Date:
20081006
Dockets: A-536-07
A-537-07
Citation: 2008
FCA 299
CORAM: LINDEN J.A.
EVANS
J.A.
TRUDEL
J.A.
BETWEEN: A-536-07
RONALD CASEY
Appellant
and
HER MAJESTY THE QUEEN
Respondent
BETWEEN: A-537-07
LAWRENCE J. LARAMEE
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE COURT
(Delivered
from the Bench at Toronto, Ontario, on October 6, 2008)
TRUDEL J.A.
Overview
[1]
This
appeal is a consolidation of two appeals from the amended judgment of Mr.
Justice Miller of the Tax Court of Canada (2007 TCC 635) (the judge), dated
November 5, 2007 (issued in substitution for the judgment dated October 19,
2007), that dismissed an appeal from the decision by the Minister of National
Revenue (the Minister) to disallow the appellants’ claim of a business loss for
the 2001 taxation year, allowing instead a business investment loss.
Issue
[2]
The only
issue in this appeal is whether the loans advanced by the appellants to
companies in which they held trading assets via a holding company were part of
an adventure in the nature of trade, or an investment of a capital nature.
[3]
These
appeals must be dismissed, substantially for the reasons offered in Miller J.’s
judgment.
The facts
[4]
The
salient facts leading up to these appeals are straightforward. In 1999,
Messrs. Laramee and Casey put up funds in a golf course development. According
to them, they were interested in a quick profit within four or five years and
had no interest in running the golf course.
[5]
Through a
Memorandum of Understanding (MOU), the appellants and two other parties
unconcerned by these appeals, Robert Stevens and William Zaduk, structured
their project plan in the following manner: the golf course was to be built
and operated by Crosswinds Golf & Country Club (Golfco), while the real
estate was to be owned by Crosswinds Properties Ltd. (Propertyco), together
"the golf companies".
[6]
Although
the four men were to hold an equal quarter-share each in both companies,
Stevens’ and Zaduk’s shares were to be held in trust by the golf companies
giving the appellants full effective control of all the shares (MOU, article 9,
AB, p. 51).
[7]
The
appellants and a third party were also the shareholders of Caslar Capital
Limited (Caslar), an investment holding company which held shares in and
advanced funds to other corporations. Messrs. Casey and Laramee each held 50
shares of Caslar, the third party holding the remaining 4 of the 104 issued and
outstanding shares of Caslar.
[8]
At the
suggestion of the appellants’ lawyer, Caslar was to act merely as a funnel or a
“single entry point to hold the security and to be the point where the monies
were financed or advanced through” (at paragraph 15 of the appellants’
memorandum of facts and law).
[9]
With this
structure in place, the appellants, through Caslar,
arranged financing of Golfco and Propertyco by way of a personal loan by
putting up $2,755,850 and $4,061,491, respectively, and a loan from the
Toronto-Dominion Bank in the amount of $6 million with an additional $1.2
million.
[10]
The loan agreements specified that personal
funds were to be lent to Caslar at an interest rate of 6%. Caslar, in turn,
entered a loan agreement with Golfco and Propertyco to lend the amounts as
development funds to Golfco and as a mortgage to Propertyco. The development
funds were lent at an interest rate of 10% calculated and compounded monthly,
to be accrued and compounded until July 2002, or until first receipt of revenue
from the golf course. The mortgage was interest-free for two years, or until
first receipt of rental revenue, after which the interest rate became 14%. The loan
became due and payable if title was transferred.
[11]
Although the golf course held one tournament in
2001, it was unprofitable. In early 2002, the golf course was sold to a third
party, and the bank was repaid in full. However, there was no money to repay the
loan that the appellants had advanced through Caslar. As stated earlier,
the appellants claimed this amount as a business loss on their 2001 income tax
returns. The Minister denied the deduction, allowing an allowable business
investment loss. The judge agreed with the respondent. Hence the within
appeal.
Analysis
[12]
The judge cited Easton v. The Queen (Easton) 97 DTC 5464 (FCA), a decision
of this Court, and restated again "the basic precepts underlying the tax
treatment of advances and outlays made by shareholders" (Easton, ibid at page 5468).
[13]
Easton reminded
us that:
"[a]s
a general proposition, it is safe to conclude that an advance or outlay made by
a shareholder to or on behalf of the corporation will be treated as a loan
extended for the purpose of providing that corporation with working
capital"
[14]
It ensues
that generally losses arising from such an advance or outlay will also be on
capital account. We say generally because there are two notable exceptions to
this accepted proposition.
