Garon T.C.J.:
1 These appeals are from income tax assessments for the 1989, 1990, 1991 and 1992 taxation years. By his reassessments for the 1990, 1991 and 1992 taxation years, the Minister of National Revenue disallowed the capital gains deduction claimed by the Appellant under subsection 110.6(2.1) of the Income Tax Act, on the basis that the Appellant did not dispose of qualified small business corporation shares.
2 At the commencement of the trial it was made clear that the Appellant was abandoning his appeal with respect to the assessment for the 1989 taxation year.
3 At the hearing of these appeals, a Partial Agreed Statement of Facts concluded between the parties was entered in evidence. This Agreement reads as follows:
The Appellant and the Respondent in the above-noted matter hereby agree to the following partial statement of facts.
Identification of Parties
- 2. Gordon Denford is an individual who was at all relevant times hereto
- 3. Christopher Denford is an individual who was at all relevant times hereto
a. resident in Canada for income tax purposes;
b. dealing at arm's length with the Appellant; and
c. the adult son of Gordon Denford.
Incorporation of Fort Chelsea
8. In January of 1984, Gordon Denford approached the Appellant and asked the Appellant to assist him with his financial difficulties by acting as a nominee director and shareholder of a new corporation (which turned out to be Fort Chelsea). The proposal was that Fort Chelsea would purchase some lots in a real estate development being carried out by a corporation in which Mr. Gordon Denford had an interest. Any profits from resale of the lot would belong to Fort Chelsea and would arguably not be subject to any financing arrangements entered into in connection with the project.
11. George F. Jones was the sole initial subscriber for shares in the capital of Fort Chelsea pursuant to the Memorandum prepared in respect of the incorporation of Fort Chelsea. Mr. Jones subscribed for one common share without par value in the capital of Fort Chelsea. As the sole initial subscriber, Mr. Jones also became the sole initial director of Fort Chelsea. A copy of the Memorandum of Fort Chelsea is set out at Tab 2 of the Appellant's Book of Documents.
- 12. A meeting of the initial subscriber and initial director of Fort Chelsea was held on January 9, 1984. The minutes of that meeting indicate that the following events transpired:
a. Fort Chelsea issued a single common share to George F. Jones pursuant to the subscription made in connection with the incorporation of Fort Chelsea;
b. the number of directors was determined at one;
c. the Appellant was appointed as the sole director of Fort Chelsea, to hold office until the first Annual General Meeting of Fort Chelsea;
d. the Appellant was appointed as President and Secretary of Fort Chelsea with no set period of office;
e. approval was given for a transfer of one common share from George F. Jones to the Appellant; and
f. George F. Jones resigned as a director of Fort Chelsea.
13. The minute book of Fort Chelsea contains share certificate number 1 issued to George Jones on January 6, 1984 in respect of one common share in the capital of Fort Chelsea. The back of this share certificate contains a transfer of that one common share from George Jones to the Appellant. This transfer is signed by George Jones but the signature of Mr. Jones was not witnessed. A copy of this document is set out at Tab 1 of the Appellant's Book of Documents.
14. On January 17, 1984, Fort Chelsea filed a Notice of Directors in the office of the Registrar of Companies. This Notice of Directors indicated that George F. Jones had ceased to be a director, that the Appellant had become a director and that the Appellant was now the sole director of Fort Chelsea. The Notice of Directors was signed by George F. Jones in his capacity as solicitor of Fort Chelsea. A copy of this document is set out at Tab 1 of the Appellant's Book of Documents.
15. Pursuant to a document dated January 9, 1984, the Appellant consented to act as a director of Fort Chelsea. The consent was to remain in effect until terminated. A copy of this document is set out at Tab 4 of the Appellant's Book of Documents.
16. Pursuant to a document dated January 9, 1984, the Appellant declared that he held the one common share in Fort Chelsea in trust for Gordon Denford and that the Appellant had no right, title or interest in the share. A copy of this document is set out at Tab 6 of the Appellant's Book of Documents.
17. Tab 5 of the Appellant's Book of Documents is similar to the document referred to in the immediately preceding paragraph except that a blank line appears instead of the name of Gordon Denford. While this document bears a signature that purports to be that of the Appellant, the Appellant has no recollection of signing such a document.
18. Pursuant to a document dated January 9, 1984, Gordon Denford agreed to indemnify the Appellant form all debts and any and all causes of actions that may arise from the Appellant acting as a director and shareholder of Fort Chelsea. A copy of this document is set out at Tab 32 of the Respondent's Book of Documents.
Events of May 1984
19. On May 29, 1984, Gordon Denford forwarded a letter to George Jones under the letterhead of Fort Chelsea. In this letter, Gordon Denford indicated that ownership of the issued shares in the capital of Fort Chelsea should be split between Gordon Denford and Christopher Denford and that Christopher Denford should become an authorized signatory of Fort Chelsea. A copy of this letter is set out at Tab 8 of the Appellant's Book of Documents.
20. On June 20, 1984, George F. Jones forwarded a letter to Fort Chelsea to the attention of Mr. Gordon Denford containing documents necessary to implement the instructions contained in the letter of May 29, 1984. A copy of this letter and the enclosures are set out at Tab 10 of the Appellant's Book of Documents.
