Citation: 2007TCC411
Date: 20070713
Dockets: 2003-2250(IT)G and 2004-4366(IT)G
BETWEEN:
GREGORINA ALESSANDRO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, A.C.J.
[1] Gregorina
Alessandro appeals from income tax assessments for 1994 and 1997. The principal
issue arising out of the assessment for 1994 is whether the appellant received
a shareholder benefit in the year of $253,074. The issue for 1997 is whether
the appellant incurred a business investment loss of $497,292 in the year and
is therefore entitled to deduct an allowable business investment loss of
$372,969.
[2] The appeals were
heard on common evidence.
Facts Common to Both
Appeals
[3] Mrs. Alessandro was
a shareholder of Arrow Management Inc. ("Arrow") in 1994 when Arrow
sold to her for $850,000 a property bearing civic number 15625 Steeles Avenue in Halton Hills, Ontario ("Property").
The consideration for the Property was satisfied by Arrow reducing Mrs.
Alessandro's shareholder account balance by $850,000 and eliminating any
outstanding balance owing to her.
[4] However, Revenue Canada, at the time, had a
different view of the fair market value of the Property at time of sale and of
the appellant's account balance.
[5] The tax authority
says that the fair market value of the Property at time of sale was $900,000
and the appellant's account balance, according to Arrow's financial statements
for the fiscal period ending August 31, 1994, was $521,926. The benefit of
$253,074, according to the Minister of National Revenue ("Minister"),
is the difference between the fair market value of $900,000 less the amount in
the appellant's shareholder account of $521,926 and a dividend of $125,000 that
was declared and not paid by Arrow but was included in the appellant's income
for 1994.
[6] The appellant says
that the fair market value of the Property on August 31, 1994 was $850,000 and
that her account balance at the time was "at least" $646,926. The
$646,926 comprised the appellant's account balance of $521,926, as of
August 31, 1994 in the financial statements of Arrow, plus the dividend of
$125,000.
[7] The appellant
claims that in 1994, she made mortgage payments in respect of the Property
totalling $76,764 on behalf of Arrow and that this amount should be added to
the shareholder account balance of "at least" $646,926, so that the
total amount of money owed to her by the corporation at time of disposition was
at least $723,690. Such an increase would add $176,310 to her income, assuming
the fair market value of the Property at time of disposition was $900,000.
[8] In her amended
notice of appeal for 1994, the appellant also submitted that a business
investment loss she claimed for 1997 be carried back to 1994. (The business
investment loss claimed for 1997 is the subject of the appeal from the 1997
assessment.)
[9] In reassessing Mrs.
Alessandro for 1997, the Minister denied her an allowable business investment
loss of $372,969 on the basis that she was not a shareholder of Oakmount Park
Holdings Ltd. ("OPHL") when funds were advanced to that corporation.
[10] Mrs. Alessandro's
position at trial was that she was a shareholder of OPHL, or of the corporation
that controlled OPHL, when the funds were advanced and that she personally
advanced $497,292 to OPHL.
[11] The appellant, Mrs.
Alessandro, testified through an interpreter. Her evidence was that she has
lived in Canada for 46 years, has
a grade five Italian education, speaks very little English and reads no
English. She is literate in Italian.
[12] Mrs. Alessandro is
married to Giuseppe (Joe) Alessandro who, she said, is a contractor. Mr. &
Mrs. Alessandro have three daughters, Giovanna, Rosetta and Alba. She stated
that she relies on her husband for all financial matters. In fact, according to
the evidence, Mr. Alessandro is the driving force in determining the family's
investments and in the family owned corporations. He decided what properties
should be purchased, who the shareholders of family corporations should be and
how funds should be invested. Mrs. Alessandro relied wholly on her husband.
[13] Mrs. Alessandro, on
more than several occasions, could not answer most questions put to her by the
respondent's counsel, declaring that events took place "many years
ago" and that she could not remember.
[14] Some information was
gleaned from Mrs. Alessandro. In her testimony she referred to OPHL as "my
company". She also stated that she owned shares of other family companies,
including OPHL, Arrow and Alessandro Holdings Limited ("AHL"). She
said she loaned money to OPHL and lost money. When asked who made funds
available to these companies and Alessandro Building Corporation
("ABC"), another family owned corporation, she simply stated that she
trusted her husband; he was in charge. Mrs. Alessandro said she made
investments in shares of corporations and in loans.
[15] Mrs. Alessandro's
mantra throughout her examination and, in particular, her cross-examination,
was that she did not know anything because her husband controlled everything
and that she could not remember anything because of the passage of time between
the event and the trial.
[16] Mr. Giuseppe
Alessandro, the appellant's husband, described himself as a subdivider and
builder. He manages OPHL and other family corporations "one hundred
percent".
