Date: 20020417
Docket: 2000-717-IT-G
BETWEEN:
GIBRALT CAPITAL CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
McArthur J.
[1]
This is an appeal from an assessment for the 1995 taxation year.
The issue is whether section 80 of the Income Tax Act
applies to a debt forgiveness of $16,000,000.[1] The Appellant[2] submits that it does not apply
because the debt was not a "commercial debt obligation"
as defined in subsection 80(1) which reads as follows:
"commercial debt obligation" issued by a debtor
means a debt obligation issued by the debtor
(a)
where interest was paid or payable by the debtor in respect of it
pursuant to a legal obligation, or
(b)
if interest had been paid or payable by the debtor in respect of
it pursuant to a legal obligation,
an amount in respect of the interest was or would have been
deductible in computing the debtor's income, taxable income
or taxable income earned in Canada, as the case may be, if this
Act were read without reference to subsections 15.1(2) and
15.2(2), paragraph 18(1)(g), subsections 18(2), (3.1) and
(4) and section 21;
[2]
The parties have agreed to a Statement of Facts which is set out
in Schedule "A" to these Reasons.[3] The events giving rise to this appeal
are complex, the gist of which is as follows. Joseph Shoctor
(Shoctor), an Edmonton businessman, controlled three
corporations[4]
that purchased the Westward Inn (the Inn) in Calgary in 1981 for
$18,000,000. The Inn was a financial disaster and in 1988,
Shoctor was in serious financial difficulties. Through personal
guarantees, he owed the TD Bank $32,000,000. He turned to his
lifetime friend, Samuel Belzberg[5] (Belzberg), who paid $10,000,000 to
the TD Bank in final payment of the $32,000,000 debt. Cal-Con
Financial Ltd. (Cal-Con) took on assignment of the $32,000,000
debt. Ultimately, Shoctor could not satisfy the $10,000,000 debt
to Belzberg and they entered a new debt restructure agreement in
1993 called the Master Settlement Agreement (MSA) wherein Shoctor
turned over many of his assets to Belzberg comprising basically
of $2 million in cash and the Inn. Belzberg forgave
approximately $16,000,000 in debt. The Appellant originally filed
returns on the basis that subsection 80(1) applied,
believing that it had sufficient non-capital losses to offset the
additional forgiveness of debt income. Apparently, the
non-capital losses were disallowed and the Appellant
re-filed on the basis that section 80 did not apply, giving
rise to this appeal.
[3]
The Appellant submits that no portion of the $16 million
satisfies the requirements in the definition of "commercial
debt obligation".
[4]
Included in the $16 million are three separate debts; $9 million,
$4 million and $2.2. million.[6] The history of each must be
considered. As stated, in 1981 three companies controlled by
Shoctor purchased the Inn with a joint and several mortgage loan
to the TD Bank in the amount of $18.2 million. In November 1987,
Shoctor personally bought the Inn from the three companies for $7
million which he borrowed from the TD Bank as well. The companies
used the $7 million to repay a portion of their original $18.2
million debt. The total debt on the books of Shoctor Group did
not change since they jointly and severally guaranteed the
$7 million borrowed by Shoctor. By 1988, the $18.2 million
debt had ballooned to approximately $32 million with interest and
various other amounts. Transactions were entered into for the
purpose of restructuring the debt. Included in this
restructuring, Belzberg borrowed $10 million from the TD Bank to
pay off the $32 million debt which was assigned by the TD
Bank to Cal-Con.[7]
[5]
In 1993, Provincial Credit Corp. Ltd. (Provincial)[8] bought the Inn back
from Shoctor for $4 million and $2 million of the $4 million
purchase price was financed by a mortgage back to Shoctor.
Various other assets were also transferred to satisfy the 1988
$10 million debt which was owed to Belzberg. One result of these
transfers was that Belzberg took 100% control of Cal-Con. At this
point, the Shoctor Group[9] owed $36 million to Cal-Con. This amount was comprised
of the original $32 million TD Bank debt that was assigned to
Cal-Con in 1988 plus interest. Provincial also owed $4 million to
Harvey Holdings Ltd. (Harvey) in the form of an inter-company
debt.
[6]
The parties entered into a new debt restructuring agreement in
1993 through which, after various debts were moved around,
Provincial ended up owing roughly $16 million to Cal-Con. This
$16 million debt, which was ultimately forgiven in 1995 when
Gibralt Capital Corporation was incorporated, was comprised of
six separate debts. Two of the debts were not in dispute and a
third debt in the amount of $139,819 was not addressed in oral
argument.[10] The
three amounts addressed were a $9 million debt, $4 million debt
and $2.2 million debt.
[7]
The $9 million debt is a portion, assumed by Provincial, of the
original $36 million which the Shoctor Group owed to
Cal-Con. As described above, this $36 million is related to the
original $18.2 million borrowed by the Shoctor Group to purchase
the Inn.
[8]
The $4 million debt is comprised of inter-company loans between
Provincial and Harvey which were subsequently assigned to
Cal-Con.
[9]
The $2.2 million debt can be traced back to when Provincial
repurchased the Inn from Shoctor in 1993 and financed this amount
of the $4 million purchase price through a mortgage take back.
This debt owing from Provincial to Shoctor was assigned by
Shoctor to Cal-Con pursuant to the debt restructuring agreement
as well.
Position of the Appellant - The $9 Million
Debt
[10] The
Appellant presents three alternative arguments why the $9 million
should not be subject to section 80. All are premised on the
basis that the debt does not meet the criteria of a
"commercial debt obligation" as defined in
subsection 80(1).
(a)
Retrospective Application
[11] The
Appellant submits that when the Shoctor Group of corporations
sold the Inn in 1987, interest on the corporations' debt to
the TD Bank ceased to be deductible pursuant to paragraph
20(1)(c) of the Act because there was no longer a
source of income.[11] It is accepted that prior to selling the Inn to
Shoctor in 1987, interest was deductible by the Shoctor Group and
the former section 80 would have applied. The thrust of the
Appellant's argument is that section 80 was amended in 1995
and it applies only to taxation years ending after
February 21, 1994[12] and that the debt can only be analysed to determine
if interest "was or would have been deductible" after
February 21, 1994. To support this position, the Appellant relies
on the presumption against retrospective statutes.[13]
[12] The
Appellant asserts that the loan should only be analysed to
determine if it is a "commercial debt obligation" for
periods after February 1994 and because there was no source of
income during this period, the interest would not have been
deductible.
