Daniel A. Shefner Estate v. Minister of National Revenue, [1991] 2 CTC 2088, 91 DTC 333

Garon, T.C.J. [Orally]: —In the present case, the appellant appeals reassessments for the 1981 and 1982 taxation years. The issue in these appeals has to do with the deductibility of a payment in the sum of $443,000 made in 1981 to Ville d'Anjou by Daniel A. Shefner hereinafter call "Shefner". That payment represents the refund of a portion of the total compensation received by East End Development Corporation, a company in whose shareholding Shefner owned at the relevant times directly and indirectly a 33 /s interest. That compensation had been paid in consequence of the expropriation of certain lands owned by East End Development Corporation by Ville d'Anjou.

Only one witness, Mr. Leon Milner, testified at the hearing of this appeal. He has been a chartered accountant for 39 years. Mr. Milner has also been the accountant for Shefner and his companies since 1953. Shefner died on July 9, 1986. Mr. Milner stated that he had a good knowledge of Shefner's business affairs.

From Mr. Milner's testimony, it appears that Shefner owned at the material times, a substantial interest in a number of corporations, some of which were in the business of acquiring and selling lands from time to time.

On account of such interest, Shefner had been involved in corporations engaged in land trading activities over a substantial number of years. Mr. Milner also asserted that Shefner was also at times a general contractor hiring subtrades for the construction of buildings. He was also engaged in the steel warehouse business.

The evidence also showed that on one occasion, Shefner acquired directly a piece of land in St. Hubert in 1959 and sold it in 1969. He sustained a substantial loss on the sale of that property. The respondent on assessing Shefner at that time in respect of that sale, treated the loss as being an account of capital. On an appeal taken to the Tax Review Board from that assessment, it was decided that the taxpayer's appeal should be allowed. The judgment pronounced on the day of the hearing of the appeal is dated February 13, 1973. No written reasons were issued. That judgment of the Tax Review Board, in view of the nature of the written pleadings can only be on the basis that Shefner was a land trader when he disposed of that land in 1969.

It was also established that Shefner owned a 50 per cent interest or a larger stake in the shareholding of seven corporations. The corporations in question are:

Europe Realties Inc.

Shefner Corporation

D.A. Shefner & Co. Ltd.

Bar Dan Realties Inc.

Ariel Realties Inc.

Ascot Construction Ltd.

Twenty-Five Corporation.

Mr. Milner characterized the role of Shefner in these corporations by saying that the latter was the driving force behind all these corporations. It was a one- man show, added Mr. Milner.

It is apparent from the profit and loss statements filed by these corporations with their corporation income tax return for some of the taxation years that are material to this appeal that some of these corporations were heavily involved in land trading activities. In this connection, it is to be borne in mind that for the years 1975 to 1979, in the case of most companies, the corporate records in question were not available on account of their destruction by fire.

A quick examination of the financial statements of three of suchcorpora- tions showed that these corporations had a substantial inventory of land holdings and were involved in selling a large number of tracts of lands.

In the case of Europe Realties Inc., the profit and loss statements for the company's taxation years 1970, 1973 and 1974 show that the proceeds of lands sales amounted to $37,000, $37,000 and $70,000 respectively for these three years. On the other hand, for the taxation years 1980, 1981 and 1982, Europe Realties Inc. had no sales of lands but earned gross rental income in the amounts of $80,000 for each of the taxation years 1980 and 1981 and $90,000 for the 1982 taxation year.

As for D.A. Shefner & Co. Ltd. whose business is described in the T-2 return, “Steel Warehouse", the perusal of its profit and loss statements for its taxation years 1973, 1974, 1975, 1976, 1981 and 1982, showed that the company was involved in sales of lands in some of those years while in other years, for instance in 1981 and 1982 there were no sales. The company Bar Dan Realties Inc. had land dealings in its 1971 and 1980 taxation years.

Some of the above-named corporations had, during those years, only rental income at least in respect of the taxation years for which corporate records were available and filed with the court. I am referring in particular to Ariel Realties Inc., Ascot Construction Ltd. and to Twenty-Five Corporation. In all cases, for the 1980, 1981 and 1982 taxation years, these companies had, during those years, rental income only.

I shall now turn to the activities of East End Development Corporation hereinafter referred to as "East End" and to the role played therein by Shefner.

That company owned huge tracts of lands. It subdivided a portion of its land holdings. It sold a number of lots, some were in the subdivided portion and others were in the remaining unsubdivided portion. It is common ground that his company was a land trading company.

There were three individuals who each owned directly or indirectly through a company that was under the control of a particular shareholder, a third of the shares of the capital stock of East End. The three individual shareholders were Max Schuchmann, David Ben Milner and Daniel A. Shefner. The management of the day-to-day affairs of East End was carried on by Max Schuchmann. He was the president and the driving force behind this company.