- 21. The June 20, 1984 letter included a document (the “Unsigned Resolution”) dated May 29, 1984. The Unsigned Resolution purports to be minutes of a meeting of the sole director and shareholder of Fort Chelsea. The Unsigned Resolution purports to record the following:
a. the resignation of the Appellant as a director of Fort Chelsea;
b. an increase in the number of directors from one to two;
c. the appointment of Gordon A.C. Denford and Christopher G. Denford as directors of Fort Chelsea;
d. the appointment of Gordon A.C. Denford as president of Fort Chelsea;
e. the appointment of Christopher G. Denford as secretary of Fort Chelsea;
f. approval of a transfer of one common share from the Appellant to Gordon A.C. Denford;
g. the allotment of 49 common shares to Gordon A.C. Denford; and
h. the allotment of 50 common shares to Christopher G. Denford.
- 23. The June 20, 1984 letter also contained the following additional documents for signature by the Appellant:
a. share certificate number 2, the back of which had been prepared to reflect a transfer of one common share from the Appellant to Mr. Denford; and
b. a document in which the Appellant resigned as a director and officer of Fort Chelsea.
- 28. The minute book of fort Chelsea contains the following share certificates:
a) share certificate number 3 issued to Gordon Denford on May 29, 1984 in respect of 50 common shares in the capital of Fort Chelsea; and
b) share certificate number 4 issued to Christopher G. Denford on May 29, 1984 in respect of 50 common shares in the capital of fort Chelsea.
29. The minute book of Fort Chelsea contains a copy of Form 19 under the Company Act, being a copy of an ordinary resolution of Fort Chelsea pursuant to which the number of directors of Fort Chelsea was increased from one to two. The resolution was stated to have been passed on May 29, 1984 and was certified true effective June 20, 1984. The Form 19 was signed by George Jones in his capacity as solicitor of Fort Chelsea. A copy of this document is set out at Tab 1 of the Appellant's Book of Documents. The parties to this action are unaware of the existence of any signed copy of the ordinary resolution.
30. The minute book of Fort Chelsea contains a copy of a Notice of Directors that purports to report a change of directors effective May 29, 1984. According to this document, Gordon Denford and Christopher Denford became directors of Fort Chelsea on May 29, 1984 and the Appellant resigned as a director. The document further indicates that Gordon Denford and Christopher Denford are all the directors of Fort Chelsea. The document is dated June 20, 1984 and is signed by George Jones in his capacity as solicitor of Fort Chelsea. A copy of this document is set out at Tab 1 of the Appellant's Book of Documents. The parties to this action are unaware of the existence of any copy of this document that has been signed by the Appellant.
- 31. The minute book of Fort Chelsea contains a document dated January 6,1985 and described as “FORT CHELSEA HOLDINGS LTD.; RESOLUTIONS CONSENTED TO IN WRITING OR PASSED AT THE ANNUAL GENERAL MEETING HELD ON January 6, 1985”. This document purports to elect or appoint
a) Gordon A.C. Denford and Christopher G. Denford as directors of Fort Chelsea;
b) Gordon A.C. Denford as President of Fort Chelsea; and
c) Christopher G. Denford as Secretary of Fort Chelsea.
32. Annual reports of Fort Chelsea filed subsequent to May 29, 1984 all indicate that Gordon Denford and Christopher Denford are the directors of Fort Chelsea, that Gordon Denford is president and that Christopher Denford is secretary. Copies of these documents are set out at Tab 1 of the Appellant's Book of Documents. The Appellant never signed any of these annual reports and did not become aware of their existence until some time in 1988.
Acquisition of Coachman Inn
33. Christopher Estates Ltd. (“Denfordco”) is a company incorporated under the Company Act (British Columbia). At all material times hereto, all the issued and outstanding shares in the capital of Denfordco were owned either by Gordon Denford alone or by a combination of Gordon Denford and members of his family.
34. Gordon Denford attempted to arrange a loan from the Western Pacific Bank of Canada (the “Bank”) for the purpose of purchasing and renovating the Coachman Inn. By letter dated February 18, 1986, Mr. Denford (writing on behalf of Denfordco and Fort Chelsea) wrote to the Bank and summarized his attempts to arrange that financing. A copy of this letter is set out at Tab 13 of the Appellant's Book of Documents. This letter also summarizes the loan application, which includes the personal covenants of Mr. Denford and of the Appellant. On page 3 of the letter, Mr. Denford specifically asked the Bank to consider that the collective net worth of the two guarantors (i.e. Mr. Denford and the Appellant) exceeded $3 million.
35. By letter dated February 20, 1986, the Bank wrote to Fort Chelsea to the attention of Mr. Denford and offered to lend $762,500 to Fort Chelsea under the terms and conditions set out in that letter. These terms and conditions included the personal covenants of Mr. Denford and of the Appellant. These conditions were accepted by Fort Chelsea on February 21, 1986. A copy of this letter is set out at Tab 15 of the Appellant's Book of Documents.
