Roth Corporation v. Minister of National Revenue, [1977] CTC 2198, 77 DTC 163

Delmer E Taylor:—This is an appeal from an income tax assessment for the year 1970. The matter at issue is the nature of the loss of $21,498.24 resulting from a transaction involving real estate in the State of Israel.

The appellant’s position, as stated in the Notice of Appeal, is that during the course of the 1968 taxation year it purchased a parcel of land situated in the resort area of Natanya, Israel, for a total price of $41,400 with a view to holding the said parcel of land and reselling it at a profit. The appellant contends that it provided the initial payment of $21,498.24 in its 1969 fiscal year, and after holding the land for a period of time with the hope that the Middle East political situation would be restored to normal, and after many efforts to salvage the original investment, the said property was sold in the course of the 1970 taxation year, thereby incurring a trading loss of $21,498.24 from the said transaction. The appellant relies, inter alia, on paragraphs 139(1 )(e) and 3(a) of the Income Tax Act, RSC 1952, c 148, as amended.

The respondent contends that, no satisfactory proof having been offered of the acquisition or sale of land, no deduction can be allowed; that, in view of the present and past operations and type of business of the appellant, this isolated transaction cannot be considered as an adventure in the nature of trade; and that any payment, if made, was on account of capital and any loss suffered on such an investment was not deductible. Alternatively, the respondent submits that, even if the loss was of deductible nature which he specifically denies, it was incurred prior to April 30, 1970, and as such was not deductible in 1970 but in 1969. The respondent relies, inter alia, on section 3, paragraphs 12(1)(a), 12(1)(b) and 139(1)(e) of the Income Tax Act, RSC 1952, c 148, as amended.

The appellant, hereinafter referred to as the “Company”, is a corporation having its head office and principal place of business in Montreal in the Province of Quebec. Evidence for the Company was given by the president, Mr Itzhak Roth, and by Mr Martin Segal, auditor for the Company. The following documents filed with the Board by the witnesses are in three different languages, and the language of each document is shown in brackets:

A-1—Document re Agreement (Hebrew)

A-2—Deed of Sale (Hebrew)

A-3—Translation of aforesaid document (French)

A-4—Registration certificates (Hebrew)

A-5—Photocopy of cheque re Bank of Montreal (English) A-6—Pictorial map of Natanya (English)

A-7—Copy of a letter dated January 7, 1969, from Roth Corporation to Mr M Kurz (English)

A-8—Copy of a letter dated January 14, 1969, from M Kurz to Roth Corporation (English)

A-9—Copy of a letter dated January 21, 1969, from Roth Corporation to Mr Kurz (English)

A-10—Copy of a letter dated January 28, 1969, from Mosze Kurz to Roth Corporation (English)

A-11—Deed of cancellation of registration of aforementioned contract of sale dated April 8, 1970 (Hebrew)

A-12—Financial statement re: Balance Sheet, Statement of Profit and Loss, and Statement of Earned Surplus for the taxation year 1969 re Roth Corporation (English)

A-13—Amended Balance Sheet for taxation year 1969 as at April 30, 1969, re Roth Corporation (English)

The Board accepts from the evidence that the Company was engaged in the business of buying, importing and selling chemicals and that the President, Mr Roth, travelled extensively, acting for the Company in these endeavours. It was during one such business trip in 1968 that this particular real estate transaction commenced.

With respect to Exhibits A-1 to A-13, the Board notes that, although these were in many instances photostatic copies and the interpretation of the Hebrew documents was provided at the hearing by the witness Mr Roth, there was no serious objection raised by the respondent regarding either situation. Certain of these documents are reproduced in their entirety hereunder since they appear to the Board to be particularly important to an understanding of the matter.

Le contrat a été fait le 15 décembre 1968 entre

Moshe Krutz (vendeur) demeurant à la rue Samuel Hanatziv No. 6 à Natania (Israël) et

Ruth Corporchin (acheteur) dont ses affaires sont dirigées par M. Roth Isaac passeport No. 435895—8000, Dante Ave.

