Citation: 2007TCC187
Date: 20070404
Docket: 2004-2484(IT)G
BETWEEN:
WAYNE WILKINS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier J.
[1] This appeal pursuant to the General Procedure was heard at Victoria, British Columbia on March 19 and 20, 2007. The Appellant testified and called his personal chartered accountant, Lorne Horning, C.A.
[2] The particulars in dispute are set out in paragraphs 1 to 17 of the Reply to the Notice of Appeal. They read:
A. STATEMENT OF FACTS
1. He admits the following allegations of fact stated in paragraphs 3a), 3d) and 3h) of the Notice of Appeal:
a) Brew Creek Enterprises Ltd. (the "Company") is a corporation duly incorporated and resident in British Columbia;
b) On November 26, 1999, the Company passed a resolution to redeem 169 Class B shares;
c) The Class B shares had a par value of $5,000 per share;
d) Prior to November 26, 1999, the Appellant acquired 11 Class B shares for $5,000 each;
e) On November 29, 1999 the Company issued 273,358 Class A shares to the Appellant. Other parties also received Class A shares at the same time;
f) The Company sold its land, buildings and equipment on April 15, 2000;
g) On August 8, 2000, the Company purchased 231,000 Class A shares from the Appellant;
h) On August 14, 2000, the Appellant was transferred 118,180 Class A shares from various individuals;
i) On August 15, 2000 the Company redeemed 160,562 Class A shares from the Appellant;
j) The Company qualified as a small business corporation under the Income Tax Act, R.S.C. 185, c. 1 (the "ITA") within the 12 months preceding August 14, 2000;
2. He denies the following allegations of fact stated in paragraphs 3a), 3f), 3g), 3h) and 3i) of the Notice of Appeal and puts the Appellant to the strict proof thereof:
a) That the transaction was concluded in January 2000;
b) That the shares were redeemed pursuant to this transaction;
c) That as a result, the Appellant suffered a loss of $49,500;
d) That the Appellant purchased 118,180 Class A shares at a cost of $130,000;
e) That the redemption of 160,562 Class A shares resulted in a loss of $129,839.00;
f) That the Company qualified as a small business corporation under the ITA on August 14, 2000;
g) At times the Company was at arm's length from the Appellant within the meaning of the ITA regarding the share transactions referred to above.
3. He has no knowledge of and therefore does not admit the allegations of fact stated in paragraph 3b) of the Notice of Appeal and puts the Appellant to the strict proof thereof.
4. The Minister of National Revenue (the "Minister") initially assessed the Appellant for the 2000 taxation year by Notice dated August 7, 2001.
5. In computing income for the 2000 taxation year the Appellant reported a business investment loss in respect of the disposition of Class A and Class B shares of $179,339 and claimed a deduction for an allowable business investment loss of $106,229.45, computed as follows:
|
|
Class A Shares
|
Class B Shares
|
|
Proceeds
|
$180,312.00
|
$5,500.00
|
|
Less: PUC
|
161.00
|
$5,500.00
|
|
Deemed Dividend
|
$180,151.00
|
NIL
|
|
|
|
|
|
Proceeds
|
$180,312.00
|
$5,500.00
|
|
Less Deemed Dividend
|
$180,151.00
|
NIL
|
|
Net proceeds
|
161.00
|
$5,500.00
|
|
Less: ACB
|
$130,000.00
|
$55,000.00
|
|
Business Investment
Loss
|
($129,000.00)
|
($49,500.00)
|
6. The Minister reassessed the Appellant for the 2000 taxation year by Notice dated April 28, 2003 to deny the Appellant's claim.
7. In so reassessing the Appellant, the Minister relied on the following assumptions:
a) The Appellant did not respond to requests to provide information to substantiate his claim for a business investment loss in the amount of $179,339;
b) The Appellant did not incur a business investment loss of $179,339.
