Donald Ransom v. Minister of National Revenue, [1982] CTC 2562, 82 DTC 1575

D E Taylor:—These appeals, heard in Winnipeg, Manitoba, on March 18th and 19th, 1982, are against income tax assessments for the years 1975 and 1976 in which the Minister of National Revenue added certain amounts to the taxable income of the appellant described as “unpaid amounts’’ — re loan from Don Ransom Livestock Ltd”. The Minister relied inter alia, upon subsections 15(2), 69(1), section 96, subsections 100(2), 251(1) and (2) of the Income Tax Act, RSC 1952, c 148, as amended by s 1 of c 63, SC 1970- 71-72 as it applied to the 1975 and 1976 taxation years.

The following information may be summarized from the notices of appeal:

— The appellant is a farmer, involved in cattle raising and cattle buying, residing near Boissevain, Manitoba.

— The appellant and his wife Barbara Ransom (“Barbara”) are the sole beneficial owners of the common stock of Don Ransom Livestock Ltd (“Livestock”) and Don Ransom Holdings Ltd (“Holdings”) with Barbara owning 25% of the common stock of each corporation.

— The Tennessee Game Farm (“TGF”) is a commercial version of a city zoo, located on 150 acres of land in close proximity to Nashville, Tennessee, in the United States of America.

— Lloyd Tytlandsvik (“Lloyd”), the appellant’s father-in-law, and Leonard Peterson (“Len”), the appellant’s brother-in-law, along with their spouses, have since late 1971 been active in the management and operation of the TGF.

— For financial reasons, in 1972, the appellant was asked to invest some funds in the TGF.

— The TGF operates with a fiscal year terminating on December 31st of each year.

— In its 1972 to 1976 fiscal years the TGF incurred operating losses after depreciation as follows:

1972	$37,985.64
1973	49,778.83
1974	38,151.47
1975	38,124.50
1976	25,904.59

— The portion of the operating losses of the TGF deductible by the appellant in each of the 1972 to 1976 taxation years of the appellant, in accordance with paragraph 96(1 )(g) of the Income Tax Act, RSC 1952, c 148, as amended by SC 1970-71-72 c 63 (the “Act”) is:

1972	$ 7,597.13
1973	9,955.77
1974	11,445.44
1975	11,437.35
1976	7,771.38

— A substantial portion of the capital contributions made by the appellant to the TGF between November 1st, 1972 and December 31, 1976 were obtained by the appellant by borrowing the funds from Livestock.

— The fiscal year of Livestock, at all material times, terminated at the end of February in each year.

— Not having cash to repay Livestock, the appellant in February of 1977 decided to and did dispose of his interest in the TGF to Livestock for the amount of $103,000.

— The financial statements of Livestock indicated a “Purchase of loans receivable

— $103,000” and under the notes to the financial statement “Note #2 LOANS RECEIVABLE. The loans are receivable from the Tennessee Game Farm and bear no interest”.

— During 1977 the appellant (attempted) to convince Lloyd and Len to incorporate the TGF so as to achieve limited liability.

— TGF was not incorporated, whereupon the appellant incorporated Holdings and Livestock disposed of its partnership interest in TGF to Holdings by resolu- tion of the directors dated February 28th, 1978, for the amount of $102,999.80 plus one Class B share of Holdings with a subscription amount of twenty cents. By a resolution of its directors of even date, Holdings evidenced the aforementioned purchase.

— The drawing account of the appellant with Livestock, at the material times, had balances as follows:

Dec 31, 1974	$ 8,778.77 Cr.
Feb 28, 1975	60,583.55 Dr.
Dec 31, 1975	44,932.05 Dr.
Feb 28, 1976	45,590.05 Dr.
Dec 31, 1976	70,488.23 Dr.
Feb 28, 1977	29,876.06 Cr.
Dec 31, 1977	10,706.30 Cr.
Feb 28, 1978	16,396.60 Cr.
Dec 31, 1978	9,034.25 Cr.
Feb 28, 1979	9,012.85 Cr.
Dec 31, 1979	5,424.98 Cr.

