Ronald J Schuss, Peter v Ciccone, Mary L Ciccone v. Minister of National Revenue, [1983] CTC 2411, 83 DTC 354, [1983] DTC 350

John B Goetz:—This is an appeal by Ronald .J Schuss with respect to his 1977 taxation year whereby he was assessed on the basis that an investment made by him with Peter V Ciccone in the amount of $25,000 was deemed to be a non-qualified investment within the meaning of paragraph 146(1 )(g) of the Income Tax Act, SC 1970-71-72, chapter 63, as amended. The said amount of $25,000 was added to his income.

It was agreed at the outset of the hearing that the appeals of Peter V Ciccone (82-1456) and of Mary L Ciccone (82-1457) would be heard at the same time and on common evidence.

Peter Ciccone was married to the appellant Mary Ciccone and together gave a mortgage in the sum of $25,000 to Ronald J Schuss.

The issue to be determined is whether these mortgages constituted a qualified investment pursuant to the provisions of the Income Tax Act.

Facts

Marvin Storrow who described himself as a tax lawyer, first gave evidence stating that he had known Schuss since 1949. He had, in the month of May 1977, arranged for the purchase of a property known as Mortclair Apartments in the City of Vancouver. He introduced Schuss to his brother-in-law, Peter Ciccone.

Ronald Schuss gave evidence to the effect that he had been a licensed realtor since 1964 and became the owner of Dorset Realty Limited in 1977. He had a self-administered registered retirement savings plan with the Montreal Trust Company since 1970. At Mr Storrow’s suggestion, Schuss contacted Peter Ciccone in the amount of $25,000 which funds were advanced from Peter Ciccone’s and Marcy Ciccone’s self-administered registered retirement savings plans with the Co-Operative Trust Company of Canada (after they had transferred the funds from their registered retirement savings plans in the Canada Trust Company). In turn Schuss advanced to Peter Ciccone the sum of $25,000 from his self-administered registered retirement savings plan. Both mortgages were prepared by Mr Storrow’s law firm and executed on June 28, 1977 and were exactly the same in form and substance. Both were second mortgages. Peter Ciccone’s mortgage was secured by his equity in the Montclair Apartments and Schuss’ was secured by a second mortgage in a property owned by him at Delta, British Columbia.

The respondent filed a Flow Chart (hereinafter reproduced) which clearly illustrates the flow of funds and securities as between the three appellants. The funds loaned by Peter Ciccone and Mary Ciccone together total $25,000 and were merged into one mortgage.

Mrs Mary Ciccone gave evidence stating that she was satisfied with the way her husband handled her business affairs. In other words, she was the alter ego of Peter Ciccone and had no objections to the $25,000 mortgage to Mr Schuss being in her husband’s name.

The respondent, in his reply to the notice of appeal of Ronald J Schuss, States as follows:

1. He admits the following allegations of fact contained in the notice of appeal:

(a) prior to 1977 the Appellant was an annuitant under a trust governed by a

registered retirement savings plan, of which Montreal Trust was trustee;

(b) the Appellant was interested in purchasing an interest in the Montclair Apartments, 3375 Oak Street, Vancouver;

(c) Peter Ciccone was also interested in purchasing an interest in the Montclair Apartments;

(d) a loan of $25,000 at 10 per cent was made from the Appellant’s registered retirement savings plan to Peter Ciccone to enable Peter Ciccone to complete his portion of the purchase of the Montclair Apartments;

(e) the loan to Peter Ciccone was secured by a mortgage of Peter Ciccone’s equity in the Montclair Apartments;

(f) a loan of $25,000 was made to the Appellant to finance the Appellant’s purchase of an interest in the Montclair Apartments;

(g) the loan to the Appellant was secured by a second mortgage of a property owned by the Appellant and located at Delta, BC;

(h) in July 1977 conventional mortgage interest rates were 10% — 1072%;

(i) the Respondent reassessed the Appellant, adding $25,000 to the Appellant’s 1977 income as the cost of a non-qualified investment (mortgage) acquired in his registered retirement savings plan in 1977.

2. The Respondent does not admit any other allegation of fact or the reasons for appeal contained in the Notice of Appeal.

3. The $25,000 loan to the Appellant was made up as follows:

(a) $12,250 transferred by Peter Ciccone and $8,750 transferred by Mary Ciccone in June 1977 from trusts governed by registered retirement savings plans with Canada Trust as trustee to self-administered registered retirement savings plans with Co-operative Trust Company of Canada as Trustee; and

(b) $2,750 contributed by Peter Ciccone and $1,250 contributed by Mary Ciccone to their new plans at Co-operative Trust Company of Canada for the purpose of the loan.