36. On or about January 22, 1986, Denfordco entered into an agreement (the “Coachman Acquisition Agreement”) with Wrayco Hotels Ltd. pursuant to which Denfordco would acquire the assets and undertaking of a hotel located at 229 Gorge Road East, Victoria, British Columbia and known as the Coachman Inn.
37. Subsequent to the signing of the Coachman Acquisition Agreement, Gordon Denford approached the Appellant and asked the Appellant if he was interested in participating in the acquisition of the Coachman Inn. The Appellant agreed on the understanding that the Appellant would hold a 50 percent interest in the venture.
39. Tab 6 of the Appellant's Supplementary Book of Documents is an agreement made among Wrayco Hotel Ltd., Denfordco and Fort Chelsea dated February 28, 1986. Pursuant to that agreement, Denfordco assigned all its right, title and interest in the Coachman Acquisition Agreement to Fort Chelsea and Wrayco consented to such assignment.
41. On January 24, 1986, Ormistonco issued a cheque in the amount of $25,000 to George Jones, in trust. This cheque was in partial satisfaction of the Appellant's undertaking to contribute $100,000 towards the purchase price of the Coachman Inn. A copy of this cheque is set out at Tab 12 of the Appellant's Book of Documents.
42. On February 20, 1986, Ormistonco issued an additional cheque in the amount of $75,000 payable to George Jones, in trust. This cheque completed the Appellant's undertaking to contribute $100,000 towards the purchase price of the Coachman Inn. A copy of this cheque is set out at Tab 15 of the Appellant's Book of Documents.
- 43. On February 21, 1986, Gordon Denford wrote to George Jones under the letterhead of Fort Chelsea. In that letter, Mr. Denford gave the following instructions:
a. Fort Chelsea “will be” owned 50 percent by Gordon Denford and 50 percent by the Appellant;
b. Gordon Denford “will be” president and the Appellant secretary;
c. both Gordon Denford and the Appellant “will be” directors;
d. the signatures of both Gordon Denford and the Appellant “will be” required with the corporate seal;
e. various other details concerning the transaction; and
f. Mr. Denford and the Appellant “will be” available for signing documents until a specified date.
- 44. On February 27, 1986, George Jones wrote to Fort Chelsea to the attention of Gordon Denford. The letter included the following documents for signature:
a. director resolution to be signed by Gordon Denford and Christopher Denford issuing one class A share to Gordon Denford;
b. a shareholder resolution to be signed by Gordon Denford and the Appellant pursuant to which the Appellant was appointed as director and secretary and Gordon Denford as appointed president;
c. consent of the Appellant to act as a director; and
d. a second copy of a share certificate number 3 issued to Mr. Denford, but this share certificate was in respect of only one class A share in the capital of Fort Chelsea.
Financing of Coachman Inn
50. On February 18, 1986, Gordon Denford wrote to the Western & Pacific Bank of Canada in connection with a loan application for the purchase and renovation of the Coachman Inn. Page 2 of this letter set out that the loan would be supported by the personal covenants of Gordon Denford and the Appellant. A copy of this document is set out at Tab 13 of the Appellant's Book of Documents.
51. On February 20, 1986, the Western & Pacific Bank of Canada wrote to Fort Chelsea to the attention of Mr. Gordon Denford. In that letter, the bank committed to providing Fort Chelsea with a loan in the principal sum of $762,500 on the terms set out in that letter. Item 8(b) of the letter required the personal covenants of Mr. Gordon Denford and of the Appellant. The commitment letter was signed by Gordon Denford on behalf of Fort Chelsea, which acceptance was dated February 21, 1986. A copy of this letter is set out at Tab 15 of the Appellant's Book of Documents.
52. Tab 24 of the Appellant's Book of Documents is a letter from Fort Chelsea (under the signature of Gordon Denford) to the Bank of Montreal. The letter includes a balance sheet of Fort Chelsea as at February 28, 1986. In that balance sheet, an amount of $100,000 is set out as owing to the Appellant. That amount is described as a shareholder loan.
53. By a letter dated September 17, 1986, the Bank of Montreal offered a line of credit to Fort Chelsea on several terms and conditions. Page 3 of the letter required that the line of credit be guaranteed by the Appellant. A carbon copy of the letter was sent directly to the Appellant. A copy of this letter is set out at Tab 28 of the Appellant's Book of Documents.
Financial Statements of Fort Chelsea
60. The balance sheet and note 5 to the 1987 Statements again indicate that Fort Chelsea owed substantial amounts to Ormistonco and Denfordco, which amounts had no fixed terms of repayment. The amounts did not bear interest except that interest at prime plus 4% was being paid on the amount by which the loan owing to Denfordco exceeded the loan owing to Ormistonco.
63. The respective balance sheets of the First and Second 1988 Statements again indicate that the capital stock of Fort Chelsea had a paid-up capital of $2. However, note 9 to each respective financial statement indicates that the issued share capital consisted of 100 common shares rather than 2 shares (as reported in the notes to the 1986 and 1987 Statements).
