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Citation: 2003TCC494
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Date: 20030717
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Docket: 2000-4389(IT)G
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BETWEEN:
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WORLD CORP,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bell, J.
ISSUES:
[1]
1. What was the value of a
"Commission" payable to the Appellant in the sum of
$3.9 million dollars on December 29, 1989 when it assigned same
to a Cayman Islands B.W.I. Corporation, not at arm's length
with the Appellant for a "Purchase Price of U.S.
$35,000.00", being $41,300 Canadian?
The Minister of National Revenue ("MNR") calculated
that the amount of commission not reported by the Appellant was
$2,458,700 (being, apparently, his estimate of a value of $2.5
million minus the aforesaid $41,300 received by the
Appellant.)
2. Was the Appellant
liable to withhold and remit tax to the MNR under Part XIII
of the Income Tax Act ("Act") in the
amount of $614,675, being 25 percent of the aforesaid sum of
$2,458,700 together with interest and penalties with respect
thereto?
3. Was the Appellant a
"Canadian-controlled private corporation" and,
therefore, entitled to a "small business deduction"
under section 125 of the Act?
FACTS:
[2] The Appellant was, in 1989, a
company licensed by the Ontario Securities Commission as a dealer
in securities. Its president, Alexander O ("O"), was
licensed by the Ontario Securities Commission to sell securities
through the Appellant. All of the Appellant's issued and
outstanding shares were owned by 616483 Ontario Limited
("Limited"). O, resident in the Cayman Islands at all
material times, owned 49 percent of the issued shares of Limited.
Rose Rende ("Rende"), the Appellant's Office
Manager and a Canadian resident, owned 51 percent of the issued
shares of that company.
[3] In October or November of 1989, O
was approached by Gerry Farantatos ("F") a builder and
developer who had had dealings previously with O and the
Appellant. O testified that he had several discussions with F. He
said that F wanted to build an office tower on property
controlled by him and that he wanted to raise approximately $100
million, $49 million of which would be an investment by partners
in Units of a limited partnership to which the property would be
sold. The balance would be raised by mortgage on the land. O
stated that he had acted as agent in selling Units in limited
partnerships of other real estate syndications of which F was the
promoter. He said also that he offered, on behalf of the
Appellant, to act as agent to sell such Units for a commission of
$3.9 million on the understanding that the commission would be
payable in instalments over a two and one-half year period, to
coincide with payments to be made by limited partners. The record
does not disclose whether, at that time, the partnership had been
formed or whether F had any authority to bind same if it had been
formed. In response to questions on cross-examination, O
testified that he was dealing with F in F's capacity as
promoter only. That position was not challenged in
cross-examination.
[4] In the discussions in October or
November of 1989 F told O about a $70 million debenture
registered against the property in favour of the Bank of Nova
Scotia. He told O that if the syndication was successful and the
requisite capital raised, F would then negotiate with the Bank to
have the debenture "lifted". O testified further that F
did not intend to raise that issue with the bank until after the
closing of the sale of partnership Units.
[5] O testified that no Offering
Memorandum ("OM") existed at the time of his initial
discussions with F. He said that Touche Ross, an accounting firm,
prepared a memorandum of outline of the structure and gave it to
Howard Kutner ("Kutner"), a lawyer for the investors
and that Kutner drafted the OM in December, 1989. O also
testified that there was no draft of a Commission Agreement in
existence in 1989.
[6] A "Commission Agreement"
is referred to in the OM under the heading MATERIAL CONTRACTS OF
THE PARTNERSHIP/CO-TENANCY. The first two paragraphs read as
follows:
World Corp., the Agent, and Alexander O will enter into the
Commission Agreement dated as of November 30, 1989. The Agent has
agreed to provide all necessary services for marketing and
coordinating the sale of the Units pursuant to the Offering
Memorandum, in return for which the Agent will be paid a
commission by the Partnership in the amount of $3,900,000.00.
This commission will be fully earned on the closing of the
sale of the Units. Subject to the terms described below, the
Agent has agreed to defer its receipt of the commission over a
schedule coinciding in amounts and at times with the principal
instalments under the Note III.
O testified that he had discussed this with F.
[7] The other MATERIAL CONTRACTS
described in the OM were:
Commission Sales Agreement - This dealt with the sale of any
part of the property and building after the "Property
Closing Date". This term is defined in the OM as meaning the
date that Asia Pacific and the Partnership agree to close the
purchase of the Property pursuant to the Purchase Agreement,
which date shall be on or before June 30, 1990.
Depository Agreement
This was described as an agreement under which the trust
documents would be held by a trustee in trust until conditions of
closing were satisfied. It provided that if all conditions of
closing were not satisfied on or before the Closing Date the
trustee would promptly return to the investors all trust
documents without interest. The term "trust document"
was defined in the OM to include the subscription agreement, the
proceeds of the Trust Cheques, the first equity loan, the third
equity loan, the Note I, the Note II, the Note III, the
post-dated cheques, the Guarantee Agreement I and the Guarantee
Agreement II. The term "Closing Date" was defined to
mean the closing of the sale of Units, pursuant to the OM which
date was to be decided by the General Partner but not be later
than December 31, 1989.
Purchase Agreement
This described the arrangement under which the Partnership
would purchase the property from the registered owners. It
provided that if the closing did not take place before July 1 the
investors would have the right to re-sell their Unit to Asia
Pacific or Asia Pacific would have the right to re-purchase the
Units from the investors at a prescribed purchase price.
Building Contract
Lease Back Agreement
Cash Flow Loan
Adjusted Project Cost and Extension of Guarantee Period
Net Net Net Rents
Services Agreement
Management Agreement
Guarantee Agreement I and Guarantee Agreement II
Partnership Agreement
[8] Returning to the Commission
Agreement, the OM also under "CONDITIONS PRECEDENT TO THE
OFFERING" provided, in paragraph (c):
the Agent, acting reasonably, shall be satisfied with the
provisions of the Commission Agreement and the Commission Sales
Agreement which agreement ... shall have been executed and
delivered, and the commission of the Agent shall have been
satisfactorily secured, in the opinion of the Agent acting
reasonably;
Paragraph (b) reads as follows:
(b) the solicitor
for the Partnership, acting reasonably, shall be satisfied
either:
i) with
the provisions of the Material Contracts which contracts shall
have been executed and delivered and form binding obligations on
the parties to them; or
ii) that Asia
Pacific has delivered its undertaking to the Partnership and to
the solicitor for the Partnership to finalize all of the Material
Contracts as soon as possible after closing but in no event later
than March 31, 1990;
[9] In response to a question from
Appellant's counsel as to whether O had seen or been
satisfied with the form of Commission Agreement. O said that no
Commission Agreement had been prepared but that his lawyer,
Donald Milner, was preparing drafts of a Commission Agreement in
late December, 1989.
