Date: 20010608
Docket: 2000-1147-IT-I
BETWEEN:
JOSEPH CAPOGRECO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1]
In computing income for the 1991 taxation year, the Appellant
sought to claim a business investment loss in the amount of
$410,082 resulting in a claim for an Allowable Business
Investment Loss ("ABIL") of $307,562. The Minister of
National Revenue ("Minister") assessed the Appellant
for the 1991 taxation year and denied the deduction of the
business investment loss. From this disallowance, the Appellant
appealed to this Court.
[2]
Joseph Capogreco testified that he initially had been granted the
loss but that his accountant was contacted in April 1997 by
Revenue Canada requesting more information. He visited their
offices on Yonge Street and subsequently the loss was
disallowed.
[3]
He introduced a number of documents to assist in the proof of his
claim in Exhibit A-1 which included a list of receivables
and payables; the anticipated bank position of 719102 Ontario
Limited (the "Company") as of September 1, 1989;
various lists of accounts receivable and payable; various
correspondence and documents with respect to various projects in
which this company was involved; lawyers' letters; letters
from Brampton Hydro; statements of accounts and other
letters.
[4]
Exhibit A-2 was a copy of the lease between 719102 Ontario
Limited and 620705 Ontario Inc. and Dr. Ivan Majesky. Exhibit
A-3 was a statement of defence and cross-claim between
Altracon Construction Ltd. and 719102 Ontario Limited, Paul
Delahunty and Brian Kenny. Exhibit A-4 was a letter from
Allen & Savage Insurance Brokers Ltd. directed to Centre Park
Medical Arts Developments Ltd., dated February 6, 1989 with
respect to insurance on the property at 30-42 Vodden Street
in Brampton, Ontario. Exhibit A-5 contained one cheque of
the Company dated December 1, 1989 and two photocopies of cheques
dated December 1, 1989 and January 1, 1990.
[5]
The Appellant regarded these documents as evidence of business
activity of 719102 Ontario Limited (the
"Company").
[6]
He testified that the Company was set up for the purposes of
developing medical buildings and services in 1987. By the end of
1987, they had acquired a lease on Vodden Street in Brampton,
Ontario. Approximately 10 to 12 doctors wanted to be in it so the
Company started to construct a medical building on the property.
The Appellant was a silent partner. There were two active
partners. The Appellant stated that he gave $140,000 to Brian
Kenny to allow the Company to proceed. The Company received
approval from the municipality to proceed and they attempted to
obtain tenants. They also obtained an X-Ray company to be their
sub-tenant. This company paid $500,000 to the Company which
was referred to as "key money". The amount of
$250,000 of this money was up-front money, so-called, and
$250,000 was to be paid on occupancy. The Company then looked for
a pharmaceutical company. The Appellant approached a friend who
said that he was interested in being a pharmaceutical tenant and
he paid $250,000 as key money to the Company.
[7]
After one to two months the three partners tried to obtain a
mortgage for 100 percent of the financing required. They were
unable to do so. The Appellant asked a friend of his to come in
to the investment and he agreed to do so. He received 10 percent
of the shares. Five per cent of the shares came from the
Appellant and 2½ percent from each of the other two
partners. The Company was able to obtain a mortgage from
Confederation Trust for $3 million for bridge financing for the
construction of the building.
[8]
As the matter progressed they were told that they needed more
money for expenses. The Appellant stated that he put $81,000 into
the Company. They also interested another investor, Mr.
D. Dienna, who received 10 percent of the shares from the
other two partners and he put in $50,000.
[9]
Within nine to ten months after construction started in October
1989, they were asked to put in more money. The Appellant put in
$107.000, Mr. Fazio put $80,000, Mr. Dienna put in the same
and Messrs. Kenny and Delahunty put in double that amount to
finish the inside of the building. The Appellant said that he
borrowed some money from the family and the Bank of
Nova Scotia but at the end of the day he put in another
$107,000.
[10] The
Appellant and some of the other partners approached the
contractors to see the books and they were refused. There were
expenditures that were not authorized. The Appellant alleged that
they put the money into another company. Further, they took fees
on the mortgage which were not agreed upon. It was the
Appellant's position that the contractors took one half a
million dollars out of the business. The partners decided to
litigate and they received an injunction to freeze the accounts
of the contractors and any further dealings by them.
Consultations were held between the various lawyers to settle the
matter, the injunction was lifted and the property was released.