Le vendeur est le propriétaire du terrain 8269—lot 39—demeurant à la rue Samuel Hanatziv No. 6 à Natania.

La plus grande partie du terrain est située sur le côté Nord Est Ouest. Cette partie est libre pour la vente. Le vendeur veut vendre 500 mètres du lot du terrain.

D’un commun accord, les deux parties ont signé ce qui suit:

Obligations des deux parties:

1. Le vendeur est obligé de se présenter au Bureau des signatures des contrats (Ministère de la Justice) pour signer tout les papiers administratifs nécessaires pour vendre 500 mètres du lot de son terrain (lot 39) du terrain 8269 qui est libre de tout prêt hypothécaire ou tout autre impôt.

L’acheteur, de son côté est obligé de signer les documents qu’on lui présente pour l’achat du terrain, et l’arrangement du paiement.

2. L’acheteur doit signer un papier attestant comme quoi il a inspecté le terrain et qu'il est d’accord de l’acheter.

3. Tous les impôts, les taxes municipales et gouvernementales qui correspondent au terrain vendu doivent être payés à compter de la date de la signature par l’acheteur.

4. L’impôt de vente devra être payé par l’acheteur au vendeur qui lui se chargera de le verser au gouvernement. Il y a un deuxième impôt (SHEVA) que le vendeur doit payer.

5. L’acheteur doit payer au vendeur un total de 145,000 lires. Le paiement s’effectuera comme suit: 70,000 lires comptant et 75,000 lires jusqu’à la date du 28 janvier 1969.

La signature du contrat a été faite le 15 décembre 1968. L’acheteur a signé une dette de 75,000 lires qu’il devra payer jusqu’au 28 janvier 1969 pour la partie du terrain qu’il a acheté. Il a été entendu entre les deux parties que si les 75,000 lires ne sont pas payées au 28 janvier 1969, le vendeur aura droit de garder les 70,000 lires d’avances qu'il a reçu en acompte ainsi que le terrain, en guise d’indemnité.

Moshe Krutz	I. Roth
A-7
TELEPHONE 376-5440-1
Roth Corporation
8000 DANTE AVE.,
MONTREAL 38, CANADA
January 7th, 1969.
Mr. M. Kurz,
Rech. Smuel Hanaziv 6,
Israel.
Dear Sir:

In reference to the balance of purchase price payable to you on January 28th, 1969, this letter is being written to you, in order to enquire whether an extension can be granted to us for 60 days. We would be to pay a reasonable rate of interest and a penalty of some sorts.

We hope that you will give this matter your kind consideration and that we will hear from you in the near future.

Yours very truly,

Roth Corporation.

Per:

President.

A-8

Mr. M. Kurz

Rech Smuel Hanaziv 6 Israel.

January 14th, 1969.

Roth Corporation

8000 Dante Ave.

St. Michel, Quebec.

Canada.

Attention: Mr. I. Roth.

Dear Sir;

Further to your letter of January 7th, 1969, its contents have been duly noted and I am very sorry to inform you that it is impossible to grant a delay for the payment due on the land purchased. I have made other comittments for the monies and as such, I must turn down your request.

I expect to receive your bank draft on the due date, after which you will be given clear title to the land.

If I can be of any service to you, please write to me.

Thanking you for your co-operation in this matter.

Yours truly.

MOSZE KURZ

A-9
Roth Corporation	TELEPHONE 376-5440-1
	8000 DANTE AVE.,
	MONTREAL 38, CANADA
	January 21st, 1969.
Mr. M. Kurz,
Rech. Smuel Hanaziv #6,
Israel.
Dear Mr. Kurz,

We are in receipt of your letter of January 14th, 1969 and are quite surprised to learn that you are unable to grant a delay in the payment date.

In view of these circumstances we would appreciate if you could arrange to sell the land that we purchased for a price similar or as near as the purchase price of $41,400.00 (U.S.).

