Degiorgio v. R., [1996] 2 CTC 2038, 97 DTC 229

O’Connor J.T.C.C.: — These appeals were heard in Toronto, Ontario on December 12 and 13, 1995 pursuant to the General Procedure of this Court. They relate to the Appellant’s taxation years 1990 and 1991.

Testimony was given by the Appellant, by his father Giuseppe De Giorgio, by two co-employees of the Appellant and by Henry Joseph Finkelstein, the accountant for the Appellant and certain family related companies.

Issues

There are two distinct issues. The first, hereinafter referred to as the “RRSP issue”, relates to whether an amount of $169,500 reported by the Appellant in his 1990 taxation year as income from R.E.D.G. Construction Ltd. (“R.E.D.G.”) qualifies as “earned income” within the meaning of paragraph 146(l)(c) of the Income Tax Act (“Act”) for purposes of calculating the Appellant’s maximum allowable RRSP contribution deduction limits in the 1990 and 1991 taxation years pursuant to the provisions of subsection 146(5) and paragraph 146(l)(g. 1) of the Act. The second issue, hereinafter referred to as the “Joint Venture issue”, relates to whether the Appellant had, in 1990, any interest in three joint ventures hereinafter mentioned such as to entitle him to deduct a share of the losses sustained by those joint ventures in 1990. These losses originally claimed as $115,688 were raised by consent at the hearing to $131,703.

RRSP Issue

R.E.D.G. was a company wholly owned and controlled by the Appellant. He was also president and performed certain services for R.E.D.G., a general contractor engaged in the construction of homes. In the 1990 taxation year the Appellant reported the receipt of an amount of $169,500 from R.E.D.G. It was reported as “Other Income” on the Appellant’s T-1 return for 1990 and was also reported as “Other Income” on an amended T-4A Supplementary form. In the 1989 taxation year the Appellant originally reported the receipt of employment income from R.E.D.G. in an amount of $160,000 on his T-1 return for that year. Later a T-1 Adjustment Request and an amended T-4 Supplementary were filed raising the said employment income to $270,000. In 1991 the Appellant reported the receipt of employment income in an amount of $18,500 from R.E.D.G. Only the 1990 income amount of $169,500 is before the Court. The other years are mentioned to demonstrate the reporting discrepancies.

The Appellant stated that he supervised building sites of R.E.D.G. on a sporadic basis and that no specific records of hours worked were kept. In 1990 the Appellant also attended the University of Toronto and in the summer held jobs first at Bick Pickles factory and then later mowing grass for the Town of Markham thus limiting the time available to work for R.E.D.G.

Submissions

Counsel for the Appellant submits that the $169,500 was earned income as defined in the Act and the Respondent submits that it was not.

Law

Earned income is defined in paragraph 146(l)(c) of the former version of the Act which corresponds to the definition in subsection 146(1) in the current Act. The relevant portions of the sections defined “earned income” as the total of all amounts each of which is the taxpayer’s income from:

(a) an office or employment ... (b) a business carried on by the taxpayer either alone or as a partner actively engaged in the business, or (c) property, where the income is derived from the rental of real property ...

Analysis

I am not convinced that the $169,500 fails to qualify as earned income simply because the Appellant did merely sporadic work for R.E.D.G. in 1990 nor because in 1989 the amount received from R.E.D.G. was reported as “employment income” as opposed to “other income” in 1990 nor because the amount appears excessive.

The amount of $169,500 was taxed as income of some sort. It was not taxed as a dividend. Counsel for the Minister however contends that the $169,500 should be considered as a shareholder benefit or appropriation as opposed to earned income.

After some consideration I am satisfied that the $169,500 reported by the Appellant in 1990 as income from R.E.D.G. qualifies as earned income as defined in paragraph 146( 1 )(c) of the Act. The Appellant held the office of president and was sole director and sole shareholder.

Appellant’s counsel acknowledged that the amount in question is large but the Appellant was the president of R.E.D.G., which is certainly an office. Given his relationship with R.E.D.G. he was entitled to have R.E.D.G. pay him any amount and to categorize the receipt as income from an office. The amount paid may relate, as testified, to the profitability of the business but that, in my opinion, does not necessarily characterize it as a shareholder benefit.

Revenue Canada assessed tax on the said amount of $169,500 and I am of the opinion that the Appellant was entitled to claim it as earned income thus justifying the RRSP premium deductions which he claimed in the 1990 and 1991 taxation years.

Consequently, on this issue the appeals succeed.

