|
Citation: 2004TCC561
|
|
Date: 20040903
|
|
Docket: 2000-4650(IT)G
|
|
BETWEEN:
|
|
ARTHUR STERN,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Paris, J.
[1] The appellant was one of several
investors in a car wash operation in downtown Toronto that was
started in 1988. In the course of this investment the appellant
lost a significant amount of money. The appellant claimed a
business investment loss of $226,547.89 and an allowable business
investment loss ("ABIL") of $169,910.92 in his 1997 taxation year
in respect of his losses on the basis that the amounts he
invested in the car wash business was the cost to him of shares
in High-Tech Car Wash Ltd. or alternatively was a loan to that
company, and that the ultimate insolvency of High-Tech caused the
value of the shares or loans to be nil.
[2] In assessing the appellant, the
Minister of National Revenue (the "Minister")
disallowed the ABIL claim, and the appellant appeals from that
assessement.
[3] The issues in this appeal are:
1. Whether the appellant was ever a shareholder in
High-Tech; and if so, the cost of those shares to him, and
whether the value of the shares was nil at the end of 1997; and,
alternatively,
2. Whether the appellant's investment in
the car wash business constituted a loan to High-Tech, and if so
the amount of the loan; and whether the loan was made for the
purpose of gaining or producing income from a business or
property.
Facts
[4] Four witnesses testified on behalf
of the appellant: Kevin O'Neill, Aaron Kwinter, Brian
Searles and the appellant himself.
[5] Evidence concerning the initial
phase of the car wash development was given by Mr. O'Neill, who
was also an investor in the venture, and who was involved with
the construction and operation of the car wash. In early
1988 he was operating an automobile repair business at 175
Ossington Avenuein Toronto in premises he rented from Mike Da
Silva. Mr. Da Silva approached Mr. O'Neill at that time
with the idea of getting a group of investors together to
purchase a neighbouring property at 159 Ossington Avenue to
develop as a car wash.
[6] Mr. O'Neill said that Mr. Da Silva
"looked after the business end of the transaction" and that he
believed that Mr. Da Silva approached Max Stern, (the appellant's
father) to raise funds for the purchase. Max Stern
arranged for several other investors to participate in the
venture. These investors and their respective interests
were[1]:
Mike Da
Silva
40%
Kevin
O'Neill
20%
Harvey
Nash
5%
Arthur Stern (the
appellant) 10%
Dawill Investments
Ltd.
5%
Max Stern Investments Ltd.
15%
C.
Grosberg
5%
[7] An offer to purchase the property
for $1.5 million was made in June 1988, showing Mr. O'Neill
as the purchaser, "in trust". The offer was accepted on
July 5, 1988, and the purchase was completed December 29,
1988. Title to the property was taken in Mr. O'Neill's name, in
trust, and the mortgages on the property were in his name as
well.
[8] The investors originally intended
to obtain a first mortgage from the CIBC but this financing was
not in place by the closing date, and the vendors provided a
first mortgage in addition to the second mortgage of $400,000
that they had agreed to take back. In March 1989 the
vendors' first mortgage was replaced by a first mortgage to the
CIBC supported by a promissory note guaranteed by each of the
investors.
[9] No written trust agreement
relating to the property was drawn up by the investors. However,
a direction dated March 6, 1989[2] relating to the CIBC mortgage
identified the investors as being the beneficiaries of the trust
relating to 159 Ossington. This document was signed by all
of the investors.
[10] Mr. O'Neill said that the investors
intended to form a company to own and operate the car wash. He
said that he held the property in trust for that company "once
that company was set up" rather than for the individual
investors. A company, High-Tech Car Wash Ltd. was incorporated on
June 23, 1989 but legal title to the property was never
transferred to it.
[11] Mr. O'Neill supervised the construction
of the car wash. He received funds from the investors and
recorded these amounts in a ledger, which he produced for the
Court[3]. Those
records showed that he received a total of $164,750 from the
appellant during the construction phase.
[12] Mr. O'Neill said that the investors had
planned to build a three storey building on the property but due
to problems with soil conditions, ended up only able to build a
one storey car wash. The car wash opened in December 1991, a year
behind schedule. Construction and financing costs were higher
than forecast due to these unanticipated problems. Apparently the
car wash was operated by High-Tech, with Mr. O'Neill taking an
active role in managing it. Initially, the car wash was
busy, but the volume of cars dropped off and it soon began losing
money. By the spring of 1993 there was insufficient revenue to
cover the mortgage payments to the CIBC, and in the fall the bank
began legal action against all of the investors to collect the
amounts owing. Mr. O'Neill said that he was president of
High-Tech up to 1994 but that he resigned in 1994 after a
disagreement with Mike Da Silva. He had only a limited
involvement in the car wash after that point.