We trust that you will give this matter your immediate and usual prompt attention, because as you are no doubt aware time is of the essence, and due to many circumstances beyond our control we are not in a position to meet our committement. However we would appreciate if you would reconsider a delay in the payment date.

Please notify us of any developments in this matter as soon as possible.

Yours very truly,

Roth Corporation.

Per: .................................................................

President.

A-10

Mr. M. Kurz

Rech Smuel Hanaziv 6 Israel.

January 28th, 1969.

Roth Corporation

8000 Dante Ave.

St. Michel, Quebec.

Canada.

Attention; Mr. I. Roth.

Dear Sir;

I have tried to dispose of the land purchased by your company but without success.

As I have not received your payment, I regret to inform you that I will be taking the necessary steps in order to void the sale to your company. I am sorry, but finances force me to do this.

Please govern yourself accordingly.

Yours truly.

MOSZE KURZ

There was some question raised regarding the authority held by the Company through its charter to trade in real estate and no evidence was presented to substantiate clearly that it could do so. There was no evidence presented that the appellant Company had on any other previous occasion been involved in the business of trading in real estate, either in Canada or abroad. There was evidence provided that Mr Roth, as a shareholder in corporations other than the appellant Company, had participated to some extent in real estate development.

The case of the appellant is simply that Mr Roth, acting as president on behalf of the Company, purchased the real estate in question with the intention of holding it as any other marketable item and disposing of it at a profit at some time in the future, all this as part of the Company’s trading operations. This appears to break down into two major questions. First, did the transaction pertain to the affairs of the appellant, or to the affairs of the president personally? And second, was the complete transaction (described by the appellant as a purchase and a foreclosure), a capital transaction or was it a trading transaction? The appellant, to be successful at this hearing, must establish both that it (the appellant Company) was indeed the entity involved and that the matter resulted from an adventure in the nature of trade.

In the opinion of the Board, the evidence presented in support of the transaction being that of the appellant Company, consists of:

(A) The statements of Mr Roth;

(B) The reference to the RUTH CORPORCHIN (assumed to be Roth Corporation) in Exhibit A-3;

(C) The designation “Roth Corporation” on the counter-cheque, Exhibit A-5;

(D) The copies of correspondence, Exhibits A-7, A-8, A-9 and A-10, either addressed to or signed on behalf of the “Roth Corporation”;

(E) The appellant’s financial statements as at April 30, 1969— Exhibits A-12 and A-13;

(F) The view that the Letters Patent of the appellant Company permitted such trading in land.

The evidence presented in support of the transaction being one of trading rather than capital account is:

(A) The statements of Mr Roth;

(B) The treatment of the transaction in the accounts of the appellant Company.

The Board has examined in some detail the documentary evidence supplied, and notes the following:

(1) With regard to Exhibits A-1, A-2, and A-3 (reproduced), the verbal evidence is that Exhibit A-1 is an Agreement to buy a piece of land, but no written translation has been provided for it. The translation (Ex A-3) of the agreement (Exhibit A-2) contains, as the final paragraph, reference to a note payable by the purchaser and to the rights of the vendor if such a final payment was not forthcoming—“le vendeur aura droit de garder les 70,000 lires d’avances qu'il a reçu en acompte ainsi que le terrain, en guise d’indemnité’’.

(2) Dealing with Exhibits A-7, A-8, A-9 and A-10 (reproduced), the series of letters between Roth Corporation and Mr Kurz, the Board notes the variation in the signature of Mr Kurz on these and other evidences of the same signature. Also, in Exhibit A-8, the vendor uses the expression “after which you will be given clear title’’; in Exhibit A-9, the purchaser uses the phrase “due to many circumstances beyond our control we are not in a position to meet our committement”, and Exhibit A-10 states “I will be taking the necessary steps in order to void the sale” (the italics in all cases are mine).