[17] Mr. Alessandro
testified that his wife "came into the marriage" in 1960 with $10,000
given to her by her father. In 1961 she purchased a property (550 College Street) for $18,000, which she
subsequently sold, tripling her money. Then she purchased another property (Montrose Avenue) for $14,000, made
renovations, and sold for $22,000. She was also in a limited partnership that
purchased land which it sold. Mrs. Alessandro, her husband said, "always
made money on sales" of land. Mr. Alessandro said he would tell her what
to buy and sell. With good investments, Mrs. Alessandro became a wealthy woman.
[18] In about 1993 the
real estate market collapsed, said Mr. Alessandro, and the companies owned
by the Alessandro family were in financial difficulty. The companies' assets
were heavily secured. In 1993 Mr. Alessandro, according to his accountant Gino
Giancola, transferred personal assets to his wife and she started to make loans
to family corporations.
1994 Appeal
[19] I shall consider
first the 1994 assessment. There were mortgage statements from the Laurentian
Bank of Canada, the mortgagee, that
Arrow was making monthly payments of $6,396.98 during the period from July 1,
1993 to August 1, 1994, that is, for 14 months. The amount of $76,764, Mrs.
Alessandro claims she paid on behalf of Arrow, was for the 12-month period from
September 1, 1993 to August 31, 1994.
[20] Unfortunately, Mr.
Alessandro recalled, there was a fire at a property owned by one of the family corporations,
at 41
Rivalda Street, either on Christmas or New Year's Eve 1995. Many financial and corporate
records, including cancelled cheques, stored in the building were destroyed as
a result of the fire. The lost documents included records of Mrs. Alessandro's
bank accounts reflecting payments to the Laurentian Bank as well as OPHL
documents relating to the appeal for 1997. Mr. Alessandro stated that he did
not request any records from the bank soon after the fire, he only made the
requests before his discovery in these appeals. In fact, in March 1999, the
predecessor to the Canada Revenue Agency asked for specific documents. All Mr.
Alessandro could recall was that the money came out of his wife's accounts at
the Toronto Dominion Bank and the Royal Bank of Canada. Mrs. Alessandro made requests to
TD Canada Trust in 2005 for personal cancelled cheques made in 1994 and
1995 as well as bank receipts. The bank replied in October 2005 that the
personal accounts and the accounts of Arrow, ABC and OPHL were closed and the
bank does not maintain records for 1994.
[21] I do not question
Mrs. Alessandro's net worth. It is not unusual for a businessman, in order to
protect assets in case of possible business reversals, to cause family wealth
to be held by his spouse. In the appeals at bar there is uncontradicted
evidence that Mr. Alessandro used his talents for the financial benefit of the
appellant. There is also evidence that the appellant's father made a gift of
money to the appellant or her spouse when they were married and that the money
was successfully invested. The appellant was in a position to subsidize family
investments as her husband may have directed.
[22] The Laurentian Bank
was being paid. Obviously, if the funds did not come from Arrow, they came from
persons not dealing at arm's length with Arrow; only they had an interest to
ensure Arrow would not default. Mr. Giancola verified the accounts of other family
corporations and confirmed the payments were not made by corporations or
"I would have seen it". The respondent does not question that
advances were made to Arrow. I believe it is reasonable to conclude that the
appellant made advances on behalf of Arrow. Since there is no paper trail
indicating who made the payments, the respondent questions whether it was the
appellant who in fact made all the payments.
[23] Mr. Alessandro and
the appellant were jointly and severely liable to the Royal Bank of Canada on a line of credit
they obtained in 1992 in the amount of $2,000,000. They borrowed from this line
of credit to advance money to family corporations, including Arrow and OPHL. There
is evidence in the form of monthly statements from the Royal Bank of Canada that at least one
account with that bank was owned jointly by Mr. and Mrs. Alessandro. There is
also evidence that Mr. and Mrs. Alessandro jointly held Canada Savings Bonds
which were given as security for the line of credit. Mr. Giancola could not deny
the money advanced to Arrow or other companies may have come from Mr.
Alessandro. While it is possible, there is no clear-cut evidence that Mrs.
Alessandro kept her money separate from her husband and that she used her own
funds to lend to Arrow or other companies. I therefore conclude that the money
applied to the Arrow mortgage was money advanced by both the appellant and her
husband. Thus her loan account ought to be adjusted by 50 percent of the
$76,764 paid to the Laurentian Bank on behalf of Arrow. Also, there was no
serious evidence challenging the Crown's value of the Property at $900,000.
Accordingly, the benefit assessed the appellant for 1994 should be decreased by
$38,382; the amount of the benefit in 1994 is $214,692. The appeal for 1994 is therefore
allowed.
1997 Appeal
[24] In the appeal from
her tax assessment for 1997, the appellant is claiming an allowable business
investment loss. She states that she made loans totalling $497,492 to OPHL for
several years prior to 1997. At the time of the loans, she says, she owned all
of the shares of AHL, the majority shareholder of OPHL. Sometime in 1997 the
loans became bad and therefore, according to the appellant, she was deemed to
have disposed of the investment in OPHL for proceeds equal to nil, thus
incurring a business investment loss of $497,492.