(b)
Release of the Debtor
[13] The
Appellant states that the $32 million, which was divided and
allocated among the parties under the MSA, was a joint and
several liability of the original parties. The Appellant submits
that when Harvey and Shoctor were released from their debts by TD
Bank in 1988, Provincial was also released by operation of law.
The Appellant adds that Provincial then assumed a new legal debt
which is not connected with any source of income and, therefore,
the new debt would not constitute a "commercial debt
obligation" as interest would not have been deductible. The
release of one joint and several debtor effects a release of all
debtors. The Appellant submits that none of the three recognized
exceptions to this rule apply to the present case and, therefore,
the rule would operate and Provincial would be released from the
original debt and would assume a new legal debt.
(c)
Novation
[14] The
Appellant submits in the alternative that when the $32 million
debt was severed and allocated to the different parties pursuant
to the MSA, and the other parties were subsequently released,
that this resulted in a novation. Through this novation
Provincial assumed a new debt of $9 million, which was legally
distinct from the original debt of $32 million. This new debt of
$9 million, it is argued, was not connected to any source of
income and, therefore, interest was not, and could not have been
deductible.
Position of the Respondent - The $9 Million
Debt
(a)
Retrospective Application
[15] The
history of the loan must be reviewed to determine whether it is a
"commercial debt obligation". To do otherwise would
frustrate the intention of the legislation.
(b)
Release of Debtor
(c)
Novation
[16]
Respondent's counsel dealt with these two arguments of the
Appellant together. Counsel submits that it is irrelevant whether
there was or was not a novation or a release of debtors. She
states that the purpose behind the debt forgiveness rule is the
characterization of the forgiven debt according to its source:
either it is a business source and will be captured or it is a
personal source and will not be captured by section 80. She
further states that the debts satisfy the "legal
obligation" requirement of the definition of
"commercial obligation" in section 80 as this section
is based on the hypothetical "if". She asserts that the
word "if" in this instance applies both to the
supposition that interest had been paid or payable and that it
was payable pursuant to a legal obligation.
[17] She
further asserts that even if there was a release of the debtors,
or a novation of the debt, subsection 20(3) would operate to deem
the money owing under the new debts to have been used for the
purpose for which the money previously borrowed was used and the
interest would, therefore, remain deductible under paragraph
20(1)(c).[14]
[18] She adds
that the releases were never fully effected and that as Shoctor
was not released, Harvey was not released either. She states that
at best, there is a covenant not to sue.
[19] Lastly,
she concludes that neither release, subsequent to the MSA,
substitutes debtors and that there is no evidence that the
parties to the MSA intended to effect a novation.
[20] In reply,
the Appellant states that the Respondent misunderstands his
arguments. If Provincial was released or there was a novation,
then the debt of $9 million that was severed and allocated
to Provincial under Part A of Schedule F to the MSA is legally a
new debt, that is, legally distinct from the 1981
debt. It was that new debt that was part of the $16
million that Cal-Con forgave on January 18, 1995.
[21] This
appeal was heard September 10, 2001. On September 11, 2001,
counsel for the Respondent requested permission to make written
submissions in respect of two of the Appellant's arguments:
(i) the release of one joint and several debtor releases all
debtors; and (ii) novation. Despite the Appellant's forceful
argument to the contrary, the request was granted to give the
Court the benefit of full arguments with respect to the release
of one joint debtor and novation. In her further arguments,
Respondent's counsel also included the issue: commercial debt
obligation - retrospective or prospective. In reply, the
Appellant urged that the Respondent's retrospective or
prospective further arguments be ignored. While the
Appellant's position is well taken, again for the purpose of
completeness, I have considered these submissions together with
the Appellant's reply and found them of minimal
assistance.
Analysis
[22] Whether
the Appellant must bring the forgiven amount into its income
depends on whether the debt is a "commercial debt
obligation" as defined in subsection 80(1). Because of its
importance to this decision, it is repeated:
"commercial debt obligation" issued by a debtor
means a debt obligation issued by the debtor
a)
where interest was paid or payable by the debtor in respect of it
pursuant to a legal obligation, or
b)
if interest had been paid or payable by the debtor in respect of
it pursuant to a legal obligation,
an amount in respect of the interest was or would have been
deductible in computing the debtor's income, taxable income
or taxable income earned in Canada, as the case may be ...
The $9 Million Debt
[23] The $16
million is made up of several components. The $9 million is a
portion, assumed by Provincial, of the original $36 million which
the Shoctor Group owed to Cal-Con. As described previously, this
$36 million is related to the original $18 million borrowed by
the Shoctor Group to purchase the Inn.
(a)
Retrospective Application
[24] I agree
with the Appellant that interest "was not or would not have
been deductible" after February 1994. The question is
whether the legislation is retrospective. Does the phrase
"was or would have been deductible" apply to the years
prior to February 1994 or does the presumption against
retrospective statutes operate to prevent this interpretation?
The Appellant referred to the following excerpt from Benner v.
Canada[15] at
paragraph 39, where Lamar C.J. quotes from an article of Elmer
Driedger as follows:
A retroactive statute is one that operates as of a time prior
to its enactment. A retrospective statute is one that
operates for the future only. It is prospective, but it
imposes new results in respect of a past event. A
retroactive statute operates backwards. A retrospective
statute operates forwards, but it looks backwards in that it
attaches new consequences for the future to an event that took
place before the statute was enacted. A retroactive statute
changes the law from what it was; a retrospective statute changes
the law from what it otherwise would be with respect to a prior
event.
[25] I do not
believe the amendments to subsection 80(1) impose retrospective
considerations when applied to the circumstances of this case.
The relevant provisions of the previous section 80 were virtually
identical in operation to the provisions now under analysis. The
outcome of the application of the old section 80 to the
Appellant's situation would be the same as under the new
section 80. The amendments to the relevant portions of section
80, therefore, do not attach any new results in respect of a past
event and do not attach any new consequences for the future when
applied to the Appellant's situation are the same under both
the old and amended section 80; the Appellant was not exposed to
a new penalty, disability or duty attaching to past events due to
the amendments. The amendments to subsection 80(1),
therefore, do not restrict me from looking at the character of
the loan in years prior to February 1994. The $9 million is part
of the 1981 debt. Interest on this debt clearly "would have
been deductible".
