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Date: 20030123
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Docket: 2000-2966(IT)G
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BETWEEN:
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SMX SHOPPING CENTRE LTD.,
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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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____________________________________________________________________
Counsel for the Appellant: Michael Beninger
Counsel for the Respondent: Linda Bell
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench on
October 4, 2002, at Vancouver, British
Columbia)
McArthur J.
[1] The Appellant seeks to deduct from
income an expense of $1,180,542 in its 1994 taxation year, and
management fees of $85,500 and $42,500 in the 1993 and 1994
taxation years, respectively. The Appellant, SMX Shopping Centre
Ltd., a Canadian corporation, carried on a real estate
development and construction business until about 1998 when it
became somewhat inactive. Shahram Malekyazdi
("Shahram"), an officer of the Appellant, was the only
witness. He was born in Iran, educated in the British Isles in
business and finance, and has lived most his adult life in
British Columbia.
[2] Through the mid-1980s, SMX
constructed and sold a shopping centre, realizing an approximate
net profit of $5 million, $3 million of which was deposited in a
Swiss bank account under the control of Amir Malekyazdi, the
father of Shahram. Shahram, his brother, and two sisters each
owned 25 percent of the issued shares of SMX. They also
controlled five or six other Canadian or B.C. corporations,
apparently all involved in construction and/or real estate
development, including Armeco Construction Limited.
[3] The Appellant's $3 million was
pooled with other funds from related companies in the Swiss bank
account. Shahram testified that commencing in January 1993, and
over a six-month period, Amir withdrew the equivalent of
$1,180,542 Canadian dollars to invest in Golbanoo Canning Company
Limited in Tehran, Iran. Golbanoo carried on a business, amongst
other activities, of importing aseptic drums from Spain in which
it stored and preserved tomato paste, which it subsequently
marketed. One of two active partners of Golbanoo was Amir's
brother-in-law, or uncle to the witness Shahram, and his brother
and sisters. It was not clear whether the money was withdrawn
from the pooled account or transferred to a separate account in
the Swiss bank in the name of Armeco Construction Limited, acting
on behalf of SMX. There was no direct or effective tracing of the
money. According to Shahram, a trustee in France, on the
direction of Amir, forwarded the equivalent amount in Iranian
funds to a bank in Tehran for Golbanoo. Subsequently, Amir
reimbursed the trustee using French francs.
[4] For his efforts in the Golbanoo
investment, Amir charged the Appellant $85,500 in 1993 and
$42,500 in 1994. The position of the Appellant, taken largely
from his Notice of Appeal and closing submissions, includes that
in the course of carrying on its business, the Appellant incurred
various business expenses, including fees of $85,500 in 1993 and
$42,500 in 1994 for consulting services provided by Amir, a
non-resident, and also had a net loss of $1,180,542 from its
Golbanoo business.
[5] Counsel for the Appellant added
the Golbanoo loss and part of the management fee were deducted in
1994 as a loss and carried back. The balance of the management
fee of $85,500 was incurred in 1993. Essentially, what is at
issue is a taxable income of $145,700 of SMX for 1993. Counsel
added that the Golbanoo loss and management fees are deductible,
based on the evidence adduced, and the Minister is statute-barred
in reassessing the Golbanoo loss. Shahram also stated that the
documents confirm that there was a business deal which was a
joint venture. It was properly recorded as such in the
Appellant's financial statements and tax return, as well as
its internal accounting documents. It was clear that the
Appellant had funds which it had made from prior business success
and $930,000 US was directed to the Golbanoo joint venture.
[6] The Respondent, in the Reply to
the Notice of Appeal, submitted that the Appellant did not carry
on a business through an entity known as Golbanoo joint venture
and, if it did, the advances of $1,180,542[1] allegedly made through Armeco were
not made or incurred. Further, the management fees of $85,500
claimed in 1993, and $42,500 claimed in 1994 were not incurred
for the purpose of gaining or producing income from a
business.