8. The Appellant objected to the reassessment by Notice of Objection dated July 16, 2003 and received July 18, 2003.
9. The Minister confirmed the reassessment of the Appellant's 2000 taxation year by Notice dated March 10, 2004;
10. In confirming the reassessment of the Appellant's 2000 taxation year the Minister relied on the following assumptions of fact:
a) On or about October 12, 1990, the Appellant acquired 10 Class B voting shares at a cost of $5,000 each;
b) On or about May 7, 1993, the Appellant acquired 1 Class B voting share at a cost of $5,000;
c) On November 26, 1999, the Company passed a resolution to redeem 169 Class B shares at a value of $500 per share;
d) The Appellant's 11 Class B shares were redeemed on November 26, 1999 at $500 per share;
e) The disposition claimed in the 2000 T1 return was incorrectly identified as Class A shares and not Class B shares;
f) On or about November 29, 1999 the Company issued a total of 999,950 Class A shares without par value for stated consideration of $.001 per share;
g) On or about November 29, 2000 the Appellant received 273,358 of the 999,950 Class A shares;
h) The Company sold its land, buildings and equipment on April 15, 2000;
i) On August 8, 2000, the Company purchased 231,000 Class A voting shares from the Appellant at a price of $1.123 per share for a total purchase price of $259,413;
j) The Company made a capital dividend election in respect of the deemed dividend incurred on redemption of the 231,000 Class A shares;
k) On August 14, 2000, 118,180 Class A shares were transferred to the Appellant from family members;
l) The Appellant did not acquire the shares from his family members for the purpose of gaining or producing income;
m) On or about August 15, 2000 the Company redeemed 160,562 Class A shares from the Appellant for a redemption price of $1.123 per share;
11. The Respondent states that the following are other material facts:
a) Brew Creek Enterprises Ltd. (the "Company") is a corporation duly incorporated and resident in British Columbia;
b) As of August 7, 1990, the Company's authorized capital consisted of 50 Class A voting shares without par value, 200 Class B voting shares with a par value of $5,000 each and 10,000 Class C preference shares with a par value of $25 each;
c) As at November 24, 1999 the Appellant owned 25 Class A voting shares without par value;
d) As at November 26, 1999, the Appellant held 11 Class B voting shares;
e) As at November 26, 1999, the Appellant together with related persons controlled the Company;
f) As of August 8, 2000, the Appellant held 42,383 Class A voting shares;
g) As of August 14, 2000, the Appellant held 160,563 Class A voting shares without par value which consisted of 42,858 Class A shares without par value acquired for consideration of $.001 per share and 118,180 Class A shares without par value transferred to the Appellant from family members;
h) The Appellant's adjusted cost base for the 118,180 Class A shares transferred from other family members was zero;
i) On or about August 15, 2000, the Appellant was left with one Class A voting share;
j) The Company did not become bankrupt in the Appellant's 2000 taxation year;
k) The Company is not a corporation referred to in section 6 of the Winding-up and Restructuring Act that is insolvent;
l) No winding-up order was made in respect of the Company in the Appellant's 2000 taxation year;
m) The Company was not insolvent at the end of the Appellant's taxation year;
n) The Company did not carry on business at the end of the Appellant's 2000 taxation year;
B. ISSUES TO BE DECIDED
12. The issues are:
a) Whether the Appellant incurred a business investment loss of $49,500 in his 2000 taxation year in respect of the disposition of his 11 Class B shares in [sic]; and
b) Whether the Appellant incurred a business investment loss of $129,839 in his 2000 taxation year in respect of the disposition of his Class A shares.
C. STATUTORY PROVISIONS RELIED ON
13. He relies on subsection 38(c), paragraph 39(1)(c), subsection 50(1), sections 54 and 84, subsections 84(3), 84(9), 248(1) and section 251 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act").
D. GROUNDS RELIED ON AND RELIEF SOUGHT
14. With respect of the disposition of the Appellant's Class B shares, any loss incurred in respect of the redemption of Class B shares occurred in 1999 when the Company's obligation to redeem the shares arose as evidenced by the resolution, and therefore the Appellant is not entitled to claim the loss in his 2000 taxation year.