[26] The
Supreme Court of Canada in Gustavson Drilling (1964) Ltd. v.
M.N.R.,[16]
discussed the retrospective operation of legislation. The issue
was whether an amendment to subsection 83A of the Act
precluded the Appellant from deducting certain expenses. But for
the amendments, the expenses would have been deductible. Dickson
J. (as he then was) writing for the majority discussed the
question of retrospective operation of statutes at
pages 5454-5456 as follows:
... It is argued that there is no need to have recourse
to presumptions of legislative intent, for such rules of
construction are only useful in ascertaining the true meaning
where the language of the statute is not clear and plain: per
Lamont J. in Acme Village School District v. Steel-Smith,
(1993) S.C.R. 47, 51. There is much to this submission.
...
He then discussed retrospection:
... The general rule is that statutes are not to be
construed as having retrospective operation unless such a
construction is expressly or by necessary implication required by
the language of the Act. I think the true view to be that
the repealing enactment in the present case, although undoubtedly
affecting past transactions, does not operate retrospectively in
the sense that it alters rights as of a past time. The section as
amended by the repeal does not purport to deal with taxation
years prior to the date of the amendment; it does not reach into
the past and declare that the law or the rights of parties as of
an earlier date shall be taken to be something other than they
were as of that earlier date. The effect, so far as appellant is
concerned, is to deny for the future a right to deduct enjoyed in
the past but the right is not affected as of a time prior to
enactment of the amending statute.
... The rule is that a statute should not be given a
construction that would impair existing rights as regards person
or property unless the language in which it is couched requires
such a construction ...
The amended subsection 80(1) did not take away any vested or
existing right of the Appellant.
[27] Even if
the effect of the amendments to section 80 is to impose
retrospective considerations, I find that a retrospective
operation is necessarily implied by the Act. The
presumption against retrospective statutes would not apply as the
language of the statute is clear and plain. I agree with the
Respondent's submission that to hold otherwise would
frustrate the obvious intention of the legislation.
[28] The
Appellant's able argument does not withstand close
scrutiny.
(b)
Release of Debtor
[29] Counsel
for the Appellant accurately submitted that, subject to certain
exceptions, the release of one "joint and several
debtor" releases all debtors. This rule has no application
in the present circumstances. The Appellant argues that the MSA
first released Harvey effectively releasing Provincial's
liability from the debt by operation of law. The Appellant added
that under the MSA, Provincial was allocated and assumed a new
debt of $9 million to Can-Con.[17] How can this be possible if Provincial was
released from liability for the $36 million? The subsequent
severance and allocation of the released debt would have no
effect. Cal-Con could not allocate a non-existent debt.
[30] I find
that the severance and allocation of the $36 million preceded the
releases. Under section 3.4.4 of the MSA, Cal-Con released
Harvey, but only subject to the completion of the transactions
referred to in the MSA. The severance and allocation, therefore,
had to be completed prior to the release. As the severance
occurred first, the subsequent release of some of the parties
would have no effect on the $9 million debt as this was no longer
a joint and several debt. The rule that the release of one joint
and several debtor releases all joint and several debtors would
simply not operate.
(c)
Novation
[31] Whether
there is a novation is a question of mixed fact and law.
Black's Law Dictionary, 7th edition, defines
novation as follows:
novation, n. The act of substituting for an old
obligation a new one that either replaces an existing obligation
with a new obligation or replaces an original party with a new
party. A novation may substitute (1) a new obligation between the
same parties, (2) a new debtor, or (3) a new creditor.
[32] In
National Trust Co. v. Mead et al,[18] the Supreme Court of Canada
defined novation as follows:
A novation is a trilateral agreement by which an existing
contract is extinguished and a new contract brought into being in
its place. Indeed, for an agreement to effect a valid novation
the appropriate consideration is the discharge of the original
debt in return for a promise to perform some obligation. ...
[T]he creditor may no longer look to the original party if the
obligations under the substituted contract are not subsequently
met as promised.
... assent is the crux of novation ...
(Emphasis added)
[33] I do not
believe it is reasonable to conclude that the creditor Harvey
intended the original debt to be discharged and a new debt
substituted for it. The original debt was not discharged and
substituted with a new debt. Before the severance and allocation
of the $36 million debt, Provincial was liable for at least
$9 million of it. The same debt was reduced, not eliminated.
After the MSA, Provincial remained liable to Belzberg for the
same debt. There is absolutely no evidence by the parties to
conclude that they "assented" to a novation through the
severance of the debt.
[34] In
National Trust, supra, the Supreme Court added that
"The essence of novation is the substitution of
debtors". The Appellant argues that with regard to the $9
million, Provincial was substituted for the other joint and
several creditors and that a new obligation arose between
Provincial and the Appellant. I find that substitution of debtors
contemplates a complete substitution. Presently, we have the
individual assumption of a joint and several debt by each of the
original joint and several debtors and not the "substitution
of debtors" as contemplated by novation. As explained
recently by Bowman A.C.J.[19]: "A novation involves the creation of a
new contractual relationship, generally where a debtor is
released from its obligation to an obligee with the consent of
the obligee and the assumption of the obligation by a third party
so that a new obligation arises between the obligee and the third
party. ..." On the present facts, I do not believe that
the assumption by each of the original joint and several debtors
of their portion of the debt resulted in the creation of a new
and distinct obligation between the Appellant and Provincial.
Here we have an allocation of debt not a novation. Further, the
allocation of a portion of the debt to Provincial cannot be
considered a complete substitution of Provincial for the original
debtors as Shoctor was not fully released from his debt
obligation.
Position of the Appellant - The $4 Million
Debt
[35]
Appellant's counsel submits that it has been agreed that $2.2
million of the $4 million was paid by Harvey to
Provincial's creditors. He admits that the origin of the $1.8
million debt from Provincial to Harvey is unknown and asks the
Court to draw an inference that the $1.8 million debt has the
same character as the $2.2 million.
[36] He
advances that an inter-company advance arising from the payment
of creditors by one company on behalf of the other would not
result in a lender-borrower relationship and, therefore,
interest was not and could not have been deductible pursuant to
paragraph 20(1)(c).
