Manuel v. The Queen, docket 2001-2446(IT)I (Informal Procedure)

Date: 20020605

Docket: 2001-2446-IT-I

BETWEEN:

SALAH MANUEL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Miller J.

[1]            Mr. Salah Manuel appeals by way of informal procedure the assessments of the Minister of National Revenue (the Minister) for the 1996 and 1997 taxation years. The Minister disallowed the deduction of rental losses claimed to have been incurred by Mr. Manuel.

[2]            Mr. Manuel indicated that in 1992 he was looking to acquire property which he hoped would appreciate in value. He and his father found a 5½-acre farm property in Thorndale, Ontario, owned by a couple to whom the Appellant's father had previously sold his business, Endless Arcade. Initially, an offer was made through a company owned solely by the Appellant, 952563 Ontario Limited (the Company). This offer was subject to approval by the Royal Bank (the Bank) of the assumption of the Bank's mortgage. The Bank did not allow an assumption by the Company, so the Company purported to assign the offer over to the Appellant and his mother. A Resolution of the Company to that effect was introduced as evidence. The Resolution reads in part:

The Corporation is hereby authorized and directed to assign its interest in an Agreement of Purchase and Sale respecting the lands and premises municipally known as R.R. #2 Thorndale, Ontario, to Salah Manuel personally and to Victoria Manuel personally, in such proportions as directed by them, particularly: 75% to Salah Manuel and 25% to Victoria Manuel, on the understanding and condition that the said Salah Manuel and Victoria Manuel verbally agreed to indemnify and save the Corporation harmless from all liability with respect to the said Agreement of Purchase and Sale.

The Resolution was dated "as of February, 1992".

[3]            What followed however was that the Appellant's mother was registered as sole owner. No explanation was given as to why the property did not reflect the 75-25% ownership suggested by the Appellant. The purchase price for the property was $227,000. The price was paid by way of an assignment of the $167,000 mortgage with the Royal Bank and the forgiveness of a $60,000 charge against the property, which the Appellant's father held, arising from the sale of his business, Endless Arcade, to the property owners. There was documentation presented in the form of a copy a charge of land showing George Manuel Industries Ltd. as chargee, though Mr. George Manuel testified he considered that company and himself as one and the same (not an uncommon sentiment in small businesses).

[4]            The Appellant indicated that each of his brothers received a financial gift from their father upon their marriage to assist with a down payment on a home. Although the Appellant was not married in 1992, the $60,000 debt forgiveness towards the purchase of the farm property was, according to the Appellant, a similar gift from his father. In his Notice of Objection the Appellant made no mention of the forgiveness of the debt by his father as being in the nature of a gift. Because it was more than had been given to his brothers, the Appellant only received a 75% interest in the farm property, with his mother retaining a 25% interest.

[5]            The Appellant did not claim any losses in connection with the property in 1992 or 1993, but started in 1994 to claim a 75% share of the losses. No explanation was offered for this delay other than it was a mistake. The Appellant claimed that in 1993 he contributed $10,000 to the Company, intended for the farm property. There is no written evidence of such contribution. In 1995 the Appellant transferred ownership of the Company to his father, George Manuel.

[6]            The losses in 1994 and 1995 from the property were $16,716 and $8,695 respectively. The financial picture for 1996 and 1997 in connection with the property was as follows:

	1996	1997
Gross Income	$6,000.00	1,200.00
Expenses
Advertising	-	-
Insurance	730.00	730.00
Interest	11,177.18	10,456.53
Property taxes	2,500.00	2,500.00
Management & administration fees	2,000.00	2,000.00
Total Expenses	$16,407.18	$16,656.53

The interest expense payments in 1996 and 1997 were made by the Company.

[7]            The financial statements of the Company for 1996 and 1997 showed a note receivable in those years of $7,554 and $20,349 respectively. A note to the financial statements in 1997 explained that the note receivable was from the shareholder's mother for cash advanced to her during the year. According to the Appellant, this related to the farm property. This note is curious as the Appellant testified he transferred ownership of the Company to his father in 1995. There is no suggestion the note referred to the Appellant's father's mother.

[8]            The Appellant initially stated that the mortgage interest on the farm property was paid by his father, but later clarified that it was actually paid by the Company. No written evidence was provided to support the insurance expenses and the management administration fees in 1996 and 1997. With regards to the latter, the Appellant maintained that a lot of work was involved in running the property, and a $2,000 management fee paid to his brother was justifiable.

[9]            The farm property was sold in 1998 for $192,000, which yielded cash of approximately $20,000 after paying the mortgage and the expenses. The Appellant's evidence was that this cash went to his father, as his father was in some financial need at the time.

[10]          The issues are whether the Appellant owned the property and thus incurred the expenses which resulted in the losses from the property, and if so, whether the insurance costs and management fees have been proven.

[11]          The Appellant argues he was a 75% owner of the farm property and consequently incurred 75% of the expenses on the property. In support of this position, he points to the following factors:

-                a Resolution of the Company assigning the offer on the property to himself and his mother;

-               his father's testimony that the forgiveness of the $60,000 charge against the property was a gift to his son; and

-                his mother's testimony that she only had a 25% interest in the property.