[10] O also stated that he received a
document from John McKellar, Q.C. ("McKellar") of Weir
Foulds, solicitor for F and his companies, on December 28, 1989
entitled "AGREEMENT" addressed to Asia Pacific Foreign
Securities Traders Inc. ("Asia Pacific"), an F company
and to The Senate Congress Partnership ("Partnership")
and to Messrs. Weir & Foulds and Howard Kestner (sic)
reading as follows:
FOR VALUABLE CONSIDERATION, the undersigned agree that if the
purchase of the Property referred to in the Memorandum and the
deed to the general partner has not been closed, and the deed to
the general partner registered, by June 30, 1990, for whatever
the reason, and whether or not any party or parties is in default
in connection therewith, the undersigned agree that they and
their sub-agents, successors and designates are not entitled to
any commission or listing agreement or right of first refusal in
connection with the Project and will cause the return of all
commission, agreements, monies, notes, guarantees or other
securities in connection therewith and will deliver a release to
Asia Pacific, the Partnership, World U.S. Corp. and all other
parties involved.
This was referred to in evidence as the "waiver" or
"Waiver". Provision was made for signature by World
Corp and World Canada Corp. O said that he was not prepared to
sign these documents and in fact they were not signed. He stated
that 100 percent of the Units had been sold as at December 28,
1989. He testified that the Appellant had agreed to pay
sub-agents the sum of $834,000. He also stated that F did not
tell them that the payment of the commission to the Appellant
would be conditional on the closing of the land acquisition by
the Partnership. O stated that no Commission Agreement or other
agreement was signed in 1989.
[11] Referring to an agreement "made as
of the 29th day of December, 1989" between the Appellant and
World International Financial Century Corp., a Cayman Island
corporation, O said that he had prepared the agreement himself
using an agreement from another transaction as a model. This was
the agreement assigning the "Commission Payable", also
referred to as "the accounts receivable", to the Cayman
company controlled by O. Although that document refers to an
agreement on the 29th day of December, 1989,
between, inter alia, Senate Congress Partnership (the
"Agency Agreement"), The Limited Partnership agree to
pay to World Commission as defined in the Agency Agreement:
O stated that there was no such agreement. He said the term
"Agency Agreement" came from another document. He said
that no monies on account of commission were payable to the
Appellant because McKellar wanted all monies to be placed in
trust.
[12] O was referred by Appellant's
counsel to a letter dated December 28, 1989 to World U.S. Corp.,
World Corp, and World Canada Corp to the attention of Mr. Alex O,
President reading as follows:
Re: Senate Congress Partnership
We confirm the following agreements reached today in the above
connection:
1. All funds
received from investors and held under the depository agreements
have been invested in term deposits with Citibank, Canada and are
held at their Islington, Ontario office. Throughout the period of
investment, all monies will be similarly invested and held in
Ontario.
2. If any
investor defaults upon any payment, there will not be two actions
commenced, but rather Asia Pacific Foreign Securities Traders
Inc., ("Asia Pacific") will work together with you to
take action, at its expense, to collect the payments not
made.
Yours truly,
WEIR & FOULDS
Per:
"signature"
J.D. McKellar
Various documents introduced in evidence including letters by
Citibank confirmed the deposit of funds as above outlined.
[13] Also produced was a letter from the
Appellant signed by O to the audit manager of Deloitte &
Touche dated March 24, 1990 which stated, among other things:
The following agreements are required to be signed.
1. Commission
Agreement
2. Commission
Sales Agreement
3. Commission
Note
4.
Guarantee
5. Agreement
of Purchase and Sale between PHI International Inc. and Churchill
Estates Development Corporation Ltd. (registered owner/vendor)
and Senate Congress Partnership (purchaser)
[14] A letter from World Corp to Deloitte
& Touche stated that Kutner, solicitor for the Partnership,
had informed O that he had not yet received documents from anyone
as of April 27, 1990.
[15] Appellant's counsel referred O to a
copy of an Offer to Purchase executed by two of F's
companies, one being the general partner of the Partnership for
the purchase of the aforesaid property. Although undated, O
testified that he received it some time in June, 1990. He
testified further that the real estate closing, that is to say,
acquisition by the Partnership of the land in question, took
place on June 29, 1990.
[16] O also stated that neither the
Appellant nor World International had received any commission
before July 17, 1990.
[17] On cross-examination O testified that
the Depository Agreement, although said to have been executed on
November 30, 1989, was prepared to reflect that date but was not
signed until June, 1990. He further stated that it was still
being drafted in May and June. When asked as to whether the terms
of his receiving the commission were settled on December 29, 1989
O replied that McKellar refused to sign unless the Appellant
signed the waiver of commission. Also introduced in evidence was
a copy of a letter from the Appellant to McKellar, Weir &
Foulds, dated June 19, 1990 enclosing executed copies of the
Commission Agreement between the Appellant, the Partnership and
the General Partner, the Commission Note to be delivered by the
Partnership, the Guarantee to be delivered by Asia Pacific and
the Commission Sales Agreement between World Canada Corp, the
Partnership, the General Partner and O. The letter also pointed
out that the Appellant and World Canada Corp had been requested
to agree to amendments to two of the original Contracts and
stated that they would be executed:
... only if the following conditions are met, namely:
1. the
Original Contracts must be executed and delivered forthwith;
2. the
purchase of the Property must be completed on the Property
Closing Date;
3. the Note
III and the post-dated cheques of the Investors in connection
with the Note III must be endorsed, negotiated and assigned to
World Corp, and released from any trust under the Depository
Agreement; and
4. the first
instalment of the commission payable to World Corp. in connection
with the sale of the Units must be paid to it and released from
any trust under the Depository Agreement.
[18] McKellar testified that F had not
reached an agreement with the Bank of Nova Scotia as of December
29, 1989 to "lift" the $70 million debenture. McKellar
also said that F had a different understanding from that of O
respecting the $3.9 million commission. He said that it was
F's understanding that no commission would be payable in the
event that the prospective sale of the Property to the
Partnership failed to close.
[19] Richard M. Wise, F.C.A., C.A., I.F.A.,
S.C.V.B., A.S.A., M.C.B.A., ("Wise") was qualified as
an expert in business valuation and, specifically, as an expert
in valuing financial assets and assessing risk attaching to
collectability of financial instruments. His outstanding academic
and professional credentials, position, experience, publications,
lectures, professional committees and other credentials and
activities including significant professional mandates fill six
and one-half pages. His report on the fair market value of the
commission receivable on or about December 28, 1989 contains his
opinion as follows:
In our opinion, based on the information and documents
reviewed, the explanations provided to us, and subject to the
restrictions, assumptions and qualifications noted herein, the
fair market value of the Commission Receivable (net of
subagents' commissions) as at the valuation date was in the
range of $60,000 to $390,000, as determined herein.
A list of the documents reviewed by his firm include the
Offering Memorandum, Limited Partnership Agreement, Commission
Agreement, Amended and Restated Commission Agreement, Depository
Agreement relating to the responsibilities and duties of the
Trustee, agreement never signed dated December, 1989 among Asia
Pacific, SCP, Messrs. Weir & Foulds and Mr. Howard Kutner,
the agent and World Canada Corp), the "Waiver", a sale
contract between the agent and the acquirer made as of December
29, 1989 relating to the Commission Receivable, and many other
documents.