The building was taken over by Mr. Fazio and the Appellant. The
settlement offer deteriorated. The Appellant and his partners
suffered from stalling tactics, the case was put off, some of the
defendants disposed of their assets and made no serious
settlement offer. A settlement was reached with Mr. Delahunty for
$265,000 and this money was put into the Company to finish the
building. The accountant was attempting to obtain a lower
mortgage rate but the mortgage rate went up to 17¼ percent
from 13 percent. Confederation Trust took over the
building.
[11] The
Appellant and other partners attempted to obtain $500,000 from
Brian Kenny but were unable to do so. He went bankrupt and
the matter was discontinued.
[12] Near the
end of 1990 or early 1991, Confederation Trust indicated that
they were going to sue the Appellant and his partners for the
shortfall. The Appellant had no money but Mr. Fazio did. He
settled with the mortgage company. The interest rates went
down.
[13] The
Company had acquired a negative flow of $500,000. The building
was losing money while being operated by the mortgage company.
The mortgage company wanted to give the building back to the
Company for $500,000 and to give them a mortgage for $3 million.
Mr. Fazio said that he could not come up with his share of
$250,000 so the Appellant turned his shares over to his godfather
for $1. He "laid low" for months and then got back on
his feet.
[14] In
cross-examination the Appellant said that the loss occurred
because he bought the shares and lost them. He confirmed that he
put in $140,000 but he already had his shares at that time. He
gave a cheque to Brian Kenny. He did not have the cheque
with him and he has not seen Mr. Kenny since 1990. He had no
other documents to show these facts. He filed his 1991 return in
1995.
[15] He put in
a cheque of $81,000 into the Company in 1988. He did not have
that cheque. This was put in to keep the Company going. He
received no shares for that amount of money. They agreed that
since they received the mortgage they would get their money back
but they did not. He put in $107,000 in October 1989.
Mr. Fazio was a witness but he could not come to Court on
the first day of the trial. He had no other evidence of that
fact.
[16] Exhibit
R-1 was admitted by consent. This was a letter to
Mr. Joe Capogreco from the Company requesting a capital
injection due to a shortage of funds. The Exhibit also contained
an invoice regarding the capital injection of $107,332. The
Appellant said that he borrowed $50,000 from the Bank of Nova
Scotia. Some of the money that he put into the Company was his
own money and some was received from his father. He also received
$90,000 from his sister. He had no documents to support this. He
is now helping to pay the mortgage.
[17] His
sister took out a mortgage for $81,000 but he had no records of
it. He was asked if he requested his sister to come to the Court
and he said that he did not. He did not think that he needed her.
It was his position that Exhibits A-1 to A-5 showed
Company activity in 1989, 1990 and 1991.
[18] At this
point the matter was adjourned to May 11, 2001, at which time
Exhibit R-2, the 1991 T1 General income tax return of
Joseph Capogreco was admitted into evidence by consent. The
Appellant said that this was the information he submitted in
support of his claim for an ABIL and other information regarding
his ownership of 20 shares of the Company.
[19] Anthony
Fazio testified that he was introduced to the Company by the
Appellant and that he received 5 percent of the shares and then
an additional 5 percent. The reason he became involved was
that the Appellant indicated to him that they were constructing a
building which was to house a pharmacy. This witness paid
$250,000 for rights to the pharmacy. It was intended to construct
the building in 1987/1988. It was just under construction and the
Company was looking for money. This witness was brought to a
meeting of the Company which needed $500,000, of which this
witness's share was $90,000 for his interest. He was also
requested to guarantee a mortgage to Confederation Trust for
approximately $3 million. The witness indicated that there
was talk of fraud taking place when the contractors produced an
interim statement with many unexplained expenses thereon and they
were requesting more money.
[20] The
witness was asked why he put more money in at that stage and he
said that he already put money in so he wanted to get the
building finished and then he would deal with the problems
afterwards.
[21] In
cross-examination he said that the $90,000 that he injected into
the Company was not for additional shares. It was a capital
investment. He admitted that in 1990 and 1991 the principal
source of income for the Company was rent.
[22] The
Appellant was allowed to ask further questions and as a result of
those questions the witness said that they hired a lawyer and
obtained an injunction. One party settled and one did not pay
anything, the injunction was released and the partners received
nothing.