[37] He
discusses two cases in support of his argument: Aylward Estate
v. The Queen[20] and A.C. Simmonds & Sons Limited v M.N.R[21] stating
that Aylward stands for the principle that if one person
has requested another to do an act which will cost him money,
that is, which will expose him to a legal liability to pay money,
the law will imply a promise on the part of the person making the
request to indemnify the other for the expenditure. He submits,
therefore, "the reason that there is an inter-company
advance set up on the books[22] is because the law implies an indemnity between
... Provincial and Harvey to repay or to pay Harvey to indemnify
Harvey for the amounts paid to the creditors".
[38] He
submits that the late Judge Christie in Simmonds, supra,
concluded that a person may be financially indebted to another
without the relationship of lender-borrower existing. He
adds that, pursuant to the analysis in Simmonds, an
inter-company advance arising from the payment to creditors by
one company on behalf of another company results in a mere
debtor-creditor relationship and not a lender-borrower
relationship. The Appellant states, therefore, that the amounts
paid to Provincial's creditors is not a loan. It is an
inter-company debt but it is not a loan. And if it is not a loan
it is not interest deductible and therefore, section 80 does not
apply to it.
Position of the Respondent - The $4 Million
Debt
[39] The
Respondent's oral argument focussed mainly on the fact that
the definition of "commercial debt obligation" uses the
word "debt" and not "loan". The
Respondent's counsel stated that none of the Appellant's
case law on the issue of loans is relevant to the determination
of whether or not the $4 million is a commercial debt obligation.
It just suffices that you find that it was a debt in the broad
sense.
Analysis
[40]
Paragraphs 50 and 51 of the Agreed Statement of Facts explain
that $2.2 million was paid by Harvey to creditors on behalf of
Provincial. It is not known how the $1.8 million arose. I
draw an inference that it is the same nature as the $2.2
million.
[41] What is
the characterization of this $4 million? Is it a loan for
business purposes or is it simply an inter-company debt that is
not a loan in law? In the case of National Revenue v. T.E.
McCool Ltd.,[23]Estey J. stated:
Terms such as "borrowed capital," "borrowed
money" in tax legislation have been interpreted to mean
capital or money borrowed with a relationship of lender and
borrower between the parties.
The financial statements of Provincial with respect to the
$4 million states "advances from affiliated companies
or unsecured, non-interest bearing with no specified terms of
repayment". The Appellant relied on the reasoning of
Mogan J. in Aylward, supra. In a situation similar to
ours, Mogan J. found that the law implies a promise on the part
of the person making the request to indemnify the other for the
expenditure. The Appellant concludes that when Harvey paid
amounts on behalf of Provincial, the transaction was not a loan
to Provincial. The law implies a requirement on Provincial to
repay Harvey but that is not a loan, it is an implied indemnity.
Although "borrowed money" referred to in subparagraph
20(1)(c)(i) refers to a debt that is a loan under a
lender-borrower relationship rather than a debtor-creditor
relationship, I accept the conclusion of Christie J. in
Simmonds that a debt may exist without a relationship of
lender-borrower.
[42] The cases
of Aylward and Simmonds are distinguishable from
the present one on their facts. Mr. Aylward had an obligation to
indemnify Aylward Limited from claims by its creditors. He
assumed the liabilities of Aylward Limited as his own. Mr.
Aylward caused Aylward Limited to deliver guarantees to its
creditors. Mogan J. stated that under common law there was an
implied contract requiring Mr. Aylward to indemnify Aylward
Limited with respect to those guarantees. There is no evidence
that Harvey exposed itself to any legal liability to pay
Provincial's creditors. I conclude that there was an
agreement between Harvey and Provincial for Harvey to advance
money on Provincial's behalf. There was no guarantee granted
by Harvey or by Provincial upon the direction of Harvey. There is
no evidence that Harvey entered into any agreements with the
creditors of Provincial such that Harvey would be liable for the
debts. It was equivalent to a single transaction. The fact that
Harvey paid Provincial's creditors directly does not change
the nature of the transaction. This was procedural only.
[43] There was
no evidence that Harvey had a contractual relationship with
Provincial's creditors nor did Harvey guarantee payment to
Provincial creditors. From the evidence, I find as a fact that
Harvey had a lender-borrower contract with Provincial, but not
with Provincial's creditors. Without such a loan agreement,
Harvey would have no other reason or obligation to advance the
funds. There was no evidence of privity of contract between
Harvey and Provincial's creditors. There was an implied
privity of contract between Harvey and Provincial.
[44] In
Simmonds, Christie J. stated at page 709:
... the appellant [arranged] with the issuer of the
letters of credit to make the issuer's credit available to
the Japanese suppliers ... and ... there was a contractual
undertaking by the appellant to the issuer of the letters to pay
for the amounts expended by it, plus interest and commissions.
Finally there was a contractual liability on Dynacharge U.S. to
reimburse the appellant for the expenses it incurred in arranging
for the credits in favour of the suppliers that made it possible
for Dynacharge U.S. to carry on business. ...
[45] In
Simmonds, as in Aylward, the Appellant was legally
liable to the third party creditors. In both cases, the money was
advanced to third party creditors through a contractual
obligation. In Simmonds at page 709, Christie J.
referred to the Black's Law Dictionary, 5th (1979)
definition of a loan of money as:
Delivery by one party to and receipt by another party of a sum
of money upon agreement, express or implied, to repay it with or
without interest.
He continued:
... This is not, in my opinion, descriptive of the
transactions involving letters of credit that are under
consideration in this appeal. ...
I find that the Black's definition is descriptive
of what transpired between Harvey and Provincial. The substance
of what we have in effect is an advance of $4 million from Harvey
to Provincial. In Simmonds, Christie J. cited from
McCool, supra, wherein Estey J. said: " ... with
reference to the relationship of lender and borrower that it is
necessary in determining whether that relationship exists to
ascertain the true nature and character of the
transaction".
[46] Christie
J. concluded as follows:
The real substance of what the appellant did was to arrange
with the issuer of the letters of credit to make the issuer's
credit available to the Japanese suppliers under prescribed
conditions and for specified amounts thereby vesting in the
suppliers the contractual commitment of the issuer to pay for the
goods sold to Dynacharge U.S. upon those conditions being met.
