J & L Video Limited v. Her Majesty the Queen (Informal Procedure), [1994] 2 CTC 2114

Christie, A.C.J.T.C.C.:—This appeal is governed by the informal procedure prescribed by section 18 and following sections of the Tax Court of Canada Act.

The notice of appeal instituted appeals with respect to the appellant's 1989 and 1990 taxation years. The appellant’s year-end is May 31. At the outset of the hearing Mr. R. Berube who appeared on behalf of the appellant agreed that the appeal with respect to 1990 should be dismissed on the ground that there was a nil reassessment in respect of that year.

The basic assumption relied on by the Minister of National Revenue in reassessing the appellant’s tax liability regarding its 1989 taxation year is that the appellant acquired a business carried on under the name J & L Video and related assets on certain terms and conditions. Paragraph 3(a) of the reply to the notice of appeal reads:

3. In so reassessing the appellant, the Minister made the following assumptions of fact:

(a) the appellant acquired the business known as “J & L Video” (the "Business"), along with all assets, including the name “J & L Video” from Video Bank of Canada Ltd. (the "vendor") pursuant to an agreement dated April 1, 1988 (the "agreement") for $138,750 payable as follows:

a. a deposit of $30,000;

b. $90,000 by payments of $5,000 per month commencing June 1, 1988 and ending November 30, 1989; and

c. $18,750, without interest, by equal monthly payments of $2,500 commencing December 15, 1989, to be secured by way of a promissory note;

The respondent's own evidence refutes this assumption. The contract was made between Video Bank of Canada and Lawrence Tramer as "vendor" and 378450 Alberta Ltd. and Leonard Hryciw as "purchaser".

I shall refer in chronological order to documents submitted in evidence by the parties. But before doing so it would perhaps be useful to identify the relationship between two corporations and two individuals whose names appear in the documents. Mr. Leonard J. Hryciw is a major shareholder, director and officer of 378450 Alberta Ltd. ("the numbered company") and Mr. Lawrence G. Tramer is a major shareholder, director and officer of Video Bank of Canada Inc. ("Video Bank”). These individuals testified on behalf of the appellant at hearing.

The copies of documents referred to are:

1. An asset purchase agreement dated December 22, 1987, made between Leonard Hryciw as "purchaser" who "offers and agrees to purchase upon the terms and conditions hereinafter set forth, the below described assets used in connection with the business known as J & L Video." The total purchase price is $95,000 and the agreement contains a schedule of payments. Provision is also made for assets and purchase price allocation. The offer was accepted by Video Bank on December 27, 1987. Mr. Tramer signed on behalf of Video Bank. This document was placed in evidence by the appellant.

2. The next document reads:

THIS agreement made effective this first day of April A.D. 1988.

BETWEEN:

VIDEO BANK OF CANADA and LAWRENCE TRAMER (hereinafter referred to as "the vendor") OF THE FIRST PART and 378450 ALBERTA LTD. and LEONARD HRYCIW (hereinafter referred to as “the purchaser) OF THE SECOND PART

The vendor hereby agrees to see and the Purchaser hereby agrees to purchase the business known as J & L VIDEO along with all assets, including the name J & L VIDEO, as at the first day of April, A.D. 1988, for the price of $138,750 payable as follows:

(a) A deposit of $30,000;

(b) $90,000 by payments of $5,000 per month commencing June 1, 1988 and ending November 30, 1989;

(c) $18,750, without interest, by equal monthly payments of $2,500 commencing December 15, 1989, to be secured by way of promissory note.

It is signed by Lawrence Tramer and Leonard Hryciw on their own behalf. It is also signed on behalf of Video Bank and the numbered company by Tramer and Hryciw respectively.

This document was placed in evidence on behalf of the respondent. It is, of course, the agreement described in paragraph 3(a) of the reply to the notice of appeal. The testimony is that it was intended to be in substitution for the asset purchase agreement of December 22, 1987.

3. Related to the agreement set out in the immediately preceding numbered paragraph are two documents. Both are dated April 8, 1988. One is addressed to "Leonard Hryciw (J & L Video)" and the other to "Lawrence Tramer (Video Bank)” and each is signed by "Ron". This is Ron Berube who, as stated at the outset of these reasons, appeared on behalf of the appellant at the hearing. The body of each document is the same. They read:

PURCHASE PRICE BREAKDOWN AGREEMENT ON THE PURCHASE OF J & L VIDEO LTD. BY LEONARD HRYCIW FROM

VIDEO BANK OF CANADA AND LAWRENCE TRAMER

Received the fax copy from Chatwin Belzil in regards to the sale price of J & L Video to Leonard Hryciw for the price of $138,750. The breakdown on the price as per agreement between you and Lawrence is as follows:

The inventory you both agree is valued at $58,500 (VHS tapes only). The balance of the purchase price of $80,250 is goodwill as per agreement by you and Lawrence. The terms of the sale are as per the fax copy from Chatwin Belzil.