[20] In describing the nature and history of
the Commission Receivable he states that SCP, the limited
partnership, was established to acquire property and construct a
building thereon, the promoter and manager being Asia Pacific. He
stated that both the General Partner and Asia Pacific were shell
companies without assets or financing ability and were directed
and controlled by F. He said that by the valuation date all Units
of the Limited Partnership had been sold. He said that investors
were required to make an initial cash payment of $1,431.49 per
Unit and were to obtain equity loans from Asia Pacific to fund
the balance of the purchase price. He stated further that
investors also issued three promissory notes ("Notes I, II
and III") covering interest payable on said loans. He then
described Note III as being issued in principal amounts
corresponding to the instalments of the Commission Receivable,
namely $9,289.82 per Unit. These notes were dated March 1, 1990,
June 1, 1990, December 1, 1990, June 1, 1991, December 1, 1991
and June 1, 1992. He stated that Note III and the cash payment
made by investors, totalling $548,260.67 were held in trust by
the trustee pending release to SCP when all conditions preceding
release were satisfied.
[21] Wise said that at the valuation date no
Commission Agreement had been signed or finalized, stating
further that the Commission Agreement and the waiver were in
draft form and unsigned. He said that the Amended and Restated
Agreement was not drafted until several months after the
valuation date, namely in late June, 1990. He said that
accordingly, his firm reviewed the Commission agreement,
being
the only document, which although unsigned, had been drafted
as of the valuation date.
It provided that the partnership was responsible for and
liable to the agent for the payment of sales commissions
totalling $3,900,000. The commission was to be paid in
instalments on December 29, 1989, March 1, 1990 and instalments
ending June 1, 1992 corresponding in time and amount with the
Note III instalments to be received from investors.
[22] Wise stated his understanding that the
Commission Agreement was signed on June 28 or June 29, 1990. He
then said that on December 28, 1989 Asia Pacific's legal
counsel sent the Appellant the above described Waiver to be
signed in an attempt to finalize the Commission Agreement. The
Waiver, dated December 28, 1989 provided that the agent would not
be entitled to any commission in connection with SCP, and would
effect a return of all commissions, agreements, monies, notes, et
cetera until the purchase of the property was formally
consummated. He stated that the only differences between the
Commission Agreement and the Amended and Restated Agreement was
that the Commission Receivable was dependent upon the property
purchase being consummated before July 1, 1990 and the instalment
dates were varied in that the first payment was postponed to
June, 1990.
[23] He stated that the closing of the
offering of the Units was subject to a number of conditions. If
any of those conditions were not met investors would be entitled
to rescind their subscription and receive a refund of their
money. Further, if the partnership had not acquired the property
before July 1, 1990 the investors would be entitled to sell their
Units back to Asia Pacific which had agreed to purchase them for
a price equal to the invested cash of the investor.
[24] Wise then referred to the conditions
precedent referred to above as set out in the OM which he
described as the only final document at the valuation
date, those conditions being:
(a) the sale of at
least 60% of all the Units offered;
(b) the solicitor
for SCP, acting reasonably, being satisfied that either:
i) the
provisions of the material contract had been executed and
delivered and formed binding obligations on the parties to them,
or
ii) Asia
Pacific had delivered its undertaking to SCP and its solicitor to
finalize all of the material contracts as soon as possible after
closing but in no event later than March 31, 1990;
(c) the Agent acting
reasonably, being satisfied with the provisions of the Commission
Agreement;
(d) Touche Ross
& Co. having provided its tax letter; and
(e) Weir &
Foulds, solicitors to Asia Pacific, having rendered its opinion
to Touche Ross & Co. to the effect that the sale of Units
conformed with the requirements of the Securities Act (Ontario)
and the Regulations thereunder.
[25] Wise then stated in his report
that:
Accordingly, as the delays in finalizing the terms of the
material contracts and condition (c) above were not met, the
completion and fulfilment of the offering continued to be in
doubt until late June 1990.
The Depository Agreement (one of the material contracts
referred to in the Offering Memorandum), although not executed
until late June 1990, was in draft form at the valuation date.
Section 2.02, which provided that the trust documents were to be
held by the Trustee pending the purchase of the Mississauga
Property by SCP, was included in the draft agreement.
In summary, as (a) the investors would have been entitled to
require Asia Pacific to purchase their Units for a price equal to
the cash invested in the event that the Mississauga Property was
not acquired by SCP on or before June 30, 1990 and (b) Asia
Pacific was a shell company lacking the financial ability to pay
the Commission Receivable in the event that it was required to
purchase the investor's Units, it appears doubtful that Asia
Pacific would have agreed to pay the commission prior to being
able to unconditionally and irrevocably retain the investors'
monies.
[26] Wise referred to the Appellant's
sale contract of the Commission Receivable and stated that there
was no guarantee of collection by the acquirer of the Commission
Receivable because the purchase of the property had not been
approved by the Bank of Nova Scotia and further because the
General Partner and Asia Pacific were both corporate shells,
neither having any material net worth.
[27] Wise then referred to the seven
instalments of commission payable, stating that the Commission
Agreement was not signed as of the valuation date, that the
waiver of the commission had not been signed and that the initial
payment of $341,998.94 due on the "Closing Date" by SCP
was not paid to the Appellant.
[28] Wise's report then said:
The Offering Memorandum provided that the Agent's
commission "will be fully earned on the closing of the sale
of the Units." It appears clear that the Agent had earned
its commission in the sense that it had fulfilled its obligations
to SCP as all Units had been sold; however, its ultimate
collectibility was doubtful as at the valuation date partly as a
result of it being unclear at the valuation date whether the
Agent was entitled to the Commission Receivable.
[29] The main issue in this appeal being a
valuation question I shall quote a substantial portion of
Wise's opinion.
5.2
Collectibility of Commission Receivable
As noted above, the Commission Agreement had not been signed
as of the valuation date and, in fact, was not signed until the
Mississauga Property was acquired (i.e., at the end of June
1990).
As the Court will determine all applicable questions of law,
we have not based our report on any legal opinion with respect to
the right, if any, of the Agent to enforce payment of the
Commission Receivable as of the valuation date. Rather, we have
assumed for purposes of our opinion as business valuators that,
in light of a number of factors, the Agent had no legal right as
of the valuation date to enforce payment of the Commission
Receivable. The relevant factors supporting this assumption of
law include the following:
(a) the Offering
Memorandum contained no draft Commission Agreement;
(b) it was a
condition precedent to the offering that the Agent "shall be
satisfied with the provisions of the Commission Agreement
... which agreements ... shall have been executed
...";
(c) while a draft
Commission Agreement existed as of the valuation date, it was
never executed as of that date by SCP;
(d) SCP apparently
would not sign the draft Commission Agreement unless and until
the Agent signed a Waiver Agreement that significantly altered
the terms of the Commission Agreement by making payment to the
Agent conditional upon closing of the acquisition of the
Mississauga Property;
(e) the Agent
refused to sign the Waiver Agreement; and
(f) not only
was there no signed agreement by the valuation dated obliging SCP
to pay the Commission Receivable, there was apparently no oral
agreement or understanding between the Agent and SCP as to terms
and conditions of any such agreement.
