Citation: 2012TCC30
Date: 20120216
Docket: 2009-3877(IT)G
BETWEEN:
RANDY J. OLLENBERGER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller J.
[1]
In September 2007 the
Appellant loaned AEF Corporation (“AEF”) $600,000. The loan was not repaid when
due and, in his 2007 income tax return, the Appellant claimed a business
investment loss (“BIL”) of $613,772 in respect of this loan. The Minister of
National Revenue (the “Minister”) has conceded that the Appellant is entitled
to a capital loss. However, the Minister has denied his entitlement to a BIL on
the basis that AEF was not a “small business corporation” because it did not
carry on an “active business” in 2007 or the 12 preceding months.
[2]
The only issue in this
appeal is whether AEF was an “active business” during the relevant period.
[3]
The witnesses at the
hearing of this appeal were the Appellant, Doug Djan on behalf of the Appellant
and Karla MacDonald, an appeals officer with the Canada Revenue Agency (“CRA”)
on behalf of the Respondent.
[4]
The Appellant leads BMO
Capital Markets’ North America. In this position, he manages a group of 22
professionals who analyze oil and gas companies in Canada
and the United States to determine whether such companies offer
good investment opportunities for professional investors.
[5]
It was Doug Djan’s
evidence that he and Scott Kisk established AEF. Its business purpose was to
acquire distressed, but producing oil and gas properties and to operate these
properties or to sell them, whichever was most profitable.
[6]
The Appellant had no
independent knowledge of AEF’s business and in his evidence he described the
events which led him to make a loan to AEF and to claim the BIL on his 2007
income tax return. Those events are as follows.
[7]
The Appellant stated
that he was contacted by Doug Djan on September 8, 2007 with respect to an
investment opportunity. Mr. Djan represented himself to the Appellant as the
president of AEF. According to the Appellant, Mr. Djan explained that AEF had
made an offer of $11,875,750 to acquire the oil and gas producing assets of
Vanquish Oil & Gas Corporation and King Energy Inc. (the “Vanquish
Properties”) from Ernst & Young Inc. (the “Receiver”) who was then acting
as interim receiver and manager for the Vanquish Properties. In order to sign
this purchase and sale agreement for the Vanquish Properties, AEF was required to
provide the Receiver with a 10% deposit by September 10, 2007. The Appellant
was informed that a portion of the funding for the deposit had fallen through
and AEF needed a further amount of $600,000 by September 10, 2007.
[8]
The Appellant satisfied
himself that Mr. Djan’s statements were accurate. He loaned AEF $600,000 on
September 10. As consideration for the loan, AEF and Mr. Djan agreed to pay the
Appellant a commission of $100,000. The loan was to be repaid in full no later
than October 4, 2007.
[9]
Sometime between
September 10 and September 21, AEF discovered that there were defects in the
title to the Vanquish Properties. There was a disagreement concerning the cost
to cure the title defects and on October 10, 2007, the Receiver sent a letter
to AEF terminating the purchase and sale agreement. The deposit was forfeited
in accordance with the purchase and sale agreement. The Appellant then sought
to claim a BIL for the amount of the deposit.
[10]
It was Mr. Djan’s
evidence that AEF produced the document titled “Business Summary” (exhibit 1,
tab 35) to raise funds for the purchase of the Vanquish Properties. The
following paragraph appears on page 5 of this document:
AEF is offering up to 75% of the common shares of
company and board representation for $50 Million. The current management team
will retain 25% common shares and board representation. Alternatively, AEF will
consider dept. (sic)
[11]
AEF was located in office
space that was shared by it and other companies owned by Scott Kisk. Mr. Djan
stated that AEF had desks, computers, its own telephone number and stationery.
All expenses were paid by Mr. Djan and Scott Kisk.
[12]
Mr. Djan testified that
he and Scott Kisk worked full time for AEF in 2006 and 2007 pursuing AEF’s
business purpose. They researched properties to purchase, sought investors and
arranged for Provident Group Asset Management to provide a commitment letter
for the purchase of the Vanquish Properties.
[13]
Neither Mr. Djan nor
Scott Kisk was ever paid as AEF had no income.
[14]
Mr. Djan stated that
AEF had a management team and their names and experience were given in the
Business Summary.
[15]
The three definitions
relevant to this determination are contained in section 248 of the Act. In
summary, they provide:
(a)
“small business
corporation” is a Canadian-controlled private corporation (“CCPC”) where “all
or substantially all of the fair market value of the assets of which at that
time is attributable to assets that are used principally in an active business
carried on primarily in Canada”.
(b)
“active business” means
“any business carried on by the taxpayer other than a specified investment
business or a personal services business”. AEF was neither a specified investment
business nor a personal services business.
(c)
“business” includes “a
profession, calling, trade, manufacture or undertaking of any kind whatever”
but does not include an office and employment.
[16]
In his written
submissions, Counsel for the Appellant wrote:
70. (b) The defined term “active business” operates only to exclude
a “specified investment business” and a “personal services business”. These
concepts are not in issue and as such “active business” only means “business”
in this case.
[17]
I disagree with the
Appellant’s position that the definition of “active business” only means
“business”. The word “active” is used in this provision as an adjective and by
its placement it is used to modify “business”. Because it is meant to be
descriptive of the word “business”, this word should not be overlooked. See
Pierre-André Côté, The Interpretation of Legislation in Canada, 4th
ed. (Scarborough: Canada, 2011) at p.295.
