Keno Holdings Limited v. Minister of National Revenue, [1991] 1 CTC 2166, 91 DTC 311

Beaubier, T.C.J.:—This case was heard in Edmonton, Alberta, on August 29, 1990.

The appellant, Keno Holdings Ltd. (“Keno”), filed its 1984 income tax return with the fiscal year ending December 31, 1984, and claimed a deduction of $125,844.72 being a downpayment on the purchase of property and $2,183.50 being legal fees and expenses incurred in purchasing the property. The appellant states that the loss was a trading loss and that the legal expenses are deductible in 1984 as a consequence of the sale of the property from the appellant to Zip Developments Ltd. “Zip") and a syndicate by agreement dated May 21, 1980. In the alternative, the appellant wishes to deduct the sum of $125,844.72 as a bad debt incurred in the ordinary course of business.

The Minister of National Revenue reassessed the appellant and disallowed a deduction of $128,028.22 for the following reasons:

(a) The appellant was not in the business of lending money.

(b) Any money loaned by the appellant was not loaned in the ordinary course of business.

(c) The disposition was to a related person and therefore is not an allowable business investment loss.

(d) The loans in question were not doubtful or bad debts of the appellant pursuant to the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

On January 22, 1979, Mr. Edward Achtem, an officer of Keno, of Edmonton, Alberta, signed an offer (Exhibit A-6) for Merdan Industries Ltd. (Merdan") to purchase 159 acres of land near Legal, Alberta, described as Part S.E. 25-57-25-

W. 4th from Roger Belzil for the total consideration of one million dollars. On January 23, 1979, Keno issued a certified deposit cheque for $30,000 signed by Mr. Achtem (Exhibit A-2) to Weber Bros. Realty Ltd., the realtor handling this offer. The offer was accepted that day. The offer was made pursuant to an understanding between Merdan and Keno that this kind of arrangement could be entered into.

Edward Achtem testified that he had hoped to persuade Merdan to acquire part of this property, but Merdan was not interested. Therefore, on March 28, 1979, Edward Achtem drew up a short document in his own handwriting respecting the property which he had the proper officer of Merdan sign. The cogent words in this document are:

Merdan Industries Ltd. holds the title in trust for Keno Holdings Ltd. & Naco Holdings Ltd.—unconditionally & will deal with the land as directed by Keno & Naco.

(Exhibit A-7)

Immediately thereafter, on March 31, 1979, Keno issued a cheque signed by Mr. Achtem to the solicitor handling the transaction for the balance of the downpayment of $95,844.72 (Exhibit A-3). On May 4, 1979, Keno issued a cheque signed by Mrs. Achtem for the solicitor's fees and disbursements with respect to the transaction in the amount of $2,183.50 (Exhibit A-4). The evidence is clear that both Mr. Achtem and Mrs. Achtem were entitled to be sole signing officers of Keno. Mr. Achtem handled all the property deals and Mrs. Achtem handled the administrative matters for Keno in the normal course of business.

Mr. Kittlitz, the proper signing officer of Merdan, stated that he knew Keno was owned by Mr. Achtem and his wife and Naco Holdings Ltd. ('Naco") was owned by Mr. Achtem's family when he signed Exhibit A-7. The evidence submitted indicates that after March 28, 1979, Merdan signed documents relating to this property on Mr. Edward Achtem's instructions and without any further documentation from Mr. Edward Achtem, from Keno or from Naco.

On April 27,1979, Merdan executed a mortgage for $875,000 in favour of the vendor Mr. Belzil (Exhibit A-9) and title issued in the name of Merdan subject to the mortgage on April 30, 1979 (Exhibit A-10).

In 1980 the chartered accountant for Keno Holdings Ltd. prepared a synoptic of this transaction and first entered the transaction as a purchase by Keno. Then the entries were changed in the synoptic to show the cheques as a" loan to Naco." During this period, the accountants were dealing with Mrs. Achtem as company officer concerning their work. The designations on the cheques themselves referred only to the property purchased, the vendor, or Merdan. One further document, #6 in Exhibit RI, was prepared by Mr. Achtem's daughter, Lori Haupt, who was a commerce graduate starting out as a bookkeeper for Keno in May 1980, wherein she describes this property, including in part this transaction, as "Belzil to Rushholm et al.” (the first and last owners of the property). At the bottom of page 1, it states in Lori's handwriting" Naco loaned Zip $128,028.22 for deal Keno paid for Zip's 1st mortgage payment". The explanations respecting the foregoing matters were testified to by all parties in- volved in writing out the synoptic and Lori's summary. The chartered accountant states that in the ordinary course he would have received the information respecting the synoptic from Mrs. Achtem. Mrs. Achtem states that she could not or would not have stated that the transaction was a loan to Naco with Naco purchasing the property. Lori states that she would have prepared R-1, document #6, on the instructions of the chartered accountant. It should be noted that these matters occurred approximately ten years before the date of trial, and the evidence is confused. Moreover, no formal document was executed by Keno or Naco pursuant to the particulars contained in Exhibit A-7.