As of the valuation date, the following facts were known and,
accordingly, an analysis and quantification of the resulting
risks, inasmuch as they affected the ultimate collectibility of
the Commission Receivable, would have to be performed.
(a) SCP, Asia
Pacific and the General Partner had no significant assets or net
worth; hence they did not have the financial ability to pay the
Commission Receivable at the valuation date and would not acquire
same unless the Mississauga Property acquisition closed on or
prior to June 30, 1990;
(b) The Commission
Agreement was unsigned as of the valuation date;
(c) The Commission
Receivable was payable in instalments over a period of two and
one-half years (according to the unsigned Commission Agreement)
and there was risk at every instalment date that the required
payment would not be made;
(d) The Commission
Receivable was non-interest-bearing (until such time as a default
occurred on the payment of any instalment);
(e) The payor had
not paid the first instalment of the Commission Receivable, i.e.,
the amount due at the Closing Date;
(f) As a
result of the Waiver imposed by SCP immediately prior to the
valuation date and as confirmed by the Amended and Restated
Agreement, a condition to the Commission Receivable being due was
the acquisition of the Mississauga Property prior to or at June
30, 1990;
(g) Although the
payments of the Commission Receivable were secured by all Notes
III provided by investors should the Mississauga Property
acquisition not be finalized at or prior to June 30, 1990
this security would have little value. This results from the fact
that investors would be able to demand from Asia Pacific the
repurchase of the Units for a consideration equal to the invested
cash. Furthermore, upon this transaction taking place, all trust
documents, including the subscription agreement, proceeds of the
trust cheques, Notes, post-dated cheques (corresponding to the
payments on the Notes), guarantee agreement I and the guarantee
agreement II were to be returned to the investors.
Consequently, in the event that the Mississauga Property
acquisition did not close by June 30, 1990, the investors had the
first right to Note III pursuant to Article 11.01 of the Limited
Partnership Agreement. The Mississauga Property closing was also
contemplated in the Waiver requested by the SCP and the Amended
and Restated Agreement;
(h) There were
numerous other conditions of closing (refer to Section 4.3 above)
which could have caused the entire transaction to collapse.
Further, as stated above, we have assumed for purposes of our
opinion that, as of the valuation date, the Agent had no legal
right to enforce payment of the Commission Receivable. If that
assumption of law is correct, it follows that, as of the
valuation date, the Agent had no legal enforceable rights to
assign to the Acquiror; and
(i) As of the
valuation date, there was substantial risk surrounding the
acquisition of the Mississauga Property. In particular, the risks
included (i) obtaining the necessary financing, (ii) being
granted a release by the Bank of Nova Scotia, (iii) a
deteriorating economic situation and (iv) deteriorating real
estate market opportunities in Ontario around the valuation date,
particularly for syndicated real estate projects in 1989.
We also wish to note an important and basic principle of
valuation, namely, that hindsight (or retrospective evidence is
inadmissible. That is, when negotiating open-market transactions,
neither the vendor nor the purchaser has the benefit of knowledge
of events that will take place at a point in time subsequent to
that as of which value is being determined. The courts
consistently hold that hindsight is inadmissible when determining
value in the notational market, except to the extent hindsight
may be admitted for the purposes of confirming the assumptions
made, and conclusions reached, as of the valuation date.
[30] Wise then referred to the standard
definitions of fair market value and continued as follows:
To determine the fair market value of the Commission
Receivable at the valuation date, we applied risk factors to the
discounted value (i.e., discounted to recognize the time-value of
money) of the Commission Receivable to reflect the following
uncertainties:
(a) at the valuation
date, the Mississauga Property, on which the entire transaction
was based, had not been secured, nor were sources of financing
guaranteed;
(b) between the
valuation date and June 30, 1990, there was a distinct
possibility that the Bank of Nova Scotia would enforce its
security of the Mississauga Property since the debtors were in
default on a $70 million debenture;
(c) the investors'
contributions were contingent upon SCP's finalizing the
acquisition of the Mississauga Property. Consequently, as the
General Partner, Asia Pacific and SCP were shells (with no
assets), there were no alternative sources of financing to meet
the Commission Receivable obligation;
(d) given the number
of failures experienced in the real estate market on or about the
valuation date, particularly in syndicated and limited
partnership deals, the drafting of numerous [unsigned] agreements
surrounding the proposed transaction alone was not sufficient to
guarantee that the Commission Receivable would be ultimately
collected, as evidenced by the default of the first payment;
and
(e) there were
conditions, subsequent to June 30, 1990, which had to be met for
the project to be successful. Any one of these events (approval
of plans by the city of Mississauga, obtaining a building permit,
successful completion of construction, leasing the building
units, etc.) may not materialize, and accordingly, the
collectibility of future instalment payments of the Commission
Receivable was not assured.
5.3.2. Valuation of Commission
Receivable
To determine the fair market value of the Commission
Receivable as at the valuation date, we first determined its
discounted value, taking into account the time-value of money. We
then applied discounts to consider the risks associated with the
collectibility of the Commission Receivable.
5.3.2.1. Discounted Value of Commission
Receivable
As outlined in Section 5.1, the Commission Receivable was to
be received, assuming all conditions were met, over a period from
the Closing Date to June 1, 1992 (the "Collection
Period"). To determine the present value of the Commission
Receivable, we selected a discount rate with regard to the
time-value of money, taking into account the following
alternative rates of return available on or about the valuation
date:
Government of Canada Treasury Bills,
90-day
maturity
12.22%
Average bond yield on Government of
Canada securities:
1-3
years
10.84%
3-5
yeas
10.19%
5-10
years
9.68%
10 years and
over
9.69%
Corporate bonds (weighted long-
term average
yields)
10.75%
Chartered bank prime lending rate
for business
loans
13.5%
Trust company guaranteed investment
certificates, 5
years
10.46%
Convention mortgage lending rates,
5
years
12.00%
Based on the foregoing, we believe that, on or around the
valuation date, an appropriate (risk-free) discount rate to be
applied to the Commission Receivable for valuation purposes was
in the rate of 10% to 12%.
By applying such discount factors to the Commission Receivable
over the Collection Period, we arrived at a rate of $3,492,000 to
$3,422,000 (Schedule II).
5.3.22.2. Fair Market Value of Commission
Receivable
As noted above, there were various risks associated with the
ultimate collection of each and every instalment of the
Commission Receivable. To arrive at the fair market value of the
Commission Receivable, we applied discounts to recognize these
risks.
To recognize the degree of uncertainty relating to the
ultimate collection of the Commission Receivable during the
Collection Period, we applied the following risk factors to the
discounted Commission Receivable determined in Section 5.3.2:
(a) We applied a
risk factor in the range of 35.0% to 37.5% to reflect the risks
related to the fact that the offering continued to be in doubt at
the valuation date, the Mississauga Property having not been
secured and the approval by the Bank of Nova Scotia having not
been received.