[23] After the
building went bankrupt in 1990, a third party bought the
building. This witness believed that Confederation Trust took it
back for a period of time. This witness and another person put in
more money and took back the building. As a result of a further
question he indicated that he took the building over in 1990 or
1991.
[24] Peter
Pugliese testified that he was the Appellant's
brother-in-law. He took out a first mortgage on his property in
July of 1987 to assist Mr. Capogreco in obtaining funds of
$90,000. In August 1998, he took a second mortgage for $120,000
to raise money for Mr. Capogreco. He gave money to him.
Exhibit A-6 was introduced by consent which contained
the signature of Joseph Capogreco acknowledging receipt of
$90,000 from Peter and Teresa Pugliese which resulted in an
increase in their mortgage from $35,000 to $125,000 regarding the
first mortgage on their house at 140 Simonston Blvd. in
Thornhill, Ontario. An agreement assuming mortgage was also
attached to this Exhibit and a copy of the charge/mortgage of
land.
[25]
Exhibit A-7 was a copy of a charge/mortgage of land in the
amount of $120,000.
[26] In
cross-examination he said that he acted through lawyers and that
the documents were signed when indicated on them. The Appellant
was to take over the mortgage payments and has paid as much as he
was able to. At that point he did not know how much he had paid
back. He said the Appellant was talking about investing in the
medical building and that was all that he knew about what he was
going to do with the money. The purpose was to help pay the
expenses for the construction of the building.
[27] In
response to a question directed to the witness by the Court, he
said that the Appellant missed paying back $45,000 in payments.
He paid back about $45,000. He still pays when it is possible for
him to do so. This witness still considers him to be responsible
for the balance.
[28] Mr.
Ronald Bruce Love was a chartered accountant and had acted for
the Appellant with respect to the facts surrounding this appeal.
He advised him about filing his tax returns. He advised him to
file under the voluntary disclosure program. There was a business
loss involved. He suggested to the Appellant that he claim an
ABIL realized in the 1991 taxation year.
[29] Mr. Love
contacted Revenue Canada and arranged a visit to their offices in
North York and on Yonge Street with the Appellant and they filed
the returns for several years including the 1991 taxation
year.
[30] The agent
at Revenue Canada asked for particulars with respect to the ABIL
claim and the witness said that they provided copies of the
Supreme Court papers setting out the circumstances of the losses
and details of the mortgage documents. There were no other
questions asked by Revenue Canada of him at that time. The agent
for Revenue Canada indicated that he was satisfied with the
information provided at that time.
[31] In 1997
he was re-contacted by Revenue Canada about the ABIL claim for
1991.
[32] In
cross-examination he said that he prepared the 1991 T1 General
for Mr. Capogreco on the basis of information provided by
him. This information was referred to on page 5 of the return.
The claim was for three quarters of $410,082.90 or $307,562.18.
This related to the acquisition by the Appellant of 20 shares of
the Company. He said that the Supreme Court documents related to
the loss of the investment.
[33] The
Appellant received $210,000 from Mr. Peter Pugliese and
$200,000 from his own resources. His notes indicated that the
money was advanced to buy the shares. The Appellant was the
registered owner of 20 percent of the Company effective May 21,
1987. He was not particularly certain about some of the other
information and notes contained in his file. At one point, where
the file indicated $138,000, he said that it should have been
$188,000. He was not sure of the year.
Argument on behalf of the Respondent
[34] Counsel
took the position that the ABIL claims were only available if
specific requirements of the statutes were met. The burden is on
the Appellant with respect to each and every requirement. He
referred to subparagraph 39(1)(c)(iii) of the
Income Tax Act ("Act") which required
the Appellant to establish that the debt was owing to the
taxpayer by a small business corporation. This entity is defined
in subsection 248(1) of the Act as:
"Small business corporation", at any
particular time means, subject to subsection 110.6(15), a
particular corporation that is a Canadian-controlled private
corporation all or substantially all of the fair market value of
the assets of which at that time was attributable to assets that
were
(a) used principally in an active business carried on
primarily in Canada by the particular corporation or by a
corporation related to it,
. . .
(c) assets described in paragraph (a) and
(b),
and, for the purposes of paragraph 39(1)(c), includes a
corporation that was at any time in the 12 months preceding that
time a small business corporation;
Subsection 248(1) defines "Active
business":
"Active business", in relation to any
business carried on by a taxpayer resident in Canada, means any
business carried on by the taxpayer other than a specified
investment business or a personal services business;
The Appellant must show that in 1990 and 1991 most of the
assets were used in carrying on an active business. However, the
Company was carrying on a specified investment business.