[25] The appellant's
notice of appeal says that she "was deemed to dispose of an investment
made by [her] in OPHL". The notice of appeal contains no material facts. There
is no statement when the loans were made and how they were made, even who made
the loans or the terms of the loans. Indeed, there are no statements describing
the making of the loans, the purpose of the loans or the nexus between OPHL and
the appellant. For example, there is no allegation that the appellant was a
shareholder, directly or indirectly, of OPHL when the loans were made from 1993
on. The appellant's notice of appeal states that the appellant was deemed in
1997 to have disposed of an investment in OPHL for proceeds equal to nil and,
as a result, realized a business investment loss of $497,492. The appellant
also alleges that OPHL "was a small business corporation and/or a
Canadian-controlled private corporation". The appellant pleads no other
contentious facts. The appellant's notice of appeal for 1997 does not fully
relate the material facts relied on by the appellant. It is the facts as
pleaded and the issues defined in the pleadings which determine the relevancy
of evidence. The appellant did not sufficiently outline her case. The appeal may have taken less time if
the facts describing the appellant's ownership of shares in ABC and AHL, for
example, had been set out in the pleadings.
[26] According to the
respondent's amended reply to the notice of appeal, the Minister, in assessing,
assumed, among other things, the following and agreed that:
a) $497,292
was advanced to OPHL but he questioned whether the appellant loaned the funds
to OPHL;
b) OPHL
was a "small business corporation";
c) The
$497,292 advanced to OPHL did not bear interest and had no fixed terms of
repayment;
d) OPHL
was insolvent at the end of its 1997 fiscal period, August 31; and
e) the
appellant was not a shareholder of OPHL when the $497,292 was advanced to OPHL.
[27] The appellant's
case, as I can make out, is based on a series of cases that hold that interest
free loans made by a shareholder to the corporation may be considered to have
been made for the purpose of earning income, to place the corporation in a
position where it could be successful and pay dividends on the shares held by
the shareholder.
[28] The respondent
questioned the title to the shares of OPHL. There is a representation in the
appellant's notice of objection to her assessment for 1997 that she is a
shareholder of OPHL. Mr. Alessandro also ratified a By-Law of OPHL on January
14, 1994 describing himself as the sole shareholder of OPHL. However, the
parties do acknowledge that Mrs. Alessandro was not a shareholder of OPHL,
although she referred to it at trial as "my company". The parties
agreed that she was a shareholder of AHL. A question is whether AHL was the
majority shareholder of OPHL.
OPHL
[29] OPHL was
incorporated on April 24, 1978 under the name Oakmount Park Management Ltd. Mr.
Alessandro was an original beneficial shareholder with two other gentlemen,
each owning one share, but by December he owned the three issued shares. In
March 1979 Mr. Alessandro transferred one share to Mrs. Alessandro. On
July 10, 1981, the appellant transferred her shares to John Cocomile who
subscribed for one share so that he owned two shares and Mr. Alessandro owned
two shares. According to the OPHL's Minute Book, the following transfers of,
and subscription for, shares in OPHL were made on the next day, July 11:
|
Joe Alessandro
|
transferred to AHL
|
2 shares
|
|
John Cocomile
|
transferred to Anco Investments
Ltd.
|
2 shares
|
|
AHL
|
subscribed for
|
173 shares
|
|
Anco Investments Ltd.
|
subscribed for
|
118 shares
|
|
Vito Alessandro
|
subscribed for
|
35 shares
|
|
Aldo Leone
|
subscribed for
|
35 shares
|
|
Cosimo Gallace
|
subscribed for
|
35 shares
|
so that at the end of July 11, 1981,
AHL owned 175 shares, Anco Investments Ltd. owned 120 shares and three
individuals together held 105 shares of OPHL. There were issued and outstanding
400 shares in OPHL.
[30] On July 11, 1981,
the number of directors of OPHL was increased from two to four.
[31] The OPHL Minute Book
records additional transfers of shares on February 1, 1983:
|
Anco Investments Ltd. transferred to
|
Kammy Philchard Holdings Ltd.
("Kammy")
|
60 shares
|
|
Vito Alessandro transferred to
|
AHL
|
10 shares
|
|
Aldo Leone transferred to
|
Kammy
|
10 shares
|
|
Cosimo Gallace transferred to
|
Kammy
|
10 shares
|
so that AHL then owned 185 shares
of OPHL, Anco Investments Ltd. owned 60 shares, Kammy owned 80 shares and
Vito Alessandro, Aldo Leone and Cosimo Gallace each owned 25 shares. From this
point on the transfers of shares of OPHL and their registered ownership become
murky. I note that the shareholders' register lacks entries for the period
after July 11, 1981; two pages stapled to the OPHL Minute Book indicate AHL
held 400 shares of OPHL as at January 1, 1989, a third page headed
"List of Shareholders" contains entries to the effect that AHL
received 60 OPHL shares on December 31, 1988 and 340 shares on January 1, 1989.
