Date: 20020208
Docket: 1999-2159-IT-G
BETWEEN:
AJMER SINGH SIDDOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan J.
[1] In 1990, the Appellant was sued in
the Supreme Court of British Columbia by two of his daughters and
a son-in-law. Other defendants in the lawsuit were a
daughter-in-law of the Appellant, two grandsons of the Appellant,
and two family corporations. The lawsuit was settled in 1992. In
the settlement arrangement, certain property was transferred to
the two grandsons who were co-defendants with the Appellant in
the lawsuit. The Minister of National Revenue concluded that the
Appellant had realized capital gains on the transfer of the
property to the grandsons; and the Minister assessed tax for 1992
with respect to those gains. The Appellant has appealed from the
assessment and 1992 is the only taxation year under appeal.
[2] At the commencement of the
hearing, the parties filed an Agreed Statement of Facts with many
supporting exhibits all of which are admitted for the purpose of
this appeal. The Agreed Statement of Facts ("ASF") is
comprehensive and was marked as Exhibit 1. It contains details of
the lawsuit, the settlement, and the transfer of property. For
convenience, I shall set out all 30 paragraphs of the ASF but
will refer to the supporting exhibits only as required.
Agreed Statement of Facts
The following facts are agreed to by the parties for the purposes
of this appeal:
1. This appeal
was brought from two assessments with respect to the
Appellant's 1992 tax year;
(a) A reassessment
dated September 22, 1994. A copy is attached as Exhibit
"A" (the "First Reassessment");
(b) A reassessment
dated July 25, 1996 (the "Second Reassessment");
2. The parties
have agreed to settle the appeal in regards to the Second
Reassessment. Thus only the appeal from the First Reassessment is
now in issue;
3. Both the
First and the Second Reassessments arose out of a settlement of a
lawsuit commenced against the appellant and various other family
members and companies by his two daughters and a son-in-law, for
a share of the family properties;
4. By way of a
Writ of Summons and Statement of Claim dated February 26,
1990 and amended on March 21, 1990 (the "Statement of
Claim"), the two daughters of the Appellant, Narinder Kaur
Chauhan and Mohinder Kaur Sandhu (the "Plaintiff
daughters"), and the Appellant's son-in-law Gurmeet
Singh Sandhu (collectively, the "Plaintiffs"),
commenced proceedings in the Supreme Court of British Columbia,
Vancouver Registry Number C901020 (the "Proceedings")
against the Appellant, Siddoo Kashmir Holdings Ltd.
("Holdings"), Siddoo A.K. Investments Ltd. ("SAK
Investments"), the Appellants' daughter-in-law Balbir
Kaur Siddoo, and his grandsons Jasvir Singh Siddoo and Ravinder
Singh Siddoo (collectively, the "Defendants").
5. The
Plaintiffs' allegations were set out in the Statement of
Claim which is attached as Exhibit "B". The
Plaintiffs' allegations included allegations that the
Plaintiffs held an interest in properties held by the Defendants
as a result of contributions by the Plaintiffs of assets,
including the value of their interest in the estate of their
mother [the Appellant's wife] and their share of the income
and sale proceeds of various properties, and valuable services
which contributions were made in the expectation of receiving an
interest in the properties held by the Defendants.
6. In early
1992 a settlement was negotiated. The intent of the settlement
was that the Plaintiffs would obtain property with a value, based
upon municipal tax assessments, of approximately one third of the
value of the family properties.
7. The
essential terms of the settlement were set out in writing in
January 1992 (the "January Agreement"). The January
Agreement is attached as Exhibit "C".
8. Detailed
settlement documentation to implement the January Agreement was
subsequently prepared (the "Settlement Documents" or
"Settlement") and a closing took place on June 1, 1992.
Certain of the Settlement Documents are attached as Exhibit
"D".
9. The January
Agreement and the Settlement Documents provided, inter
alia, that certain of the Defendants would transfer or cause
to be transferred specified property to the Plaintiffs and the
Plaintiffs would provide releases and give up shares that they
held in Holdings and the half interest that they held in an
apartment building called the Kashmir Manor.
