Citation: 2013 TCC 216
Date: 20130711
Docket: 2011-1(IT)G
BETWEEN:
KAY FISHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris J.
[1]
This is an appeal from
reassessments of Ms. Fisher’s 2003 and 2004 taxation years. The issue before
the Court is whether Ms. Fisher is entitled to a capital loss of $239,236.19 in
either her 2003 or 2004 taxation year in relation to a project to purchase and
redevelop a regional shopping mall near Niagara Falls, New York. The project
was ultimately abandoned and money which Ms. Fisher had provided was lost.
[2]
In her 2003 tax return,
which she filed in 2006, Ms. Fisher claimed a business loss of $239,236.19 in respect of the project. She also sought to carry forward for the
unused portion of the loss to her 2004 taxation year. The request for the loss
led to an audit of her 2000 to 2004 taxation years by the Canada Revenue Agency
(“CRA”). The audit resulted in a denial of her claim for the business loss and
the loss carry forward. She was also reassessed for other matters that were subsequently
reversed at the objection level.
[3]
In her original Notice of Appeal, Ms. Fisher
claimed that she was entitled to a capital loss of $170,500 in her 2003 and
2004 taxation years in respect of the project, and requested a carry back of
the allowable capital loss to her 2002 taxation year to offset a capital gain
she realized in that year.
[4]
At the hearing, Ms. Fisher was
represented by counsel and was permitted to amend her Notice of Appeal to
increase the amount of the loss claimed to $239,236.19, and to advance the
additional claim that the loss was a business investment loss within the
meaning of paragraph 39(1)(c) of the Income Tax Act (“the Act”)
in either 2003 or 2004. At the conclusion of the evidence, counsel for Ms.
Fisher abandoned the business investment loss argument, presumably because it
was clear the corporation in which Ms. Fisher alleges she invested the money was
a U.S. corporation.
Facts
[5]
In early 2003, an
individual by the name of Howard Hurst (“Hurst”) was attempting to raise funds for
a U.S. company, Niagara Falls Entertainment and Attraction Limited (“Niagara”), to fund the purchase of an aging regional shopping mall known as the Summit Park
Mall. Hurst represented that he was a director of Niagara. I infer from his
actions and from the documentation that he controlled Niagara as well.
[6]
According to a memo dated
February 8, 2003 written by Hurst, Niagara was in negotiations to buy the mall,
which it intended to redevelop into a major tourist attraction by adding a
planetarium, a space theatre, a science and cultural museum, a Comedy Hall of
Fame, a sports complex, a golf course, ice rinks, an aquatic park and a 200
room hotel.
[7]
Ms. Fisher became aware
of the mall project through a work colleague, Arthur Lyew, (“Lyew”) who was a
friend of Hurst’s. Lyew told Ms. Fisher that the project was a good investment and
vouched for Hurst’s professionalism and skill. Ms. Fisher said she was also
aware that Hurst had successfully developed a large property on Yonge Street in Toronto. All of this led her to agree to provide funding for the project out
of an inheritance she had received.
[8]
Ms. Fisher entered into
a Letter of Intent with Hurst and Niagara. The Letter of Intent was dated
March 27, 2003 but it appears that it was executed by the parties on
April 9, 2003 because other documents refer to this date in relation to it.
[9]
The Letter of Intent stated
that Hurst was a director of Niagara and that Niagara had a letter of intent
with ‘The Oberlin Partnership’ to purchase the Summit Park Mall for $3.55
million plus unpaid taxes of approximately $450,000 under an agreement of purchase
and sale with a closing date of June 30, 2003. It also set out that Niagara would become the General Partner in a Limited Liability Partnership to acquire the
mall.
[10]
The Letter of Intent provided
that Ms. Fisher would loan Niagara a minimum of $125,000 US to be used as
the deposit for the purchase of the mall and for related expenses. Niagara agreed to repay the loan along with a “20% interest bonus” on closing. Hurst agreed to personally guarantee the repayment of the principal portion of the loan. In
addition, Ms. Fisher was to receive a 5% equity interest in Niagara and the option to convert her loan into an interest in the Limited Partnership. She
was also to be given the opportunity to obtain investment financing for the
Mall in return for a 3% commission.