15. In the alternative, if the Appellant incurred a loss on the disposition of the Class B shares in his 2000 taxation year:
a) The Appellant is not entitled to a business investment loss under subparagraph 39(1)(c)(i) of the Act for the reason that subsection 50(1) does not apply. The Class B shares were not owned by the Appellant at the end of the 2000 taxation year as required by paragraph 50(1)(b) of the Act and furthermore, none of the conditions of subparagraphs 50(1)(b)(i), (ii) or (iii) are satisfied; and
b) The Appellant is not entitled to a business investment loss under subparagraph 39(1)(c)(ii) of the Act for the reason that the Appellant did not dispose of the Class B shares to a person with whom the Appellant was dealing at arm's length. The Appellant did not deal at arm's length with the Company pursuant to section 251 of the Act.
16. The Appellant has not shown that he paid consideration to other individuals for the transfer of the 118,180 Class A shares therefore, the Appellant's adjusted cost base for the shares is zero. Accordingly, the Appellant did not incur a loss on the disposition of the 118,180 Class A shares.
17. If the Appellant incurred the loss on the disposition of the Class A shares in the 2000 taxation year:
a) The Appellant is not entitled to a business investment loss under subparagraph 39(1)(c)(i) of the Act for the reason that subsection 50(1) does not apply. The Class A shares were not owned by the Appellant at the end of the 2000 taxation year as required by paragraph 50(1)(b) of the Act, and furthermore, none of the conditions of subparagraphs 50(1)(b)(i), (ii) or (iii) are satisfied; and
b) The Appellant is not entitled to a business investment loss under subparagraph 39(1)(c)(ii) of the Act because the Appellant did not dispose of the Class A shares to a person with whom the Appellant was dealing at arm's length. The Appellant did not deal at arm's length with the Company pursuant to section 251 of the Act.
[3] Assumptions 10(a) to (g), inclusive, and (i) to (m), inclusive, were established to be true by the evidence. More specifically, respecting assumption 10(l), I believe the Appellant's testimony that he purchased the shares from family members to fulfil his promise to them that they would not lose money on their shares. For this reason, I conclude that assumption 10(l) was established. However, respecting assumption (h), the Company closed its sale and sold its land and buildings for $3,000,000 on May 31, 2000, not April 15, 2000.
[4] The first issue in dispute is whether the Appellant incurred a business investment loss of $49,500 in his 2000 taxation year in respect of the disposition (to the Company) of his 11 Class B shares. I conclude that he did not.
[5] On November 29, 1999, the Company filed with the Registrar of Companies for British Columbia a special resolution that all the Class B shares be cancelled, "none of which is allotted or issued" (Exhibit A-4, Tab 1). The Appellant not only signed all of the resolutions which caused this to happen, he also signed the certificate for filing this with the Registrar. He suggested, without providing firm dates or supporting documents, that this did not get finalized until 2000. However, the resolution speaks for itself as do the Company's records. The shares were redeemed in November 1999.
[6] It should be noted that the Appellant's personal accountant prepared the 2000 income tax return based solely upon a description of the transactions, without actual transaction dates, that he received from the Company's chartered accountants. The Appellant's testimony about it in Court was not credible in the face of the Company documents and it called the Appellant's entire testimony into question. The appeal of the first issue is therefore dismissed.
[7] The second issue in dispute is whether the Appellant incurred a business investment loss of $129,839 in his 2000 taxation year on account of the redemption of 160,562 Class A shares. It should be noted that the Notice of Appeal and the Reply both refer to 160,562 Class A shares. However, the Minutes and the Company's documents refer to 160,563 shares. I have accepted the Appellant and Respondent's figure described in their pleadings, as it is mathematically correct after reviewing the transactions in sequence.