[32] On June 1, 1985, AHL
transferred its 185 shares in OPHL to ABC in trust. No trust declaration was
made at or about the time of the transfer concerning the ownership of the
beneficial interest of these shares. It appears — there is no independent
evidence — that the words "in trust" are not in the same typeface as
the other words on the consent to transfer of shares. There is no evidence
whether the words "in trust" were added before or after or at the
time two of the directors signed the consent to the transfer; the two other
directors did not execute the consent.
[33] The appellant denies
any beneficial transfer of shares in OPHL took place in 1985. The appellant's
position is that ABC held the shares in trust for AHL. Mr. Alessandro did not
explain the reason for such a transfer. Mr. Frank Peri, C.A. was retained by Mr.
Alessandro in 1984 to prepare unaudited financial statements for AHL, ABC and
other corporations owned by the Alessandro family. Notes to AHL's financial statements
for 1984 and 1985 list AHL's investment in OPHL at 185 shares. ABC's financial
statements for 1984 and 1985 do not reflect an investment in OPHL. As of August
31, 1985, OPHL had 400 shares outstanding. Mr. Peri "probably" also
prepared tax returns for these corporations and did not report any transfer of
OPHL shares in 1985. He depended on Mr. Alessandro for information in preparing
financial statements. He relied on the previous accountant's records for share
ownership in the various companies. Mr. Peri gave up his practice in about
1988.
[34] On February 17, 1987,
Kammy transferred its 80 shares of OPHL to ABC in trust so that the latter
corporation became the registered owner of 265 shares of OPHL, according to the
appellant. Here, also, signatures of two of the directors' are missing from the
consent to the transfer of the shares. According to OPHL's Articles of
Incorporation no shares of OPHL could be transferred without the consent (by
resolution or writing) of more than 50% of the shareholders of OPHL or a
majority of the directors of OPHL.
[35] On December 31, 1988,
according to the appellant, each of the three individual shareholders of OPHL,
Vito Alessandro, Aldo Leone and Cosimo Gallace, transferred his 25 shares
to AHL in trust. Again, there is no declaration of trust in the Minute Book
with respect to these transactions. The document headed List of Shareholders
attached to the OPHL Minute Book records only 60 shares, not 75 shares,
registered in the name of AHL as of December 31, 1988. The number of directors
of OPHL was reduced to one.
[36] The appellant states
that on December 31, 1988, Anco also transferred its 60 shares to ABC in
trust. The sole director of OPHL, Mr. Alessandro, approved the transfer. However,
the transfer document dated "effective the 31st day of December, 1988"
is not signed by the purported transferor. The share certificate representing
these shares was not produced. It may be that the entry in the List of
Shareholders has confused the Anco and individual shareholders transactions.
[37] In the appellant's view
as at December 31, 1988, ABC in trust was the registered owner of
340 shares of OPHL and AHL in trust was the registered owner of 75 shares
of OPHL. There are no declarations of trust or references at the end of
calendar 1988 indicating the beneficial owner or owners of the shares. However,
the Minute Book of OPHL contains a document signed by ABC addressed to the
secretary of OPHL, dated "effective the 1st day of January, 1989"
that it holds 340 issued shares of OPHL in trust for AHL, it is transferring
340 shares to AHL and appoints the secretary of OPHL to transfer the shares in
the books of the company. In another document, AHL also directs the secretary
of OPHL to transfer the 60 shares registered in AHL in trust to itself as
beneficial owner. These transfers are consented to by Mr. Alessandro in his
capacity as director.
[38] However, if I accept
the appellant's evidence that AHL transferred 185 shares of OPHL to ABC in
trust on June 1, 1985, that Kammy transferred 80 shares of OPHL to ABC in
trust on February 17, 1987 and Anco transferred 60 shares of OPHL to ABC in
trust on December 31, 1988, then ABC in trust would have been the registered
owner of 325 shares of OPHL on December 31, 1988, not 340 shares as assumed by
the appellant.
[39] Respondent's counsel
suggested that the unsigned document purporting to the transfer of the 60
shares on December 31, 1988 and the directions of January 1, 1989, were
prepared sometime after their purported dates. There is no evidence supporting
or questioning his suggestion except for the documents themselves.
[40] To add to the
confusion, By-Law No. 8 of OPHL, dated January 14, 1994, was consented to on
the same day by Giuseppe Alessandro, "the sole shareholder" of OPHL.
[41] No annual meeting of
OPHL was held nor were resolutions executed for the fiscal years 1989 to 2002.
There are no records in the Minute Book of OPHL after March 14, 1997. However,
according to Mr. Alessandro, sometime in February 2003, his daughter Alba
Alessandro, a lawyer practicing in New York City, attempted to bring the corporate
records of OPHL, AHL and ABC up‑to‑date. In 2003, she prepared
resolutions of the director of each corporation approving financial statements
for the "outstanding period" and documents ratifying actions of the
corporation during the period. She also prepared shareholder's resolutions to
the same effect as well as electing directors and appointing accountants, among
other things.