There was also a contractual undertaking by the appellant to the
issuer of the letters to pay for the amounts expended by it, plus
interest and commissions. Finally there was a contractual
liability on Dynacharge U.S. to reimburse the appellant for the
expenses it incurred in arranging for the credits in favour of
the suppliers that made it possible for Dynacharge U.S. to carry
on business. I do not regard what was done by the appellant in
establishing those credits and the benefit flowing from them to
Dynacharge U.S. as constituting the creation of contracts between
them whereby the appellant delivered sums of money to Dynacharge
U.S. upon agreement by the latter to repay them without
interest.
As set out earlier, that is not what transpired between Harvey
and Provincial.
[47] Lastly,
the Appellant argues that to have a loan, there has to be a
promise to repay the amount. I accept this submission. I do not,
however, accept the submission that the description "no
specified terms of repayment" on the financial statements of
Provincial indicates that there was no promise to repay. I
believe this description indicates, that by referring to the
repayment, there was a promise to repay, however the terms of
repayment had not been specified. There would be no need to
indicate that the terms of repayment had not been specified if
there was no promise to repay.
$2.2 Million Debt
[48] The
Appellant reverses rolls with the Minister of National Revenue in
arguing that when Provincial purchased the Inn for $4 million in
1993, it had no reasonable expectation of profit (REOP) and
interest on the $2.2 million was not deductible because there was
no source of income as required in subsection 20(1).
Although we await guidance with respect to REOP from the Supreme
Court of Canada judgments in Stewart andWalls,[24] applying the
present law I have no difficulty in concluding that Provincial
had a REOP. I accept that the fair market value of the Inn was
$18 million in 1981, $7 million in 1987 and $4 million in 1993.
In 1993, it may not have had a REOP at $18 million or
$7 million but there is no evidence that it did not have a
REOP at $4 million. In fact I believe the evidence of Belzberg
was that in recent years it has shown a profit.
[49] I will
not dwell at length on this issue. I accept the Respondent's
argument in this regard, particularly at pages 103, 104 and 105
of the transcript of the closing submissions.
[50] The
Respondent referred to the decision in Pelechaty v. The
Queen,[25]
wherein Hershfield J. concluded that the source-of-income test[26] comes down to
determining whether there was a genuine commercial enterprise. I
have no doubt that the Inn business was carried on in a
businesslike manner with a genuine profit-making motive. Shoctor
and Belzberg were very highly qualified businessmen who were
determined to operate the Inn successfully.
[51] There was
no personal element in respect of the conduct of the Inn's
business. Belzberg took over the Inn reluctantly, but having done
so, he directed his finances and extraordinary business talent
into turning the operation around. He appointed a new manager,
made renovations and entered a franchise agreement with Holiday
Inn. The Inn is now profitable.
[52] I am
informed that an application by the Appellant for an Order to
have the Respondent admit certain documents was denied by my
colleague, Mogan J. prior to this hearing. Judge Mogan's
Order was appealed by the Appellant and is scheduled to be heard
by the Federal Court of Appeal on April 24, 2002. While I accept
that the Westward Inn did not earn a net profit between 1981 and
1993, as stated, I find the Inn's business did have a
reasonable expectation of profit during those years.
[53] The
appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 17th day of April, 2002.
J.T.C.C.
Schedule "A"
AGREED STATEMENT OF FACTS
The parties herby agree that for purposes only of this appeal and
any appeal therefrom or any other proceeding taken in this
matter, the facts set out herein are true. Either party may
adduce other evidence not inconsistent with these facts. The
parties also agree that the documents attached hereto in the Tabs
referred to below are true copies of the documents they
represent, were signed by the persons who purported to have
signed them, and were signed on the dates they were purportedly
signed. Either party may adduce other documents not inconsistent
with these documents.
1.
The Appellant was created effective January 31, 1995, by the
amalgamation of Provincial Credit Corp. Ltd.
("Provincial"), Citadel Mortgage Corporation Ltd.
("Citadel"), 1751 Holdings Ltd. ("1751")
and Cal-Con Financial Ltd. ("Cal-Con") (the
"Amalgamation").
The Parties (as they were at all material times prior to
August 1, 1993)
2.
Provincial:
a)
was incorporated in Alberta on January 22, 1959;
b)
had issued shares all of which were owned or controlled by Joseph
Shoctor, an Edmonton businessman ("Shoctor") or members
of his family; and
c)
acted at arm's length with Samuel Belzberg, a Vancouver
businessman ("Belzberg") and David Kline
("Kline"), also a Vancouver businessman.
3.
Citadel:
a)
was incorporated as Genevieve Mortgage Corporation (Alberta) on
June 30, 1977, and changed its name to Citadel on October 14,
1977;
b)
had issued shares all of which were owned or controlled by
Shoctor or members of his family; and
c)
acted at arm's length with Belzberg and Kline.
4.
Harvey Holdings Ltd. ("Harvey"):
a)
was incorporated in Alberta in 1959;
b)
had issued shares all of which were owned or controlled by
Shoctor or members of his family; and
c)
acted at arm's length with Belzber and Kline.
5.
For purposes of this Statement of Agreed Facts, Provincial,
Citadel and Harvey are referred to as the "Three
Companies" and together with Shoctor, are collectively the
"Shoctor Group".
6.
1751:
a)
was incorporated on or about July 27, 1988 in British Columbia
and continued into Alberta as an Alberta corporation on January
17, 1995;
b)
owned all the shares of Cal-Con; and
c)
had issued shares all of which were owned by Kline, who was
acting at arm's length with Belzberg.
7.
Cal-Con:
a)
was incorporated on or about July 27, 1988 in British Columbia as
1749 B.C. Ltd., and continued in Alberta on January 17, 1995;
and
b)
acted at arm's length with Belzberg.
8.
Saxony Motor Hotel Ltd. ("Saxony Ltd.") and Desa Stores
Ltd. ("Desa Ltd.") were incorporated in Alberta.
The Properties
9.
At all material times, the Westward Inn was a hotel and property
in Calgary, Alberta.
10.
Immediately before July 31, 1993,
a)
Saxony Ltd. held title to the Saxony Motor Hotel Joint Venture as
bare trustee for the joint venturers, namely Harvey (45%),
Provincial (33 1/3% and Citadel (21 2/3%); and
b)
the Saxony Motor Hotel Joint Venture was a motor inn and related
properties in Edmonton, Alberta.