Operation of the Coachman Inn
Court Action commenced by the Appellant
67. Some time in 1988, the Appellant discovered that the share register of Fort Chelsea did not indicate that the Appellant was the owner of 50 percent of the issued and outstanding shares in the capital of Fort Chelsea. Upon learning of this, the Appellant contacted his solicitors, being Crease & Company of Victoria, British Columbia.
68. On July 13, 1988, Mr. L.B. Jamieson of Crease & Company forwarded a letter to Mr. George Jones inquiring as to the reasons why the Appellant's name was not included in the share register of Fort Chelsea. A copy of this letter is set out at Tab 39 of the Appellant's Book of Documents.
70. By a Writ of Summons filed in the Supreme Court of British Columbia on September 9, 1988, the Appellant commenced an action against Fort Chelsea, Gordon Denford and Christopher Denford. In that action, the Appellant claimed various relief which is set out in the Statement of Claim. Among other relief, the Appellant requested that the register of members of Fort Chelsea be rectified to show the Appellant as the owner of 50 percent of the issued share capital of Fort Chelsea. Documents relating to this action are set out at Tab 41 of the Appellant's Book of Documents.
The parties agree to the above as an accurate statement of facts but reserve the right to call witnesses to establish other facts.
DATED as of November 1, 1996.(signature)
________
Blair P Dwyer, Counsel for the Appellant
________
Robert Carvalho, Counsel for the Respondent.
This Partial Agreed Statement of Facts was confirmed and completed particularly by the testimonies of the Appellant and Mr. Gordon Denford.4 The Appellant is a retired masonry contractor. He had been engaged in this type of activity for 47 years. As indicated in paragraph 16 of the Partial Agreed Statement of Facts, the Appellant held one common share in Fort Chelsea Holdings Ltd. (“Fort Chelsea”) in trust for Mr. Gordon Denford as from January 9, 1984. As mentioned in Paragraph 19 of the Partial Agreed Statement of Facts, Mr. Gordon Denford, on behalf of Fort Chelsea, forwarded a letter dated May 29, 1984, to Fort Chelsea's solicitor, instructing him to set up ownership so that Mr. Gordon Denford and his son, Mr. Christopher Denford, each owned 50 per cent of the capital stock of the company. These instructions to Fort Chelsea's solicitor were given at the time when the latter company was applying for a neighbouring pub licence and in contemplation of it obtaining such licence. Sometime later, the appropriate authorities decided not to grant such licence to Fort Chelsea.
5 At the time of the acquisition of the Coachman Inn, the Appellant, at Mr. Gordon Denford's request, agreed to put up $25,000.00 very quickly for the acquisition of this hotel. For this purpose a cheque dated January 24, 1986 to the order of Fort Chelsea's solicitor, was issued by the Appellant's personal holding corporation, H.A. Sandy Ormiston Limited. This payment of $25,000.00 was followed by a second payment made by the same corporation in the amount of $75,000.00. The cheque evidencing this payment is dated February 20, 1986.
6 In his testimony, the Appellant asserted categorically that, in making these payments through his corporation, he was not a lender but a purchaser of the subject property. The Appellant's evidence relating to the purpose of these two payments is made clear by Fort Chelsea's letter of February 21, 1986, signed by Mr. Gordon Denford under the letterhead of Fort Chelsea. This letter is well summarized in paragraph 43 of the Partial Agreed Statement of Facts. In this connection, it is worth reproducing the first paragraph of this letter.
I confirm that Fort Chelsea Holdings Limited would be 50 per cent owned by myself and 50 per cent by H.A. Sandy Ormiston.
According to the oral evidence, these instructions regarding in particular the 50/50 ownership of Fort Chelsea were to be implemented immediately. This evidence is also supported by the last paragraph of this letter, which reads in part as follows:Sandy and I will be available for signing until Thursday next.
7 The commitment letter of Western & Pacific Bank of Canada, dated February 20, 1986, to which letter reference is made in paragraph 51 of the Partial Agreed Statement of Facts, is of a special interest. In connection with paragraph 8 (b) of this letter, the Appellant stated that he received no fee for giving to the Bank his personal covenant because in his view, he was to become the co-owner of a hotel. As noted in paragraph 52 of the Partial Agreed Statement of Facts, the balance sheet of Fort Chelsea as at February 28, 1986, shows that Fort Chelsea long-term debt consists of two “shareholders' loans, one made by the Appellant in the amount of $100,000.00 and the other made by Mr. Gordon Denford amounting to $150,000.00.