[42] As in the appeal for
1994, it appears that the bank accounts from which the monies were advanced to
OPHL originated from a line of credit from the Royal Bank in favour of
Mr. and Mrs. Alessandro. There are statements from the Royal Bank of Canada with respect to one
joint account. Out of this account were cheques aggregating $96,500 that were
paid to OPHL in 1994. Cheques from another Royal Bank account aggregating
$328,000 were made to OPHL in 1993 and 1994; no statement with respect to this
account is in evidence, only the account number. I infer that this money also came
from the line of credit. Mr. Giancola suspects the balance of the funds
came from the Toronto Dominion Bank account. I note that the Statement of
Investment Income (T5) slip for 1997 from the Toronto Dominion Bank is in the
name of Mrs. Alessandro; the amount of interest income in 1997 from this bank
was $101.30. This suggests a modest amount of capital in the account in 1997. There
is no evidence of amounts in the account during the period 1993 to 1997
inclusive. As in the appeal for 1994, it would appear that if any funds were
advanced by Mrs. Alessandro to OPHL, it is reasonable to conclude that her
share of the loans was approximately half of the monies advanced from the line
of credit.
[43] There are no records
from the second Royal Bank of Canada account and the Toronto Dominion Bank (except for the
1997-T5 slip from the latter bank). Mr. Alessandro stated that the fire in
1995 destroyed many of the banking records of the Alessandro group of
companies.
AHL
[44] AHL was incorporated
by articles of amalgamation on September 1, 1983 and issued 562 shares to Giuseppe
Alessandro on incorporation. Mr. Alessandro transferred the 562 shares to the
appellant on September 3, 1983 and since then there have been no changes in
ownership of shares of AHL.
ABC
[45] The Minute Book of
ABC was also produced at trial. Some of the minutes and notices are confusing.
ABC was incorporated in 1982. The first shareholders of ABC transferred their
four shares to Giovanna Alessandro, a daughter of the appellant, who also
became ABC's only director and its President and Secretary in August 1982. In a
Trust Declaration dated January 18, 1984, Giovanna Alessandro declared
that she owned the four shares of ABC in trust for herself and her sisters Rosetta
and Alba Alessandro.
[46] A photostatic copy
of a second Trust Declaration, dated February 18, 1984, signed by the three
sisters and their mother, the appellant, was found in the Minute Book of ABC,
but not attached to the book. The three daughters acknowledge that they hold
the shares of ABC in trust for their mother.
[47] In a third document
entitled Declaration of Trust "effective the undated day of April,
1990", signed by Giovanna Alessandro, there are recitals that
Giovanna is the registered owner of the shares of ABC; that she holds the
shares in trust for herself and her two sisters "pursuant to a Trust Declaration
dated January 18, 1984"; that the beneficial ownership of the shares have
been transferred from the three daughters to their mother; and that Giovanna
has agreed to continue as trustee. There is no reference to the Trust
Declaration of February 18, 1984. Gregorina Alessandro agreed to the terms of
this trust on April 11, 1990. Pages stapled to the Minute Book of ABC,
described as share transfer register and shareholder's ledger, reflect the
transfer of the four shares from Giovanna Alessandro to Gregorina Alessandro on
April 11, 1990. One queries why the register and ledger required a record of
the transfer if the erstwhile registered owner, Giovanna Alessandro, was to remain
the registered owner as trustee.
[48] Mr. Alessandro
testified that his secretary prepared the minutes for the family's companies,
usually on the instructions of his long-time lawyer, Mr. Dingwall. Mr.
Alessandro stated that he kept the Minute Books in his possession, either in
the basement at home or on the second floor of his garage. It was pointed out
to him that some documents in the Minute Books are dated as of an
"effective" date, some pages are loose leaf and most are permanent,
and some documents conflict with others. He replied that if there are errors in
the Minute Book, they are the secretary's errors; he could not recall the
secretary's name. He said that he signed documents on the actual date specified
on the document.
[49] Rosetta Alessandro
testified that her sister Giovanna held shares in ABC in trust for herself and
her two sisters. Later her mother invested in ABC and her father wanted to
"update" the shareholding in ABC. The direction transferring the four
shares of ABC to her mother, dated "effective the 11th day of
April, 1990" was signed, she said, at the family kitchen table on April
11, 1990. In any event, the appellant appears to have been the beneficial owner
of the shares of ABC as of April 11, 1990.
[50] The shareholdings of
ABC, in particular the various trust documents, as far as this 1997 appeal is
concerned, serve as an example of the shoddy manner in which the Alessandro
family, or Mr. Alessandro, treated the ownership of shares in a typical
Alessandro family corporation.
[51] Gino Giancola, C.A. took over the
Alessandro family companies account for Mr. Peri in 1989 and, like Mr. Peri, he
prepared financial statements with information provided by Mr. Alessandro. In
1989 Mr. Alessandro employed a Mr. Miller as an accountant and Mr. Giancola obtained the necessary records from Mr. Miller to start work on the
financial statements. The material he received from Mr. Miller included the
previous year's records, the general ledgers and a list of shareholders,
officers and directors of each corporation.