The subsequent deal for the property so summarized in Exhibit R-1, document, #6, occurred when the property was sold and title transferred by Merdan (Exhibit A-14) in May 1980 to Zip. Zip was an Alberta Corporation of which Lori Haupt was a shareholder, which was incorporated by Mr. Achtem's brother on October 11, 1979. The $128,028.22 was left as a debt from Zip to the owner on an oral basis. Mrs. Achtem testified that there was to be no interest owed on the $128,028.22. Mr. Achtem's brother testified that $128,028.22 was to bear interest of ten per cent per annum. Zip had previously sold 60 per cent of this purchase to “Rushholm et al.” by means of the syndication which occurred in February, 1980. The property interest of Zip and the syndicate terminated when Mr. Belzil, the original vendor, foreclosed the mortgage on November 22, 1983 (Exhibit A-10) and recovered title December 15,1983 (Exhibit A-20). Zip was dissolved as a corporation on November 1,1985, (Exhibit A-21).

The evidence of Mr. Edward Achtem is that when he signed the original offer to Belzil on January 22,1979 to purchase the 159 acres for one million dollars he was very open about who would ultimately own the property. Respecting a Keno-Merdan venture, the deal “could have gone either way”. When he drew Exhibit A-7 and had Merdan Industries Ltd. sign it on March 28, 1979 he thought of Keno and Naco. He states that he had Mr. Kittlitz, on behalf of Merdan Industries Ltd., sign Exhibit A-7 in the event that Mr. Kittlitz should die so that there would be evidence that Merdan did not own the property in its own right. Mr. Edward Achtem also stated that shortly after the purchase was completed, he turned the concept over to his son Neil, a commerce graduate working as a real estate agent and soon saw that Neil could not do anything with the property and that there was nothing there for Naco, in respect of which he stated “! am looking at success I am not hurting anyone else".

With respect to Exhibit A-7 and its execution by Merdan on the instructions of Mr. Edward Achtem, reference is made to D.W.M. Waters, Law of Trusts in Canada, 2nd ed. (1984), at page 311 where it is stated:

Even the donor cannot retract his gift, if he enabled the donee to acquire title and intended at that time to make a gift. As Viscount Simmonds put it in Shephard v. Cartwright, quoting Snell's Principles of Equity:

The acts and declarations of the parties before or at the time of the purchase [or of the voluntary transfer], or so immediately after it as to constitute a part of the transaction, are admissible in evidence either for or against the party who did the act or made the declaration . . .

But subsequent declarations are admissible as evidence only against the party who made them, and not in his favour.

It should be noted that the evidence of Mr. Edward Achtem is that Naco was owned by his children at the times in question. It should also be noted that there is some evidence that Keno loaned money to Naco from time to time and merely recorded the loans by book entry in sums which at times considerably exceeded $100,000.

It was established by Mrs. Achtem and Lori that Keno's business was buying and selling properties, that there were as many as 40 transactions in progress during a year, and that to facilitate a sale Keno would often finance part of the purchase price. To that extent, Keno made "loans" in the ordinary course of its business.

The consequence of the foregoing is that I find the declaration of Merdan dated March 28, 1979, combined with the cheques issued by Keno on March 31, 1979 and May 4, 1979, and with the mortgage for $875,000 signed by Merdan to Belzil on April 27,1979 establish that the title to Part S.E. 25-57-25-W. 4th purchased by Merdan from Belzil was owned by Keno and Naco as tenants in common, to each an undivided one-half interest. On the basis of the various evidence presented I find that Naco's one-half interest was given as a gift by Keno to Naco. The appeal fails with respect to the one-half interest owned by Naco.

With respect to the remaining one-half interest owned by the appellant, I find that when Merdan transferred the property to Zip the remaining one-half of $128,028.22 consisting of $64,014.11 was owed by Zip to Keno. The evidence is conflicting as to whether or not any interest was to accrue on the outstanding balance and therefore I find that there was no indebtedness on account of interest. Thus, the appellant has established that $64,014.11 was carried as financing by the appellant to Zip on account of the purchase price and that this was a transaction in Keno's ordinary course of business.

The evidence by the appellant was that the lawyer and accountant of Keno determined when the debt owed by Zip to Keno became a bad debt, and they determined that to have occurred in 1984. The other evidence led by the appellant indicates that the timing of this determination was correct.

The appeal is therefore allowed in part and this matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that for its 1984 taxation year, the appellant is entitled to write off a bad debt of $64,014.11.

Costs are granted in favour of the appellant.

Appeal allowed in part.