Provisions of the Settlement relating to the transfer by
the Plaintiff Daughters of their shares in Holdings and interest
in the Kashmir Manor
10. One of the agreements
which formed part of the Settlement Documents was a Settlement
Agreement dated June 1, 1992 (the "Settlement
Agreement"), to be found at tab 20 of Exhibit D). Paragraph
4 of the Settlement Agreement provided that:
"The Plaintiffs, Mohinder Kaur Sandhu and Narinder Kaur
Chauhan, will transfer to the Defendant Siddoo or such other
transferees as he may direct, all of their shares of Holdings and
all of their right, title and interest in 2355 West 2nd Avenue,
Vancouver, B.C. ... ("Kashmir Manor") including
all furniture and fixtures, in consideration for the payment by
the Defendant Siddoo of the sum of $95,500, and the Defendant
Siddoo shall be responsible for property purchase tax payable in
respect of the transfer of Kashmir Manor to him. The Defendant
Siddoo shall not be obliged, in any event, to pay more than
$95,000 to the said Plaintiffs in consideration of the transfer
of such shares and Kashmir Manor as hereinbefore
provided."
The Plaintiff Daughters' shares in Holdings will be
referred to as the "Shares" and their interest in the
Kashmir Manor as the "Interest in the Kashmir
Manor".
11. On June 1, 1992, as
part of the closing of the Settlement, the Shares and the
Interest in Real Property were transferred from the Plaintiff
Daughters to the Grandsons. The transfer documentation for the
Shares is to be found at tabs 69, 70, 71, 72, 73, 74 and 75 of
Exhibit D. The transfer documentation for the Interest in Real
Property is to be found at tab 76 of Exhibit D.
12. On June 1, 1992, the
Shares had a fair market value of $66,000 and the Interest in
Kashmir Manor had a value of $550,000.
13. The Appellant paid to
the Plaintiff Daughters the sum of $95,500 referred to in
paragraph 4 of the Settlement Agreement. The cheque is found at
tab 77 of Exhibit D.
14. In addition, the
Appellant also paid to the Minister of Finance for British
Columbia the sum of $9,000 being the property purchase tax for
the transfer of the Interest in Kashmir Manor. The cheque is to
be found at tab 79 of Exhibit D.
Other material provisions of the Settlement
Documents
The Haro Street transaction
15. Prior to May 29, 1992
the Appellant was the registered owner of 2 Class "B"
common shares in SAK Investments, which constituted all the
issued shares in that company.
16. SAK Investments owned
an apartment building at 1655 Haro Street, Vancouver, B.C.
("Haro Street"). Prior to the settlement the Appellant
caused SAK Investments to divest itself of all other assets and
liabilities.
17. On May 29, 1992:
(a) The Appellant
converted his 2 common shares to 2 Class B Non-Voting
Preferred shares and froze the value of those shares in SAK
Investments at $5,200,000, representing the directors'
estimate of the fair market value of the shares at that date. The
Minister of National Revenue has never sought to challenge that
value and does not take issue with that value in this appeal.
(b) The Appellant
also arranged for SAK Investments to issue 100 Class A Voting
Common shares to each of two companies owned by the Plaintiffs
(the "Plaintiff's Companies"), such shares
representing control of SAK Investments and an entitlement to all
increases in value of SAK Investments over $5,200,000.
(c) The preferred
shares were redeemable by the Appellant at any time for
$5,200,000.
(d) The preferred
shares issued to Mr. Siddoo had no right to dividends except as
declared in the sole discretion of the directors of SAK Holdings,
who would be appointed by the Plaintiffs' Companies as the
shareholders with voting control of SAK Investments.
18. At the closing of the
Settlement on June 1, 1992, the Appellant provided to each of the
Plaintiff Companies a promissory note which provided that if he
redeemed his preference shares he promised to pay each of them
$2,600,000 (the "Promissory Notes"). The Promissory
Notes are at tabs 66 and 67 of Exhibit D.
19. At the closing the
Appellant also entered into an agreement in which he agreed to
transfer his preferred shares to the Plaintiffs' Companies on
his death (the "Share Purchase Agreement"). The Share
Purchase Agreement is at tab 55 of Exhibit D. The purchase price
payable by the Plaintiffs' Companies pursuant to the Share
Purchase Agreement for the preferred shares on Mr. Siddoo's
death was the amount of income tax payable by Mr. Siddoo's
estate on the deemed disposition of the preferred shares
immediately before his death pursuant to subsection 70(5) of
the Income Tax Act.
20. The effect of the
delivery by the Appellant of the Promissory Notes and the Share
Purchase Agreement on the closing of the Settlement was that the
Appellant would receive no further benefit from his shares in SAK
Investments (or from Haro Street which it owned) after the
settlement, other than the promised payment by the Plaintiff
Companies on his death in the amount of the taxes arising from
that disposition and that the Plaintiffs would receive all of the
income of SAK Investments, all of the increase in value of the
company and, upon the Appellant's death, all of this interest
in the company.