[52] In
examination-in-chief Mr. Giancola had no idea what "ABC in trust"
signified with respect to the 185 shares of OPHL. He did not discuss this with
Mr. Alessandro. He assumed it was a transfer from AHL to ABC. Mr. Giancola recalled
that when Mr. Alessandro "had some financial difficulties" in 1993,
he "transferred Alessandro Holdings and then any other assets, I guess, to
his wife".
[53] Mr. Giancola
prepared tax returns of OPHL and ABC for 1989 to 1997 taxation years on the
basis ABC was a shareholder of OPHL and that they were associated companies.
However, Mr. Giancola said he never reviewed any Minute Books until 2003, once
these appeals were filed.
[54] When Mr. Alessandro
would meet with Mr. Giancola to sign corporate tax returns, he made only a
"cursory review", according to Mr. Giancola; "he didn't really
understand corporate tax".
[55] Appellant's counsel
raised the issue of the tax returns for ABC and OHPL with Mr. Giancola:
Q. Now you've mentioned that
these tax returns, the corporate tax returns, for Alessandro Building
Corporation and OPHL were prepared by you on the basis that Alessandro Building
Corporation was the shareholder of OPHL. Have you had any opportunity to
reflect on that as a result of this tax appeal?
A. Well, in preparing for
this case and with your examination of the minute books going back to the
period prior to me becoming the accountant, it seems that perhaps Alessandro
Holdings was always the owner of these shares and there was no real change of
ownership that took place at any point in time.
JUSTICE RIP: That's your
conclusion?
THE WITNESS: Yes.
JUSTICE RIP: On what basis do
you make that conclusion?
THE WITNESS: On discussions
that I've had with Mr. Alpert.
BY MR. ALPERT:
Q. Does that have to do with
the meaning of the term, "in trust"?
A. Yes.
[56] Later on in
examination-in-chief, Mr. Giancola stated that if he had "dug deeper to
get a better understanding of the share structure of" OPHL he would have
shown in the corporate tax return for 1989 and subsequent years that ABC was
not a shareholder of OPHL, that AHL was the majority shareholder.
[57] In cross-examination
Mr. Giancola was asked:
Q. In your examination
in-chief you were candid and you acknowledged that you probably should have dug
deeper to get a better understanding of the share structure of this company.
I'm not sure if you were referring to OPHL or to A.H.L., but I wonder if you
would just elaborate a little bit on that?
A. I think with OPHL where
you have different shareholdings, you have stuff being crossed off. Alessandro
Holdings was very straight forward. On September 1, 1993, the amalgamation was
done, a new Alessandro Holdings came to be and was amalgamated. At that point,
the shares were all transferred to Gregorina Alessandro from that point onwards
that's fairly clear. Anything prior to that I have no – (inaudible).
Q. I think you indicated that
it appears that AHL was always the shareholder of OPHL?
A. Yes.
Q. That was based on your
discussions with Mr. Alpert?
A. Subsequent to the appeals
when we went to see Mr. Alpert to deal with this issue and he went into these
minute books in detail as a lawyer going back to these trust agreements, back
to '85, and he pointed out to me that perhaps no transfer took place, any
beneficial ownership of transfer took place.
Q. So, he explained to you
these trust agreements, did he, and based on that explanation you took the view
that perhaps AHL was always a shareholder?
A. Yes.
Q. That's not a conclusion
that you drew on your own?
A. No I think it's a legal
issue. I mean today if I look at this, I wouldn't be able to determine exactly
who the – - I don't know what's going on here.
Q. Thank you for that.
JUSTICE RIP: What company are
you referring to specifically?
THE WITNESS: I would imagine
Oakmount Park Holdings.
MR. LECKIE: I think that's
perhaps a good time for me sit down, thank you.
[58] Mr. Giancola
prepared Mrs. Alessandro's 1997 tax return on the basis she loaned $497,292 to
OPHL, a company in which AHL was the majority shareholder. During this period
she owned all of the shares of AHL during the period 1993 to 1997. At the end
of its 1997 fiscal year OPHL was insolvent. Thus, a business investment loss of
$497,292 was claimed. Mr. Giancola determined the amount of the loan from
the general ledger account and from consulting the bank accounts from which the
loans were advanced. He considered the appellant was "indirectly" a
shareholder of OPHL since she owned OPHL through a holding company.
[59] Neither party's
pleadings raised the issue of the existence or not of a trust. Only in argument
did the appellant through her solicitor raise the possibility of a resulting
trust in ABC. Because this issue was not raised in pleadings and no attempt was
made to amend the notice of appeal to include this issue I did not allow
counsel to make any submission whether there was a resulting trust. The
respondent would not have had the opportunity to examine the appellant on the
facts that she may have alleged to support her submission.