[11]
Ms. Fisher also
produced a copy of an “Interoffice Memorandum” from Hurst addressed to her,
dated April 8, 2003, stating that he had entered into an agreement to
purchase the Summit Park Mall on her behalf, and that he incorporated Niagara
to sign the agreement as ‘bare trustee’ on her behalf. Ms. Fisher agreed,
though, that she never intended to purchase the mall herself, and that she could
not have afforded to do so. She said that it was her understanding that she
would be one of a number of investors in the project.
[12]
Ms. Fisher
gave Hurst three certified cheques for $50,000 each on April 14, 2003
and Hurst gave Ms. Fisher two promissory notes: one for $100,000 and
one for $50,000. The promissory notes were both dated April 9, 2003 and
were payable by Hurst personally.
[13]
Ms. Fisher said that
after she gave Hurst the money she visited the mall with Hurst and met
other potential investors and local government officials from the town in which
the mall was located. She trusted Hurst to handle the matter and relied on
him to keep her informed about the project. She kept in regular contact with
him and was told that the closing was delayed a number of times. She said that on
various occasions Hurst asked her for more money for the project. Often, he
requested that she provide him with cash, which he said was necessary to
expedite the payment of expenses relating to the prospective purchase. The only
records she had of these additional payments were two cancelled cheques for
$17,500 and $3,000 dated January 12, 2004 and February 24, 2004,
respectively. Ms. Fisher wrote “accounting” on the former cheque and “loan” on
the latter.
[14]
What happened next is
not entirely clear. The purchase of the mall by Niagara did not proceed and
there is a reference in later documents to litigation between Niagara and Oberlin.
Ms. Fisher was apparently made aware of these events by Hurst, at least in a
general sense, but she was not able to say with any certainty when the mall
project was ultimately abandoned. Generally, Ms. Fisher’s recollection with
respect to the timing of events and the amounts paid to Hurst was not good.
This is understandable, given the amount of time that has passed since her
dealings with Hurst. Ms. Fisher was adamant, though, that she knew by the end
of 2003 or the beginning of 2004 that her money had been lost.
[15]
In her testimony,
Ms. Fisher said that when it became clear that the mall project was not
going ahead, Hurst repeatedly assured her that he would “replace” her loss
by giving her an interest in other projects, but nothing ever came of it. She
tried contacting him many times, but learned that he was out of the country
working in Ghana. Eventually, she said, he stopped responding to her emails. Again,
it was not clear from Ms. Fisher’s testimony when these events took place. I
also gather from Ms. Fisher’s testimony that she did not attempt to contact Hurst to give evidence in this matter because she believed that he was still out of the
country.
[16]
In mid-2006 Ms. Fisher
emailed Hurst to request a copy of the Agreement of Purchase and Sale for the mall. On June 23, 2006, Hurst emailed Ms. Fisher and attached an
unexecuted copy of the Agreement of Purchase and Sale. He also stated that he
was attaching a “letter setting out the relationship between the parties to the
transaction”, but no such letter was attached to the copy of the email that was
produced at the hearing. It is not clear to which letter he was referring and
Ms. Fisher was unable to shed any light on the matter.
[17]
In the June 23,
2006 email, Hurst also wrote to Ms. Fisher that:
As
you are aware, Oberlin would not close the transaction necessitating our filing
of a ‘lis pendens’ on title.
Because
of the legal advice we were given and the fact that the Summit Park Mall lost
almost all of their major tenants while the litigation was ongoing, we agreed
to drop the action for payment by Oberlin of our litigation fees.
[18]
There is no indication
in the evidence when the events referred to by Hurst in the email took place.
[19]
On September 11,
2006, at Hurst’s request, Ms. Fisher signed a “Termination Agreement” between
herself, Hurst, Niagara and another company. That agreement read as follows:
Termination
Agreement – The Summit Park Mall
This letter is in
furtherance to the Letter of Intent dated April 9, 2003 between Niagara
Attraction & Entertainment Inc., Mesh Entertainment Inc., Mr. Howard Hurst,
and Ms. Kay Fisher (“Letter of Intent”) with respect to the acquisition of The
Summit Park Mall (“Property”).