Based upon the above, the appellant’s position was outlined:

— The unprofitable start up period for the TGF was extended due to the delay in the completion of the four lane access route and the requisite interchange, but satisfied that TGF would become profitable and also that its property would become more valuable, the appellant agreed to become a partner with a 20% interest in TGF.

— The appellant, Lloyd and Len recognized that the appellant might be expected to contribute more capital as time went on and it was agreed that when and if the appellant’s capital contribution got around $100,000 his interest in the partnership would be increased to 30%.

— Between November 1, 1972 and December 31, 1976, the appellant advanced a total of $104,660 US ($104,660 Cdn plus exchanges of $210.55) to the TGF, of which $96,660 US ($96,660 Cdn plus exchange of $194.46; $96,854.46 Cdn in total) was considered by the partners as the capital contribution of the appellant for his partnership interest which in 1974 was increased to 30% in accordance with the preceding paragraph.

— The appellant with Lloyd and Len did form a partnership pursuant to the oral agreement between themselves.

— The appellant did pay a total sum of $96,854.46 Cdn as a capital contribution to the TGF partnership.

— The appellant did transfer his TGF partnership to Livestock in February of 1977 for the amount of $103,000 Cdn, thus incurring a taxable capital gain for his 1977 taxation year in the amount of $24,103.94;

— The appellant did incur losses properly deductible, in accordance with paragraph 96(1)(g) and subsection 3(d) of the Act, in his 1972 to 1976 taxation years as follows:

1972	$ 7,597.13
1973	9,955.77
1974	11,445.44
1975	11,437.35
1976	7,771.38

In reply, the Minister assumed:

— Livestock and the appellant were not persons dealing with each other at arm’s length;

— Livestock and Holdings were not persons dealing with each other at arm’s length;

— Bona fide arrangements were not made at the time the loans were made for repayment thereof;

— The appellant was not in partnership with his father-in-law or brother-in-law in the operation of TGF during the 1972 - 1976 taxation years;

— The appellant did not share in the losses or profits generated by TGF during the period 1972 - 1976;

— During all material times the appellant was not actively engaged in the operation of TGF

And the Minister contended:

— There was no assignment by the appellant of a partnership interest in TGF to Livestock on February 27, 1977;

— The appellant is not entitled to deduct a share of the losses incurred by TGF during the years 1972 - 1976 (if such losses were incurred, which is specifically denied).

— In the alternative the respondent submits that if the appellant did assign his interest in the partnership of TGF (which is specifically denied), the value of the said interest was not $103,000.

Evidence

The evidence presented by counsel for the appellant in support of the position outlined was full and detailed. The appellant himself, Mr Lloyd Ty- tlandsvik (noted earlier in connection with TGF), Mr Stuart Jacques (presently retired but during the relevant period engaged in office and accounting work for the appellant) and Mr Marvin Anthony Maes, a real estate appraiser from the State of Tennessee, all testified at the hearing. The informality of the arrangements between the partners in TGF was stressed by both the appellant and Mr Tytlandsvik but they both assured the Board that the fundamentals of a partnership arrangement had always been understood between them. There was no written documentation provided by the appellant to support the existence of such a partnership. On the other hand, certain documentation provided by counsel for the Minister during cross-examination relevant to the TGF operation, indicated only the investment of Mr Tytlandsvik and that of Mr Leonard Petersen — nothing at all to connect the appellant until considerably subsequent to the taxation years at issue in these appeals. Mr Tytlandsvik dealt at length with the value of the animals which he had acquired, and estimated that they would be worth some $100,000.