8 Reference was also made to a Statutory Declaration dated February 28, 1986, given by Mr. Gordon Denford in support of an application for a loan of $762,500.00 proposed to be made by Western & Pacific Bank of Canada to Fort Chelsea. Paragraphs 14 and 15 read thus :
14. That each person named below holds the offices in the Company set forth below opposite his name:
| Name | Office | Signatures of Officers executing Security Documents |
| Gordon A.C. Denford | President | |
| H.A. (Sandy) Ormiston | Secretary | |
15. That the Board of Directors of the Company consists of the persons named below (and no others):Signatures of Officers
executing Security
| Name | Office | Documents |
| Gordon A.C. Denford | President | ____________________ |
| H.A. (Sandy) Ormiston | Secretary | ____________________ |
9 The Direction to pay to Fort Chelsea the amount of $762,500.00 was signed on February 28, 1986 by both the Appellant and Mr. Gordon Denford. Likewise, the document headed “Guarantee and Postponement of Claim” directed to Western & Pacific Bank of Canada made on February 28, 1986, was given by both the Appellant and Mr. Gordon Denford. The general assignment of debts dated February 28, 1986, made by Fort Chelsea in favour of Western & Pacific Bank of Canada was also executed by the Appellant and Mr. Gordon Denford on behalf of Fort Chelsea. The loan agreement entered into on February 28, 1986, with Western & Pacific Bank of Canada was signed on behalf of Fort Chelsea by the Appellant and Mr. Denford. As well, the Demand Promissory Note dated February 28, 1986 in the amount of $562,000.00 was signed on behalf of Fort Chelsea by the Appellant and Mr. Gordon Denford. Also, the Appellant and Mr. Gordon Denford took out term life insurance policies in September 1986 with American Life Insurance Company of the type commonly issued on the lives of business partners. These policies were assigned to Fort Chelsea.
10 The Appellant also testified that when he provided the Bank of Montreal, in September 1986 with a guarantee to the extent of $300,000.00 in respect of the line of credit granted to Fort Chelsea, he received no payment therefore because he was, according to his terms, the owner of the hotel.
11 Substantial renovation work was carried out in the months following the acquisition of the Coachman Inn by Fort Chelsea on February 28, 1986. A little less than a year later a disagreement developed between the Appellant and Mr. Gordon Denford as to the nature and extent of the renovations. The Appellant was of the view that too much money was put in with respect to the refurbishing of the hotel.
12 Probably in the spring of 1988, the Appellant learned through a friend who made a search regarding Fort Chelsea, that the share register of Fort Chelsea did not show that he was the owner of 50 per cent of the issued shares of the capital stock of Fort Chelsea. As a result, following an exchange of correspondence between the solicitors for the parties involved over a period of a few months, the Appellant commenced in September 1988 an action against Fort Chelsea, Mr. Gordon Denford and Mr. Christopher Denford, the details of which action appear in the Partial Agreed Statement of Facts under the caption “Court Action Commenced by the Appellant”. The types of relief sought by the Appellant in this action were couched in the following terms:
13 THE PLAINTIFF CLAIMS AS FOLLOWS:
(a) A Declaration that the affairs of Fort Chelsea Holdings Ltd. have been conducted or the powers of the directors of Fort Chelsea Holdings Ltd. have been exercised in a manner oppressive to the Plaintiff or in a manner prejudicial to the interests of the Plaintiff;
(b) A Declaration that Denford or Christopher or both Denford and Christopher hold their shares of the Company subject to the beneficial entitlement of the Plaintiff to 50 percent of the issued share capital of Fort Chelsea Holdings Ltd.;
(c) An Order that the Register of Members of Fort Chelsea Holdings Ltd. be rectified entering the Plaintiff as the owner of 50 percent of the issued share capital of Fort Chelsea Holdings Ltd., pursuant to Section 68 of the Company Act;
(d) An interim injunction prohibiting Denford, Christopher and Fort Chelsea Holdings Ltd. from transferring, in any manner whatsoever, any funds or property of Fort Chelsea Holdings Ltd. to Denford, Christopher, or any other corporation, firm, or person directly or indirectly controlled by or related to Denford or Christopher pending trial;
(e) An Order that a Receiver Manager be appointed or, alternatively, that all further payments and transfers of funds or property by Fort Chelsea Holdings Ltd. require the authorization in writing of the Plaintiff;
(f) An Order that Fort Chelsea Holdings Ltd. be wound up;
(g) Alternatively, an Order that Denford or Christopher or both Denford and Christopher be required to purchase from and compensate the Plaintiff for 50 percent of the issued share capital of the Company;
(h) As against Denford, damages;
(i) A permanent injunction;
(j) An accounting;
(k) An Order that the Denford or Christopher or the Company or any combination of them as this Honourable Court shall direct, pay to the Plaintiff such compensation as is found owing to the Plaintiff upon the accounting directed;
(l) Costs.
14 This litigation led to a mutual release of claims dated April 25, 1990, providing for the payment of $300,000.00 to the Appellant by Fort Chelsea and to a Consent Dismissal Order issued by the Supreme Court of British Columbia on May 3, 1990.
15 It came out from the Partial Agreed Statement of Facts and from the Appellant's evidence that the Appellant held one share of Fort Chelsea in trust for Mr. Gordon Denford from early 1984 to February 1986. The Appellant recognized the accuracy of the document showing the month end balances of loans made to Fort Chelsea by him and Mr. Gordon Denford over a period beginning in February 1986 and ending in the summer of 1988. This document shows, inter alia, that the Appellant had advanced to Fort Chelsea a total amount of $160,000.00 by July 1987. He made no further loans to Fort Chelsea after that time. This document also discloses that Mr. Gordon Denford had advanced to Fort Chelsea considerably larger sums of money during the same period. According to this document, Mr. Gordon Denford's loans reached at one point a total of $422,460.00. The Appellant gave certain explanations about the larger advances made at the time by Mr. Gordon Denford.