Joint Venture Issue

In October 1989, Harrow Construction Limited (“Harrow”), a company owned and controlled by the Appellant’s father, Giuseppe De Giorgio, entered into a written agreement dated October 12, 1989 with respect to three joint ventures respectively named Barrie Joint Venture, Whitby Joint Venture and Bowmanville Joint Venture. The Appellant contended that he had an interest in these joint ventures thus entitling him to claim business losses in the amounts of $111,792 in 1989 and $131,703 in 1990. The 1989 claim is not in issue but its existence helps to clarify matters and may have a bearing on the amount claimed in 1990. The amount claimed in 1990 is not disputed; only its deductibility is.

By a cheque dated October 18, 1989 Harrow paid a sum of $227,460 to Country Glen Homes, the construction manager for the three joint ventures. The Appellant claims that at all material times Harrow was holding its interest in the joint ventures “in trust” for the Appellant. Harrow paid an additional amount of $36,270 to Country Glen Homes on December 31, 1989, as required by the agreement of October 12, 1989.

Submissions of the Appellant

Counsel for the Appellant submits that the Appellant verbally agreed in October of 1989 to take a position in the joint ventures to the extent of approximately $300,000. He states further that the Appellant was in a position to do this financially because of monies owing to him by R.E.D.G. He adds that based upon certain testimony of both De Giorgios and Mr. Finkelstein it seemed more prudent to leave the monies in R.E.D.G. as it was a continuing operating company which needed funds. It was thus decided to use Harrow to make the investment in trust for the Appellant. Counsel points to various trust agreements executed in 1991 and 1992 which indicate that Harrow held the joint venture investment in trust for the Appellant. He also points to the various financial statements of the joint ventures where the words “in trust” have been added when referring to the interest of Harrow. These words were apparently added by an employee of Mr. Finkelstein, the Appellant’s accountant.

Counsel explains one reason for the absence of documentation establishing the trust was the bond of trust between the Appellant and his father, the sole shareholder of Harrow.

Counsel also points to the computer print out of a general ledger for Harrow showing funds being transferred from a shareholder advance account on February 13, 1991 and March 4, 1991 to offset the October 1989 payment made by Harrow in the amount of $227,460.

Counsel adds that Harrow’s financial statements do not identify any interest in the joint ventures, that Harrow did not claim the losses and is now time-barred from so doing. He states also that, as the testimony revealed, Harrow, with limited liability, was a better choice as the apparent legal title holder, as opposed to the Appellant whose liability was unlimited. In other words, if the joint ventures soured or incurred liabilities, the Appellant was probably immune from resulting claims.

Counsel for the Appellant referred, inter alia, to the decision of the Federal Court, Trial Division in Bouchard v. R. (sub nom. Bouchard v. The Queen) [1983] C.T.C. 173, 83 D.T.C. 5193. In that case the taxpayer purchased a house in 1963 for $23,000 and he and his wife took title as joint tenants. The taxpayer’s son and daughter-in-law immediately went into possession of the house and began making monthly payments to the taxpayer. They also paid larger amounts to the taxpayer on various occasions and also made extensive improvements to the house. In 1971, a written agreement of purchase and sale was entered into whereby the taxpayer and his wife agreed to sell the house to the son and daughter-in-law for $23,000. In 1976, after the purchase price was fully paid, the transaction was completed. The Minister assessed the taxpayer for a capital gain of $11,135, contending that this was a non-arm’s length transaction for less than fair market value. The Federal Court held that the evidence established that the taxpayer purchased the house in 1963 in trust for his son and daughter-in-law. Accordingly, there was no deemed disposition at fair market value when the property was transferred by the taxpayer to them in 1976.

Counsel referred to the tests set forth by Cattenach J. for determining if a parol trust exists at page 183 (D.T.C. 5202):

When a trust may be established by parol despite the Statute of Frauds as I accept as a premise in this appeal sound policy demands that its existence must be brought within reasonable certainty and not left within the realm of conjecture.

In such cases the Court should ask itself:

(1) is the claim supported by probability?

(2) is it supported by writing in any form?

(3) is it supported by any indisputable facts?

(4) is it supported by disinterested testimony?

(5) is the parol evidence quite satisfactory and convincing?

Counsel for the Appellant then argued that the evidence establishes these tests were met in this appeal.