11.
Immediately before July 31, 1993,
a)
Desa Ltd. held title to the Desa Joint Venture as bare trustee
for the joint venturers, namely, Harvey (35.3%) and two other
corporations; and
b)
the Desa Joint Venture was a residential development in Edmonton,
Alberta.
The Master Settlement Agreement and Debt
Forgiveness
12.
On or about December 9, 1993, the Shoctor Group, Belzberg, 1751,
Cal-Con and other persons related to Shoctor executed a
series of agreements and related documents effective July 31 and
August 1, 1993 (collectively, the "Master Settlement
Agreement"). Attached as Tab 1 is the Master Settlement
Agreement including Schedules. Cal-Con and 1751 were part
of the Belzberg Group for purposes of the Master Settlement
Agreement.
13.
By the Master Settlement Agreement, the following occurred
effective July 31, 1993:
a)
Provincial acquired a 45% interest in the Saxony Motor Hotel
Joint Venture from Harvey;
b)
Provincial acquired a 35.3% interest in the Desa Joint Venture
from Harvey; and
c)
Provincial acquired the Westward Inn from Shoctor for a total
purchase price of $3,918,000, being the fair market value of the
Westward Inn as of that date.
14.
By the Master Settlement Agreement, the following occurred
effective August 1, 1993;
a)
Belzberg acquired from Shoctor all the shares of Provincial and
Citadel;
b)
Provincial assumed a portion of the debt owed by the Shoctor
Group to Cal-Con;
c)
Harvey assigned to Cal-Con certain debt owed by Provincial to
Harvey; and
d)
Shoctor assigned to Cal-Con certain debt owed by Provincial and
Shoctor.
15.
On November 19, 1993, Belzberg acquired all the shares of 1751
from Kline.
16.
Effective December 9, 1993, and September 2, 1994 the Shoctor
Group and the Belzberg Group (as defined in the Master Settlement
Agreement) entered into Releases releasing each other from all
claims that may have existed prior to the Master Settlement
Agreement, except those specifically set out in the Releases.
Attached as Tabs 2 and 3 are the Releases. As a result of the
Master Settlement Agreement and the Releases, Belzberg forgave
several million dollars owing to him by Shoctor.
17.
As a result of the Master Settlement Agreement, immediately after
August 1, 1993 Provincial owed Cal-Con $16,179,606 (the
"Total Debt") as follows:
|
Origin
|
Quantum
|
|
Assumption by Provincial of a portion of debt owed by
Shoctor Group to Cal-Con
|
$9,064,900
|
|
Amounts owed by Provincial to Harvey and assigned by
Harvey to Cal-Con
|
$4,053,372
|
|
Debt owed by Provincial to Harvey on purchase of the
35.3% interest in the Desa Joint Venture and assigned by
Harvey to Cal-Con
|
$458,000
|
|
Debt owed by Provincial to Harvey on purchase of the 45%
interest in the Saxony Inn and assigned by Harvey to
Cal-Con
|
$231,847
|
|
Deficiency balance owed by Provincial to Harvey in
respect to the Saxony Motor Hotel and assigned by Harvey to
Cal-Con
|
$139,819
|
|
Debt owed by Provincial to Shoctor on purchase of
Westward Inn and assigned by Shoctor to Cal-Con
|
$2,231,668
|
|
Total Debt
|
$16,179,606
|
18.
In its fiscal periods ending January 31, 1994 and 1995, Cal-Con
did not report that Provincial paid any interest on any of the
Total Debt after August 1, 1993.
19.
Immediately prior to January 18, 1995, Provincial was indebted to
Cal-Con for at least $16,000,000 (the "Debt") of the
Total Debt.
20.
Cal-Con released Provincial from the Debt (the "Debt
Forgiveness") pursuant to a Debt Forgiveness Agreement dated
and effective January 18, 1995. Attached as Tab 4 is the Debt
Forgiveness Agreement.
21.
Under Alberta law a corporation may not amalgamate if it is
insolvent. Provincial would have been insolvent due to the Total
Debt and thus would have been prevented from entering into the
Amalgamation if the Debt Forgiveness had not occurred.
The Reassessments
22.
Based on reassessments and a Notice of Determination of Loss
issued to Provincial for its 1993 taxation year, which
reassessments and Notice were not objected to or appealed from.
Provincial's total non-capital loss carry-forward at the
beginning of its 1995 taxation year was $12,486,621 (prior to the
Debt Forgiveness).
23.
Under section 80 of the Income Tax Act (Canada) where a
"commercial obligation" of a "debtor" is
settled, an amount equal to the "forgiven amount"
reduces, firstly, the taxpayer's non-capital losses.
24.
In filing its income tax return for its taxation year ending
January 31, 1995 Gibralt, as the successor to Provincial by the
Amalgamation, reported a reduction in Provincial's
non-capital loss carry forward of $16,000,000, based on the
Debt Forgiveness, and carried forward from Provincial's 1993
taxation year non-capital losses of $428,890 to reduce its 1995
income to nil.
25.
By Notice dated November 20, 1995 the Minister of National
Revenue ("the Minister") assessed Gibralt's 1995
taxation year as filed.
26.
The Minister reassessed Gibralt for its taxation year ending
January 31, 1995 by Notice dated November 19, 1998 (the
"First Reassessment") on the basis that its taxable
income was $428,890 because it had no available non-capital
losses to carry forward from Provincial's 1993 taxation year.
In issuing the First Reassessment the Minister assumed section 80
of the Act applied to the Debt Forgiveness and hence
reduced Provincial's 1993 loss carry forwards from
$12,486,621 to nil.
27.
Gibralt duly objected to the First Reassessment and duly filed a
Notice of Appeal in the Tax Court after more than 90 days had
lapsed since the filing of the Objection.
28.
In response to a request by Gibralt, the Minister reassessed
Gibralt's 1995 taxation year by Notice dated June 1, 2000
(the "Second Reassessment") thereby reducing its 1995
income from $428,890 to $233,413 by allowing additional capital
cost allowance deductions but the Second Reassessment did not
otherwise affect the Debt Forgiveness issue.
29.