4. The terms of the mortgages referred to in paragraphs 1(e) and (g) were identical with payments of interest only at a rate of 10% calculated and payable quarterly and providing the mortgagor with the right of repayment without notice or bonus.

5. In reassessing the Appellant for the 1977 taxation year, the Respondent assumed, inter alia, that the Appellant and Peter Ciccone did not deal at arm’s length.

6. The Respondent relies upon, inter alia:

(a) sections 146 and 251 of the Income Tax Act,

(b) regulation 4900 of the Income Tax Regulations.

7. He submits the mortgage of Peter Ciccone’s equity in the Montclair Apartments was not a qualified investment for a trust governed by a registered retirement savings plan, because the mortgagor, Peter Ciccone, was not a person with whom the Appellant dealt at arm’s length within the meaning of the restriction provided in Regulation 4900(1)(h).

8. He submits there is properly included in the Appellant’s income for the 1977 taxation year the amount added back pursuant to section 146(10) as the fair market value at the time it was acquired, of a non-qualified investment.

The respondent’s replies to notices of appeal of Peter Ciccone and Mary Ciccone were in similar form and the allegations contained in these replies covered the evidence adduced at the hearing.

Findings

All the appellants were annuitants under self-administered registered retirement savings plans. This they had in common. Schuss was an old friend of Mr Storrow and through Mr Storrow, attracted Peter Ciccone in the purchase of the Montclair Apartments. Mr Storrow appeared before me in the case of Selwyn Chamberlain et al v MNR, [1982] CTC 2772; 82 DTC 1781, where a like situation with respect to an exchange of funds from registered retirement savings plans between three law partners was set up in the same manner as in the appeals before me. In that case I found against the three appellants, represented by Mr Storrow, and relied basically on a decision of my learned colleague Michael Bonner, Esq, in G Sayers v MNR, [1981] CTC 2871; 81 DTC 791.

It is trite law to say that each case must be determined on its own facts. The facts of the appeals before me are so similar to those in the Chamber- lain and Sayers appeals that I feel bound by them.

It is clear from the relationship between the three appellants and Mr Storrow, their tax adviser, that the appellants were not acting at arm’s length in any sense of the word. The Ciccones had an RRSP with the Canada Trust Company but had the funds therefrom transferred to the Co-Operative Trust Company of Canada which they could administer themselves. Peter Ciccone, in his evidence, says that Mr Storrow told him about Schuss being interested in borrowing $25,000 in connection with the Montclair Apartments purchase. It was as the result of Mr Storrow’s introduction of Mr Schuss to Peter Ciccone that the foregoing events came about. The two mortgages in question, as mentioned earlier, were in identical terms where the interest rate at 10% was lower than the going interest rate on the open market. Peter Ciccone referred to this rate of interest as “a nice round number”, although 10 /2% was the going rate at the time. The terms of the twin mortgages were identical and beneficent to all of the appellants. They also has the following in common: first, the interest was less than the standard mortgage rate of interest; secondly, the payments were made quarterly; thirdly, either Schuss or Ciccone had the right to pay out the mortgage without notice or bonus; fourthly, both were second mortgages.

In other words, the three appellants acted in concert in a plan orchestrated by Mr Storrow. The only difference between the mortgages was the matter of the property securing the mortgages, the parties to the mortgages, and the borrower purportedly involved. What they, of course, all have in common is that the funds flowed from self-administered registered retirement savings plans. As I stated in the Chamberlain case, (supra), the appellants acted in concert “whereby they all obtained the flow of money on paper, one to the other in a circle . ..”. Both the Chamberlain and Sayers cases, (supra), set out the relevant sections of the Income Tax Act in detail and I need not repeat them here. I would quote directly from the Chamber- lain decision, (supra), at 2778 and 1787 respectively:

In the case at bar, we have a third party involved in an arrangement whereby three law partners through their RRSP’s of which they were annuitants, gave one to the other mortgages for the same amount and for the same terms. There was no flow of cash and the three partners’ interests were identical and inter-dependent one with the other. They were clearly acting in concert and were of one mind, as each had the same interest, the same responsibility and the same obligation one to the other.

Clearly, Schuss and the Ciccones were not dealing at arm’s length but had mutual obligations and constraints upon each other. From the facts of this case, it is obvious that Schuss was not dealing at arm’s length with the Ciccones or vice versa.

For the above reasons, all three appeals are dismissed.

Appeals dismissed.