A portion of the lands owned by East End was expropriated by Ville d'Anjou in 1966 or thereabouts. Ville d'Anjou made payments to East End in the amount of $841,156 as compensation for the expropriation of certain lands exclusive of buildings. It was later on established that East End had been overcompensated. The compensation was later reduced considerably by the Tribunal de l'expropriation.

Following changes in key people in the municipal administration of Ville d'Anjou, the latter demanded substantial refunds of the compensation payment that had been made to East End. That company could not satisfy the claims lodged by Ville d'Anjou since it had no assets at that time. Because of this situation, Ville d'Anjou pursued claims against the three above-named individuals and the companies through which they owned stock in East End. Faced with the threat of possible civil and criminal proceedings in respect of his share in the excess compensation money received by East End, Shefner decided that he would rather pay back a portion of the proceeds of compensation received by East End than be involved in Court proceedings.

The following extracts of the document entitled "Quittance" dated September 21, 1981 where Shefner is described as the party of the second part and Ville d'Anjou as the party of the first part, are quite clear about this.

Attendu que les prétentions de Ville d’Anjou sont à l'effet que les montants versés à la compagnie East End Development Corporation sont supérieurs à l'indemnité à laquelle cette compagnie aurait eu ou aura droit dans les quatre causes ci-mentionnées;

Attendu que la partie de deuxième part était ou a été actionnaire, ou avait des intérêts dans ladite compagnie East End Development Corporation au moment où lesdits montants ont été payés à la compagnie East End Development Corporation;

Attendu que si les prétentions de Ville d’Anjou étaient maintenues, en totalité ou en partie, relativement aux procédures judiciaires de revision et de fixation d'indemnités, Ville d’Anjou se devra de se pourvoir en répétition de l'indû contre ladite compagnie East End Development Corporation;

Attendu que Ville d’Anjou se devra également d'exercer des recours en répétition contre les actionnaires, officiers ou administrateurs de la compagnie, East End Development Corporation, y compris ledit Daniel Shefner, en vue de récupérer les argents versés en trop à la compagnie East End Development Corporation;

Attendu que Daniel Shefner est désireux de mettre fin, quant à lui, sa famille immédiate et les corporations dans lesquelles il a été, jusqu'à date, actionnaire ou administrateur, à toutes les réclamations et litiges de toute sorte avec Ville d'Anjou et que la partie de première part est prête moyennant ce que prévu aux présentes, à acquiescer au désir ainsi exprimé par la partie de deuxième part.

The same document "Quittance" or “Release” acknowledges receipt by Ville D'Anjou on the day the document was signed, that is September 21, 1981 of an amount of $443,000 paid by Shefner in relation to his own share in the excess compensation received by East End Development Corporation.

The "Quittance" referred to above shows why Shefner decided to work out a settlement with Ville d'Anjou. The other two individual shareholders chose not to effect the settlement with the result that civil proceedings were instituted by Ville d'Anjou in the Superior Court, District of Montreal, not only against East End but also against the two individual shareholders, Max Schuchmann and David Ben Milner and their respective companies, Doral Investment Corporation and Milner Inc. In this action, Ville d'Anjou claimed against the above-named defendants, $341,748.20 together with yearly interest at 5 per cent since December 4, 1967 and unspecified additional compensation provided by law. Ville d'Anjou was entirely successful in its action in the matter as appears from the judgment of Madame Justice Alice Desjardins, dated December 5, 1984. By agreement of counsel for both parties to the present case, the facts found by the judgment of the Superior Court were admitted for the purpose of these appeals.

Analysis

Counsel for the appellant in his notice of appeal and during argument put forward two basic propositions in support of the appellant's entitlement to a deduction of part or all of the amount of $443,000.

According to the first proposition, the appellant would be entitled to the full deductibility of the amount in question on the basis that Shefner made a business expense which resulted in a business loss in 1981 in refunding to Ville d'Anjou a portion of the compensation money received by East End.

Under the second proposition advanced by counsel for the appellant, the payment of $443,000 would be an eligible capital expenditure within the meaning of paragraph 14(5)(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and the deductibility of half of the amount in question would be spread over a number of years in accordance with paragraph 20(1) (b) of the Income Tax Act.

Counsel for the respondent advanced as his principal submission that Shefner was no longer in the business of dealing in lands and there was no source of income against which the loss represented by the payment of $443,000 to Ville d'Anjou could be deducted. He also contended that this disbursement had not been made by Shefner at the time for the purpose of earning income.

Dealing first with the respondent's main submission to the effect that Shefner was no longer in business in 1981 at the time that the payment of $443,000 was made to Ville d’Anjou, I find that on the whole of the evidence, that Shefner was a land trader at that time. It is true that he had not personally disposed of any land that he himself owned since he had sold, in 1969, the tracts of land about which there was litigation before the Tax Review Board resulting in a judgment in 1973. However, some of the seven above-mentioned corporations in which he played a key role were involved in the purchase and sale of lands during the years subsequent to the 1969 taxation year. In this connection, it has been recognized in many court decisions, in examining the whole course of a taxpayer's conduct for the purpose of determining whether or not he is engaged in trading that it is proper to take into account the activities of a taxpayer for that purpose through the medium of partnerships or corporations which are engaged in trading activities particularly, as is the case here, if his involvement in corporations is substantial and significant.