Mr Jacques’ testimony dealt with the elementary nature of the record keeping for the appellant’s businesses, and the explanations provided in the books for some of the “loan repayment” transactions in question might be inaccurate or incomplete. Mr Maes presented a lengthy report which was prepared in February 1982. It was complete with explanations, photographs, etc, of the TGF lands, other assets and its operation. Since the remainder of this decision will show that I regarded that evidence as Critical to the case, I will quote certain relevant passages therefrom:

VALUE IN USE SUMMARY

It is now necessary to estimate the Value in Use of the improvements as of February 28, 1977, and February 28, 1978. This has been done by adjusting the current estimate of reproduction cost backward using construction cost indexes provided by the Marshall Valuation Service, subtracting an estimate of accrued depreciation and adding a separate value estimate of the log residence based on judgment for the two alternative dates as follows:

It is now necessary to estimate the Market Value of the improvements as of February 28, 1977 and February 28, 1978. This has been done by adjusting the current estimate of reproduction cost backward using construction cost indexes provided by the Marshall Valuation Service, subtracting an estimate of accrued depreciation and adding a separate value estimate of the log residence based on judgment for the two alternative dates as follows:

Correlation and Final Value Estimate

Correlation is a reconciliation process whereby the appraiser evaluates and chooses among the alternative value indications, a single answer for the final value estimate.

As this appraisal involved the estimating of the value of the subject property as of two different dates utilizing essentially the same method no correlation of value indications derived from various approaches is required.

The real estate market lacks the pricing precision which the securities markets enjoy and consequently the value of any property at a particular point in time is always difficult to estimate. In this case the estimates span almost five years and involve a very unusual and unique property. Consequently, the value estimates should be used with care and consideration of assumptions and methodology employed herein.

Argument

Counsel for the appellant:

The first question, it is submitted . . ., is whether or not the Tennessee Game Farm was a business as opposed to a hobby or a family rest haven, or any other personal pursuit of Mr Tytlandsvik and members of his family.

The second question, and I am trying to put these in sort of logical order, although they keep overlapping and one depends on the other in part, was whether or not Donald Ransom was a partner or a creditor of the TGF, specifically for purposes of this appeal, in 1975 and 1976.

The issue that follows from that question is essentially whether or not Mr Ransom would be entitled to the proportionate deduction under para 96(1 )(f) of the Income Tax Act.

The next question Mr Chairman, the Appellant would submit, is whether or not whatever interest Mr Ransom had in the TGF was assigned or transferred to Livestock, or to Don Ransom Livestock Ltd., in February of 1977.

. . . if the transfer or assignment was successfully completed, then the next question posed is what was the value of that interest that was transferred and to the extent that it has a value, and presumably that amount was a repayment of the outstanding shareholders’ loan by the end of the 1977 fiscal year of Don Ransom Livestock Ltd.

_.. the evidence shows that some $104,000 was paid by Donald Ransom to Mr Lloyd Tytlandsvik and the TGF.

. . . that $104,000 according to the evidence of Mr Ransom, is a substantial portion of his net worth. The tax returns of Mr Ransom filed in evidence, it is submitted, would go a distance to demonstrating, based on a review of those returns, to show what the investment income was and so on, to illustrate that his statement is, generally speaking, supported by those returns.

. . . Mr Tytlandsvik and Mr Ransom both testified that at the material time, late 1976, early 1977, Mr Ransom was a 30 percent partner in the TGF.

. .. they considered themselves to be partners.

. . . (From) The issue of the valuation in general . . . it is reasonably obvious. . . that the appellant feels they give (support) to his views that at the time the interest was transferred it did have value, albeit that his assumption as to the determination or the value has in fact, by the appellant’s own evidence, been established to be less than that which he thought it was, subject to any other components of value and to the basic fact Mr Chairman, it is submitted that when two parties, albeit not at arm’s length, enter into a transaction that is bona fide, and in these circumstances it is submitted that bona fide means no more than that they actually intended to transfer the interest and that they sincerely believed at that time that it had a value of the nature that they ascribed to it. When this interest was transferred on this bona fide basis they have, in the first instance, a right, it is submitted. . . to have that transaction dealt with as the parties have agreed.