16 The Appellant agreed with the statement made by the Appellant's solicitor in the first paragraph of his letter to him of November 24, 1989. This paragraph reads as follows:
Your claim against Mr. Denford relates to the failure of Mr. Denford to issue and register your shares of Fort Chelsea Holdings Ltd. and the manner in which Mr. Denford has conducted the affairs of Fort Chelsea Holdings Ltd. The relief which has been claimed by you includes the following:
1. A declaration that you are beneficially entitled to 50% of the issued share capital of Fort Chelsea Holdings Ltd.;
2. An Order that 50% of the issued share capital of Fort Chelsea Holdings Ltd. registered in your favour;
3. An Order that Fort Chelsea Holdings Ltd. be wound-up;
4. Alternatively, an Order that Mr. Denford or his son, or both, be required to purchase from and compensate you for 50% of the issued share capital of Fort Chelsea Holdings Ltd.
17 With regard to the payment to the Appellant of the sum of $300,000.00 by Fort Chelsea, the Appellant stated clearly that of the amount of $300,000.00, $160,000.00 represented the repayment of the loans he had made to Fort Chelsea and the sum of $140,000.00 represented his share, to use his own words, of the hotel.
18 It was also established that two appraisals had been obtained relative to the market value of the Coachman Inn hotel; one in the amount of $2,950,000.00 in the case of the appraisal requested by the Appellant and the other one in the amount of $2,160,000.00 in the case of the appraisal submitted by Mr. Gordon Denford. The liabilities of Fort Chelsea at the time of the settlement of the action instituted by the Appellant were in the vicinity of $1,900,000.00.
19 It was also made clear by the depositions of two individuals who visited the premises of Coachman Inn, that the Appellant was recognized by the manager of this hotel and by the staff as a part owner of this hotel. Furthermore, the Appellant was seen by one of the two individuals in question signing cheques pertaining to the Coachman Inn business. These two individuals were independent witnesses.
20 Mr. Gordon Denford testified for the Respondent. He clearly stated that the Appellant and himself agreed to purchase the Coachman Inn on the basis that each would own 50 per cent of the shares. They were also in agreement that substantial renovation work was required and both of them were prepared to advance monies to Fort Chelsea for this purpose. Mr. Denford also recognized that immediately prior to the acquisition of the Coachman Inn, Fort Chelsea was a shell. He explained that within a year of the acquisition of the hotel, a disagreement developed between him and the Appellant with respect to the need to do further renovation work and to what was referred to as Phase 2 of the renovation work. He readily admitted that there had been no agreement between himself and the Appellant about Phase 2 of this project. Mr. Gordon Denford asked the Appellant to equalize his contribution to Fort Chelsea for the purpose of carrying out additional renovation work, which, from Mr. Gordon Denford's standpoint, was required for the long term successful operation of this business. The Appellant disagreed with Mr. Gordon Denford's approach and refused to make further advances to Fort Chelsea.
21 With respect to the payment of $300,000.00, Mr. Denford stated that there was no definite basis for arriving at this figure. He agreed that the $160,000.00 portion of $300,000.00 constituted the reimbursement of money advanced by the Appellant to Fort Chelsea. As for the remaining $140,000.00, he felt that it was a reasonable return on the loans made by the Appellant to Fort Chelsea. In this connection, he indicated that he relied to some extent in his computation of the amount to be paid to the Appellant over and above the $160,000.00 on the application of appropriate interest rates to the advances made by the Appellant over the period stated earlier. In line with this approach, in its T2 return, Fort Chelsea claimed the deduction of the amount of $140,000.00 as representing interest expense. This position was not accepted by Revenue Canada. Fort Chelsea, after serving on the Minister of National Revenue a notice of objection, decided not to pursue the matter further.
22 Mr. Gordon Denford agreed that the shares of Fort Chelsea had some value at the time of the resolution of his dispute with the Appellant. Mr. Gordon Denford clearly stated that the nominee agreement was not addressed at the time of the acquisition of the Coachman Inn. Mr. Gordon Denford confirmed that when he forwarded his instructions on behalf of Fort Chelsea to the latter company's solicitor, he wanted these arrangements to be implemented immediately. Mr. Christopher Denford was not to be a shareholder of Fort Chelsea at the time of the purchase of the Coachman Inn. In cross-examination, Mr. Gordon Denford stated that he assumed at the time that the Appellant was already a shareholder. Incidentally, Mr. Gordon Denford asserted that the shares of the capital stock of Fort Chelsea, in February 1986, prior to the arrangements leading to the acquisition of Coachman Inn, were not worth anything. The Appellant was not simply a lender as far as Mr. Gordon Denford was concerned when the Coachman Inn was acquired by Fort Chelsea. Mr. Gordon Denford corroborated the Appellant's deposition regarding a) their dispute about the extent of the renovation work, b) the giving of guarantee by the Appellant for no consideration on two distinct occasions, and c) the fact that no interest was payable on the monies advanced to Fort Chelsea by the Appellant and himself, except with respect to the portion of the advances made by Mr. Gordon Denford that was in excess of those contributed by the Appellant.