[7] I will attempt to set out some of
the documents relied on by the Appellant, taken from Exhibit A-1
which consists of some 45 tabs and over a hundred documents. Tab
6 is a translation from Farsi and is on the letterhead of
Golbanoo and dated December 22, 1992 and reads:
Armeco Construction Ltd. on behalf of SMX Shopping Centre Ltd.
c/o Mr. Malekyazdi, 8, Rue Parmentier, 92800 Puteaux,
France.
Subject: Proposal for investment in food making projects in
Iran and the Middle East.
Further to our numerous discussions regarding your investment
in food making projects in Iran and the Middle East during which
you expressed an interest in investing in some of the profitable
ones, we hereby inform you of one of our projects which is called
"Golden Drum" and has the following specifications:
1. Golden
Drums are barrels with a capacity of approximately 200 litres
which are used for the purpose of preserving food products such
as tomatoe paste, dill pickles, compotes and fruit and vegetable
concentrates.
2. Golden Drum
barrels can preserve foods for up to three years outside of cold
storage without the need for preservatives.
3. Golden Drum
barrels are built in accordance with the American F.D.A.
Standards and are accepted for export purposes by forty-two
advanced countries, including those in North America and
Europe.
Our company has signed a contract with a large French company
called Van Leer, which is part of the Shell Petroleum Group and
is a specialist in the manufacturing and sale of these barrels,
to undertake the business of these barrels in two phases:
Phase One
Importing 5000 ready-made barrels from Europe to Iran on a
trial basis.
Phase Two
Importing a factory for the purpose of manufacturing Golden
Drum barrels in Iran or any other suitable location in the Middle
East. The purpose of such a project is to save transportation
costs related to bringing empty barrels to the Middle East from
Europe with the result that the price of the barrels will be
reduced by approximately a half.
Amir's office was in Puteaux, France. The head office of
Golbanoo was in Tehran, Iran. Tab 7 is a translation of a letter
(joint venture agreement) completed on the letterhead of Armeco
in Puteaux - France, addressed to Golbanoo and dated January 18,
1993. It provides as follows:
In response to your proposal dated 22 December, it is hereby
agreed that we will participate in Phase One of the project and
will decide in due course about our involvement in Phase Two.
We shall pay the US $930,000 for our 50% share in three
instalments as follows:
First Installment:
Upon confirming your
agreement by signing
the bottom of this
letter
US $232,000
Second Installment:
After receiving the Credit
documents for 5000 barrels
from Van Leer Co. and the
arrival of the barrels in
Bandar Abbas (or, in the event
existing barrels are used, when
their documents are presented,
but in any event before
10th April
1993)
465,000
Third Installment:
After arrival of the barrels
at the Tehran factory (or,
in the event that the existing
barrels are used, by 10 June
1993)
235,000
TOTAL US
$930,000
If you are in agreement with this proposal, please sign this
letter at the bottom and return same.
(signed)
GOLBANOO CO. hereby agrees to the foregoing
(signed)
[8] Tab 8 is a translation of a
Golbanoo receipt, prepared on Golbanoo letterhead and dated June
15, 1993. As stated, the managing director of Golbanoo was
Amir's brother-in-law. The receipt provided as follows:
To: Armeco Construction
Ltd.
acting on behalf of S.M.X. Shopping Centre
We hereby verify that we have received the third instalment of
your investment in the amount of $235,000 bringing the total
amount we have received from you to a total of $930,000.
Yours truly,
GOLBANOO COMPANY
Managing Director
Jahangir Moussavizadeh
(signed)
[9] Tab 9 is a translation of a letter
from Golbanoo on its letterhead and dated December 20, 1993 as
follows:
Subject:
Golden Drum project in which you
have invested US $930,000
It is with regret that we notify you that we have to date made
a loss of US $1,500,000 in this project and your share of this
loss is $750,000.
The reason for the loss is the hard economic situation in most
countries of the world in particular North America and Europe who
are amongst our major purchasers. Similarly, as you may be aware,
the economic situation internally in Iran is very critical.