Il Mercato Transaction
21. On June 1, 1992 the
Appellant was a shareholder of Holdings.
22. Prior to the
Settlement, Holdings owned a shopping centre known as the Il
Mercato (the "Il Mercato").
23. Pursuant to the
Settlement Agreement, at the close on June 1, 1992, Holdings
transferred the beneficial ownership of the Il Mercato to the
Plaintiffs or companies owned by them. At the date of the
transfer, the value of the beneficial interest was $2,855,339.
Holdings also paid the property purchase tax in the amount of
$219,980. The total benefit to the Plaintiffs of the transfer of
the Il Mercato from Holdings was thus $3,075,319 (the "Value
of the Il Mercato Transaction").
Releases and other provisions
24. At the closing of the
Settlement the Plaintiffs provided releases of all claims to
Holdings and to all the other Defendants. The releases are at
tabs 52 and 81 of Exhibit D.
25. Paragraph 14.6 of the
Settlement Agreement also provided, inter alia, that:
"The arrangements made herein are contemplated by the
Defendant Siddoo, and acknowledged by the Plaintiff, to be in
substitution for any inheritance the Plaintiff would otherwise
receive from the estate of the Defendant Siddoo, on his death, or
would have otherwise received from the estate of the Defendant
Siddoo's wife Jaswant Kaur Siddoo, at the time of her
death.
The Closing of the Settlement
26. At the closing of the
Settlement on June 1, 1992 all the documents to be delivered at
the closing were to be tabled and held in escrow until all
parties agreed to terminate the escrow. The following documents,
among others, were then delivered simultaneously:
(a) the two
Promissory Notes and the Share Purchase Agreement in regards to
the Haro Street Transaction;
(b) the documents
that effected the transfer of the Il Mercato;
(c) the Settlement
Agreement;
(d) the documents
effecting the transfer of the Shares and the Interest in Kashmir
Manor;
(e) the
releases.
The second reassessment and the settlement of the appeal
from that reassessment
27. In the Second
Reassessment, the Minister added the Value of the Il Mercato
Transaction ($3,075,319) to the Appellant's income as a
shareholder benefit conferred upon him in the 1992 year by
Holdings.
28. The appeal from the
Second Reassessment has been settled on the basis that the
shareholder benefit to the Appellant from the transfer of the
Il Mercato be reduced by one half to $1,537,659.
The First Reassessment
29. For the 1992 taxation
year, Revenue Canada's initial assessment of tax payable by
Mr. Siddoo was $369,828.14.
30. The First Reassessment
was issued on the basis that Mr. Siddoo acquired the Shares and
the Interest in the Kashmir Manor or alternatively, the right to
acquire them, from the Plaintiffs and then disposed of them for
no consideration to his Grandsons, so that he realized capital
gains of $520,500 in total, calculated as follows:
|
Fair market value of shares in Holdings
|
$66,000
|
|
Portion of $95,500 allocated to shares
|
10,232
|
|
Capital Gain
|
$55,768
|
|
Fair market value of Interest in Kashmir Manor
|
$550,000
|
|
Portion of $95,500 allocated to Interest in Kashmir
Manor
|
85,268
|
|
Capital Gain
|
$464,732
|
[3] The litigation within the
Appellant's family is at the heart of this appeal because the
transfers of property upon the settlement of that litigation are
the cause of the assessment which is under appeal. All parties to
the litigation are described in the table below. Because the
Appellant appears to be the patriarch of the family and was the
principal defendant, all other parties are described as
individually related to the Appellant.
|
Plaintiffs
|
Defendants
|
|
1. Narinder Kaur Chauhan
("Narinder") daughter
|
1. Ajmer Singh Siddoo
("Appellant")
|
|
2. Mohinder Kaur Sandhu
("Mohinder") daughter
|
2. Balbir Kaur Siddoo
("Balbir")
daughter-in-law
|
|
3. Gurmeet Singh Sandhu
("Gurmeet") son-in-law
|
3. Jasvir Singh Siddoo
("Jasvir")
grandson
|
|
|
4. Ravinder Singh Siddoo
("Ravinder")
grandson
|
|
|
5. Siddoo Kashmir Holdings
Ltd. ("Holdings")
family company
|
|
|
6. Siddoo A.K. Investments
Ltd. ("SAK
Investments")
family company
|
[4] Paragraph 10 of the ASF above
quotes from paragraph 4 of the Settlement Agreement (Tab 20 of
Exhibit 1). I propose to restate paragraph 4 in the hope that I
can extract and describe only the transfers and payments:
(i) Mohinder and Narinder will
transfer to the Appellant (or such other person as he may
direct):
all of their shares of Holdings; and
all of their interest in 2355 West 2nd Avenue, known as
"Kashmir Manor";
(ii) the Appellant will pay
$95,000 to the Plaintiffs;
(iii) the Appellant will be
responsible for the property purchase tax payable upon the
transfer of Kashmir Manor to him.