23 There were discussions in March 1987 between the Appellant and Mr. Gordon Denford concerning the possible purchase of the Appellant's shares in Fort Chelsea, as evidenced by the letter dated March 20, 1987 from Coopers & Lybrand to Mr. Gordon Denford and Mr. Gordon Denford's letter of March 23, 1987 to the Appellant. Both letters expressly assumed that the Appellant was the owner of shares in Fort Chelsea.
24 In the course of his testimony, Mr. Gordon Denford was also asked to give some explanations about the “Counterclaim” that he had made against the Appellant in the proceedings instituted by the latter. The first seven numbered paragraphs of this “Counterclaim” are of particular interest. They read as follows:
1) A declaration that the oral shareholders agreement made between Gordon Denford and H.A. Ormiston in or about January and February, 1986 is void.
2) A declaration that H.A. Ormiston has breached fundamental terms and conditions of the oral shareholders agreement made between Gordon Denford and H.A. Ormiston in or about January and February, 1986.
3) A declaration that H.A. Ormiston has breached fundamental terms and conditions of the oral shareholders agreement made in or about January and February, 1986, between Gordon Denford and H.A. Ormiston as amended in September 1986.
4) Rescission of the oral shareholders agreement made in or about January and February, 1986 between Gordon Denford and H.A. Ormiston as amended in September, 1986.
5) Damages for breach of the oral shareholders agreement made in or about January and February, 1986 between Gordon Denford and H.A. Ormiston as amended in September, 1986.
5a) An Order that Fort Chelsea Holdings Ltd. be wound up by Gordon Denford or his company acquiring any shareholding of H.A. Ormiston or his company at a price to be determined by this Honourable Court.
5b) In the alternative, a Declaration that there was no agreement between Gordon Denford and H.A. Ormiston or their respective companies.
25 Mr. Gordon Denford simply replied that the various types of relief sought in this “Counterclaim” have to be viewed simply as a response to a claim. In the course of giving evidence, some reference was made to paragraphs 3.10, 3.11, 3.15 and 3.16 of the Amended Statement of Defence filed on December 19, 1989. Mr. Gordon Denford recognized that paragraph 3.11 of this Amended Statement of Defence constituted a fair statement of his agreement with the Appellant at the time. Paragraph 3.11 reads as follows:
- 3.11 Ormiston accepted the entire business plan and on that basis Gordon Denford agreed with Ormiston that their respective companies would proceed with the project as a 50/50 enterprise on the following terms and conditions:
.1 Estates[FN1: <p>This is a reference to Christopher Estates Ltd. of which the only shareholders and directors were at all material times Mr. Gordon Denford and his son Christopher Denford.</p>] would assign to Fort Chelsea its interest in the accepted offer to purchase the Coachman Inn from Wrayco.
.2 Fort Chelsea would borrow money from Western & Pacific Bank as short term financing to acquire the Coachman Inn and commence the renovations. The short term financing would be replaced by longer term financing.
.3 Gordon Denford and Ormiston or their respective companies, Estates and H.A. (Sandy) Ormiston Ltd. would make equal initial cash contributions of $125,000 each and make additional equal cash contributions as required from time to time.
.4 Gordon Denford and Sandy Ormiston or their respective companies would make equal cash contributions to provide necessary equity capital and operating capital to the extent that capital requirements might exceed the interim or long-term financing from time to time.
.5 Fort Chelsea would retain Estates as construction manager to carry out all renovations and refurbishing. Estates agreed to provide its labour at specified hourly rates plus 50% and to charge for materials at cost plus 10%.
.6 Gordon Denford through Estates would provide day-to-day management of the Coachman Inn for a fee of $2,500 per month which commenced in or about September, 1986.
.7 The Coachman Inn would be held for a minimum of 5 years.
.8 Denford and Ormiston and their respective companies each agreed to give their goodwill and co-operation and support to the project.
26 Mr. Denford also testified that Fort Chelsea took steps early in 1988 leading to the refinancing of its indebtedness with Standard Trust Company. As a result of Mr. Gordon Denford's initiative, Fort Chelsea granted in May 1988 a debenture in favour of Standard Trust Company securing a principal amount of $1,475,000.00. The services of a mortgage broker were used for this purpose. The Appellant did not agree to the refinancing in question and was not a guarantor of Fort Chelsea's debt to Standard Trust Company.
27 In light of these facts, the question in issue is whether the Appellant disposed of qualified small business corporation shares in the 1990 taxation year. If the answer to this question is in the affirmative, the Appellant would be entitled in computing his taxable income to the deduction provided by subsection 110.6(2.1) of the Income Tax Act.
28 The Respondent's main contention is that the Appellant is not entitled to the benefit of the capital gains deduction because the gain realized by the Appellant did not arise from the disposition of qualified small business corporation shares but rather from the disposition of the right to acquire shares. Counsel for the Respondent relied on many decisions of the Court where the issue was whether a particular payment was of an income nature or on account of capital. In some cases, the payment was made in the context of an employer/employee relationship.