[60] The words "in
trust" follow those of ABC and AHL in the share transfer register of OPHL,
in notices of transfers of shares to the directors of OPHL and in consents to
the transfers signed by several, if not all, directors of OPHL. Do these words
have any impact in determining the beneficial owners of the OPHL shares
registered in the name of, or transferred to, a purported trustee?
[61] It is not my wish to
discuss in any detail the law of trusts. However, I believe I must make some
comments. The word "in trust" following a corporate or individual's
name without any contemporaneous indication of the trust's beneficiary is
troubling. In such a situation the beneficiary may be anybody or nobody,
depending on circumstances.
[62] Under the law of
trusts, ownership of a property may be divided into legal and beneficial
interests. Underhill, Law of Trusts and Trustees, 11th ed., has offered
the following well-known definition which has been endorsed by the courts in Re
Marshall's Will Trusts, [1945] Ch. 217 at 219 and Green v. Russell,
[1959] 2 Q.B. 226 at 241:
A trust is an equitable obligation,
binding a person (who is called a trustee) to deal with property over which he
has control (which is called the trust property), for the benefit of persons
(who are called the beneficiairies or cestuis que trust), of whom he may
himself be one, and any one of whom may enforce the obligation. [See also the
explanation of a trust in Lewin on Trusts, 16th ed. London: Sweet and Maxwell, 1964.]
[63] Generally, in order
to create a valid express private trust a number of conditions must be present.
All parties to the trust must have the requisite legal capacity to create a
trust. Without the three certainties of intention, subject-matter and objects,
the trust will fail.
The trust must be constituted and the requisite formalities must be satisfied.
Given the facts at hand, the most relevant considerations are the certainty of
intention, that is, the intention to create a trust, the certainty of object,
that is someone in whose favour the Court can enforce the trust, and constitution of the trust, that
is, the transfer of the property to the trustee.
[64] Where an express
trust fails, the equitable proprietary remedy of resulting trust may apply. In
such cases, the Court will find that the beneficial interest in the property
was never properly relinquished to the trust and therefore the property results
back to the settler.
[65] There is also a
question whether the deficiencies in any of the following transfers would
invalidate a transfer:
a) the
absence of consent by a majority of directors of OPHL to the transfer of 185
shares of OPHL from AHL to ABC in trust on June 1, 1985;
b) the
absence of the consent by a majority of the directors of OPHL to the transfer
of 80 shares from Kammy to ABC in trust on February 17, 1987;
c) a
missing signature of an officer of Anco in the purported transfer on December
31, 1988 of 60 shares of OPHL by Anco to ABC in trust; and
d) a
possible error by ABC in trust, when it transferred 340 shares of OPHL to AHL
on January 1, 1989 when it was the registered owner of only 325 shares of
OPHL.
[66] I cannot determine
from the evidence before me whether trusts were intended at the time of the
pertinent transfers or whether the beneficiary of each purported trust was
declared subsequently. I have therefore considered the following possibilities,
assuming that no beneficiary was designated at time the relevant property is
said to be transferred to the particular trustee:
a) If one argues that the transfer of 185 shares from
AHL to ABC in trust should be set aside because a majority of the directors of
OPHL did not consent to the transfer, then AHL has remained the beneficial
owners of the 185 shares; the June 1, 1985 transaction did not take place. If a
transaction did take place on June 1, 1985 but there was no intention to create
a trust, that is, there is no beneficiary, then, here too, the 185 shares stay
with the transferor AHL;
b) if
the transfer of the 185 shares were valid and there was an intention to create
a trust but no beneficiary was designated, the trust would be void for
uncertainty of object and the beneficial ownership would revert back to AHL;
the conclusion in b) would also apply to the other transfers in trust,
i.e., Kammy to ABC in trust and Anco to ABC in trust. However, Anco and Kammy
appear to have considered their interests in OPHL to have terminated with the
purported transfers by them to ABC in trust; no interested party has otherwise
questioned the transfers and the divestitures of OPHL shares by Anco and Kammy were
not seriously questioned by the Crown; and
c) in the event the transfer to a transferee in trust was valid but the
transferee did not declare for whom it holds the shares, there would be no
ascertainable beneficiary and therefore no trust. The transferee would be the
legal and beneficial owner of the shares. Thus ABC would be legal and
beneficial owner of 325 shares (81.25 per cent) of OPHL.
[67] I have concluded
that the appellant was the beneficial owner of all of the shares of ABC from
April 11, 1990. Therefore, whether the beneficial owner of the majority of the
shares of OPHL is either AHL or ABC, it is the appellant who had ultimate
control of OPHL, despite the many inconsistencies I have heard. She controlled
both AHL and ABC.
[68] Generally speaking,
paragraph 39(1)(c) creates a business investment loss (three quarters of
which was fully deductible in 1997 against any income source) which may be
triggered by an election under subsection 50(1) for a bad debt. However,
subparagraph 40(2)(g)(ii) will deny the loss on a debt where there is no
income purpose for the loan. Subparagraph 40(2)(g)(ii) requires a
linkage from the lender taxpayer to the income.