Counsel for the respondent:

If I could make a few preliminary comments, the Minister of National Revenue in this particular case has added to Mr Ransom’s income in the 1975 and 1976 taxation years, the amounts of $44,932.05 and $25,516.18 respectively, as unpaid amounts re loan from Donald Ransom Livestock Ltd, and which in the course of my argument Mr Chairman, I will be referring to as “Livestock”, if that is acceptable.

There is no issue between the parties that the loans, if they were not repaid, were otherwise correct. There is no issue . . . between the parties that the figures are correct, and the issue before you today is whether an entry on the books of Livestock which later showed up in the financial statements crediting the shareholders’ loan account with the amount of $103,000 is, in effect, the repayment of a loan, thus satisfying the provisions of section 15(2) of the Income Tax Act.

The appellant here takes the position that there was a repayment, and as I understand his argument, he takes this position on the basis that there was a partnership between Donald Ransom, Lloyd Tytlandsvik, and Len Peterson in the opera tion of the Tennessee Game Farm; that that partnership interest was assigned to Livestock and that it had a value of some $103,000 and as I now understand his argument, perhaps that figure could be reduced to $70,000.

In the alternative, if I understand my friend’s position, he puts the argument forth that if it is not a partnership interest and Don Ransom is not a partner, then there has, nonetheless, still been a repayment of the loan within the provisions of section 15(2) by the assignment of what, I assume he is saying, is an account receivable from TGF to Lloyd Tytlandsvik and that satisfied the provisions of section 15(2).

It is the position of the Minister of National Revenue that no partnership existed between Don Ransom and his father-in-law and his brother-in-law in the operation of TGF. It will be the position of the Minister that there was no partnership. . . .

The second position of the Minister of National Revenue is that if a partnership existed, and which is specifically denied, that the value of that partnership interest does not equal $103,000 and that, in fact, the value of that partnership interest would have a negligible value.

.. . . the parties dealt with the public not as a partnership. They never purported to be a partnership.

(In Cornforth v The Queen, [1982] CTC 45; 82 DTC 6058), Mr Justice Cattanach at pages 6066 and 55 respectively, goes on and deals with the facts of the case and makes the conclusion that there was no partnership. . . . about the bottom of the page (he) says:

I am not satisfied on a consideration of all of the evidence that it was the intention of the plaintiff and his wife to enter into a partnership in the legal sense but on the contrary the natural and preponderant inference from the evidence is that no such intention was present to their minds.

I suggest ... that there was no such intention present in their minds. And I suggest that there was no common intention among the partners and the witnesses you had before you today, to create a legal partnership until, at the very earliest, 1979, after Mr Ransom’s tax problems arose in 1974.

I would ask you to consider if in fact Livestock was transferred a partnership interest, and in my view it was not, to consider the value of what it got. It got the right to share in profits. The TGF was not getting any profits during that period; it did not have profits from 1971. That, I submit, was not too much of a value. There has been no business valuation approach taken of the TGF, but the financial statements are before you and it was suffering substantial losses.

It then has another right Mr Chairman, upon dissolution Livestock would get its proportionate share of the assets which it can’t call for. Lloyd Tytlandsvik and Len Peterson could run that partnership for a very long time and Livestock could do nothing about it. Couldn’t demand books, it couldn't demand accounts.

But, when there is a dissolution Livestock does have a right to share in the assets to a certain extent.

The question then Mr Chairman, becomes, what is the value of those assets? Mr Chairman, the evidence of the expert then becomes relevant. The expert has given us two approches; he has given us the market approach. Market approach being, if hey had to go out and sell it on the market to anybody else in 1977, anybody who specifically wanted to buy a game farm, and I think, and I hope I am reciting the evidence correctly, Mr Maes said buying the game farm in 1977 was like shooting craps. But, if somebody wanted to go out there and buy that game farm just for the land and the buildings, and it is important to remember that this is what Mr Ransom told us that he was looking at, the value of that land; that in 1977 if that is what they wanted, if they had to sell it on dissolution they would get $145,000 for the land and buildings. If we take $145,000 and we assume that the value of those animals was $100,000 and I submit to you . . . that the value would be somewhat less than $100,000 because Mr Tytlandsvik gave us the financial — his listing of the animals and their value for 1977 and 1978, and he did say that it would be less in 1976, I admit we don’t know how much less.