[5] On June 1, 1992, as part of the
closing of the settlement of the litigation, the following
transfers and payments were made:
(i) Mohinder transferred 5
shares of Holdings to Ravinder;
Cancel Share Certificate No. 8
Issue Share Certificate No. 13
Tabs 69, 70, 71, 73 and 75
(ii) Narinder transferred 5
shares of Holdings to Jasvir;
Cancel Share Certificate No. 7
Issue Share Certificate No. 12
Tabs 69, 70, 71, 72 and 74
(iii) Narinder and Mohinder
transferred an undivided one-half interest in Kashmir Manor (2355
West 2nd Avenue, Vancouver, legally described as Lot 16, Block
212, District Lot 256, Plan 1076) to Ravinder (an undivided
one-quarter interest) and to Jasvir (an undivided one-quarter
interest);
Tab 76, Land Titles Act, Form A
(iv) The Appellant paid $95,500 to
Mohinder and Narinder with respect to the transfer of their
one-half in Kashmir Manor;
Tab 77, Appellant's cheque
(v) The Appellant paid $9,000 to the
Province of British Columbia with respect to the property
purchase tax on the transfer of one-half interest in Kashmir
Manor;
Tab 79, Balbir issued cheque on Appellant's account
[6] Paragraphs 27, 28, 29 and 30 of
the ASF describe the positions taken by the Minister of National
Revenue on the first reassessment of September 22, 1994 and
second reassessment of July 25,1996. The issues arising out of
the second reassessment were settled prior to the commencement of
the hearing of the appeal; and the terms of the settlement are
described in paragraphs 27 and 28. The issues arising out of the
first reassessment were not settled but are the subject of this
appeal. The aggregate capital gains of $520,500 which are in
dispute are described in paragraph 30 of the ASF.
[7] The Appellant claims that the
settlement of the lawsuit within the Appellant's family was a
package deal. The parties agreed in paragraph 26 of the ASF that
all documents delivered at the closing of the settlement on June
1, 1992 were held in escrow until the parties agreed to terminate
the escrow; and at that time the documents were delivered
simultaneously. Under this scenario, the Appellant claims that
the properties (10 shares in Holdings and a one-half interest in
Kashmir Manor) which were transferred to the grandsons (Ravinder
and Jasvir) were never owned by the Appellant.
[8] The Respondent claims that the
settlement was not a package deal. Specifically, the Settlement
Agreement of June 1, 1992 (Tab D-20) isolates the transaction
concerning the Il Mercato Centre in paragraphs 1, 2 and 3 of
Tab D-20 from the transactions concerning a one-half
interest in Kashmir Manor and the 10 shares in Holdings in
paragraph 4 of Tab D-20. The release at Tab 52 concerns only the
defendant Holdings and relates to the Il Mercato Centre whereas
the release at Tab 81 concerns the other five defendants and
relates to Kashmir Manor and the shares in Holdings.
[9] The Respondent's position is
summarized as follows at paragraph 17 of the notes of argument
submitted by Respondent's counsel:
17. The Respondent
respectfully submits, however, that the property disposed of by
the Appellant as a result of the settlement was the Shares (i.e.
10 shares in Holdings) and 50% interest in the Property
(i.e. Kashmir Manor). For it is submitted by the Respondent
that upon execution of the Settlement Agreement, the Appellant
became beneficial owner of the Shares and the 50% interest in the
Property and as the Shares and 50% interest in the Property
eventually ended up in the grandsons hands, this was the property
disposed of by the Appellant in 1992.
The Settlement Agreement under which the Appellant
"became beneficial owner" of the 10 shares in Holdings
and of a one-half interest in Kashmir Manor (according to the
Respondent's argument) was an all-encompassing agreement
comprising 18 pages (Tab D-20) in which the three plaintiffs were
the parties of the first part and the six defendants were the
parties of the second part.