[69] In Rich v. The
Queen
the Federal Court of Appeal concluded that as long as earning income was one of
the purposes of the loan (although not necessarily the primary purpose), the
income-earning requirement of subparagraph 40(2)(g)(ii) of the Act had
been met.
[70] In order to satisfy
the income purpose test, income need not flow directly from a loan to the
taxpayer. In Byram, supra, the Federal Court of Appeal adopted an
approach that was consistent with commercial reality and held that the taxpayer
was entitled to deduct the loss because he was able to demonstrate a sufficient
nexus between himself and the dividend income he could receive as a shareholder. In the Court's view:
[17] Such an approach is also consistent with commercial
reality. Frequently, shareholders make such loans on an interest-free basis
anticipating dividends to flow from the activities financed by the loan. To
adopt the position of the Minister would require that this Court ignore this
reality. It would also be contrary to the comments of the Supreme Court of
Canada in Stubart Industries Ltd. v. The Queen. Commercial reality is to
be considered by the Courts in interpreting tax provisions like subparagraph
40(2)(g)(ii) so long as it is consistent with the text and purpose of
the provision.
[18] The ultimate purpose of a parent company or
a significant shareholder providing a loan to a corporation is, without
question, to facilitate the performance of that corporation thereby increasing
the potential dividends issued by the company. This purpose is clearly within
the scope of both the text and the purpose of subparagraph 40(2)(g)(ii),
a section which is directed towards preventing taxpayers from deducting losses
that are not incurred for the purpose of earning income from a business or
property.
[19] There is a growing body of
jurisprudence that considers current corporate reality as being sufficient to
demonstrate that the expectation of dividend income justifies a capital loss
deduction under subparagraph 40(2)(g)(ii). . . .
[71] The Court also cautioned that
the anticipation of dividend income could not be too remote, as follows:
[21] It is equally clear that the anticipation of
dividend income cannot be too remote. It is trite law that sections 3 and 4 of the
Act, in conjunction with the rules set out in subdivisions (a) through (d) of
division B, establish that the income of a taxpayer is to be determined on a
source by source basis. Furthermore, the availability of certain deductions
under the Act, including subparagraph 40(2)(g)(ii), require that some
regard be given to the source of income that is relevant to the deduction.
Accordingly, a deduction cannot be so far removed from its corresponding income
stream as to render its connection to the anticipated income tenuous at best.
This does not preclude a deduction for a capital loss incurred by a taxpayer on
an interest-free loan given to a related corporation where it had a legitimate
expectation of receiving income through increased dividends resulting from the
infusion of capital.
[22] The shareholders of a company are directly
linked to that corporation's future earnings and its payment of dividends.
Where a shareholder provides a guarantee or an interest free loan to that
company in order to provide capital to that company, a clear nexus exists
between the taxpayer and the potential future income. Where a loan is made for
the purpose of earning income through the payment of dividends, this connection
is sufficient to satisfy the purpose requirement of subparagraph 40(2)(g)(ii).
[23] In situations where the taxpayer
does not hold shares in the debtor, but rather is a shareholder of a
parent company or other shareholder of the debtor the taxpayer is not entitled
to dividend income directly from the debtor. Generally speaking, the burden of
demonstrating a sufficient nexus between the taxpayer and the dividend income,
in such cases, will be much higher. The determination of whether there is
sufficient connection between the taxpayer and the income earning potential of
the debtor will be decided on a case by case basis depending on the particular
circumstances involved.
[Footnote
omitted.]
[72] In the appeal from the
assessment for 1997 we are dealing with a series of family corporations. By
1994 one mind was directing ABC, AHL and OPHL, that of Mr. Alessandro. However,
from 1993 on, when the loans began to be made, Mrs. Alessandro was the
shareholder who controlled, directly and indirectly, all three corporations. Even
if her husband directed her how to act, it was Mrs. Alessandro who had the
right to elect the directors of all three corporations. At the end of the day,
she could cause OPHL to declare and pay dividends to AHL, if AHL controlled
OPHL, or ABC, if ABC controlled OPHL. In turn, she could cause AHL or ABC to
pay dividends to herself. While there is a degree of remoteness between
Mrs. Alessandro and OPHL there is a clear nexus between her and dividend
income.
[73] However, as I have already
stated, it is likely that Mrs. Alessandro's share of the loans to OPHL was only
one-half of what she claimed. The source of funds advanced to OPHL appear to be
from a line of credit to both the appellant and her husband. Therefore, her business
investment loss was $248,646 and her allowable business investment loss for
1997 was $186,484.50 which, to the extent it has not been carried back or
forward to other years, may be carried back to 1994. The appeal for 1997 is
allowed on this basis.
Costs
[74] I do not award costs in either
of these appeals. The degree of success for each appeal has been shared equally
by the parties. Also, the appellant's notice of appeal for 1997 did not
sufficiently outline her case and caused the appeals to take more time than was
necessary.
Signed at Ottawa, Canada, this 13th
day of July 2007.
"Gerald J. Rip"
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