[35]
Subsection 248(1) of the Act defines "Specified
investment business" as:
"Specified investment business" has the meaning
assigned by paragraph 125(7)(e);
Paragraph 125(7)(e) defines "Specified
investment business".
"Specified investment business" carried on
by a corporation in a taxation year means a business (other than
a business carried on by a credit union or a business of leasing
property other than real property) the principal purpose of which
is to derive income from property (including interest, dividends,
rents or royalties), ...
The Company here derived its income from rental of property
and the other exemptions referred to in paragraph
125(7)(e) do not apply here.
[36] Counsel
referred to the case of Gill v. Minister of National
Revenue, 1998 CarswellNat 1725 (T.C.C.) at page 1 where the
Court decided that the corporation was not a small business
corporation within the meaning of subsection 248(1) of the
Act as the corporation was not carrying on an
"active business", but was involved in a
"specified investment business". The only income
earned by the corporation there was rental income, and the
principal purpose of the corporation was to derive income from
property. The same can be said of the case at bar.
[37] In that
case, Judge Brulé also considered the cases of
Prosperous Investments Ltd. v M.N.R., [1992] 1 C.T.C. 2218
(T.C.C.) and Ben Barbary Company Limited v. M.N.R., 89 DTC
242 (T.C.C.) where the learned trial judge stated at page
244:
In determining the "principal purpose" of a
business carried on by a corporation the stated object of the
person who carries it on is not necessarily the only, or even the
most important, criterion. Of critical importance is what the
corporation in fact does and what its sources of income are.
In Gill, supra, the Court said:
Therefore, on the evidence before the Court, it is the
Court's opinion that the "principal purpose" of
Homebank was to derive income from property.
[38] In 1990
and 1991, the Company in question in this case leased a building
and the only source of income was rental income. It was carrying
on a "specified investment business" and not an
"active business".
[39] Further,
the Appellant has not proven what he paid into the Company. The
Respondent accepted that he put $210,000 into the Company only
but he must show that he put it in to acquire shares that related
to a debt that was lost and he has not done that. There was some
evidence that he already had the shares when he put the money in
and there was no evidence that the Company promised to pay the
money back.
[40] Only
Exhibit R-1 asks for a capital injection but it does
not say that he will get any shares for it and it does not say
that it will be considered to be a debt of the Appellant.
[41] Counsel
also referred to Wierbicki v. R., 1996 CarswellNat 2202
(T.C.C.) at page 1 where the appeal was dismissed and the Court
found that "the taxpayer failed to establish that there was
an indebtedness to him by S. that was capable of becoming a bad
debt for the purposes of section 50 of the Income Tax Act.
Moneys were put into S. to keep it afloat and not with any
intention or expectation of creating an indebtedness."
[42] Counsel
also referred to Eynan v. R., 2001 CarswellNat 302
(T.C.C.) at pages 6-7 where Judge Lamarre Proulx said:
The appellant had the burden of showing that he had incurred
an ABIL within the meaning of paragraph 39(1)(c) of the
Act, which reads:
. . . . .
Among other conditions he was required to meet, the appellant
had to show that he incurred a loss from a disposition of a share
of the capital stock of a small business corporation or of a debt
owing to him by a Canadian-controlled private corporation. None
of this was proven by the appellant as there was no evidence
adduced on that particular issue. The appellant put the money
into the project but he has not established that the loan was
made to a corporation of the type described above. The appellant,
therefore, is not entitled to an allowance business investment
loss for 1992.
[43] In the
case at bar, the Appellant has not been able to establish on a
balance of probabilities that the requirements of paragraph
39(1)(c) had been met.
[44] It is
true that the Appellant did say that he hoped to get the money
back, but what he meant by that was that he would be able to earn
income from it when it flourished and not that he considered it
to be a debt.
[45] This
appeal should be dismissed.
Argument on behalf of the Appellant
[46] The
Appellant argued in his summation that he put the money in but he
did so to get the shares and that he fully intended to get the
money back. He then said: "I understood that we were to get
the money back".
[47] He also
said that the Company was an active business in that it not only
had rental income but that it also intended to obtain other
companies and other businesses to occupy the premises and this
was an active business. He then admitted that in 1990 and 1991
the Company's only income was rental income.
