Alfred Rosene v. Minister of National Revenue, [1982] CTC 2600, 82 DTC 1620

John B Goetz:—This is an appeal with respect to the appellant’s 1974 taxation year.

The issue before me is to determine who held the beneficial ownership of certain farmland.

Facts

At all material times the various titles to the farmland involved were in the name of the appellant. The said farmland (one quarter) was acquired from the appellant’s father prior to October 1962 and the other seven quarters were purchased from Boyd Benjamin Gray on June 6, 1962. In October 1962 the appellant incorporated Jubilee Services of Camrose Ltd (hereinafter referred to as “Jubilee”) for the purpose of operating a service station at Camrose. Out of 21 shares, 20 shares of Jubilee were held by the appellant and one was held in his wife’s name. The farming operation was a mixed farming operation and the appellant says that he attended at the farm on weekends but had a hired hand who worked full time. In 1964 he moved on the farmland for three years with his family. In 1966 the appellant obtained a Farm Credit Corporation mortgage for improvements on the farm residence. In late 1968 or early 1969 the appellant moved to Red Deer, Alberta, and started a local car wash business. To start his business he obtained an Industrial Development Bank (“IDB”) loan in the sum of $110,000 with a partner, Gordon Hilland, whom he later bought out.

The appellant explained that he incorporated Jubilee on the advice of his chartered accountants and starting in 1963, filed tax returns in the name of Jubilee. In the financial statements attached to the return for 1963 was the chartered accountants’ note that the operations for the year resulted in a net loss of $12,820.40. There was a loss on farm operations of $13,210.45 and a profit on garage operations of $390.05, after providing for administrative salaries of $3,140. The balance sheet for Jubilee Services of Camrose Ltd shows as a liability: “Investment in Jubilee Farm $10,530.10”. Attached to the said balance sheet was a balance sheet for “JUBILEE FARM OPERATED BY JUBILEE SERVICE OF CAMROSE LTD”. This balance sheet as at October 31, 1963, showed the following fixed assets:

A statement of operations attached to the return showed a net loss of $13,210.45. Also attached to this return was a T-2 information sheet for the year ended October 31, 1963, which reads:

Jubilee Service of Camrose Ltd

Reconciliation of Net Income to Taxable Income

In the corporation tax return of Jubilee for 1964 the operations of the service station and farm were accounted for in separate balance sheets and attached thereto is a depreciation schedule including land, buildings and equipment for the farm and for the garage. In the Jubilee tax returns, all the profits and losses of the farm are shown in the company books, the appellant signed all these tax returns and stated that he would tell the accountant everything he knew about the business and explain the invoices, etc. The appellant stated that his wife (who had some experience in accounting) did what he called “box accounting” and relevant invoices, bills and payments, etc were put in separate boxes for the farm operation as opposed to the service station or the car wash.

In 1971 the appellant changed accountants as he found the first firm “too expensive” and hired a Mr Loren Blain, APA, who continued to complete Jubilee’s returns until 1974 when the company was wound up.

In the balance sheet of Jubilee for the taxation year 1963, there is an item referred to as:

Deferred Liabilities

Loans payable — shareholders $15,686.97

The appellant cannot explain this item. Tax notices went directly to the appellant in that at all relevant times the property was in his name. As opposed to that, all liabilities were paid by cheque from Jubilee. At the hearing, the appellant was specifically asked if Jubilee had its own cheques and strangely, the appellant stated: “I don’t remember”. No cheques were filed as the appellant stated he could not locate them, although he did file tax returns throughout the years, electricity bills and all other documents relevant to the operation of the service station, car wash and farm.

Counsel for the appellant argued quite strongly that in spite of the fact that all expenses of the farm were paid by Jubilee, beneficial ownership as well as legal title could only be construed as being that of the appellant. The respondent had admitted legal ownership but claimed that as Jubilee paid all expenses to taxes, insurance, operating expenses, etc the beneficial ownership of the farm rested in Jubilee. A perusal of any of the financial statements attached to the appellant’s tax returns would support this.

From 1964 onward, the land and buildings of the farm are in the financial statements of Jubilee. I think there was a breakdown in the communication between the appellant, his accountants and his lawyer who worked with the accountants in setting up Jubilee in the first instance. There is no documentation showing any transfer of the land to Jubilee or any declaration that it had acquired a beneficial interest. However, all of the financial statements prepared by the accountants, on information provided to them by the appellant, seem to point in only one direction, namely, that Jubilee had acquired beneficial ownership of the farmland.