(3) Exhibit A-5 (not reproduced)—the photostatic copy of the cancelled cheque—is not just a bank counter cheque, it is a cheque for the Bank of Montreal account of ITZHAK ROTH &/OR MRS. BELLA ROTH. This printed identification and also the bank account number have been crossed off, “ROTH CORP” written in, and another bank account number (presumably that of the Roth Corporation) also written on the cheque. The cheque is for $20,000, paid in US dollars. It is dated December 15, 1968, but carries the notation immediately below that date “Payable 15 January 1969”. The back of the cheque bears several bank clearing stamp marks, and although they are not completely legible, all appear to be in February, 1969. One specifically for the Provincial Bank of Canada, Montreal, bears the date February 7, 1969. The payment stamp on the face of the cheque, from the Bank of Montreal on which it was drawn, bears the date February 12, 1969. Finally the endorsement—there appears to be substantial variation between the signature for MOSHE KURZ on the cheque, Exhibit A-5, and that on the agreements, Exhibits A-1 and A-2; and a still different signature for MOSHE KURZ has already been noted on the letters to the Roth Corporation dated January 14 and January 28, 1969. There may be explanations for these apparent variations in the endorsements and in the relevant dates, but no such information was provided to the Board.

(4) Turning to the copies of the financial statements as at April 30, 1969, Exhibits A-12 and A-13 (not reproduced), it may be observed that on the original Balance Sheet (A-12) the Merchandise Inventory is shown as $212,170.26, whereas on the attached Statement of Profit and Loss, the closing Merchandise Inventory is shown as $190,672.02. The difference ($21,498.24) is obviously the amount of the initial payment in connection with the land transaction ($20,000 in US Funds). The amount of $21,498.24 therefore did not form part of the Cost of Sales figure for the fiscal year—that is, the purchase of or down payment for the land, however described, did not go through the accounting records as part of the trading transactions of the appellant.

Although there was no firm evidence that the appellant was empowered in its charter to trade in land, and the documentary photostatic evidence, particularly the cancelled cheque (Ex A-5), was only of limited clarity and value, in examining the matter the Board finds that the transaction did relate to the affairs of the appellant rather than to Mr Roth personally. This conclusion is based on the fact that the funds apparently came from the appellant’s bank account and the results of the transaction were shown, however incompletely, on the appellant’s balance sheet.

With regard to the commercial nature of the transaction, the exhibits do not provide convincing evidence that it was a sale rather than a payment on account of a sale to be completed when total payment was made. The Board recalls the evidence of Mr Roth that he did not go to Israel in 1968 to buy land and that the intention of the transaction was solely to make a profit in a highly active and speculative market situation. The agreements (Exhibits A-1, A-2 and A-3), the cancelled cheque (Exhibit A-5) and the series of letters (Exhibits A-7, A-8, A-9 and A-10) raise as many questions as they provide answers. A review of the financial position of the appellant as indicated on the balance sheets, when related to the other evidence, leaves in some doubt the capability or the determination of the appellant to meet the second payment on the transaction, and possibly this extends to the bank negotiation of the first payment. The Board is therefore not satisfied that external forces alone necessitated the termination of the effort to buy the land. There is no basis for the Board to conclude that this transaction was part of any deliberate programme for expansion of the appellant’s business into the field of trading in land; or, if it was to be the one and only transaction of its kind, that it was other than a sudden interest in the acquisition of a capital asset under circumstances which at the time appeared to favour an eventual profit. The appellant has not discharged the onus upon it to support its position to the Board on this point.

Counsel for the Minister raised as an alternative point the issue of the appropriate taxation year involved—1969 or 1970. The Board sees no basis in the evidence for the conclusion that the loss occurred at a date later than January 28, 1969, but makes no further comment on this point, the assessment having been made by the Minister to apply to the year 1970, and the appellant not having been required at this hearing to present specific evidence in support of the relevance of that taxation year. The loss of $21,498.24 itself, however, is on capital and not operating account in determining any liability for taxation of the appellant corporation. The appeal is dismissed.

Appeal dismissed.