Quite apart from the role that Shefner played in some of those seven corporations referred to earlier, some of which were dealing in lands, Shefner's activities, by themselves, in East End, which was essentially a land trading company as indicated earlier, made Shefner a land trader. Madame Justice Desjardins, in the above judgment, felt justified to pierce the corporation veil. What is said in the following passages of that judgment about the role of Milner is on the evidence equally applicable to Shefner:

Monsieur Milner et Milner Inc. ne se sont pas occupé activement des affaires de East End Development Corporation. Monsieur Milner s'est fié à l'expertise de monsieur Schuchmann qui, à toutes fins pratiques, était l'âme dirigeante de East End Development Corporation.

Quant à eux cependant, le Tribunal conclut que monsieur Milner et Milner Inc. ayant été actionnaires de la compagnie East End Development Corporation, ayant signé une entente donnant pleins pouvoirs à monsieur Schuchmann, et ayant signé ou ratifié le contrat P-39, sont régis par les mêmes principes que ceux qui gouverne le sort de monsieur Schuchmann et Doral Investment.

Having concluded that Shefner was a land trader at the time of his payment of $443,000 to Ville d'Anjou in 1981, I must consider the nature and purpose of such a payment. There can be no doubt that the payment in question made by Shefner was dictated by business considerations. As appears from the "Quittance" or "Release", Shefner wanted to avoid long and protracted litigation and costs associated with such litigation in connection with a business deal entered into by East End in which he had a substantial interest.

His decision with the benefit of hindsight turned out to be right having regard to the outcome of the proceedings instituted by Ville d'Anjou against East End and the other two individual shareholders, Max Schuchmann and David Ben Milner and the companies controlled by these two individuals.

This payment was made to satisfy a legal obligation arising out of the receipt by East End of excess compensation as a result of the expropriation of the subject lands. It was therefore a payment in connection with a business deal relating to the land trading activities of Shefner and of East End.

From another angle, this payment by Shefner could be viewed as a reimbursement to Ville d'Anjou of a portion of the excess compensation received by East End for the refund of which excess payment, Shefner and the other two shareholders were personally liable. If the reverse situation would have occurred that is, if Ville d'Anjou had been legally bound to pay an additional amount as compensation to Shefner, Schuchmann and Milner despite an earlier agreement by the parties concerned on a smaller amount of compensation for the expropriated property, I have no doubt that such additional amount would have been taxable in the hands of Shefner in particular, because of his involvement in land trading activities.

I therefore conclude that on the whole of the evidence, Shefner made the payment of $443,000 in the course of his land trading activities and in consequence of his carrying on that type of business. It was one facet of a commercial transaction.

I am also of the view that the criterion that the payment must be made for the purpose of earning income as laid down in paragraph 18(1)(a) of the Income Tax Act, is satisfied here in the sense that this requirement must be understood in the light of the decision of President Thorson in the case of Imperial Oil Ltd. v. M.N.R., [1947] C.T.C. 353; 3 D.T.C. 1090. The following extract at page 373 (D.T.C. 1099-1100) is of particular interest here:

It is no answer to say that an item of expenditure is not deductible on the ground that it was made primarily to earn the income but primarily to satisfy a legal liability. This was the kind of argument that was expressly rejected by the High Court of Australia in the Herald and Weekly Times, Ltd. case, and it should Be rejected here. In a sense, all disbursements are made primarily to satisfy legal liabilities. The fact that a legal liability was being satisfied has, by itself, no bearing on the matter. It is necessary to look behind the payment and enquire whether the liability which made it necessary—and it makes no difference whether such liability was contractual or delictual—was incurred as part of the operation by which the taxpayer earned his income. Where income is earned from certain operations, as it was by the appellant from its marine operations, all the expenses wholly, exclusively and necessarily incidental to such operations must oe deducted as the total cost thereof in order that the amount of the profits or gains from such operations that are to be assessed may be computed. Such cost includes not only all the ordinary operations costs but also all moneys paid in discharge of the liabilities normally incurred in the operations.

The payment of $443,000, as I have indicated earlier was part and parcel of the land trading activities of Shefner.

For these reasons, I would allow the appeal with costs and refer the reassessments for the 1981 and 1982 taxation years, back to the respondent for reconsideration and reassessment on the basis that the payment of $443,000 represents a business expense giving rise to a business loss sustained by Shefner in the 1981 taxation year and is deductible in that year as provided by section 3 of the Act and other years to the extent that such non-capital loss may be carried over having regard inter alia to section 111 of the Income Tax Act.

Appeal allowed.