We hereby
acknowledge and agree that:
1. the
Agreement of Purchase and Sale between Niagara Attraction & Entertainment
Ltd. (“Niagara”) as bare trustee and Oberlin Investors, LLC (“Oberlin”) to
acquire the Property was terminated and that Niagara and Oberlin have provided
mutual releases with respect to the acquisition.
2. all
funds invested were utilized in accordance with the Statement of Real Estate
Operations dated December 31, 2003 and that all and any Security generated
directly or indirectly with respect to this transaction have been satisfied and
discharged (Schedule A).
3. the
Letter of Intent and all related documentation are hereby null and void and of
no further force or effect, and
4. to
provide mutual releases as required.
[20]
No copy of Schedule A,
as referred to in paragraph 2 of the Termination Agreement, was entered into
evidence.
[21]
Ms. Fisher testified
that Hurst told her the deal was over and that she needed to sign the release
because there were “lawsuits pending”. She did not obtain any legal advice
before signing the Termination Agreement. I infer that the main reason for the
termination agreement was that Hurst wanted to obtain a release from his obligation
under the promissory notes he gave to Ms. Fisher in 2003. Despite what Hurst apparently told Ms. Fisher, there is nothing in the evidence to suggest that any
other party to the Termination Agreement had any claims against the others.
[22]
At some point, Hurst gave Ms. Fisher a statement setting out that in the year ending December 31,
2003 she paid expenses totalling $239,236.19 relating to the “aborted
acquisition” of the mall. Those expenses included consulting and option fees,
legal and accounting fees as well as various other amounts. Ms. Fisher could
not recall exactly when Hurst gave her the statement, but thought that it
was around the end of 2003 or the beginning of 2004. Therefore she believed
that her money had been lost by that point. She was also unable to say if the
$239,236.19 figure shown on the statement included the $17,500 and $3,000 she
gave Hurst in 2004.
[23]
After Ms. Fisher filed
her tax return for 2003 to claim a business loss in relation to the mall
project, the Canada Revenue Agency commenced an audit of her 2000 to 2004
taxation years. That audit took over two years to complete and resulted in the
addition of large amounts of income and the disallowance of expenses relating
to Ms. Fisher’s principal business as a real estate broker. In the course of
the audit, Ms. Fisher submitted two boxes of documents to substantiate the
amounts reported on her returns and she testified that Hurst, at her request,
also submitted documents to the auditor to support the claim for the business
loss in respect of the mall project. After the audit was completed and the
reassessments were issued, Ms. Fisher asked to have these documents returned to
her so that she could use them to support her objection to the reassessments.
The CRA could not locate the documents and as a result, it vacated the
reassessments in respect of her brokerage income and expenses. However, the CRA
maintained its position that there was insufficient proof that she had suffered
a business loss on the mall project in her 2003 taxation year.
Position of the appellant
[24]
Ms. Fisher’s
counsel maintained that Ms. Fisher provided $239,236.19 to Niagara in 2003 on the understanding that she was to be a 5% investor in the mall project.
Although the Letter of Intent provided that Ms. Fisher would loan money to
Niagara, counsel said that this was not determinative of the nature of her
interest, and that the funds were advanced to Niagara in the context of Ms.
Fisher becoming an investor rather than a lender. Counsel also maintained that the
interest became worthless when the project was discontinued at the end of 2003
or in early 2004 at the latest and that she incurred a capital loss at that
time.
[25]
Counsel argued that the
Statement of Real Estate Operations provided by Hurst to Ms. Fisher was proof
of the amounts that she advanced for the project and proof that those amounts
were spent on the project. It showed that the total amount invested by Ms.
Fischer that year was $239,236.19, which was consistent with Ms. Fisher’s
testimony that she gave cash in addition to the cheques totalling $170,500 to Hurst.
[26]
With respect to the
timing of the loss, counsel submitted that the purchase of the mall was ‘dead’
soon after the closing date of June 30, 2003, and that Ms. Fisher’s investment
was gone by early 2004 at the latest. He said that the Termination Agreement
was not conclusive of when the project was terminated but was only for the
purpose of preventing a lawsuit against Hurst.