To support the risk factor related to the Mississauga
Property, we reviewed various industry publications and articles
concerning syndicated and other forms of real estate deals
proximate to the valuation date.
In addition, we interviewed various consultants, financial
analysts, securities brokers and syndicators as to the investment
climate in or around 1989, more specifically the success and risk
factors associated with the establishment of real estate
partnerships and syndications.
As a general comment, most of the individuals who were
interviewed agreed that in 1989 many real estate deals failed
because of (i) the downturn in the real estate market, (ii) high
interest rates and (iii) the introduction on the market of
investors, brokers and developers which had virtually no prior
experience in the real estate sector (as was the case for SCP).
As a result, investors and other parties were not carrying out
proper due diligence and, in many cases, deals were being
formulated which were not financially sound to begin with.
Most individuals interviewed felt new-construction real estate
deals were inherently more risky than "up and running"
operations, as there was (and continued to be) a greater
incidence of parties not meeting their commitments, inexperienced
developers not offering sufficient guarantees to investors and
investors making decisions based on tax issues without verifying
the underlying value of the real estate.
We obtained information that, despite offerings and numerous
documents and related agreements finalized, in excess of 50% of
deals had failed in 1989 because parties were retracting their
commitments at the "eleventh hour" without allowing
sufficient time for promoters to access economical refinancing,
given the high interest rates.
The results of our survey attributed the failures in 1989 to
the fact that deals were poorly structured, overpriced (given
interest rates at the time), prepared by brokers and promoters
with little experience in the real estate industry and
structurally unsound developments. In many cases reported, the
paperwork (offering memoranda and related documents), although
drafted, was not finalized and, accordingly, deals were being
abandoned. Undue reliance was being placed on developers to carry
out proper development work, obtain adequate financing and
provide sufficient guarantees to investors. Investors and other
interested parties were neither carrying out proper due diligence
nor obtaining independent advice as to the strength of the
investment vehicle, the sponsorship, the developers, and more
importantly, the validity of lender commitments. In many cases,
lenders had not granted formal commitments and, in the absence of
a secondary market, many real estate deals were either abandoned
or had failed because of a lack of confidence in the depressed
real estate market.
(b) We applied a
risk factor in the range of 10.0% to 12.5% to recognize that the
General Partner, Asia Pacific and SCP lacked financial net worth
to secure the Commission Receivable as at the valuation date.
(c) We applied a
risk factor of 10.0% to 12.5% to reflect the risk of
non-fulfilment of terms and conditions of the investors' Note
III on which the payments of the future instalments were entirely
dependent (e.g., financial ability to pay of each investor, risk
of "stop" payments on post-dated cheques of Note III,
the fact that Note III was unsecured and would not be endorsed
until after closing, etc.). In other deals, many investors
expressed financial difficulties for not having been advised
property and not having the financial strength to assume the
responsibilities inherent in the real estate development deal.
Many investors, in or around 1989, had to withdraw, given high
interest rates and their inability to obtain beneficial
financing.
(d) We applied a
risk factor of 5.0% to reflect the fact that material agreements
were still in draft form at the valuation date.
(e) Given the
failures witnessed on the market, in or around 1989, there was a
risk that the instalment payments would not be met in accordance
with the pre-agreed schedule, as evidenced by the default of the
first instalment. Therefore, we applied a risk factor of 5.0% to
7.5%.
(f) It should
be noted that we have applied no specific risk factor with
respect to the assumption in law we have made as valuators that
the Agent had no legally enforceable right to enforce payment of
the Commission Receivable as of the valuation date.
Accordingly, we determined the fair market value of the
Commission Receivable to lie in the range of $851,000 to
$1,222,000 (Schedule I) at the valuation date, discounted to take
into account the time-value of money as well as the various risks
outlined above.
[31] Wise then dealt with the subagents'
commissions stating that he deducted amounts to reflect the
$833,635 in commissions payable by the Appellant to sub-agents at
the valuation date. He pointed out that while no written
agreements were drafted for the commissions so payable by the
Appellant there was, in Wise's understanding, a history of
good faith business relations among the Appellant and the
sub-agents. He also stated that the agent had never disputed its
obligation to pay them.
[32] Finally, Wise's statements under
the heading "ASSUMPTIONS" reads as follows:
7.
ASSUMPTIONS
In forming our opinion of fair market value, we have assumed,
in addition to the assumptions noted throughout this report,
that:
· the Trustee
could not release any funds to the Agent in the event that the
Mississauga property did not close;
· SCP, the
General Partner and Asia Pacific had no alternative source of
financing (other than through the development project) to pay the
Commission Receivable to the Agent;
· it was
difficult (given the market at the time and lack of lender
confidence) to obtain financing for the Mississauga Property at
the valuation date;
· there were
no contracts or agreements in effect or being negotiated at the
valuation date which would have a material effect on the
Commission Receivable, that have not been noted in this
report;
· the Agent
accepted that it had an obligation to pay the subagents'
commissions;
· as a matter
of law, the Agent had no right to enforce payment of the
Commission Receivable as of the valuation date; and
· there are
no significant factors that bear on the fair market value of the
Commission Receivable at the valuation date that we have not
considered in reaching our conclusions as noted herein.
SUBMISSIONS BY APPELLANT'S COUNSEL:
[33] Counsel, after highlighting salient
facts, said that there was risk that the Bank of Nova Scotia
would not cooperate in removing the $70 million debenture against
the property thereby creating an obstacle to its successful
syndication. He submitted that the limited partners would not
assume responsibility for that debt if the debenture had to be
removed before the closing of the sale of the property. He
submitted that O and F were not ad idem in their 1989
discussions respecting the consequences that would flow from the
failure to complete the property purchase. He referred to O's
testimony to the effect that F never indicated that the
commission was conditional upon the property closing. In this
regard, he referred to McKellar's evidence that F's
understanding was that no commission would be payable upon
failure to close.
[34] Counsel then said that this issue
"did not become manifest in the Offering Memorandum".
He submitted that the first draft of the OM was based upon a deal
memorandum provided by Touche Ross. He continued that that
memorandum set out the basic business structure, that Kutner
prepared a draft of the OM and received comments from Touche
Ross, from McKellar on behalf of F and from Milner on behalf of
the Appellant. Counsel suggested that the OM could be seen as an
attempt by Touche Ross, the tax advisors of the limited
partnership, to "have one's cake and to eat it
too". He referred to a schedule to the Touche Ross report,
respecting the 1989 year which referenced a loss position to the
Partnership, thereby providing the investors with a deduction for
that taxation year.
[35] He also referred to the closing
conditions precedent in the OM which he stated made it clear that
Kutner, for the Partnership, must approve all material contracts,
including the Agency Agreement. He referred also to the provision
that the agent must be satisfied that the provision of the future
written Commission Agreement and the agent's right, is also
referred to as a condition precedent to the closing. He stated
that the OM made it clear that not only were the provisions to be
approved by Kutner acting reasonably and by the agent acting
reasonably but that it was to be executed and delivered by the
date of the Unit closing, subject to the right of the promoter to
give an undertaking to finalize the material contracts after the
Unit closing, but before March 31, 1990. He referred to
McKellar's evidence that F gave such an undertaking but that
none of the material contracts in issue were approved or executed
at that time.