[48] With
respect to the question of whether an active business existed, he
referred to the case of Geropoulos v. R., [1998] 3 C.T.C.
2384 (T.C.C.) which was apparently a Tax Court of Canada case for
which he did not have the citation and which may not have been
reported. After a reference was made to the case, the Appellant
then added that the Company was incorporated for other purposes
than earning rental income. He said that it was not just a
specified investment business and the appeal should be
allowed.
Analysis and Decision
[49] There are
two issues which arise in this case. One issue is whether or not
the Appellant has established on a balance of probabilities that
he invested the money in the shares of the Company that he said
he did amounting to $410,082. The second issue is whether or not,
on the basis of the evidence adduced before the Court, the
Appellant is entitled to an ABIL in the year 1991.
[50] Although
the evidence introduced on the first point was somewhat sparse,
in light of documentation that the Appellant did provide, in
light of some corroboration of the amount that the Appellant put
into the Company; on the basis of the evidence of the accountant
and the other two witnesses who testified; and based upon the
credibility that the Court attaches to the evidence of the
Appellant himself, the Court is prepared to accept the evidence
that the Appellant had put into the Company the amount of
$410,082 as he indicated.
[51] However,
the Appellant's problem does not stop at that point. The
more difficult issue for him is whether or not the evidence
establishes on a balance of probabilities that the Appellant has
met the requirements of paragraph 39(1)(c) which will
allow him to be entitled to the ABIL which he seeks.
Unfortunately for the Appellant, the evidence on that issue falls
far short of that which is required in a case of this nature.
[52] As
referred to by Judge Lamarre Proulx, in the case of Eynan,
supra, the Appellant in the case at bar must establish that
the reassessments in this regard are in error. This onus can be
discharged by the Appellant adducing evidence that satisfies the
Court on a balance of probabilities of the existence of such
error. However, as in that case, this Court is in agreement with
the submissions made by counsel for the Respondent in argument
that there was no satisfactory substantiation of the existence of
the alleged ABIL.
[53] This
Court is satisfied that the arguments of counsel for the
Respondent are well taken and the evidence of the Appellant
himself at the end of the day indicated that the only income that
the Company had in 1990 and 1991, or for which it had any
prospect, was income from rental. Although this position was
somewhat diluted at the end of the argument put forward by the
Appellant, there can be no doubt that even the thrust of what he
said was that in the years 1990 and 1991 the Company's only
income was rental income. Consequently, the Court is satisfied
that in the year in question, on the evidence before the Court,
that the "principal purpose" of the Company was to
derive income from property.
[54] Further,
this Company was carrying on a "specified investment
business" under the provisions of paragraph
125(7)(e) and none of the exceptions referred to therein
apply to the business of the Company.
[55] The Court
is also satisfied that the Appellant has failed to establish that
there was an indebtedness to him by the Company that was capable
of becoming a bad debt for the purpose of section 50 of the
Act. There is no doubt that monies were put into the
Company but these monies were put in to keep it afloat and there
was insufficient evidence to establish that they were put in with
the intention or expectation of creating an indebtedness. As in
the cases referred to, no documentary evidence was adduced to
this effect. This Court must make its decision based upon the
evidence before it.
[56] In the
end result then, the Court is satisfied that the Appellant has
not made out a case which will entitle him to the ABIL as
claimed. The appeal is dismissed and the Minister's
assessment is confirmed.
Signed at Ottawa, Canada, this 8th day of June
2001
"T.E. Margeson"
J.T.C.C.
COURT FILE
NO.:
2000-4733(IT)I
STYLE OF
CAUSE:
Ken Taylor and Her Majesty The Queen
PLACE OF HEARING:
Calgary, Alberta
DATE OF
HEARING:
April 24, 2001
REASONS FOR JUDGMENT BY: The
Honourable T.E. Margeson
DATE OF JUDGMENT & REASONS FOR
JUDGMENT:
June 8, 2001
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Margaret McCabe
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1147(IT)I
BETWEEN:
JOSEPH CAPOGRECO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 11, 2001, at Toronto,
Ontario, by
the Honourable Judge T.E. Margeson
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Meghan Castle
JUDGMENT
The appeal from the assessment made under the Income Tax
Act for the 1991 taxation year is dismissed and the
Minister's assessment is confirmed in accordance with the
attached Reasons for Judgment.
Signed at Ottawa, Canada, this 8th day of June
2001.
J.T.C.C.
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