[15]
We need not
describe the first exception as this case deals with the second exception as
found in M.N.R. v. Freud, 68 DTC 5279 (SCC), and discussed in Easton,
supra at page 5468:
Where a
taxpayer holds shares in a corporation as a trading asset and not as an investment
then any loss arising from an incidental outlay, including payment on a
guarantee, will be on income account. This exception is applicable in the case
of those who are held to be traders in shares. For those who do not fall
within this category, it will be necessary to establish that the shares were
acquired as an adventure in the nature of trade. I do not perceive this
"exceptional circumstance" as constituting a window of opportunity
for taxpayers seeking to deduct losses. I say this because there is a
rebuttable presumption that shares are acquired as capital assets: see Mandryk
v. The Queen, 92 DTC 6329 (F.C.A.) at 6634.
[16]
Although
the judge found that the appellants’ shares in Golfco and Propertyco were
acquired as trading assets and not as long term investment of a capital nature,
he also found that the financing of the golf companies through Caslar was not
part of that adventure as an incidental outlay.
[17]
The crux
of his decision can be found at paragraphs 33, 35 and 36 of the reasons:
33 Had Mr. Laramee and Mr.
Casey injected their funds directly into Golfco and Propertyco, then, given my
finding that the acquisition of shares in Golfco and Propertyco was an
adventure in the nature of trade, I would have had no difficulty applying the Freud
and Easton principles to find the lending of money in such case was an
incidental outlay of their adventure. But to reach that same conclusion, when
funds are channeled through a separate legal entity, which is not acting as an
agent, but clearly creating its own rights and responsibilities, especially a
company with a shareholder other than Messrs. Laramee and Casey, requires me to
pierce the corporate veil and effectively ignore the very existence of Caslar.
The Appellants argue they are not requesting a piercing of the corporate veil,
but are simply asking me to consider the totality of the circumstances
surrounding the use of the companies: they refer to Caslar as simply a red
herring. I disagree.
35 Yes, the economic
realities are that Messrs. Laramee and Casey lost their money. Their
acquisition of Golfco and Propertyco shares was an adventure in the nature of
trade. Why should monies put indirectly into the "project" not be
considered part of that adventure, given that had they been put in directly
they would be considered part of the adventure; or put another way, why should
the introduction of an intermediary affect the nature of the monies from being
on income account to being on capital account? Because the payment is no longer
incidental to the share purchase: it is a separate loan transaction to a third
party, Caslar, in which Messrs. Casey and Laramee are not the only
shareholders, and which in turn makes a commercial loan to the project with the
profit being solely the interest earned thereunder. The outlay is simply not
incidental to the purchase of the company's shares as it is not made to the
company. The fact Mr. Laramee and Mr. Casey only owned 100 of the 104
outstanding shares in Caslar certainly influences my decision. I cannot ignore
Mr. Weber, or presume that he is part of Mr. Casey's and Mr. Laramee's
adventure.
36 I find that Caslar's loan to Golfco and Propertyco
is simply a capital investment and not incidental to Mr. Laramee's and Mr.
Casey's adventure in the nature of trade: it will return the principal plus
interest -- period. Its income is simply the determinable, calculated
difference between the terms of borrowing and the terms of lending. There is
nothing exceptional about this loan; if it had been repaid, Caslar would have
received considerably more interest than it would have had to pay to Mr.
Laramee and Mr. Casey and would have paid tax on that difference. The resulting
after-tax profit would have been available for distribution to all common
shareholders, not just Mr. Casey and Mr. Laramee. There is nothing so
extraordinary about these loan arrangements to shift them from being on capital
account to being on income account. As stated in Freud:
It is, of course,
obvious that a loan made by a person who is not in the business of lending
money is ordinarily to be considered as an investment. It is only under quite
exceptional or unusual circumstances that such an operation should be
considered as a speculation.
[18]
It is
clear to us that the judge embarked on a thorough fact-driven analysis before
deciding that the lending of money to Caslar for lending on to Golfco and
Propertyco was not part-and-parcel of the adventure in the nature of trade,
thereby concluding that the appellants did not meet their burden, that is to establish
that the loans to Caslar for the golf companies fell into one of the two
exceptions described in Easton. There was evidence on the record to
support his conclusion.
[19]
The
appellants have failed to show a palpable and overriding error on the part of
the judge justifying this Court’s intervention.
[20]
The appeals will be dismissed with costs, the
respondent being entitled to one bill of costs for both appeals.
"Johanne Trudel"
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