The Notice of Appeal was duly amended to refer to the Second
Reassessment but was otherwise unchanged.
The $9,064,900 Assumption
30.
The amount of $9,064,900 of the Total Debt above arose as
follows:
31.
On June 26, 1980:
a)
the Westward Inn was owned by the Westward Inn Inc., a company at
arm's length with Shoctor; and
b)
Shoctor acquired an option (the "Option") to purchase
the Westward Inn for a total purchase price of $18,000,000. The
Option had to be exercised by June 30, 1981, with the closing
being August 1, 1981.
32.
Shoctor acquired the Option as bare trustee for the Three
Companies with each Company holding an undivided 1/3 beneficial
interest.
33.
To finance the purchase of the Westward Inn as described in the
next paragraph, on July 24, 1981 the Three Companies jointly
and severally borrowed $18,255,000 (the "1981 Debt")
from the Toronto Dominion Bank (the "TD Bank").
Attached as Tab 5 is a copy of the promissory note issued by the
Three Companies to the TD Bank and the Mortgage Deed granted by
them to the TD Bank.
34.
The Option was exercised and the Three Companies each acquired a
1/3 beneficial interest in the Westward Inn on or around July 31,
1981 for a total purchase price of $18,000,000 being the fair
market value of the Westward Inn as of that date.
35.
As between the Three Companies, it was agreed that, as of August
5, 1981, Provincial's share of the 1981 Debt was
$6,085,000.
36.
By July 1986, the Three Companies had fallen into significant
arrears with respect to the 1981 Debt. On July 1, 1986, the TD
Bank and the Schoctor Group agreed to restructure the 1981 Debt.
Attached as Tab 6 is a copy of the July 1, 1986 Agreement.
37.
By an agreement dated July 2, 1986 (which was amended on April
28, 1987 with effect as of July 2, 1986), Shoctor agreed to
purchase from each of the Three Companies its 1/3 interest in the
Westward Inn for a total purchase price of $7,376,832 ($2,458,944
per interest), which was the fair market value of the Westward
Inn as of that date. The purchase price was payable:
a)
$350,000 on execution of the agreement;
b)
$719,701 by assumption of the Westward Inn's liabilities;
and
c)
the balance of $6,307,131 on or before November 30, 1987, at 9%
interest.
38.
Provincial's loss on the sale of its interest in the Westward
Inn was $3,015,174.
39.
On November 27, 1987 Shoctor borrowed $7,104,939.85 from the TD
Bank (the "1987 Amount") to pay the balance of the
purchase price owing under paragraph 37(c) plus accrued
interest.
40.
On November 27, 1987, Shoctor paid the 1987 Amount to the Three
Companies. Pursuant to an agreement between the Shoctor Group and
the TD Bank dated November 27, 1987 (copy attached as Tab 7),
each of the Three Companies jointly and severally guaranteed the
repayment to the TD Bank of the 1987 Amount and each used
one-third of the 1987 Amount ($2,368,313) to repay the TD Bank
that amount of the 1981 Debt.
41.
As of May 11, 1988, the Three Companies were jointly and
severally indebted to the TD Bank in respect of the 1981
Debt as follows:
a)
principal of $8,468,866.10; and
b)
interest of $12,525,914.48 on the principal.
42.
As of May 11, 1988 the Three Companies were jointly and severally
indebted to the TD Bank in respect of the Westward Inn
for:
a)
a tax payment made by the Bank in 1985 of $732,150.45; and
b)
interest on the tax payment made by the Bank in 1985 of
$201,334.76.
43.
Between 1988 and 1993 Shoctor attempted to sell the Westward Inn
to satisfy the $10,165,033 borrowed from Belzberg, but without
success. Attached as Tab 8 are letters dated March 15, August 9
and November 28, 1990 from Shoctor to Belzberg discussing sales
of the Westward Inn that did not materialize.
44.
By early 1988 the Shoctor Group was in severe financial
difficulties with the TD Bank. By letter dated May 20, 1988 (copy
attached as Tab 9). Shoctor asked Belzberg to write a letter to
Shoctor, which Shoctor could use in negotiations with the TD
Bank. Belzberg wrote the letter on May 27, 1988 (copy attached as
Tab 10). Shoctor used that letter to negotiate a settlement with
the TD Bank. The settlement culminated in the TD Bank's offer
dated June 30, 1988 (copy attached as Tab 11) to settle all
Westward Inn debts for $10 million.
45.
On or about October 11-17, 1988 the TD Bank, Belzberg, 1751,
Cal-Con and the Shoctor Group entered into the following
arrangements:
a)
the TD Bank lent Belzberg $10,165,033.53;
b)
Belzberg lent $10,165,033.53 to the Shoctor Group under a Loan
Agreement;
c)
The Shoctor Group lent $10,148,033 to 1751, which in turn lent it
to Cal-Con; and
d)
Cal-Con used the $10,148,033 to purchase $32,611,334.17 of debt
owing by the Shoctor Group to the TD Bank. The $32,611,334.17 of
debt purchased by Cal-Con was composed of the amounts shown
in the Debt Purchase Agreement.
Attached as Tabs 12 and 13 are the Loan Agreement dated October
11, 1988 without schedules and the Debt Purchase Agreement dated
October 17, 1988 between the TD Bank and Cal-Con.
46.
By July 31, 1993 the debt owing by the Shoctor Group to Cal-Con
was $36,791,358 as shown in Schedule F to the Master Settlement
Agreement (the discrepancy between the principal amounts of
$32,611,334.17 purchased under the Debt Purchase Agreement and
the principal amounts of $32,896,856 shown in Schedule F is
irrelevant).
47.
By Schedule F the Shoctor Group's total debt to Cal-Con of
$36,791,358 was severed and allocated to and assumed by each
member of the Shoctor Group as being owing to Cal-Con with
Provincial's share being $9,064,000.
The $4,053,372 Advance
48.
The amounts paid by Harvey to or on behalf of Provincial and
assigned by Harvey to Cal-Con in the amount of $4,053,372
of the Total Debt, characterized on Provincial's Financial
Statements as advances, arose as follows (the Respondent is not
conceding that those amounts were, in law or fact, advances).
49.
As of December 31, 1990, Harvey had paid $1,843,787 to or on
behalf of Provincial as an unsecured, non-interest bearing amount
with no specific terms of repayment. Attached as Tab 14 are
Provincial's 1986-1995 Financial Statements.