[27]
Counsel also maintained
that, given Ms. Fisher’s age and circumstances, and given that Hurst was
difficult to track down, the efforts she made to obtain some kind of return
from Hurst on her investment were reasonable. He said that it could not
seriously be suggested that Ms. Fisher could have collected anything from Niagara
or Hurst after the end of 2003, no matter how vigilant she had been.
[28]
He further submitted
that any claim by Ms. Fisher against Hurst would have become statute-barred under
the Ontario Limitations Act, 2002, prior to the Termination Agreement.
Position of the respondent
[29]
The respondent takes
the position that there was no proof that the money Ms. Fisher gave to Hurst was used for the mall project, since Niagara, not Hurst, was the intended purchaser
of the mall. Counsel said that it was more likely that Ms. Hurst loaned the
money to Hurst, since the promissory notes given to her by Hurst contained no
reference to the mall project.
[30]
In the alternative, if
Ms. Hurst is found to have provided money to Niagara, counsel argued that it
was a loan and that only $150,000 of the amount paid by Ms. Fisher could be
tied to the purchase of the mall.
[31]
Counsel also submitted
that Ms. Fisher has not established that the debt went bad before the
termination agreement was executed in 2006 and therefore that she had not shown
that she had suffered a capital loss before that point. He suggested that the
evidence showed that Ms. Fisher was still hoping in 2006 that the project would
continue. Finally, counsel cautioned against relying on the statement of
operations that Hurst gave to Ms. Fisher as evidence of when the project was
abandoned, since the statement was undated and Ms. Fisher could not recall when
she received it.
Analysis
[32]
A capital loss arises
under the Act where a taxpayer disposes of a capital property for proceeds
that are less than his or her adjusted cost base of the property. In certain
circumstances, the Act also deems a taxpayer to have disposed of
property, giving rise to deemed proceeds of disposition. The relevant deeming
provision here is paragraph 50(1)(a). According to that provision, a
taxpayer may elect to have disposed of a debt that he or she has established to
be bad. Where the taxpayer makes the election, he or she is deemed to have
disposed of the debt for no proceeds and to have reacquired it for no cost.
[33]
In this case, it is
first necessary to establish what amounts Ms. Fisher paid to Hurst in relation
to the mall project. After considering all of the evidence, I find that Ms. Fisher
has only shown that she provided Hurst with a total of $170,500. This amount is
supported by the cancelled cheques, copies of which were produced by Ms. Fisher
at the hearing. While Ms. Fisher’s testified that she gave Hurst additional
amounts of cash, she had no records regarding these amounts and her evidence is
vague on this point. I find that the Statement of Real Estate operations
prepared by Hurst as at December 31, 2003 is not sufficiently reliable to
constitute prima facie proof of the amounts advanced by Ms. Fisher. The
Statement appears to contradict the evidence by way of cancelled cheques that
Ms. Fisher advanced additional funds in January and February 2004 and that the
project had not been aborted by December 31, 2003. I also find that the
documentation prepared by Hurst in a number of instances was inaccurate. The
most obvious example is the Interoffice Memorandum dated April 8, 2003 stating
that the mall was being purchased on behalf of Ms. Fisher. The Memorandum
completely contradicts the Letter of Intent that the parties executed the next
day, and Ms. Fisher herself testified that she did not intend to purchase the
mall herself. Other examples include the variations in the nomenclature used to
designate Niagara in various documents, and the inclusion of a party in the
Termination Agreement who had no apparent involvement in the project.
[34]
There was a suggestion
by counsel that the amounts might have been proven by information sent by Hurst to the auditor which was among the material that was lost by the CRA. In my view,
this is merely speculation. There is nothing in the record that confirms that Hurst in fact sent anything to the auditor or that if he did, it would prove the amounts
paid by Ms. Fisher.
[35]
The next question is
whether Ms. Fisher loaned the $170,500 (whether to Hurst or to Niagara) or whether she provided the funds in order to acquire an equity interest in the
mall project.
[36]
I find that Ms. Fisher
loaned at least the initial $150,000 in issue to Niagara. The Letter of Intent
she entered into with Niagara and Hurst on April 9, 2003 provided that she was
loaning money to Niagara and that Hurst was guaranteeing the repayment of those
amounts. This arrangement was also corroborated by the promissory notes
that Hurst gave to Ms. Fisher.