29 For his part, Counsel for the Appellant contended that the Appellant became the beneficial owner in early 1986 of 50 per cent of the issued and outstanding shares of the capital stock of Fort Chelsea and retained the beneficial ownership of those shares until he disposed of that beneficial ownership by means of the Consent Dismissal Order dated May 3, 1990. The Appellant further submitted that even if the Appellant had only a right to acquire 50 per cent of the issued and outstanding shares in the capital of Fort Chelsea, that right “was enough of a right to constitute beneficial ownership of the shares for the purposes of section 110.6 of the Income Tax Act.” He also advanced the proposition that if the Appellant did not have any right in respect to the shares of Fort Chelsea, the amount in issue represents a windfall to the Appellant rather than a capital gain and such amount is consequently not taxable.
30 In support of the Appellant's position, Counsel for the Appellant relied mainly on two decisions, the first one, Spence v. R., [1995] 2 C.T.C. 2911 (T.C.C.), a decision of Judge Bowman of this Court, and the second one, a decision of the Alberta Supreme Court, in the case of Monarch Oil Co. (Liquidator of) v. Chapin (1917), 37 D.L.R. 772 (Alta. T.D.).
31 In my view, the weight of the evidence establishes that the Appellant was the beneficial owner of 50 per cent of the issued and outstanding shares of the capital stock of Fort Chelsea as from February 1986 and, particularly, at the time it was agreed that a payment of $300,000.00 should be made to the Appellant by Fort Chelsea in April 1990.
32 The facts to which I will be referring fully support this conclusion:1. As mentioned in the Partial Agreed Statement of Facts, Mr. Gordon Denford approached the Appellant prior to the purchase of the Coachman Inn by Fort Chelsea and asked him if he was interested in participating in the acquisition of the Coachman Inn.
2. The Appellant agreed on the understanding that the Appellant would hold a 50 per cent interest in the venture.
3. Through his personal holding corporation, the Appellant contributed $100,000.00 towards the purchase price of the Coachman Inn.
4. On February 21, 1986, Mr. Gordon Denford instructed the solicitor of Fort Chelsea in a letter dated February 21, 1986, under the letterhead of Fort Chelsea, that ownership of Fort Chelsea stock be split equally between him and the Appellant.
5. The solicitor for Fort Chelsea complied with these instructions and prepared documents implementing them. The draft document did not include any resolution issuing shares to the Appellant. This approach is consistent with there being only one validly issued share in Fort Chelsea, which share was registered in the Appellant's name.
6. The loans in the amount of $25,000.00 and $75,000.00 advanced at the time by the Appellant, through his holding corporation, to Fort Chelsea, to effect the purchase price of the Coachman Inn were described in the balance sheets as at February 28, 1986 and February 28, 1987 as shareholders' loans. These loans were bearing no interest and had no fixed terms of repayment.
7. The Appellant provided a guarantee in respect of the debt owing to the Bank of Montreal and did not charge any fee for giving this guarantee.
8. The Appellant also guaranteed Fort Chelsea's loan from Western & Pacific Bank of Canada without charging a fee.
9. The Appellant behaved as a shareholder in the days preceding the acquisition of the Coachman Inn and afterwards until the settlement of the Court action.
10. The letter dated March 20, 1987, from Coopers and Lybrand to Mr. Gordon Denford and the latter's letter dated March 23, 1987 to the Appellant, clearly confirm that the Appellant was viewed by Mr. Gordon Denford as a shareholder.
11. The Statement of Claim, and in fact in many respects the Statement of Defence and the Counterclaim are consistent with the position that the Appellant was a shareholder of Fort Chelsea during the period referred to in paragraph numbered 9 above.
33 Having regard to the above, I conclude that the Appellant was, as from February 1986 and during the period of time ending with the settlement of the court action, the beneficial owner of 50 per cent of the issued and outstanding shares of Fort Chelsea. I find support for this conclusion in Judge Bowman's decision in the Spence case referred to earlier in which it was held that the taxpayer in the latter case had a clear and enforceable right in equity to compel two individuals to transfer the shares to him since the taxpayer had fulfilled his part of the bargain. There is a passage in the Monarch case, also mentioned earlier, which is of a special interest for our present purposes; it reads as follows, at page 773:
If there is an offer to take shares and an acceptance by the company of the offer, which is communicated to the party making the offer, there is a completed agreement enforceable by either of the parties and this in effect is an allotment of the shares the subject matter of the bargain.
34 I also find that of the amount of $300,000.00 that was agreed to be paid to the Appellant by Fort Chelsea, $140,000.00 represents the proceeds of disposition of qualified small business corporation shares.
35 The Appellant is therefore entitled to the deduction set out in subsection 110.6(2.1) of the Income Tax Act.
36 For these reasons, the appeals from the assessments for the 1990, 1991 and 1992 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to the deduction provided in subsection 110.6(2.1) of the Income Tax Act in respect of the receipt of the amount of $140,000.00 for the disposition of qualified small business corporation shares.
37 In view of what was said at the beginning of these reasons, the appeal from the assessment for the 1989 taxation year is dismissed.
Email this Content