[13] At some point in 1994 the property was
refinanced, and the CIBC mortgage was paid out. The property was
still registered in the name of Kevin O'Neill in trust. The car
wash continued to operate, and was kept open by infusions of
funds by Mike Da Silva. In 1997 the premises were
rented out, and in 2001 the property was sold under a power of
sale by the mortgage holder. None of the investors received any
of the sale proceeds.
[14] Aron Kwinter testified that he acted as
the investors' lawyer on the purchase of the property. His
primary contacts with the group were Kevin O'Neill and
Mike Da Silva. Mr. Kwinter produced copies of cancelled
cheques totalling $41,855 that he had received from the appellant
as his share of the funds used to purchase the property. He said
that it was possible that the appellant had made additional
payments for the purchase but no record of further payments could
be found.
[15] Mr. Kwinter said that the property was
transferred to Mr. O'Neill in trust for the investors for the
sake of keeping the transaction simple. It was his recollection
that the investors intended to set up a company in which they
would all be shareholders. The company was to hold the land,
construct the car wash and operate it. He said that it was not
possible to set up the company prior to completing the purchase
of the property, but that he was instructed to do so
afterwards.
[16] High-Tech was incorporated in June
1989. The documents showed that the sole shareholder of the
company was Manuel Da Silva, whom Mr. Kwinter identified as Mike
Da Silva's father. He had no recollection of why
Manuel Da Silva was made a shareholder.
[17] Mr. Kwinter knew that there was further
work to be done to organize the company's affairs after its
incorporation, but said that it was very difficult to get the
group of investors together to discuss what arrangements should
be made. Over the next few years he said he tried to get the
investors together to tie up loose ends. He recalled meeting with
the investors and sending out letters to them, and finally, in
January 1994 preparing a draft shareholders' agreement. However,
the investors did not execute the agreement and in Mr. Kwinter's
view, organizing the company was not a priority for them. By
1994, the venture was in financial difficulties and he guessed
that the investors did not want to spend money on legal fees. He
tried again to get a shareholders' agreement signed in November
1994 but was unsuccessful.
[18] Mr. Kwinter was unaware of whether the
investors had ever been issued shares in High-Tech, but said that
he had never been involved in the issuance of High-Tech shares to
them. He also could not say if he had ever seen any document
indicating that High-Tech had become the beneficial owner of the
property.
[19] Brian Searles, the accountant for
High-Tech from about 1990 to 1998, said that he had prepared
annual financial statements for the company, although only one
statement, for the year ending February 28, 1994 and prepared on
July 28, 1994, was produced in Court. He referred to a note in it
stating that:
"The registered owner of the Land...and the Mortgagee of
the 1st Mortgage ... are both Kevin O'Neill, in Trust. Mr.
O'Neill is holding both in trust for Hi-Tech Car Wash Ltd. and
therefore they are included in the accounts of the company."[4]
[20] Although Mr. Searles said that he had
seen documents showing that the property was being held in trust
for High-Tech, he admitted under cross-examination that he
could not say for certain that he had. The note in
High-Tech's financial statement was based on what he
understood to be the intention of the investors to have the
property held in trust for the company.
[21] The financial statement also made
several references to the investors as "shareholders" and showed
the amounts invested by them as "shareholder loans" totalling
$2,309,419[5]. Mr.
Searles admitted, however, that he knew that the investors had
never been issued shares in the company.
[22] The appellant gave evidence that his
father approached him in 1988 to invest in a property that was to
be developed into a car wash. The car wash was to be operated by
a company of which he was to be a shareholder. The appellant was
offered a 10% interest in this venture. He recalled, from
meetings of investors that he attended, that the property was
being purchased in the name of Kevin O'Neill who was to hold
it in trust for the shareholders of a corporation that would be
set up at a later date. It was done this way for the sake of
convenience.
[23] He said that the investors always
intended that a corporation would own the property and operate
the car wash, and that High-Tech was set up for that purpose. He
recalled attending various meetings of the investors at which
Mr. Kwinter was present, where Mr. Kwinter tried to get the
documentation for the venture in order. Mr. Kwinter was unable to
act for all the investors and told them they needed to get
independent legal advice. The documentation however was never
finalized. In the end, the appellant said that he never received
shares in High-Tech.