[37]
While the Respondent’s
counsel submitted that there was no proof that Hurst used the money from Ms.
Fisher in the course of Niagara’s proposed acquisition of the mall property, I
accept that it was. There was sufficient evidence presented at the hearing to
show that the mall project was genuine and that Niagara had entered into
negotiations to purchase the property. Ms. Fisher visited the mall and met with
local government representatives and other potential investors in the project,
and documentation concerning the project was produced at the hearing.
[38]
According to the Letter
of Intent, Ms. Fisher was also to be “provided with a 5% equity ownership
interest in Niagara”, but there was no consideration given by her for that
interest. Furthermore, there was no indication that she was ever issued shares
in Niagara or that the Limited Partnership that was to be set up with Niagara
as General Partner to purchase the mall ever came into existence. Therefore, I
find that the $150,000 paid by Ms. Fisher in April 2003 was a loan to Niagara.
[39]
It is unclear how the
parties intended to treat the remainder of the money advanced by Ms. Fisher. Ms.
Fisher simply referred to all of the amounts paid to Hurst as “an investment”
in the project. However, there was no evidence of any agreement that the
subsequent amounts were given in exchange for any additional equity interest in
Niagara or for any rights to profits that might be generated by it or for any
other rights whatsoever. Given that the initial amounts were advanced as a
loan, and given that the cheque dated February 24, 2004 given by Ms. Fisher to Hurst was marked “Loan”, and in the absence of any evidence to the contrary, I am inclined
to view the subsequent amounts as being loans to Niagara as well. There is no proof
though that Hurst personally guaranteed the subsequent amounts since no
promissory notes were given in relation to them.
[40]
In order for Ms. Fisher
to have a capital loss in her 2003 or 2004 taxation year in respect of the debt
owing to her by Niagara, she must establish according to paragraph 50(1)(a)
of the Act that the debt became bad before the end of 2003 or 2004.
[41]
In Rich v The Queen
2003 FCA 38, one of the issues before the Federal Court of Appeal was when a
debt owing to the taxpayer had become bad. At paragraphs 12 to 15 of that
decision, Rothstein J.A. wrote:
[12 ] The assessment of whether a debt
is bad is one based upon the facts at a particular point in time, i.e. December
31, 1995. The Income Tax Act
does not prescribe factors to be considered in assessing the collectibility of
a debt. However, Tax Appeal Board judgments in Hogan v. The Minister of
National Revenue, 56 D.T.C. 183 and No. 81 v. The Minister of National
Revenue, 53 D.T.C. 98, suggest some of the factors to be taken into
account. After the creditor personally considers the relevant factors, the
question is whether the creditor honestly and reasonably determined the debt to
be bad.
[13] I would
summarize factors that I think usually should be taken into account in
determining whether a debt has become bad as:
1. the
history and age of the debt;
2. the
financial position of the debtor, its revenues and expenses, whether it is
earning income or incurring losses, its cash flow and its assets, liabilities
and liquidity;
3. changes
in total sales as compared with prior years;
4. the
debtor's cash, accounts receivable and other current assets at the relevant
time and as compared with prior years;
5. the
debtor's accounts payable and other current liabilities at the relevant time
and as compared with prior years;
6. the
general business conditions in the country, the community of the debtor, and in
the debtor's line of business; and
7. the past
experience of the taxpayer with writing off bad debts.
This list is not exhaustive and, in
different circumstances, one factor or another may be more important.
[14] While future prospects of the debtor company may be relevant in some cases,
the predominant considerations would normally be past and present. If there is
some evidence of an event that will probably
occur in the future that would suggest that the debt is collectible on the
happening of the event, the future event should
be considered. If future considerations are only speculative, they would not be
material in an assessment of whether a past
due debt is collectible.
[15] Nor is it necessary for a
creditor to exhaust all possible recourses of
collection. All that is required is an honest and reasonable assessment.
Indeed, should a bad debt subsequently be collected in whole or in part, the
amount collected is taken into income in the year it is received.