[18]
Reading the definition
as a whole, I conclude that an “active business” must be one which is “carried
on”. The question therefore is whether there is sufficient evidence before me
that would allow me to conclude that AEF carried on such a business.
[19]
The only evidence
before me with respect to the business of AEF was the document entitled the Business
Summary and the testimony of Mr. Djan. When I consider the totality of this
evidence and the inconsistencies in Mr. Djan’s evidence and the inaccuracies in
the Business Summary, I must conclude that the evidence as a whole is not
credible.
[20]
These inconsistencies included
the following.
[21]
The Business Summary
listed Mr. Djan’s education as degrees in law, marketing and business from
Pepperdine University and the University of Calgary. However, Mr. Djan testified that he had a political
science degree from the University of Saskatchewan and a marketing degree
from Pepperdine University. Although
this inconsistency is innocuous, it is typical of the lack of veracity throughout
most of his evidence.
[22]
Even the first line of
the Business Summary was inaccurate. It stated that AEF Corporation was formed
in 2005; whereas, AEF was incorporated on April 27, 2006.
[23]
AEF has never owned any
real property and yet the Business Summary contained the following paragraph:
At present, AEF has acquired 5 producing properties in
the Western Canadian Sedimentary Basin. They are: Provost,
Coronation, Lochend, Stanmore and Viewfield. AEF currently has 41 producing oil
wells and 4 producing gas wells located on these properties. These wells are
producing approximately 350 BOE/day which we plan to optimize and increase
production to 525 BOE/d by years end. AEF is in the process of acquiring an
additional asset from Flagship Energy. This acquisition will add an additional
5 properties. The additional properties as well as 426 BOE/day. These lands we
are prime for our expanded developmental drilling program. There are
approximately 20 drilling, recompletion or tie-in opportunities that are
supported by over 50 kms of 2D and 3D seismic data. The wells awaiting tie-in,
they have seismic lines in place and show a very high probability of success in
drilling along these same seismic lines. This is confirmed by referencing the
production of the wells on the existing lines as well as existing wells on the
properties that are adjacent to these seismic lines.
[24]
In cross-examination,
Mr. Djan admitted that AEF did not own any real property and the Provost,
Coronation, Lochend, Stanmore and Viewfield properties, referenced in the
Business Summary, were actually owned by Troy Bilon.
[25]
The Business Summary contained
wording meant to mislead the reader into believing that AEF had a management
team and the members of that team were the shareholders of AEF.
[26]
Mr. Djan also testified
that there were a number of shareholders of AEF. However, the Certificate of Status
from the Alberta Corporate Registration System listed only one shareholder for
AEF. It was Scott Kish. He was not listed in the Business Summary as either part
of the management team of AEF or the shareholder of AEF.
[27]
When Mr. Djan was
questioned about the absence of Scott Kish’s name in the Business Summary, he
said that in 2009 he had revised the Business Summary to remove Scott Kish’s
name. I find this difficult to believe because it raises many questions which
were not answered by the evidence before me. If Mr. Djan had revised the
document, why did he leave the date of July 2007 on the cover page? Why did he revise
the Business Summary when its purpose was to raise money to purchase the
Vanquish Properties? (The opportunity to acquire these properties had passed.) Why
would he leave all the names of the alleged management team in the Business
Summary, when, according to his evidence, these persons had asked on October
10, 2007 to have their names removed from any involvement with AEF?
[28]
I have no evidence
which would lead me to believe that any of the individuals named in the
Business Summary were involved in the management of AEF. None was called to
testify.
[29]
The Appellant stated
that as part of his due diligence he had spoken to Rick Johnson who was
identified in the Business Summary as the financial person. The Appellant did
not give an account of his conversation with Rick Johnson nor did he call him
as a witness.
[30]
Troy Bilon was listed
in the Business Summary as the Director of Geology. However, Mr. Djan testified
that Troy Bilon would only be joining AEF once it acquired the Vanquish
Properties. He stated: “we had an agreement in principle with Troy Bilon and
Core Exploration to join our company on the date that we closed the Vanquish
asset”.
[31]
The purchase and sale
agreement with the Receiver signed by Mr. Djan on September 10, 2007 with the
Receiver listed a GST registration number for AEF. I assume this number was
given to the Receiver by Mr. Djan. However, the evidence disclosed that AEF was
not a GST registrant.
[32]
Counsel for the
Respondent asked Mr. Djan if AEF had office supplies. He answered:
“Stationery,
business cards, letterhead, all under the AEF banner, obviously our prospectus,
our bulletins, our website, our -- all clearly showing that we are in the
business of -- I mean, I can simply say this, when you're asking someone for
$50 million, Your Honour, you kind of have to have something behind you more
than just, you know, air. You need some of the accoutrements, if you will, that
allow you to be legitimate, I guess, in the business, so – ”
[33]
Counsel for the
Respondent aptly summarized Mr. Djan’s evidence as follows:
Mr. Djan seemed to
imply that he had all of the -- what does the term he used accoutrements of
business and that he had to give potential investors something besides just
air. When the reality is, that's what he gave them. I can go tomorrow and
create lovely, lovely business cards. I can prepare a business summary. I can
do all of those things, that doesn't make me a business, and that's what we
don't see here.
[34]
The onus was on the
Appellant to produce credible evidence to support his position that AEF was an
active business and that he was entitled to a BIL. This he failed to do.
[35]
The appeal is dismissed
with costs to the Respondent.
Signed at Ottawa,
Canada, this 16th day of February 2012.
“V.A. Miller”
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