So, we come up with a figure of roughly $245,000 from which we have to deduct the bank loan of $182,000 ... (and a separate) $8,000 loan that Livestock had made, and we come down to a very low figure ... somewhere in the area of $16,000 or $17,000 (for the appellant’s interest).

Mr Maes then took another approach. He called it current value and he defined current value as something dependent upon the productivity of the asset and its continuing use.

Findings

While the assessments in question dealt with a “loan”, it was the sole thrust of the efforts of counsel for the appellant to deal with the amount at issue as a “partnership” interest. Counsel in so doing properly noted the major elements which would require proof in order to substantiate the appellant’s claim — that TGF was in fact a “business”; that TGF was operated as a partnership; that the appellant was one of the partners in TGF; that he had transferred his partnership interest in TGF to Livestock; and that the interest so transferred had a value at the relevant time equivalent to or greater than his indebtedness to Livestock. I have already noted that the concentration of this decision would be on the value of that which was transferred to Livestock. In order for the appellant to support the “business” assertion of TGF, it would be necessary that he demonstrate that the conditions outlined for any deduction in Moldowan v The Queen, [1977] CTC 310; 77 DTC 5213, were fulfilled. The evidence to support such a position is slim indeed.

With regard to the “partnership” aspect, again the application of relevant jurisprudence to the evidence in this case would leave that point in considerable jeopardy. Regarding any “transfer” of interest, the documentation if anything would point the other way. It is not beyond reason that a determination on any or all of these points would go against the appellant but, in my view, no such final determination by the Board is required. Assuming that TGF was a business operation, that indeed the appellant held a valid claim to a partnership interest and that such a partnership interest was transferred, that interest must have had a value to the extent of the amounts at issue at the relevant dates, in order that the appellant’s case be upheld. The qualifications in Mr Maes’ report (noted earlier) are understandable, and I would not expect real estate valuation (or business valuation) to always have the precision of some other valuations such as listed securities. That is particularly true when the valuations are prepared many years after the fact and under very different economic circumstances. However, I am satisfied that only a speculator hoping for enormous potential profits from a visibly high risk venture would have entertained thoughts of acquiring TGF as a going concern in the years in question. In my mind, it is questionable that as a going concern it had any value at all, since its invested capital had largely deteriorated as a result of continuing and substantial losses. There is no indication other than the subjective and optimistic hopes of the participants that the venture held commercial aspects which a disinterested and knowledgeable investor would find attractive. The “Value in Use” amounts of some $300,000 and $325,000 for 1977 and 1978 (supra) as suggested by Mr Maes must be rejected.

Turning to the alternative method suggested by Mr Maes, I would refer to the comments made by counsel for the respondent in argument — taking into account the relevant bank loans (which have not been disputed), there is little residual equity evident in the assets themselves. I have no doubt that some of the animals would have had sale value. However, the estimate of Mr Tytlandsvik himself (some $100,000) was based to a large extent on the utilization of the animals as breeding stock for TGF, and it might be a generous assessment of their worth in the “break-up” of the operation. The evidence and testimony of Mr Maes, while professionally and competently provided, do not adequately augment the other testimony and fulfill the task before the appellant. Mr Ransom’s proposition that he had a 30% interest in TGF and that such interest was worth about $103,000, would mean that the total TGF operation had net assets of about $325,000. The evidence to support that conclusion has not been made available at this hearing. Whatever may have been the business or legal arrangements between TGF and the appellant, and whatever may be contended as the repayment of loan arrangements between the appellant and Livestock, the evidence and testimony do not support a conclusion that a 30% share of TGF could be valued at an amount equivalent to or greater than that loan balance at the times critical to these appeals.

Decision

The appeals are dismissed.

Appeal dismissed.