[8] The Appellant obtained the shares in question over the course of several transactions. In November 1999 he acquired 273,383 Class A shares at a subscription price of $0.001 per share. On August 8, 2000, the Company purchased 231,000 of those shares for $1.123 per share. This left a balance of 42,383 Class A shares, which were then contained in share certificate 15A dated
August 8, 2000. On August 14, 2000, the Appellant purchased Class A shares from his relatives for $1.099 per share as follows:
|
Vendor
|
Share
Certificate
|
Number
of Shares
|
|
Stan Wilkins
|
6A
|
4,545
|
|
Juanita Wilkins
|
7A
|
63,636
|
|
Helen Wilkins
|
8A
|
4,545
|
|
William Poole
|
9A
|
27,273
|
|
Stewart Poole
|
10A
|
4,545
|
|
George Poole
|
11A
|
4,545
|
|
Catherine Poole
|
12A
|
9,091
|
|
Total Shares
|
|
118,180
|
|
Total Price Paid
|
|
$129,890.82
|
[9] Following this transaction, the Appellant had a total of 160,563 Class A shares, of which 42,383 had been acquired at $0.001 per share and 118,180 had been acquired at $1.099 per share. These shares were combined and issued to him in share certificate 17A dated August 14, 2000.
[10] Based upon counsels' pleadings, the Company then redeemed 160,562 of the 160,563 shares in share certificate 17A on August 15, 2000 for $1.123 per share.
[11] Thus, the Appellant's profit on the 118,180 Class A shares was $0.024 per share ($1.123 - $1.099). His profit on the remaining 42,383 Class A shares was $1.122 per share ($1.123-$0.001).
[12] After August 15, 2000, there were only two shares outstanding. One was in the name of Hugh Oswald - share certificate 18A for one Class A voting share, and the other was in the name of the Appellant - share certificate 19A for one Class A voting share.
[13] To paraphrase paragraph 39(1)(c), a taxpayer may claim a business investment loss from the disposition of certain property in two situations: a disposition to which subsection 50(1) applies or a disposition to a person with whom the taxpayer was dealing at arm's length.
[14] This was not a disposition to which subsection 50(1) applies. There is no evidence that the Company ever became insolvent or bankrupt, nor was it wound up in 2000. No evidence was presented that the Company was carrying on business on November 30, 2000, the end of its taxation year. The evidence is that the Company leased the sold premises until November 30, but the Appellant himself spent his time looking for new premises to lease for corporate meetings and seminars until sometime in August 2000, when Mr. Oswald decided that the business should not continue.
[15] Nor was this a disposition to a person with whom the taxpayer was dealing at arm's length. Respondent's counsel cited Fournier v. M.N.R., 91 DTC 746 as authority for the proposition that if Messrs. Wilkins and Oswald were acting together in concert in these share transactions, the Company was not dealing at arm's length with the Appellant pursuant to subsection 251(1). The Court accepts this conclusion as correct.
[16] The evidence is clear that after Mr. Oswald became a shareholder, he and the Appellant worked in concert in all of the Company's proceedings. During the November 1999 corporate proceedings, all of the shareholders were removed from the Company except the Appellant's relatives. This gave the Appellant time to deal with them so that they could be removed on the Appellant's terms in August 2000. The Appellant's relationship with his relatives was such that he signed Company documents on their behalf without any evidence of a power of attorney for them. The Appellant's relationship with Mr. Oswald was so close that Mr. Oswald accepted the Appellant's signature as sufficient, as did the Company itself. The November 1999 and August 2000 share dealings were, in effect, one long transaction by the two of them together for each one's benefit. They had a common economic interest in deciding how they would withdraw the profits from the Company for their personal use. Therefore, the Company was not at arm's length with the Appellant when the August 2000 share transactions occurred. The appeal of the second issue is also dismissed.
[17] The Respondent is awarded its taxable costs.
Signed at Saskatoon, Saskatchewan, this 4th day of April 2007.
"D.W. Beaubier"
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