Analysis
Statutory provisions
[24] The provisions of the Income Tax
Act relevant to this appeal read as follows:
38. For the purposes of this Act,
...
(c) a taxpayer's allowable business investment loss
for a taxation year from the disposition of any property is 3/4
of the taxpayer's business investment loss for the year from
the disposition of that property.
...
39(1) For the purposes of this Act,
...
(c) a taxpayer's business investment loss for a
taxation year from the disposition of any property is the amount,
if any, by which the taxpayer's capital loss for the year
from a disposition after 1977
...
of any property that is
(iii) a share of the capital stock of a small business
corporation, or
(iv) a debt owing to the taxpayer by a Canadian-controlled
private corporation (other than, where the taxpayer is a
corporation, a debt owing to it by a corporation with which it
does not deal at arm's length) that is
(A) a small business corporation,
...
[25] In order to succeed in this appeal, the
appellant must show either that he owned shares in High-Tech or
that High-Tech was indebted to him. In the former case he must
also show the cost of those shares. If he is found to have a debt
owing to him by High-Tech he must show the amount of the debt and
that the debt was acquired for the purpose of gaining or
producing income. Counsel for the Respondent conceded that if the
appellant is found to have purchased shares in, or loaned money
to, High-Tech, those shares would no longer have had any value or
the loans would have become uncollectable by the end of 1997.
Amount of appellant's contributions
[26] Mr. O'Neill's evidence that he
received $164,750 from the appellant during the construction
phase of the car wash venture was not challenged by the
Respondent and I have no reason to doubt it. The evidence of the
amount of the appellant's contribution to the purchase of the
property is not as clear. Although Mr. Searles testified that he
saw records showing that the appellant had paid $63,797 to
Mr. Kwinter towards the purchase, he did not have those
documents at the hearing. Only the amount of $41,855 has been
corroborated as having been paid to Mr. Kwinter. The appellant
himself could not recollect how much he had paid and had no
records or documents to support a larger amount than what was
shown by the cancelled cheques that were produced. On the basis
of this evidence I find that the appellant made a total
investment of $206,605 in the car wash venture.
Was the appellant a shareholder?
[27] In my view it is clear that the
appellant never became a shareholder in High-Tech. He
admitted as much himself. It appears that the investors initially
intended that the property be transferred to a company in
exchange for shares in that company but that this step in the
organization of the venture was never carried out.
[28] It appears though that the organization
of the company and the legal arrangements regarding the holding
of the property were a low priority for the group. No company was
set up prior to the purchase of the property, despite the fact
that the investors had almost six months from the time their
offer was accepted until closing, and no shares were ever issued
to the investors after the incorporation of High-Tech.
[29] Counsel for the appellant argued that
it was open to me to find that even though the appellant had
never been issued shares in High-Tech, that he had an equitable
right to be issued shares because he had made a significant
financial contribution to the company on the understanding that
he would receive shares. He said that the draft shareholders'
agreement prepared by Mr. Kwinter in early 1994 was evidence of
the appellant's entitlement to shares in High-Tech. That document
showed that the appellant held 10% of the shares of High-Tech.
Counsel said that the appellant was entitled under the Ontario
Business Corporations Act[6] ("OBCA) to an order granting him
10 per cent of the shares of High-Tech. According to
section 248 of the OBCA a beneficial owner of security of
a corporation can bring an action in the Superior Court of
Justice for an order directing rectification of the registers of
a corporation and that such an order may be granted if the Court
is satisfied that an act or omission of the corporation effects
or threatens to effect a result that is oppressive of unfairly
prejudicial to the interest of any security holder, creditor,
director or officer of the corporation.
[30] It is not within the jurisdiction of
this Court to decide whether the appellant would be entitled to
such an order under the OBCA and there was no evidence
that he had ever applied for or been granted such an order by an
Ontario court. I can only deal with the facts of the appellant's
situation as they were at the time of the hearing before me. In
another case before this Court where an appellant argued that he
would be entitled to a rectification order from another court,
Bowman, A.C.J. said:
... This court's function is to decide whether an
assessment is right on the facts before it, not whether it might
be changed as the result of a subsequent event such as a
rectification order. If, every time a particular transaction had
unexpected or unwanted tax consequences and the Minister assessed
accordingly, this court on an appeal were to defer making a
decision and grant a sort of stay of execution while the taxpayer
sought a rectification order to reverse the adverse effects of
the earlier transaction a goodly number of our cases would be
hoist into judicial never-never land pending the disposition of
the application by the provincial court. Acting as a form of
judicial limbo is not part of this court's mandate.[7]
[31] I am also unconvinced that the
appellant had any beneficial ownership of shares in High-Tech.