Submissions of the Respondent

The submissions of the Respondent’s counsel are best set forth by quoting from paragraphs 14 to 19 of Respondent’s Notes of Argument filed at

the hearing:

14. In fact, at all material times and in particular in the 1989 and 1990 taxation years, in respect of which business losses were claimed, the Appellant did not have any interest in the said joint ventures. This conclusion is supported by the following facts:

(a) the agreement dated October 12, 1989 was entered into in the name of “Harrow Construction Limited” as the “investor”, with no mention of any trust;

(b) in the original financial statements as prepared on behalf of the joint ventures, “Harrow Construction Ltd.”, and not the Appellant, is listed as one of the participants;

(c) no payment was made by the Appellant to acquire an interest in any of the joint ventures, nor did the Appellant incur any obligation to make a payment or otherwise invest in the joint ventures;

(d) the only “trust agreements” in existence were executed in 1991 or later years, after Revenue Canada reassessed the Appellant;

(e) there were no documents or other records created in 1989 or 1990 to indicate that Harrow Construction Limited was holding its interests in trust for the Appellant;

(f) a computer print-out of a general ledger for Harrow Construction Ltd. appears to show funds being transferred from a shareholder advance account on February 13, 1991 and March 4, 1991 to off-set an October, 1989 payment made by Harrow Construction in the amount of $227,460. Even assuming, without admitting, that there is some connection between the Appellant and the said shareholder advance account...the relevant accounting entries are dated as being made in 1991 and do not support the contention that the Appellant acquired interests in the joint ventures in 1989 or 1990;

(g) the investment had already been made, according to Mr. Finkelstein, before the discussions as to how to structure the investment occurred; and

(h) there are no documents, aside from ex post facto journal entries and declarations to support the contention that a trust existed in 1989 and 1990.

15. ...

16. All of the documents in existence in 1989 and 1990 point to the conclusion that Harrow Construction Limited, and not the Appellant, was a participant in the joint ventures in the 1989 and 1990 taxation years. In determining who has title to property, the Court should have regard to the documents evidencing the transactions at the time of transfer or acquisition, as opposed to documents prepared “after the fact” in an effort to repair or restructure the situation. As observed by Mr. Justice Linden in Friedberg v. Minister of National Revenue:

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax.... If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to “correct” documents which clearly point in a particular direction.

Friedberg v. Minister of National Revenue, [1992] 1 C.T.C. 1, 92 D.T.C. 6031 (F.C.A.) [Appealed to the Supreme Court of Canada, reported at [1993] 2 C.T.C. 306, 93 D.T.C. 5507 (S.C.C.)], at page 2 (D.T.C. 6032). See also page 6034.

17. The signing of trust declarations years after the interest in the joint ventures is alleged to have been acquired does nothing to enhance the Appellant’s position. The signing of post facto trust declarations in 1991 or 1992 is just as indicative of a transfer to the Appellant from Harrow Construction Limited in 1991 or 1992, after Harrow Construction acquired the interests, as it is of Harrow Construction having purchased the interests for the Appellant ab initio.

Gosse v. R., (sub nom. Gosse v. Canada), [1993] 2 C.T.C. 2205, 93 D.T.C. 1017 (T.C.C.), at page 1020.

18. At all material times, the Appellant and Harrow Construction Limited were non-arms’ length parties. The joint venture agreement and the joint venture financial statements only named Harrow Construction Limited, and not the Appellant, as an investor. There were no trust declarations signed in 1989 or 1990. No consideration was paid by the Appellant in 1989 or 1990 to acquire an interest in the joint ventures, nor did any obligation by the Appellant to pay any consideration arise in those relevant taxation years.

19. Particularly in the case of non-arms’ length parties, a business relationship (in this case the alleged existence of a trust) should not be assumed where the alleged business relationship is not consistent with the documents, the conduct of the parties or their relations with third persons. It is not sufficient for the taxpayer to simply assert the existence of a relationship after year end because it was convenient to do so for accounting purposes.

Kuchirka v. R., (sub nom. Kuchirka v. Canada) [1991] 1 C.T.C. 339, 91 D.T.C. 5156 (F.C.T.D.), at pages 5157-58.

Analysis

I am totally convinced that the position of the Respondent on this issue is the correct one. The testimony given by the Appellant as to his acquisition of the interest in the joint ventures was vague and selective. An example of this was his answers to certain questions on Discovery which were read into the record.

Q. Did you have discussions with your father in 1989 concerning this investment?

A. Yes

Q. And what was the nature of those discussions?

A. They were just a general overview of what the sites were and what was going on.

Q. Did you have any discussions concerning your interest in these investments?

A. I don’t know.

Q. You don’t know?

A. No, I don’t remember.

Exact dates could not be remembered. There was nothing in writing in 1989 or 1990 which demonstrated that the investment by Harrow was in fact an investment in trust for the Appellant. The execution of trust agreements and the making of journal entries after the end of the 1990 year cannot serve to change what was already in place in 1989 and 1990. The authorities on this point submitted by counsel for the Respondent are clear.

In my opinion the Appellant has clearly not met the burden of proof to demonstrate that he had an interest in the joint ventures in 1990. To the extent the tests set forth in the Bouchard case are authoritative, I am not at all convinced they have been met in this appeal.

Consequently, for all of the above reasons, the appeal on the Joint Venture issue is dismissed.

Given the mixed results of these appeals there shall be no order for costs.

Appeal allowed in part.