[36] He then referred to that part of the OM
which spoke in terms of certain prospective contractual
provisions which the agent had agreed to provide. He read a
portion of the OM as follows:
In order to secure any part of the commission not paid to the
agent on the Closing Date, the Partnership has agreed to assign
and negotiate the Note III of each investor, together with the
corresponding post-dated cheques to the agent on the closing
date...
[37] Counsel then stated that O, as a lay
person, was having trouble when he was cross-examined on that
point because he, as a business person, understood that under the
OM he wasn't going to get those notes and in fact didn't
get those notes until the closing of the real estate transaction.
He then said:
And this perhaps is the best example of an OM that tries to be
all things to all people and, as I characterize, having your cake
and eating it too.
[38] Counsel stated that the OM, read as a
whole, spoke of prospective obligations in the agreement, not
prepared and executed on or before the valuation day. He
submitted that in spite of language in the OM to the effect that
the commission would be fully earned by the Appellant on the
closing of the Unit sale, O said that that was language that Mr.
Tsi, a Touche Ross partner, insisted upon. He referred to it as
"evocative tax driven language". He spoke then of
non-executed contracts and conditions precedent which had not
been met. He referred to the fact that if the partnership had not
completed its property purchase at the date of the Unit closing
then all subscription agreements, initial down payments, Note III
and all post-dated cheques were to go into trust. He referred
further to the fact that if the property acquisition did not
close by June 30, 1990, all investors were entitled to receive
back their invested cash which was defined to include initial
deposits, subsequent deposits and Notes III. He then said:
So, in short, while you don't see it on pages 23 and 24
where the accountants have a 1989 deductibility, the document,
read as a whole, contains a mechanism to unwind the
investors' syndication completely.
[39] Counsel then referred to the portions
in the OM that provided that notwithstanding the completion of
Unit sales on the defined Closing Date the trustee was obliged to
retain the trust cheques and all payments under the Notes until
the property purchase had been completed with the property
registered in the name of the general partner. He then submitted
that when the limited partnership agreement came into existence
it was clear that the limited partners had a mechanism to
exercise their rights to exit their obligations, the Offering
Memorandum being a "bare-bones outline of material contracts
that are yet to come into existence". He then emphasized
that it was clear from the entire OM that there was no
entitlement and there was no collectibility because all the money
was to be held in trust, the initial deposit, the Notes, the
future cash, all of that to be held in trust subject to a future
and uncertain event. He referred to McKellar's testimony that
if the property was not acquired by June 30, he, McKellar,
expected that all investors would require the re-purchase of
their Units. He followed by stating that McKellar had not been
challenged on that assertion. He then referred to McKellar's
evidence that F was not going to sign any draft commission
agreement if the foregoing waiver agreement was not also
signed.
[40] Counsel then referred to O's
evidence that Canada Customs & Revenue Agency
("Revenue") disallowed the 1989 taxation year
partnership expense loss attributable to the commission although
it allowed same for subsequent years. The following exchange
respecting the Appellant then took place, my use of
"he" referring to O for the Appellant:
HIS
HONOUR:
Are we in the position that the very government agency that
disallowed that expense claim to the investors is the one that
said now that he was entitled to it?
MR. ROEBUCK:
Yes. I don't think I can say any more on that point.
[41] With respect to what counsel referred
to as a "commission agreement and unconditional
commission" and then a "conditional amended and
restated commission agreement" he posed a question as to why
there were two agreements. His response was:
Because it all depends on who's knocking on the front
door. If its CCRA knocking on the front door, you hand them the
absolute unconditional agreement and say the partnership was
obliged to pay and the payments are deferred. But if its World
Corp, Mr. O, knocking on the door, looking to be paid, you hand
him the conditional agreement and say you don't have a right
unless and until the real estate property closes.
[42] He then reviewed the evidence that O
met with McKellar and that he gave O a copy of both agreements,
the conditional and unconditional, but made the Appellant sign
the undertaking that says if the real estate transaction
scheduled to close the next day didn't close, O undertook to
give back the commission agreement, the amended and restated
commission agreement and commission Notes. He then said that
Kutner, solicitor for the Partnership, did not approve the form
of commission agreement until June 25, 1990 at the earliest, with
execution thereof taking place on June 28. He also reminded the
Court that the $70 million debenture was not removed until June
29, 1990.
[43] Respecting the commission agreement
counsel stated:
If Mr. O chose to sue, in my respectful submission, he
wouldn't have an oral understanding with the partnership to
rely upon and he wouldn't have that which was contemplated in
an Offering Memorandum, namely a written contract approved by
both parties.
Still, in my respectful submission, it is absolutely clear
that no contract was entered into, oral or written, was entered
into with the agent and the partnership as of December 29,
1989.
And I therefore say that in this respect this is an issue that
is left entirely to Your Honour, not to the valuator. If you
agree with that submission, then in my respectful submission it
is appropriate for you to apply a further discount to the
valuation of Mr. Wise since Mr. Wise only dealt with the issues
of the collectibility.
He then said that if a business person looked at the
collectibility risks and superimposed an enforcement risk or an
enforcement certainty one would only pay a nominal or speculative
amount. He then submitted that it would not be greater than
$35,000 U.S. and an assumption of liability for the sub-agents.
Counsel added that the assignment of the commission to the Cayman
Island company described the right to the commission in the
preamble as an agreement with Senate Congress Partnership and
that it only assigned rights with respect to a purported
agreement or arrangement with the partnership. He then emphasized
that O had prepared the document without legal consultation and
that what he purported to assign was not his rights as against
the rest of the world but his rights as against the limited
partnership.
SUBMISSIONS OF RESPONDENT'S COUNSEL:
[44] After presenting submissions about the
meaning of "fair market value" counsel referred to
Hallatt et al v. The Queen, 2001 DTC 128 at page 132,
where Bowman, A.C.J. of this Court said:
It must however be borne in mind that what the court has to do
in a valuation case of this type is to attempt to arrive at the
price upon which willing and knowledgeable vendors and purchasers
would settle. This is a relatively mundane task in which common
sense and commercial reality necessarily play a large part.
She then said that:
It is the role of the Court to look at the facts in evidence
that were known on the valuation date and to impute this full
knowledge into the minds of the purchaser and vendor in order to
determine the fair market value of the Commission Receivable.
[45] Counsel submitted that the facts
concerning the collectibility and enforceability of the
commission receivable support a finding that the Appellant had
taken steps to structure the deal in an effort virtually to
eliminate the risk of non-collection. She submitted that in the
circumstances the fully informed vendor and purchaser would agree
that the discount made for those risks would be minimal.
[46] She submitted that the OM was the
document provided to potential investors to promote the
transaction and that the vendor and purchaser must be presumed to
have knowledge of that document and the facts described therein.