[42]
Since Ms. Fisher
continued to provide funds for the project at least until the end of February
2004, I find that she did not establish that the debt was bad by December 31,
2003. On the evidence before me, I also find that Ms. Fisher has not
established that the portion of the debt guaranteed by Hurst became bad by the
end of 2004. Whether or not Niagara could repay the debt at that time, which I
will consider later in these reasons, Ms. Fisher has not shown that she took
any steps to collect from Hurst on the promissory notes he gave her or even to
assess whether she could collect from him. I infer from the fact that Hurst had Ms. Fisher sign the Termination Agreement in September 2006 that Hurst was concerned about his exposure on the promissory notes and this suggests to me that
it was likely Ms. Hurst could have recovered something from Hurst at that time.
In any event, she did not investigate Hurst’s financial position and presented
no evidence at the hearing relating to his ability to pay.
[43]
I do not agree with
counsel for Ms. Fisher that any claim against Hurst had become statute-barred
pursuant to the Ontario Limitations Act, 2002 prior to the date of the
Termination Agreement. The Limitations Act, 2002 came into force on
January 1, 2004. It created a new regime for calculating the limitation period
for initiating court proceedings in respect of a claim. According to the
transitional rules in subsection 24(5), where a claim for which a limitation
period is provided in the Act had been discovered by a claimant prior to
the coming into force of the Limitations Act, 2002, the former
limitation period in respect of the claim applied. The former limitation period
for a claim under a promissory note was six years and the new limitation period
is two years. It is clear that Ms. Fisher was aware that the loans had not been
repaid by June 30, 2003, which was the date set in the April 9, 2003 Letter of
Intent for the closing of the purchase of the Mall and therefore the date for
repayment of the loan to Niagara. Therefore, Ms. Fisher had until June 30, 2009
to commence an action against Hurst.
[44]
I must also decide
whether Ms. Fisher established that the remainder of the debt owing to her had
become bad by December 31, 2004. Ms. Fisher’s position is that the debt became
bad when the mall project was abandoned, which she said occurred in early 2004
at the latest.
[45]
Ms. Fisher did not make
any enquiries about Niagara’s finances or whether it had any assets, but it
seems reasonable to assume that, once the project was abandoned, Niagara would have been unable to repay the loans. This goes to the considerations listed
in the Rich decision relating to the history of the debt and the
financial position of the debtor. The company was set up to purchase and
redevelop the mall and I accept that all of the funds raised by it were used in
attempting to acquire the property. Unfortunately, Ms. Hurst’s evidence
concerning the date the project was abandoned was not corroborated in any
manner whatsoever and she herself admitted that her recollection of the timing
of events was affected by her poor health and by the amount of time that had
passed. While the Statement of Real Estate Operations for the year ended
December 31, 2003 prepared by Hurst gives the impression that the project was
terminated by the end of 2003, the fact that Ms. Hurst continued to advance
money into early 2004 would disprove that view. Also, Hurst’s email to Ms.
Fisher dated June 23, 2006, set out that Niagara sued Oberlin to complete the
sale of the mall after Oberlin refused to do so. According to the email,
“Summit Park Mall lost almost all of their major tenants while the litigation
was ongoing”. This, along with the fact that the Termination Agreement was not
entered into until September 2006, leads me to believe that the dispute and the
litigation lasted for some time, and therefore that it is unlikely that the lawsuit
against Oberlin was dropped before the end of 2004. In any event, Ms. Fisher
has not shown that the litigation was discontinued prior to December 31, 2004.
[46]
Most of the remaining
considerations in Rich were not addressed by counsel and are not
relevant in the circumstances of this case, since Niagara was in the start up
phase and had not yet acquired the mall or begun earning revenue.
[47]
In light of all of the
evidence, it does not appear to me that it was reasonable to consider that the
amounts owing by Niagara had become uncollectible by the end of 2003 or 2004.
Therefore Ms. Fisher has not shown that the debt owing to her by Niagara became bad during either year and paragraph 50(1)(a) is not applicable in
this case in the years in issue.
[48]
The appeal is dismissed,
with costs to the Respondent.
Signed at Vancouver, British Columbia this 11th day of July 2013.
“B.Paris”
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