Date: 20000301
Docket: A-801-97
CORAM: DÉCARY, J.A.
SEXTON, J.A.
EVANS, J.A.
BETWEEN:
JEAN SKIDMORE
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario on Wednesday, March 1, 2000
Judgment delivered at Toronto, Ontario on Wednesday, March 1, 2000
REASONS FOR JUDGMENT BY: SEXTON J.A.
Date: 20000301
Docket: A-801-97
CORAM: DÉCARY, J.A.
SEXTON, J.A.
EVANS, J.A.
BETWEEN:
JEAN SKIDMORE
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
(Delivered from the Bench at Toronto, Ontario
on Wednesday, March 1, 2000)
SEXTON J.A.
| _. The appeals numbered A-800-97 and A-801-97 were heard together and these reasons are applicable to both appeals. |
| _. The Appellants, husband and wife, were equal owners of Birchill Nurseries Inc. (hereinafter "Birchill"). That company grew tree seedlings and then sold them in the early years to the Government of Ontario and later to Abitibi Price Inc. During the time that the Appellants owned the company, being the years 1983 to 1988, it kept substantial cash reserves. The Appellants argued that these cash reserves were maintained for various purposes including the following: |
| 1) Because conventional bank financing and crop insurance were not available, cash reserves were necessary in order to finance the cost of planting seedlings in the year following a total or partial crop failure. |
| 2) If Birchill failed to perform the specific terms of its contract with the Ontario Government and therefore the Government terminated the contract and demanded repayment of certain grants made to Birchill, which it had the right to do, the reserves could be used to satisfy this obligation. Similarly, if Birchill failed to comply with the terms of its contract with Abitibi, the reserves might be required. |
| 3) If Birchill failed to produce the target number of seedlings and thus became obligated to repay some of the advances which had been paid under the contracts, the reserves could be used to satisfy this obligation. |
| 4) Birchill required reserves because the purchaser of the company insisted upon them on the sale. |
| _. In 1988 the Appellants sold the shares in Birchill to another company in which their children had an interest. The purchase price was $645,000.00. |
| _. One of the terms of the agreement was that certain term deposits in the amount of $160,000.00 held by Birchill were to form part of its assets and that $145,000.00 of the purchase price was to be allocated to their acquisition. |
| _. The Appellants claimed capital gain exemptions on the sale of these shares based on the assumption that Birchill was a small business corporation as defined by Section 248(1) of the Income Tax Act (hereinafter the "Act"). |
| _. The Minister of National Revenue disallowed these exemptions taking the position that Birchill was not a small business corporation. |
| _. Section 110.6 (2.1) of the Act allowed a taxpayer to deduct from his taxable income certain amounts which represent the capital gain on the disposition of qualified small business corporation shares. |
| _. Section 248(1) of the Act defines a small business corporation as follows: |
| "small business corporation" at any particular time means a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time was attributable to assets that were |
| (a) used in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it, |
| and, for the purpose of paragraph 39(1)(c), includes a corporation that was at any time in the 12 months preceding that time a small business corporation; |
| _. The Tax Court Judge held that the Appellants had failed to demonstrate that "all or substantially all of Birchill" assets were used in an active business within the meaning of Section 248(1) of the Act .1 |
| _. He found that the Appellants had failed to prove that the cash reserves which Birchill kept were reasonably required as backup assets or that Birchill relied on the term deposits as an integral aspect of its business operation. He heard the evidence of the Appellants and was unable to conclude that there existed a relationship of financial dependence of some substance between the amounts in issue and the seedling nursing business. He found that Birchill had never had to draw upon the reserves and that the possibility of the reserves being drawn upon to sustain Birchill"s business was remote. |
| _. He referred to the fact that as the risk of repayment of the Ontario Government grant was gradually reduced to nil, the amount kept on hand as "reserve funds" were increasing and that no rationale for this state of affairs was advanced by the Appellants. |
| _. Despite the thorough submissions of counsel for the Appellants, we can find no palpable and overriding error on the part of the Tax Court Judge in his conclusion that Birchill was not on the evidence before him a small business corporation. He correctly directed himself as to law as enunciated by Strayer J. in McCutcheon Farm Ltd. v. The Queen2 to the effect that the taxpayer must clearly show that the reserves are reasonable and that there is a rational relationship between the principal sums accumulated and the reserves required. |
| _. These appeals will be dismissed with one set of costs. |
"J. E. Sexton"
J.F.C.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
| STYLE OF CAUSE: JEAN SKIDMORE |
HER MAJESTY THE QUEEN
DATE OF HEARING: WEDNESDAY, MARCH 1, 2000
PLACE OF HEARING: TORONTO, ONTARIO
| REASONS FOR JUDGMENT BY: SEXTON J.A. |
DELIVERED AT TORONTO, ONTARIO ON WEDNESDAY, MARCH 1, 2000
APPEARANCES: Mr. J. Richard Lockwood
Mr. Shatru Ghan
| SOLICITORS OF RECORD: Siskind, Cromarty, Ivey & Dowler |
Deputy Attorney General of Canada
FEDERAL COURT OF APPEAL
Date: 20000301
Docket: A-801-97
BETWEEN:
JEAN SKIDMORE
Appellant
Respondent
REASONS FOR JUDGMENT
__________________
1 (1997), 98 D.T.C. 1135 and [1998] 1 C.T.C. 2619 (T.C.C.).
2 91 D.T.C. 5047 (F.C.T.D.).
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