This document was placed in evidence on behalf of the respondent.

4. A letter from Prowse & Chowne, solicitors for Leonard Hryciw, to Chatwin Belzil, solicitors for Lawrence Tramer, dated April 6, 1988, which pertains to the agreement of April 1, 1988. The letter makes no reference to the corporate appellant. The subject line is: "Re: Sale of Assets — J & L Video to Len Hryciw". This letter was placed in evidence on behalf of the respondent.

5. An agreement made June 1, 1988, between Lawrence Tramer as "the principal" and Video Bank as "the corporation” and Leonard Hryciw as "the purchaser" and the numbered company as "the operating corporation". The recitals read:

WHEREAS the principal is a major shareholder, director and officer of the corporation;

AND WHEREAS the corporation carries on a video cassette and recording machine sales and leasing distributorship under the firm name and style of J & L Video;

AND WHEREAS the principal has caused the corporation to enter into an agreement dated December 22, 1987, (the "agreement") with the purchaser for the purchase of the assets and goodwill of that business by the purchaser or nominee of that business carried on under the firm name and style of J & L Video which agreement is attached hereto as Schedule "A";

AND WHEREAS the purchaser is a major shareholder, director and officer of the operating corporation;

AND WHEREAS the operating corporation is the purchaser's nominee in the within transaction.

These recitals are followed by eight clauses, the contents of which need not be gone into for the purposes of these reasons. The copy of the agreement placed in evidence is unsigned. It is to be noted that it makes no reference to the corporate appellant. Also attached as Schedule "B" is an agreement between Lawrence Tramer as “the pledgee" and Leonard Hryciw as "the pledgor". The recitals read:

WHEREAS the pledgor is the owner of certain shares in 378450 Alberta Ltd., a corporation registered in the Province of Alberta and having its registered office as #224, 5008— 86 Street, Edmonton, Alberta (hereinafter called “the corporation");

AND WHEREAS the corporation is purchasing certain assets from the Video Bank of Canada Inc. of whom the pledgee is a principal;

AND WHEREAS as part of the asset purchase agreement aforesaid the pledgor has agreed to pledge certain of his shares in the corporation to the pledgee.

The terms of the agreement pertaining to the pledging of the shares follow. It is unnecessary to relate them for the purposes of these reasons. But again, it is to be noted that no reference is made therein to the corporate appellant. The copy of the agreement placed in evidence is signed only by Leonard Hryciw.

The documents described in this numbered paragraph were placed in evidence by the appellant.

6. A dispute arose between Video Bank and the Minister of National Revenue in which the sale of the assets to the numbered company was germane. This led to an appeal to this Court which was settled. The minutes of settlement are in evidence. They were signed on November 5, 1993. What is relevant therein to this appeal reads:

IN RE the Income Tax Act

BETWEEN:

VIDEO BANK OF CANADA INC. (appellant) and HER MAJESTY THE QUEEN (respondent)

MINUTES OF SETTLEMENT

4. The respondent agrees to reassess the appellant for the 1988, 1989 and 1990 taxation years on the following bases:

(d) the appellant’s 1990 taxation year shall be reassessed to remove from income the amount of $42,770.25 relating to the sale of assets to 378450 Alberta Ltd. that had previously been included into the appellant’s income for the year following the reassessments.

(e) the appellant’s 1989 taxation year shall be reassessed as follows to include into income all of the proceeds of the sale of assets to 378450 Alberta Ltd.

[The rest of the paragraph need not be reproduced.]

The minutes of settlement were placed in evidence on behalf of the respondent.

It will be seen from the foregoing that the only mention of the appellant is in the subject line of the message of April 8, 1988, to Leonard Hryciw and Lawrence Tramer from Ron Berube. Even in that context it does not speaK of J & L Video Ltd. acquiring anything. Rather it speaks of the purchase of J & L Video Ltd. by Leonard Hryciw from Video Bank and Lawrence Tramer. The message sent by Berube clearly has reference to the agreement of April 1, 1988, and it is perfectly clear on the face of that agreement who the parties to it are. Presumably the reference to "Ltd." was an error.

I emphasize that there is no evidence indicating what relationship, if any, existed between the appellant and the numbered company. One can speculate about that in an evidentiary vacuum, but this litigation cannot be properly resolved on that basis.

The appellant’s appeal regarding its 1990 taxation year is dismissed. The evidence at the hearing of this appeal having established that the basic assumption relied on by the Minister of National Revenue in reassessing in respect of the appellant’s 1989 taxation year is incorrect, the appeal is allowed and the reassessment is vacated.

Appeal allowed in part.