Three criteria must be met in order to establish a valid trust.
These are: certainty of intention, certainty of subject matter
and certainty of objects. It must be clear that the settlor of a
trust intended that the property transferred to the trustee be
held in trust as a binding obligation. The property that is the
subject of the trust and the beneficiaries of the trust must be
identifiable, and the interests of the beneficiaries in the trust
property must be defined.
[32] According to the documents entered at
the hearing, only one share in High-Tech was ever issued.
There was no evidence led regarding the circumstances under which
the share was issued to Manuel Da Silva and no evidence that he
was holding it in trust for anyone else. Even if I were to accept
that Kevin O'Neill was holding the car wash property in trust for
High-Tech this is not sufficient in itself to create a trust with
respect to the High-Tech share held by Manuel Da Silva in favour
of the appellant and the other investors. I am not satisfied that
a trust regarding the shares in High-Tech has been shown to
exist.
Did the appellant loan money to High-Tech?
[33] The appellant's counsel argued in the
alternative that the amounts the appellant paid towards the
purchase of the property and for the construction of the car wash
were loans to High-Tech. He asserted that those amounts were in
effect advances to High-Tech, and that the appellant is therefore
entitled to an ABIL for the losses he suffered when High-Tech
became insolvent. He relied on the 1994 financial statement for
High-Tech which listed "shareholder loans" outstanding, and
Mr. Searles' evidence that these loans were the investor
contributions to the purchase of the property and construction of
the car wash.
[34] However, the appellant's own evidence
contradicts the representations made by Mr. Searles on the
1994 financial statement that the investors had made loans to
High-Tech. The appellant stated on a number of occasions that he
understood from his father (who arranged the financing and
assembled the group of investors) that he was to receive a 10%
interest in the company that would own and operate the car wash.
There was no mention made of being a creditor of that company and
there was no evidence that the appellant or other investors
intended that the amounts they advanced for the car wash venture
would be loans to the company. As I stated earlier, the investors
appear to have intended to receive shares in the company in
exchange for transferring the property to it but this never
occurred.
[35] I find that the presentation of the
amounts contributed to the venture by the investors as
shareholder loans was inaccurate; the investors never became
shareholders and the amounts they invested were not loaned to the
company
[36] Even if I had accepted that the
appellant's contributions to the venture were loans to High-Tech,
he would still not be entitled to an ABIL because he has not
shown that the loans were made for the purpose of gaining or
producing income. Without an income earning purpose, the
appellant's loss on the disposition of the alleged debt would be
deemed to be nil by subparagraph 40(2)(g)(ii) of the
Income Tax Act.
[37] There is no evidence that would permit
me to conclude that there was any means by which income from
High-Tech could flow to the appellant; no interest was payable on
the appellant's contributions, nor could he expect a return in
the form of dividends since he was never a shareholder in
High-Tech. If the appellant's contributions had resulted in a
debt owing to him by High-Tech, the loss on that loan would
therefore be deemed to be nil.
Summary
[38] While the appellant suffered large
losses on his investment in the car wash venture, the manner in
which his participation in that car wash venture was structured
does not entitle him to a business investment loss or an ABIL.
Although he may have intended to receive shares in
High-Tech in return for his investment, that intention was never
realized. I have no jurisdiction to grant him the relief sought
on the basis of that intention alone. As Linden, J.A. said in
Her Majesty the Queen v. A.D. Friedberg[8]:
In tax law, form matters. A mere subjective intention, here as
elsewhere in the tax field, is not by itself sufficient to alter
the characterization of a transaction for tax purposes. If a
taxpayer arranges his affairs in certain formal ways, enormous
tax advantages can be obtained, even though the main reason for
these arrangements may be to save tax (see The Queen v. Irving
Oil, 91 DTC 5106, per Mahoney, J.A.). If a taxpayer
fails to take the correct formal steps, however, tax may have to
be paid. ...
The appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 3rd day of September 2004.
Paris, J.
Email this Content