We not only do not think that our situation in 1994 will be
better, but believe that it could be worse due to the fact that
costs, bank interest charges, as well as other storage expenses,
could increase our losses.
Yours truly,
GOLBANOO COMPANY
(signed)
[10] Tab 13 is an invoice from Van Leer, who
manufactured the drums for Golbanoo and Tab 19 is an invoice from
Amir to the Appellant for management services. There is a also
similar one for the 1994 year. Tab 19 provides as follows:
INVOICE
January 29, 1993
TO: SMX Shopping Centre Ltd
595 Burrard Street
P.O. Box 49077
Vancouver, B.C. V7X 1G5
For my services in negotiating the Golbanoo agreement
including several meetings in Paris with Mr. Jahangir
Mousavizadeh, the managing director of Golbanoo, making numerous
phone calls to Iran, meetings with various persons familiar with
the local and export markets for tomato paste, and for
miscellaneous other disbursements and services related to the
aforementioned.
9 months at $9500 per month = $85,500 in Canadian Funds
The above amount is due and payable upon receipt.
Amir Malekyazdi
(signed)
[11] Much of Shahram's evidence was
hearsay. He had no direct involvement in Golbanoo. He attempted
to relate what he had been told by his father. He was not the
author of most of the documents contained in the Appellant's
book of documents (Exhibit A-1). He tried to piece together
various bills of lading, contracts, agreements, accounting
records, bank statements and the like, of which he had no
personal knowledge. He spoke in generalities to the effect that
this must have been what happened but he did not know firsthand,
he was not there, he did not do it. He did not know the specific
banking arrangements made by his father with the Union Swiss
Bank. There were no cancelled cheques or drafts in evidence
demonstrating that the $1,180,542 was paid. Many of the documents
were written in Farsi and translated into English by Shahram. The
Respondent accepts the accuracy of these translations.
[12] I further find there was no solid
corroborating evidence. An in-house accountant for the Appellant
and related companies had prepared the trial balance and general
ledger and worksheets for the Appellant. These, together with the
Appellant's income tax returns, had been either reviewed or
prepared by an outside accounting firm, Sheinin & Company.
Neither the in-house accountant nor a representative of the
accounting firm testified.
[13] It is Shahram's understanding that
the payments to Golbanoo were made through an intermediary, paid
in US dollars and transferred to Iran to be converted into
Iranian currency for the benefit of Golbanoo. This appears to be
contradicted by one of the documents. Apparently, the aseptic
drums were capable of preserving tomato paste for three years. It
remains a mystery why the Appellant claimed the total loss of its
investment after less than two years of operation.
[14] Generally, the evidence of Shahram was
unreliable and insufficient. Much of it was his surmising or
guessing what took place. In some of these instances, he was not
certain if the Appellant's money was held in a separate
account or a pooled account when, through Armeco, it flowed to
the intermediary. There were no cheques tracing the money. He
believed that an intermediary paid the money to Golbanoo who
subsequently was reimbursed by the Appellant. Again, this
appeared to have been contradicted.
[15] Other than offering surmises and
generalities, he could not articulate with any certainty that
Golbanoo could not repay the debt and why it could not, and where
the money went. He stated his father was a careful and
conservative investor, yet there is little documentation to
support this. There was no security provided and no evidence of
any efforts made to recover the money.
[16] Dealing with the Appellant's
statute-barred submissions, there is a three-year time
limit for reassessing a taxpayer that can be extended in certain
circumstances. It is conceded that the Minister's
reassessment was beyond the three-year period. The Respondent
relies on subparagraph 152(4)(b)(iii) of the Income Tax
Act, which provides, in part, that the Minister may at any
time make a reassessment only if the reassessment is made as a
consequence of a transaction involving the taxpayer and a
non-resident person with whom the taxpayer was not dealing at
arms length. Also, subparagraph 152(4.01) states that
notwithstanding subsection (4), a reassessment may be made to the
extent that (but only to the extent that) it can reasonably be
regarded as relating to the transaction referred to in paragraph
152(4)(b)(iii).