[10] I cannot accept the Respondent's
argument. There is no document in evidence which conveys a
property interest in Kashmir Manor to the Appellant. The only
relevant conveyance with respect to Kashmir Manor is the direct
transfer of a one-half interest from Narinder and Mohinder to
Ravinder (a one-quarter interest) and Jasvir (a one-quarter
interest). See Tab D-76. On the evidence before me, the Appellant
never had a property interest in Kashmir Manor which could be
conveyed, transferred or disposed of to the grandsons Ravinder
and Jasvir.
[11] Similarly, there is no documentary
evidence that the Appellant ever had a property interest in the
10 shares of Holdings which were transferred to Ravinder and
Jasvir. The only relevant documents are corporate proceedings of
Holdings (Tabs D-69, 70 and 71) and share certificates (Tabs
D-72, 73, 74 and 75). Those documents demonstrate that 10 shares
of Holdings were transferred directly from Narinder to Jasvir (5
shares) and from Mohinder to Ravinder (5 shares). The Appellant
never had a property interest in the 10 shares of Holdings which
he could convey, transfer or dispose of to the grandsons Jasvir
and Ravinder.
[12] According to the transfers of property
and documents described in paragraphs 10 and 11 above, it is two
of the plaintiffs (Narinder and Mohinder) who are transferring
property to two of the dependents (Jasvir and Ravinder).
According to the ASF, however, it was the intent of the
settlement that the plaintiffs would obtain property with a value
of approximately one-third of the value of the family properties.
See paragraph 6 of the ASF. One must look elsewhere to find
property flowing from one or more defendants to one or more
plaintiffs. Paragraphs 1, 2 and 3 of the Settlement Agreement
(Tab D-20) describe the transfer of a shopping centre identified
as "Il Mercato" from Holdings to SAK Investments at a
purchase price of $11,099,000.
[13] Paragraph 2 of the Settlement Agreement
required the purchase price of $11,099,000 to be paid as
follows:
(a) SAK Investments assumed a
mortgage on the Il Mercato payable to Canada Life Assurance
Company in the amount of approximately $8,644,000; and
(b) The plaintiffs or their designated
recipient of a fractional beneficial interest in the Il Mercato
delivered to Holdings a release in the form found at Tab
D-52.
As I interpret this method of paying the purchase price, the
plaintiffs appear to have received a financial advantage of
approximately $2,455,000 (being $11,099,000 less $8,644,000)
because under clause (b), they delivered only a release with
respect to value of approximately $2,455,000.
[14] I return to paragraph 6 of the ASF. If
the plaintiffs were to obtain additional property having a value
of approximately one-third of the value of all family properties,
it was only through the "purchase" of the Il Mercato
that they obtained additional property. It was not really a
purchase because the equity in the Il Mercato (valued at
$2,455,000) was transferred to SAK Investments in exchange for
what was, in substance, the plaintiffs' release to Holdings
which had been the owner of the Il Mercato. From paragraph 3 of
the Settlement Agreement (Tab D-20), I infer that the plaintiffs
controlled SAK Investments because paragraph 3 begins with the
words:
3. The
Plaintiff will cause Investments to enter into an agreement (the
"Assumption Agreement"), pursuant to which Investments
shall assume the obligations of Holdings and the Defendant
Siddoo, as mortgagor and guarantor, respectively, under the
Canada Life Mortgage and of Holdings under the assignment of
rents collateral thereto, ...
[15] It seems to me that the quid pro
quo of the settlement was that the plaintiffs, in substance,
would transfer to the defendants a few (10) shares in Holdings
plus a one-half interest in Kashmir Manor (valued at $550,000
- see Tab D-76) in exchange for the equity in Il Mercato
(valued at $2,455,000). It is not clear to me how the plaintiffs
could control SAK Investments if it was a named defendant but, as
stated above, paragraph 3 of the Settlement Agreement implies
that the plaintiffs do control SAK Investments.
[16] I accept the Appellant's argument
that the whole settlement of the family litigation was a package
deal. Not one property transferred in accordance with the
Settlement Agreement would have been transferred unless all other
property transfers and payments had been made at the same time.
That was one of the purposes of the escrow arrangement. I cannot
trace any property flowing from the plaintiffs to the Appellant
and then from the Appellant to the two grandsons, Jasvir and
Ravinder. The Appellant and the grandsons were only three of six
defendants. I can find no facts on which to conclude that the
Appellant disposed of 10 shares in Holdings or a one-half
interest in Kashmir Manor to the grandsons. The appeal is
allowed, with costs.
Signed at Ottawa, Canada, this 8th day of February, 2002.
J.T.C.C.
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