The appellant treated the farm as a business and states that in 1972 he decided to sell the farm and listed it, together with the car wash, with a real estate agent. The car wash was sold in 1973 for $160,000 which paid out the farm mortgage. On January 16, 1974, an acceptance to an offer to purchase the farm for $115,000 was signed by Rosene. It was at this point that I was not impressed with Mr Blain in that he attempted to amend the 1974 balance sheet by taking the land sale out of the assets of the company. The reason he gave for this was that he felt that the farm sale proceeds were the personal property of Rosene. They were not reflected in Mr Rosene’s tax return because he felt that there was no capital gain and that could be treated as a tax-free dividend. When asked whether there was a capital surplus in 1971, Mr Rosene had to, of course, answer “no”. Consequently, there could not possibly be a tax-free dividend under subsection 83(2) of the Act. He regarded the company paying all the expenses in the following words: “I decided if I treated the expenses as Rosene’s rent, it would balance”.

The respondent called Alex Peck, a chartered accountant, who examined the tax returns of Jubilee and frankly noted that the IDB mortgage liability was not shown. The balance sheet in 1970 was never reflected anywhere in the financial statements. In 1963 there were two separate balance sheets prepared for Jubilee, one for the garage and one for Jubilee Farm. In 1974 two balance sheets were also prepared but the words “Operated By” were not used. From 1964 until 1974, he (Mr Peck) stated that anyone looking at the balance sheets would conclude that the farmlands were corporate assets.

Findings

The farmland and buildings were shown as assets on Jubilee’s balance sheets from 1963 to 1974 inclusive. The farm mortgage was held by Jubilee as one of its assets in that it continued to make the payments thereunder and they were claimed as deductions. Jubilee took capital cost allowance on the farmhouse which was built on the farmland in 1960, as well as on other farm buildings. Jubilee paid all the interest, insurance and taxes and deducted them as expenses in each year. The accountant Blain put the sale of the land in 1974 through the company’s books and not only were mortgages shown as liabilities throughout the financial statements, but the discharge of the mortgage in 1974 on the sale of the land was shown as a debit entry on the company’s financial statements. There were also entries for the gain on the sale and for recapture of depreciation. I find that the inclusion of the farm business and the sale of the land as an asset of Jubilee and the dealings throughout the 12 years after acquisition of the farmland, as it appeared to be the property of Jubilee, are more consistent with the interpretation of the financial statements that Jubilee had the beneficial ownership of the land. Mr Peck said that any accountant perusing the financial statements after 1964 could draw but one conclusion, namely, that the land was owned by Jubilee. The fact that the words “Operated By” on the heading of Jubilee Farm statements in 1963 and 1964 was obviously rectified by the chartered accountant at that time showed an amalgamation of the two businesses on the page entitled T2 Information. From 1963 on Jubilee showed both the losses and profits from the farming business and the garage business and, by paying the expenses related thereto, could deduct same from income. In other words, the farm business and the garage business were all dealt with under the aegis of Jubilee Services of Camrose Ltd. Further, from 1964 on, the farmlands were included in Jubilee’s returns on the depreciation schedule.

Mr Rosene exercised complete control over Jubilee and likewise, of course, the farm business. As all too often happens in a situation such as this, the individual fails to appreciate that once having set up a company such as Jubilee, his dealing with a separate legal entity is quite manifest from an examination of the financial statements from the outset. After Jubilee was incorporated, part of Jubilee’s business was that of farming, albeit that the appellant and his family lived on the farmland for three years. This conclusion is further demonstrated by the fact that Jubilee, after the sale of the farmland in 1974, was wound up. The appellant has convinced me that either as legal owner of the land or as president of the company and major shareholder thereof, in dealing with the farmland through Jubilee, he had created a constructive trust in favour of Jubilee. There are certain liabilities to shareholders in some of the financial statements that went completely unexplained. I can only assume that they related to the farmland as being acquired by Jubilee to have the beneficial ownership and to operate same under the canopy of a corporation.

For the above reasons, I dismiss the appeal.

Appeal dismissed.