[17] I believe the Appellant agrees that the
Minister properly assessed the Appellant beyond three years with
respect to the management fees. The Appellant's counsel
submits, again taken from his submissions, the transaction
referred to in paragraph 152(4)(b)(iii) is the joint
venture itself, and that transaction is between the Appellant and
Golbanoo, but that corporation deals at arms length with the
Appellant so the exception cannot apply.
[18] I find that the exception does apply
for the reasons given by Respondent's counsel. Again I refer
to the submissions where the Respondent's counsel stated:
The Minister's position is that even if the transaction
was the joint venture, as submitted by the Appellant, the joint
venture involved SMX Shopping Centre, as represented by its agent
Armeco, and Golbanoo Canning Company Limited. Both corporations
are beneficially owned by Shahram and his brother and sisters.
The shares are legally owned by his father and mother.
The shares of Golbanoo are owned 50 percent by the
brother-in-law of Amir, who is the uncle of the witness and his
brother and sisters. On the basis of section 251 of the Income
Tax Act, these two corporations are related because of the
relationship between the parties who control those companies and
own the shares. Therefore, they are deemed to be dealing, by
virtue of section 251, at arms length and they come within the
exception of (iii).
I agree with this reasoning.
[19] To be entitled to deduct the
million-dollar-plus losses, the Appellant must show that it
expended the money and establish that the money was lost, or not
recoverable. For reasons given by Respondent's counsel, I
find that the Appellant has not established either obligation. I
draw an adverse inference from the fact that Amir Malekyazdi did
not testify. He is the one who apparently investigated Golbanoo,
entered into a joint venture agreement, advanced the money, and
decided it was not recoverable, not the witness Shahram, who was
in B.C. when the venture transpired in Europe and the Middle
East. Shahram's evidence was, for the most part, as I have
stated, hearsay. He tried to repeat what his father had told
him.
[20] The Respondent's second position
that there was no or insufficient evidence that the money was
lost, if in fact it had been advanced, I find is even a stronger
reason for disallowing the deduction of the $1.180 million.
Shahram testified that Golbanoo, which had been in existence for
15 years, had other activities in addition to the alleged SMX
joint venture. The evidence relied on by the Appellant is a
letter from Amir's brother-in-law saying Golbanoo lost $1.5
million, together with a ledger account of the Golbanoo
Corporation and not the alleged joint venture.
[21] There is nothing to tie the losses to
the joint venture. Golbanoo refers to Armeco, as agent for the
Appellant, as a temporary debtor and not a joint venture. Perhaps
the transaction, if any, is more accurately described as a loan
from Amir to Golbanoo.
[22] There is insufficient evidence to
support a loss of the money. I do not accept that Amir performed
services to the Appellant as set out in the invoices. In
evidence, we have inadequate invoices and the generalities of
Shahram who could only guess what his father might have done.
Particularly, in such a non-arms-length transaction, direct
evidence from Amir at least is required to satisfy the
Appellant's onus to establish that the services were rendered
and the fee was recoverable. The evidence provided is that Amir
entered into an agreement with his brother-in-law, the terms of
which were not respected by either party, and after advancing
over a million dollars, he decides it is uncollectable within
less than two years. There was no security, and that was the end
of the money without any further explanation. It remains a
mystery what happened to it, if anything. From the evidence
presented, it is very doubtful that the Appellant in fact lost
the $1.180 million.
[23] In conclusion, there is insufficient
evidence presented by the Appellant to meet its burden of proof
that there was a joint venture, that $1.180 million was advanced.
Even if the Appellant got over that hurdle, there was absolutely
insufficient evidence that it was not recoverable. The
Appellant's statute-barred argument does not succeed because
the Minister properly reassessed under the exception provided in
subsection 152(4) because the parties were not dealing at arms
length.
[24] The appeals are dismissed, with
costs.
Signed at Ottawa, Canada, this 23rd day of January, 2003.
J.T.C.C.
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