— on December 21, 1979 a J. laboni received 500 common treasury shares of 433152 Ontario Limited for $5,000;

— on December 31, 1979, the Appellant sold its loan receivable from M.I.L. of about $301,757 to Wallace for $1.00;

— the Appellant was not dealing at arm's length with M.I.L. within the meaning of paragraph 251(1)(b) of the Income Tax Act in December of 1979 and the loss on the loan receivable of $301,757 could not be a business investment loss pursuant to subsection 39(1)(c)(iv) of the Act;

— The Appellant was not dealing at arm's length with M.I.L. within the meaning of paragraph 251 (1)(b) of the Income Tax Act.

— The Respondent relies, inter alia, upon paragraph 251(1)(b), subsection 39(1)(c)(iv) of the Income Tax Act, R.S.C. 1952, Chapter 148 as amended (the "Act") and section 4300 of the Income Tax Regulations.

The history of the businesses involved, and the transactions detailed were provided by Mr. Robert Foster (see above). Essentially there was little variance in his testimony with regard to the facts from the information already noted from the reply to notice of appeal. The series of transactions which occurred in December 1979 was designed to "separate the businesses in an organized manner", from which the "end result was the disposition of a debt", again "in an organized manner". The listing of the shareholdings in Roxon before December 17, 1979 showed that Mr. Blake Wallace (see above) had effective control of that company (the appellant in this matter). The testimony was that the shareholders had received professional advice before embarking on this series of transactions, and that the "restructuring" (as it was Called) was conceived as a package. The numbered company 433152 (see above) was always intended to have (and finally did have) three common shareholders — Wallace, Foster, and J. laboni (see above) each with one third of the issued common shares. The $600,000 financing used by 433152 Ontario Limited to purchase the property at 55 Mutual Street (see above) from M.I.L. (see above) was provided in equal parts ($300,000 for each one) by Wallace and Foster — for which they took back preference shares.

Three other points should be noted — first that there was no dispute regarding the origin of the amount at issue — it represented a straight loan from the appellant to M.I.L.; second, that the ownership of the building at 55 Mutual Street, as well as the loan itself commenced several years before 1979; and third, that the evidence indicates the “loan receivable” at issue certainly did not become a "bad debt" or a “doubtful account" on December 31,1979 (the date of the sale from Roxon to Wallace), but rather had been of very doubtful collection for a long time, at least dating well before December 16, 1979 — this was clearly one of the factors that prompted the “restructuring”.

The argument proferred by the agent for the appellant was that as at December 31, 1979 (the date of the sale of the loan receivable from Roxon to Wallace) the two corporations Roxon and M.I.L. were completely separate

— each owned by a different shareholder. The Minister therefore could not support any allegation that the sale transaction at that date was not at arm's length. In support of that proposition Mr. Zwingerman referenced Swiss Bank Corporation and Swiss Credit Bank v. M.N.R., [1972] C.T.C. 614; 72 D.T.C. 6470 (S.C.C.).

For Mr. Dans, the matter was much more complicated — he regarded the process and programme developed before December 17, 1979 and carried out during December 1979 as clear indication that all parties involved — the corporations as well as the individuals were working in concert, and not in own separate interests. Therefore it could not be said that the transactions at issue were at arm's length. He specifically referred to subparagraph 39(1)(c)(iv) of the Act and cited the following case law:

1. M.N.R. v. Sheldons Engineering Ltd., [1955] C.T.C. 174; 55 D.T.C. 1110 (S.C.C.)

2. M.N.R. v. Estate of Thomas Rodman Merritt, [1969] C.T.C. 207; 69 D.T.C. 5159 (Exch. Ct.)

3. Re Tremblay; Gingras, Robitaille, Marcoux Lée v. Beaudry and Paradis, 36 C.B.R. 111 (Que. S.C.)

4. Swiss Bank Corporation and Swiss Credit Bank v. M.N.R., [1972] C.T.C. 614; 72 D.T.C. 6470 (S.C.C.)

5. Oryx Realty Corporation v. M.N.R., [1974] C.T.C. 430; 74 D.T.C. 6352 (F.C.A.)

6. Oryx Realty Corporation and Shofar Investment Corporation v. M.N.R., [1972] C.T.C. 35; 72 D.T.C. 6018 (F.C.T.D.)

7. Noranda Mines Limited v. M.N.R., [1987] 2 C.T.C. 2089, 87 D.T.C. 379 (T.C.C.)

Analysis

As I understood the comments, both Mr. Foster and Mr. Zwingerman agreed that the organized manner of the corporate restructuring should be viewed as a package from beginning to end — as the Minister contended. The appellant's argument however, was that the restructuring accomplished an appropriate purpose — to set up the affairs of the appellant in such a way that it (Roxon) was entitled to the “allowable business loss” sought. I am of the view that it can be found as a fact that as at December 16, 1979 (before the series of transactions before the Court in this matter) any transaction between Roxon and M.I.L., or Roxon and Wallace would not have been at arm's length. Therefore the opportunity for the “allowable business loss” at issue would have been foregone. The question becomes — did the events and transactions on or after December 17, 1979 so alter that relationship between Roxon and Wallace as to eliminate this obstacle and thereby provide Roxon with the deductions sought. It will be noted that I have indicated the relationship between "Roxon and Wallace" — because these are the parties the final sale involves. The Minister (see above) stood on the assumption that:

the Appellant was not dealing at arm's length with M./.L. . . . [Emphasis mine.]

Wallace owned all the shares of M.I.L. — so he could not deal with M.I.L. at arm's length. The lack of precision in the Minister's pleadings — see above — is certainly noted by the Court, but I am not prepared in the circumstances of this case to regard it as fatal to the assessment at issue. The appellant still must show that the "restructuring" which culminated in the sale of the loan receivable from Roxon to Wallace exempted Roxon from the previously required treatment of the amount at issue as a “capital loss”, and transformed it into an “allowable business loss”.

We return to the main area of dispute between the parties, the perspective of Mr. Zwingerman — that the critical time is December 31, 1979, at which the disposition took place, and the view of Mr. Dans that the "series" of transactions which commenced on December 17, 1979, must be viewed by the Court as critical.

In my opinion the Minister's position is correct — the matter cannot be dealt with by viewing only the shareholdings of Roxon and M.I.L. as at December 31, 1979, as Mr. Zwingerman would have the Court do. The direction for the corporations Roxon (the appellant) and M.I.L., and for that matter 433152 Ontario Limited, during the month of December 1979 was the combined mind and will of Wallace and Foster. In late 1979, they had one central purpose and objective — to "restructure" the companies and where necessary the shareholdings and the assets involved, in such a way as to produce the appearance of separate corporate entities, but primarily to write off as a bad debt the loan receivable for M.I.L. to Roxon, and at the same time do so in a way which provided for certain income tax relief. Other possible objectives — separate operations, better management, bringing in Mr. laboni, etc., were of relatively insignificant importance. There is not the slightest indication that either Wallace, Foster, Roxon, M.I.L., or 433152 Ontario Limited operated independently and for separate and distinct purposes, which would lend support to the "arm's length" contention they bring to the Court. I am satisfied that the earlier portion of the events in December 1979, would not have occurred without a joint understanding of the final result, the elimination of the loan from Roxon — with the relevant income tax relief.

Paragraph 251(1)(b) states:

it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.

While Mr. Zwingerman took some comfort from certain passages to be found in Swiss Bank, supra, I would note from page 618 (D.T.C. 6473) of that judgment the following:

In my opinion, the interposition of the managing agent and the two depositaries between City Park and the certificate holders does not, despite the regulations, create an arm's length situation between them, . . .

The same can be said here. Wallace and Foster remained in control and conduct of these two corporations, Roxon and M.I.L., with the addition of 433152 Ontario Limited during this critical period up to and including the December 31,1979 “disposition” at issue, with Wallace very probably capable of exercising all of the direction himself, if needed. The corporations Roxon and M.I.L. were not operating at arm's length during this period of time, and the transactions under review do not serve the purpose for which they were intended.

The appeals are dismissed.

Appeals dismissed.