50.
In 1991 Harvey paid the following amounts on behalf of
Provincial:
|
Paid To
|
Amount
|
|
Deloitte & Touche
|
$2,943.57
|
|
Edmonton Motors
|
882.38
|
|
Belzberg as partial repayment of October 11, 1988 loan
to Shoctor Group
|
1,019,757.10
|
|
Total
|
$1,023,582.90
|
51.
In 1992 Harvey paid (was credited) with the following amounts on
behalf of Provincial:
|
Paid To
|
Amount
|
|
Belzberg as partial repayment of October 11, 1988 loan
to Shoctor Group
|
$1,138,852.05
|
|
Deloite & Touche
|
3,048.43
|
|
Citadel
|
44,433.34
|
|
Provincial
|
(3,500.00)
|
|
|
|
|
Total
|
$1,182,833.70
|
52.
To July 31, 1993 Harvey paid an additional $3,169.30 to or on
behalf of Provincial.
53.
The total amount paid by Harvey to or on behalf of Provincial by
July 31, 1993 was $4,053,372.
The Westward Inn Debt of $2,231,668
54.
Under the Master Settlement Agreement, Provincial acquired the
Westward Inn from Shoctor for a purchase price of $3,918,000
payable as to:
a)
$1,686,332 by Provincial assuming liabilities of Shoctor for that
amount; and
b)
the balance of $2,231,688 by a demand, non-interest bearing debt
owing from Provincial to Shoctor;
The Tax Lien
55.
As of September 13, 1993, the City of Calgary had placed a lien
against the Westward Inn for arrears of property taxes in the
amount of $1,157,877.91 as shown in Tab 15.
56.
There were further discussions between representatives of
Provincial and the City from September 24-27, 1993, shown in Tabs
16 and 17.
57.
Provincial paid the tax owing to the City and refinanced the
payment by a loan from the Alberta Treasury Branches in September
1994.
The Financial Performance of the Westward Inn
58.
As shown on the Financial Statements for the Westward Inn (Joseph
H. Shoctor, Proprietor) (Tab 18) for the 1991 and 1992 fiscal
periods, the Net Loss incurred by Shoctor in respect of the
Westward Inn for the 12 month period ending December 31, 1990 was
($407,394), for the period ending December 31, 1991 was
($1,520,778), for the period ending December 31, 1992 was
($851,505) and for the 7 month period ending July 31, 1993
was ($319,399) and the Proprietor's cumulative Deficit in
respect of the Westward Inn from July 2, 1986 to July 31, 1993
was ($5,450,726).
59.
Provincial's net cash outflow in respect of the Westward Inn
from July 31, 1993 to January 31, 2000, after taking into account
any net income earned from the Westward Inn, was as shown on the
Cash Outlay table, attached as Tab 19.
60.
For the 6 month period running from August 1, 1993 ending January
31, 1994, Provincial incurred a loss for income tax purposes of
$455,265 in respect of its ownership of the Westward Inn.
61.
For its 12 month 1995 fiscal period ending January 31, 1995,
Provincial incurred a loss for income tax purposes of $751,036 in
respect of the ownership of the Westward Inn.
62.
Cal-Con included the following amounts of interest income on its
Financial Statements for the 1989-1993 years respectively:
$780,486; $780,000; $785,000; $786,400; $762,699.
63.
Pursuant to a Waiver of Interest dated January 31, 1994 for the
period February 1, 1994 to January 31, 1995 (Tab 20), Cal-Con
waived the interest owing by Provincial on the debt of
$16,179,606 owing to Cal-Con.
64.
In its 1996 fiscal period, Gibralt became a franchisee of the
Quality Inn and changed the name of the Westward Inn to the
Quality Inn.
65.
In its 1998 fiscal period, Gibralt became a franchisee of the
Holiday Inn and changed the name of the Quality Inn to the
Holiday Inn.
Belzberg's attempts to sell the Westward Inn
66.
On or about January 25, 1993 Belzberg entered into discussions
with Coopers & Lybrand for the sale of the Westward Inn.
Attached as Tab 21 is a copy of a letter from Coopers to Bel-Fran
Investments Ltd. (one of Belzberg's companies).
67.
In or about September 1993 Belzberg entered into discussions with
Midland Walwyn concerning a sale of the Westward Inn. Attached as
Tab 22 is a letter dated September 24, 1993 from Bel-Fran
Investments Ltd. to Midland.
68.
In 1993 Provincial (through Belzberg or one of his companies)
received two offers to purchase the Westward Inn, neither of
which was accepted. Attached as Tab 23 are copies of the
offers.
69.
On or abut December 16, 1994 Belzberg had discussions with
Colliers International concerning a sale of the Westward Inn.
Attached as Tab 24 is a letter from Bel-Fran to Colliers
discussing the sale.
70.
Attached as Tab 25 are six diagrams (with approximate numbers)
showing the transactions referred to above up to but not
including the implementation of the Master Settlement
Agreement.
Dated this 7th day of September, 2001.
|
Gibralt Capital Corporation
Per: _"Signed"__________
Counsel for the Appellant
|
Her Majesty the Queen
Per: __"Signed_______________
Counsel for the Respondent
|
COURT FILE
NO.:
2000-717(IT)G
STYLE OF
CAUSE:
Gibralt Capital Corporation and
Her Majesty the Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
September 10, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge C.H. McArthur
DATE OF
JUDGMENT:
April 17, 2002
APPEARANCES:
Counsel for the Appellant: Joel A. Nitikman
Counsel for the
Respondent:
Lynn M. Burch
COUNSEL OF RECORD:
For the
Appellant:
Name:
Joel A. Nitikman
Firm:
Fraser Milner Casgrain
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-717(IT)G
BETWEEN:
GIBRALT CAPITAL CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 10, 2001, at
Vancouver, British Columbia, by
the Honourable Judge C.H. McArthur
Appearances
Counsel for the
Appellant: Joel
A. Nitikman
Counsel for the Respondent: Lynn M.
Burch
JUDGMENT
The
appeal from assessment of tax made under the Income Tax
Act for the 1995 taxation year is dismissed, with costs.
Signed at Ottawa, Canada, this 17th day of April, 2002.
J.T.C.C.
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