She stated that documentary evidence indicates that the terms
stated in the OM reflected the agreements (obviously meant to be
"verbal agreements") as they existed between the
parties on the valuation day. She then said:
In addition, it is not sufficient to say that the provisions
of the OM that stated that the commission had been fully earned
were in fact inaccurate and were merely tax driven by unwitting
accountants. The OM is a serious document governed by the
Securities Act. It must not contain
misrepresentations as noted by section 130 of that Act.
Indeed the OM gives the investors a statutory right of action if
there were any misrepresentations.
From that, it would be reasonable for a prudent and
knowledgeable vendor and purchaser on the valuation day to
believe that the terms of the OM were accurate, especially the
terms that gave the investors certain tax opportunities. The
investors would rely on those provision (sic) to take
their bona fide write-off.
[47] With respect to enforceability counsel
stated that on valuation day a hypothetical vendor and buyer
would have the benefit of the OM which said that F controlled
companies that were the promoter, general partner and original
Limited Partner. She then said:
They could assume from this that when he negotiated the OM, he
was speaking for the partnership as well.
[48] Counsel made further submissions as
follows:
The OM states that the Commission will be fully earned on the
closing of the sale of the Units, and that the Agent has agreed
to defer payment of the Commission.
... there is no document in evidence that existed at
valuation date upon which Farantatos could rely to prove that the
earning of the commission was contingent upon the acquisition of
the Mississauga property ...
Even the Commission Agreement which was in draft form at
valuation date mirrored the OM and did not state the Notes III
were to be returned or cancelled if the ... Property did not
close or that the Agent was not entitled to the Commission if it
did not close.
The only provision in the OM about the failure of the ...
property to close was that the investors would be able to sell
back the Units at a price EQUIVALENT to their "invested
cash".
"Invested cash" in the OM includes amounts that the
investors paid on account of Note III.
However, this provision of the OM only states that the
promoter must pay the investor the equivalent of those amounts.
It does not say that the Note III would be returned or
cancelled.
The partnership agreement was not reduced to writing until the
spring of 1990. It was not in existence at valuation day. There
is no statement either orally or written, as of valuation day
that the Notes III were to be returned to the investor if the
... Property did note (sic) close. The only thing
that existed was the summary of the partnership agreement.
There is no evidence of any discussions as of valuation day of
the return of the Notes III.
[49] Counsel said that the OM states that
the Notes III and corresponding post-dated cheques were meant to
pay the commission and that the partnership had agreed to assign
and negotiate the Notes III and post-dated cheques to the agent
on the closing date. She then said:
various provisions in the OM informed the investors that the
obligations they were accepting in respect of the payments under
Notes III were a specific risk and would not be subject to any
rights of set-off whatsoever or any other equities.
and
the Note III itself contains a paramountcy clause which states
that the terms of Schedule "F" take precedence over all
other agreements.
[50] Counsel submitted that a prudent vendor
and purchaser with full knowledge of the aforesaid facts would
not be overly concerned with the prospect of litigation in the
event that F denied that the commission receivable had been fully
earned at the valuation date.
[51] Counsel also said that there was high
likelihood that the property would be acquired by June 30, 1990.
She referred to the fact that F had a great deal of experience in
real estate syndications, that he was the sole shareholder and
controlling mind of the promoter (Asia Pacific), that he
controlled both companies owning the land, that he was the sole
director of the general partner and the original limited partner
and on valuation day was actively taking all necessary steps to
permit the property to be transferred by the date contemplated in
the OM. She closed that portion of her submission by saying that
the vendor and purchaser could conclude that F had the
experience, ability and personal qualifications that would enable
him to negotiate successfully the transfer of the property from
his corporation to the partnership. She submitted that the
purchasers, being intelligent individuals, would assume the risk
of default as being minimal and that very little should be given
by way of discount. She submitted that there was a dispute
between F and O but that it was possible that the presentation of
the waiver at the last minute "was simply posturing or an
effort to get a better deal. She said that the belief and
intentions of Farantatos might have been information that a
Vendor or Purchaser would have attempted to determine on
Valuation Day, but that Farantatos was not called to give
evidence."
[52] She argued that investors had made
their payments as required and that the payments for the
commission receivable were to be funded from the investors'
downpayment and post-dated cheques. She stated that on valuation
day none of these payments was in default. She then said that
they had been paid but were being held by the trustee. This was
followed by the statement that although Wise applied a discount
to reflect the fact that the general partner, Asia Pacific, and
the partnership lacked sufficient net worth to secure the
commission receivable at valuation date, the evidence was that
the Notes III had been set up to secure the payments of the
commission. She submitted that a prudent vendor and purchaser
would place minimal or no weight on the risk of default because
there was no evidence that the investors were likely to
default.
[53] Counsel then submitted again that there
were no investor defaults and that the payments under the Notes
were made. She stated that the property transaction closed as
expected by the OM.
[54] With respect to the small business
deduction, counsel submitted that the Appellant was not a
Canadian-controlled private corporation, as defined in subsection
125(7) of the Act because it was controlled, in fact, by O
even though he only owned 49 percent of the shares of the
company. She suggested that without O, the company business
activity would cease, he being a registered securities dealer and
that this was the sole business of the Appellant.
ANALYSIS AND CONCLUSION:
First Issue:
[55] I accept and agree with the submissions
of Appellant's counsel. They, unlike the Respondent's
submissions, took into account a considered analysis of the
pertinent facts described in Judge Bowman's words as,
"the common sense and commercial reality". I also agree
with the logic of Wise's analysis and accept his conclusions,
with slight modification. That modification will be dealt with
later respecting enforceability of the right to collect the
commission. The combination of Appellant's submissions and
the Wise opinion have led me to conclude that the OM was prepared
on the basis of furnishing investors with partnership loss
deductions for the 1989 taxation year and that the urge to take
advantage of same had paramountcy over consideration of the many
steps that had to be taken in order for the transactions
contemplated therein to be completed.
[56] Respondent's counsel adduced no
evidence, ordinary or expert. There was, accordingly, no
explanation of how the Minister arrived at or could support the
valuation of $2.5 million for the Commission Receivable.
Appellant's counsel did not deal with my comment in Court
about the fact that Revenue denied a deduction to the investors
of their share of the partnership loss created by the commission
said to be owing in 1989, while for the same period[1] it, paradoxically,
assessed the Appellant in respect of a large portion of the
commission receivable.
[57] Wise stated in his report that no legal
opinion had been obtained with respect to the right, if any, of
the Appellant to enforce payment of the commission receivable as
at valuation date. He said, as quoted above:
Rather, we have assumed for purposes of our opinion as
business valuators that, in light of a number of factors, the
agent had no legal right as of the valuation date to enforce
payment of the Commission Receivable.