[12]          The Respondent argues the Appellant had no ownership interest in the property based on the following:

                -                he was not shown as the registered owner;

                -                no mention of a gift was made at the objection or appeal stage;

-                the Appellant made no payments towards the expenses in 1994, 1995, 1996 and 1997;

-                the Company owned by the Appellant's father in 1996 and 1997 made the mortgage payments;

                -                proceeds on the sale went to the Appellant's father; and

-                the only evidence of a debt to the Company in connection with the property was from the Appellant's mother, not the Appellant.

[13]          While there are some indications of the possibility of the Appellant having an ownership interest in the farm property, these are not sufficient on balance to prove that ownership. There are just too many factors weighing against Mr. Manuel.

[14]          I will look first at the arguments raised by Mr. Manuel's agent. The Resolution, which is Mr. Manuel's only written support of the alleged 75-25 ownership arrangement with his mother, purports to authorize an assignment of an interest in an Agreement of Purchase and Sale. The Agreement is a standard form of offer to purchase, conditional on approval by the Royal Bank of an assumption of its mortgage within five days of the acceptance of the offer. The acceptance on the offer is undated. The offer itself is dated February 1992 with no reference to a day. The Resolution is likewise undated other than indicating the month of February. The evidence was that the Bank did not approve the assumption by the Company. What therefore was really assigned? The only other document in connection with the transfer of the property was the Transfer/Deed of Land, dated February 28, 1992 signed by the Appellant's mother, indicating she was to be the sole owner. Whatever purpose the corporate Resolution served, if any, it has not proven that the Appellant ever acquired a 75% interest in the property.

[15]          With respect to the testimony by the Appellant and his father that the father's forgiveness of a debt charged against the property was in keeping with the family tradition of gifting down payments on homes for his newly married offspring is suspect. First, the Appellant was neither recently married nor engaged. Second, the property was not intended for a principal residence, a possible matrimonial home; it was bought for capital appreciation purposes and was rented out. Third, the Appellant made no mention of this "gift" until very late in the appeal process. Fourth, the property was not found out of the blue by the Appellant, but was a property owned by a couple with whom the Appellant's father had previous business dealings. This strikes me as a business venture, not at all the type of gift arrangement common to the Manuel family's domestic arrangements.

[16]          Next, the Appellant's mother in her brief testimony simply acknowledged she only claimed 25% of the losses from the property based on her understanding she only owned 25%. Mrs. Manuel did not appear to appreciate the nature of the transaction and was confused by some of the questioning. I do not rely on her testimony as establishing the legal ownership of the property.

[17]          Finally, there is a lack of plausible explanations for several aspects of the Appellant's position. First, although the Appellant's Company evidently was not approved for the mortgage assumption, there is no evidence as to why the Appellant and his mother could not have both appeared on title. Next, while the Appellant testified he contributed $10,000 to the Company in 1993 (though there was no written support for such) why were there no further payments towards the property he purportedly owned during the relevant years? No explanation. Why did the Appellant not claim his losses in 1992 and 1993? He claims that was a mistake, yet by 1994 he realized his mistake but did nothing about it for 1992 and 1993. Why did he not, as majority owner, receive cash from the sale? His answer was that his father needed the money. There is no evidence of his father's financial hardship, but clearly it was his father who put $60,000 into the property in the form of a forgiven debt. I do not find his explanation on this point particularly persuasive.

[18]          Overall, the Appellant's explanation has not proven a 75% ownership interest in the property. He has not demolished the Minister's assumptions. I find on a balance of probabilities, he did not have a 75% ownership interest in the property in 1996 and 1997, and therefore is not entitled to claim losses from the property in those years.

[19]          The appeals are dismissed.

Signed at Ottawa, Canada, this 5th day of June, 2002.

"Campbell J. Miller"

J.T.C.C.

COURT FILE NO.:                                                 2001-2446(IT)I

STYLE OF CAUSE:                                               Salah Manuel and Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           May 29, 2002

REASONS FOR JUDGMENT BY:      The Honourable Campbell J. Miller

DATE OF JUDGMENT:                                       June 5, 2002

APPEARANCES:

Agent for the Appellant:                     Joseph Manuel

Agent for the Respondent:                 Lorraine Edinboro (Student-at-law)

COUNSEL OF RECORD:

For the Appellant:                

Name:                                --

Firm:                  --

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-2446(IT)I

BETWEEN:

SALAH MANUEL,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on May 29, 2002, at Toronto, Ontario, by

the Honourable Judge Campbell J. Miller

Appearances

Agent for the Appellant:             Joseph Manuel

Agent for the Respondent:          Lorraine Edinboro (Student-at-law)

JUDGMENT

The appeals from assessments of tax made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed.

Signed at Ottawa, Canada, this 5th day of June, 2002.

"Campbell J. Miller"

J.T.C.C.