[58] Whereas Respondent's counsel sought
to persuade the Court that little, if any, heed be paid to the
Wise report and that attention should be focused upon the OM,
this ignores the reality of the events described in detail in
evidence. One cannot ignore the fact that the commission
agreement was to be entered into between the partnership
and the Appellant. That was not done until the time of the
partnership acquiring the property, namely in June, 1990. One
cannot ignore the fact that the partnership may never have
acquired that property, among other reasons, it being subject to
a $70 million debenture in favour of the Bank of Nova Scotia. One
cannot ignore the existence of the conditions precedent described
above. One cannot ignore the financial position of pertinent
entities, described above, having no assets whatsoever. One
cannot ignore F's view of the circumstances, namely that no
commission would be payable until the partnership acquired the
property. One cannot ignore the fact that material contracts
described in the OM were not in existence at valuation date. One
cannot ignore McKellar's evidence concerning the waiver
agreement in support of F's position which he described
clearly with respect to no commission being payable until the
property acquisition. One cannot ignore the fact that the
agreements were substantially not completed and executed until
the end of June, 1990. The point is that on the valuation day
none of these documents contemplated by the OM had been executed
and none of the acts contemplated by the OM had been
performed.
[59] Respondent's counsel's
statement that
there is no document in evidence that existed at valuation
date upon which Farantatos could rely to prove that the earning
of the commission was contingent upon the acquisition was
contingent upon the acquisition of the ... property
ignores the oral evidence presented.
[60] She submitted that the purchasers,
being intelligent individuals, would assume the risk of default
as being minimal and that very little should be given by way of
discount. I regard this as an attempt, in the absence of any
expert evidence produced by the Respondent, to trivialize the
opinion of Wise, one of the country's best valuators.
[61] Further, Respondent's counsel's
statement "that the property transaction closed as expected
by the OM" refers to a fact some six months after the
valuation day, having absolutely no relevance to the valuation
process.
[62] I now deal with the aforesaid
modification of the Wise opinion. Respondent's counsel, while
founding her submissions upon a construction of the OM without
countenancing the mass of evidence presenting relevant commercial
facts, dealt solely with the provisions with which she sought to
advance the Minister's position. For example the Commission
Agreement referred to under MATERIAL CONTRACTS in the OM
stated:
... the Agent will be paid a commission by the
Partnership in the amount of $3,900,000.00"
In her submissions on enforceabililty her comments that F was
in charge of the promoter's companies and of the general
partner corporation, were facile. They ignored the above
provision of the very document that was the foundation of her
presentation. In what capacity would F be sued? This was a
shotgun approach of general legality without a precise point
being made. The Appellant's assignment of the commission
receivable, although not a well prepared legal document, clearly
contemplated payment of the commission to the Appellant by
"The Limited Partnership" There is no evidence that any
such agreement existed on December 29, 1989.
[63] Respondent's counsel said:
The OM is a serious document governed by the Securities
Act. It must not contain misrepresentations as noted by
section 130 of that Act. Indeed the OM gives the investors
a statutory right of action if there were any misrepresentations.
... From that it would be reasonable for a prudent and
knowledgeable vendor and purchaser on valuation date to believe
that the terms of the OM were accurate, especially the terms that
gave the investors certain tax opportunities.
This totally ignores the fact that it is the value of the
commission receivable that is in dispute, not the sanctity of the
OM and what investors may have thought. Further, the fact that
the investors had some statutory right of action is
irrelevant.
[64] Counsel said that there was "a
high likelihood that the" property would be acquired by June
30, 1990. She then stated that that was the responsibility of F
and then recited facts relating to F's experience and
connection with corporate entities involved. This is sheer
speculation not leading to any solid conclusion that all that was
contemplated would be achieved. Her submission that F was not
produced to give evidence lies, in part, at the Respondent's
feet.
[65] Counsel's statement that O's
refusal to sign the waiver was followed by this:
At most, this is evidence of a dispute although it is also
possible that the presentation of the waiver at the last minute
by Farantatos was simply posturing or an effort to get a better
deal.
These words were designed to support her statement that:
It is incorrect to say that on Valuation Date the right to the
Commission was contingent on the acquisition of the Mississauga
Property.
Again, this is speculation not taking into account the very
real facts touching upon the value of the assigned commission
receivable.
[66] Although Wise had made an
assumption that the Appellant had no legal right as of
valuation date to enforce payment of the commission receivable,
he, not being a lawyer and having had no legal opinion
expecting same, was in no position to conclude that there
was no such right. Having agreed with the comments of one of
the foremost valuators in Canada and having agreed with the
sensibility of the submissions advanced by Appellant's
counsel and having observed the limited view taken by
Respondent's counsel, namely reliance upon the OM without
heed to the commercial realities, I have determined, not
assumed as did Wise, that the right to enforce payment of
the commission on the valuation day was so remote as to be
worthless. O made some reference to the Securities Commission
requirements but there was no evidence as to how the value of
$41,300 was fixed for the assignment of that right. I am unable,
in the circumstances, to ascribe any value greater than the sum
of $41,300 to that right. It is my frank view that, in the
circumstances, that sum was far too high.
Second Issue:
[67] It follows that I need not deal with
submissions as to withholding tax assessed together with
accompanying interest and penalties.
Third Issue:
[68] With respect to the small business
deduction and whether the Appellant was a Canadian-controlled
private corporation, Respondent's counsel sought to persuade
the Court to accept a submission based upon subsection 256(5.1)
which deals with control in fact. Appellant's counsel, Mr.
Ronald Farano, rightly objected to the Respondent's ability
to refer to this section on the grounds that it was not raised in
the Reply to the Notice of Appeal and it was not raised prior to
Respondent's submissions after the close of the
Appellant's case. Subsection 152(9) of the Act reads
as follows:
(9) Alternative
basis for assessment. The Minister may advance an alternative
argument in support of an assessment at any time after the normal
reassessment unless, on an appeal under this Act
(a) there is
relevant evidence that the taxpayer is no longer able to adduce
without the leave of the court; and
(b) it is not
appropriate in the circumstances for the court to order that the
evidence be adduced.
[69] The Respondent's submissions under
subsection 256(5.1) were raised for the first time in her
argument on the fourth and final day of the hearing of this case.
Appellant's counsel, during the presentation of evidence, had
no notice that this argument would be raised. It was, in fact,
raised near the end of a Friday afternoon. Whatever the effect
any relevant evidence the Appellant could have adduced, it was,
in my judgment, not appropriate in those circumstances to order
that evidence be adduced. This would have caused an adjournment
and delay of the conclusion of the hearing. Accordingly, I ruled
that the submission based upon that subsection could not be
made.
[70] As Appellant's counsel submitted,
without that subsection, the matter of control was reduced to a
"numbers game". He submitted that there was very little
cross-examination of O respecting control and very little
cross-examination about what duties were performed by Rende. The
evidence established that she had signing authority at the bank
and that she looked after the office in O's absence. There
were no questions respecting her influence on the company. In
addition, not only did Respondent's counsel not cross-examine
O in this regard but produced no evidence to the effect that O
had any direct or indirect influence that, if exercised, would
result in control, in fact, of the corporation. Therefore, I have
determined that Limited was a Canadian-controlled private
corporation entitled to the deduction it sought under section 125
of the Act.
[71] Accordingly, the appeal is allowed with
costs payable by the Respondent to the Appellant.
Signed at Vancouver, British Columbia this 17th day of July,
2003.
Bell, J.
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