Robert C. Hokanson v. Minister of National Revenue, [1994] 1 CTC 2845, 94 DTC 1472

Rowse, D.J.T.C.C.:—The appellant appeals from a reassessment of income tax for the 1985 taxation year. The respondent determined that the appellant's Cumulative Canadian Exploration Expense (C.E.E.) was $151,250 and not $302,500, as Claimed by the appellant.

The appellant testified he is a commercial fisherman residing at Cowichan Bay, British Columbia. On November 30, 1984 he entered into an agreement with Black Thunder Petroleum Corporation, referred, to as Black Thunder, whereby he participated in an investment which relied upon receipt of funding from the federal government operating the Petroleum Incentives Program, commonly referred to as P.I.P.. The agreement, an unsigned copy of which was filed as Exhibit A-1, called for him, as a subscriber, to invest the sum of $151,250, which was paid, together with an additional $151,250, which would be forthcoming when a P.I.P. reimbursed the exploration company for Canadian exploration expense incurred in exploring for petroleum and natural gas. The appellant stated that he relied on Black Thunder and its associated companies to do all that was required in order to obtain the P.I.P. grant relating to ongoing exploration activities and filed as Exhibit A-2, a letter dated April 24, 1985 setting out the details of his participation in the Black Thunder 1984 Private Placement Offering Memorandum to the extent of 2.75 units of $110,000. The appellant stated that Black Thunder was an agent for Exco Energy Ltd., referred to is Exco, and that an agency of the federal government agency responsible for payment of P.I.P. grants undertook an audit and on the basis of the findings refused to pay P.I.P. grants based on certain alleged exploration expenses and further took the position that the proposed adjustments exceeded the outstanding receivable P.I.P. so as to put the federal government in the position of a preferred creditor of Exco. A letter to that effect, dated September 6, 1985, enclosing a report from Deloitte, Haskins & Sells Ltd. filed as Exhibit A-3, set out details of the state of the financial affairs of Exco which made an assignment into bankruptcy on July 26, 1985. As at August 31, 1985, Exco had total unsecured creditors totalling a debt in excess of $53 million. In July 1985 the R.C.M.P. executed a search warrant, and seized corporate books and records of Exco and the Alberta Securities Commission issued a cease trading order on September 3, 1985. The appellant stated that the President of Exco was later convicted of fraud and sentenced to a term of seven years in a penitentiary. However, the appellant stated that the receiver, Deloitte Haskins & Sells Ltd. was suing the federal government in the sum of $150 million based on the failure to pay to Exco the P.I.P. grants which had been claimed in relation to the exploration expense incurred. The appellant stated that he relied on Black Thunder and Exco and the failure of the federal government to advance the P.I.P. grants was based on no fault attributable to him and that he should not suffer any negative tax consequences as a result.

In cross-examination, the appellant agreed that he had not purchased flow- through shares and that his deduction did not arise from his ownership of shares but from participation in a unit. He agreed that he had purchased 2.75 units at $1100 per unit, for a total of $302,500. He wrote a cheque to Black Thunder for $151,250 and the remaining $151,250 was to come from the P.I.P. grant, which when received by Exco, would be applied to pay in full the balance of his investment. At that point he would owe Exco nothing it all. He agreed that, since 1985, he has never been called up by anyone to pay the $151,250 balance.

The appellant submitted that the federal government wrongly applied the 'lowest reasonable cost" method of determining the amounts payable under the P.I.P. and that the government was in breach of its contractual obligation to match dollar for dollar exploration expenses incurred by Exco, which were obviously incurred, in that unsecured creditors were owed in excess of $53 million.

Counsel for the respondent submitted that the second payment of $151,250 was never paid by the appellant in 1985 and that it was merely a contingent liability which he cannot deduct under subsection 66.1(3) and related provisions iS a current expense.

Paragraph 2 on page 4 of the agreement of November 30, 1984 reads as follows:

The subscriber assigns to the company, as agent for the subscriber, all amounts due to the subscriber under the Petroleum Incentive Program (the "P.I.P.") to be used by Black Thunder to pay amounts due from the subscriber in respect of C.E.E. incurred by him.

The letter, Exhibit A-2, from Black Thunder to the appellant makes it clear that the income from P.I.P.s would cancel the promissory note for the balance of $151,250.

The appellant relied on the decision of Reed, J. of the Federal Court-Trial Division in Ward v. The Queen, [1988] 1 C.T.C. 336, 88 D.T.C. 6212. In that case, the taxpayer was one of a number of individuals who entered into a joint venture, carrying on the business of developing a golf course. The taxpayer claimed, as his portion of the expenses of the joint venture, an amount in excess of that actually paid out of his pocket. The Minister of National Revenue (the "Minister") had taken the position that the loss had to be restricted to the amount actually paid by the taxpayer on the basis of the "at risk" principle, even though there was no provision in the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") at the time which so provided. At page 348 (D.T.C. 6221) of the judgment, Reed, J. stated:

The agreement between the joint venturers (i.e., the members of what I have called the joint venture proper) was clearly described to allow the doctors' group to take the benefit of the losses which it was anticipated would arise in the early years of the development project. (The tax consequences for the doctors' disposition by them of a 75 per cent interest to the financiers is a matter which seems not to have been addressed.) During the 1974-78 taxation years, the trustees, financiers and managers acted in accordance with the agreement; the accounting they provided to the doctors flowed the losses of the joint venture through to the members of that group. The Department taxed the members of the group on that basis. I have been referred to no authority which indicates that this was not allowed under the Income Tax Act at the time. It accords with what I understand to have been the rules applicable to partnerships. And, as noted above, the Department during the 1974-78 taxation years treated this method of dealing with the joint venture proceeds as appropriate.

In Raessler v. M.N.R., [1984] C.T.C. 2575, 84 D.T.C. 1516, Christie, C.J.T.C.C., as he then was, held that the balance of the purchase price pursuant to the relevant agreement, was payable only in the event that certain minimum royalties were paid and therefore the said balance was a contingent liability and no capital cost allowance could be claimed with respect to it.

In Mandel v. The Queen, [1978] C.T.C. 780, 78 D.T.C. 6518 (F.C.A.), the taxpayers by way of related appeals, formed a limited partnership and acquired a motion picture film in production. A down payment was made and the agreement called for the balance to be paid from the proceeds of the eventual distribution of the film. In computing income for the 1971 taxation year, the appellant and his colleagues claimed capital cost allowance on the entire purchase price. The Minister reassessed on the basis that the capital cost to the purchasers was limited to the actual cash payment made. At page 785 (D.T.C. 6521) of the judgment, Ryan, J. of the Federal Court of Appeal stated:

The trial judge, after careful analysis of the expert testimony, decided that the liability to pay the balance was contingent for relevant purposes, and I agree with him. The consequence, of course, was that the balance was not properly includable in the taxpayer's capital cost for the taxation year. The amounts actually paid in the future, from earnings, if any, would be taken into capital cost in the years of payment.

There is no doubt, as the trial judge indicated, that, in contracting to buy the film on the agreed terms, the purchasers incurred a liability both in respect of the cash payment and the balance. It was not, however, as to the balance, a liability to pay merely on the expiration of a period of time or on the happening of an event that was certain, or even likely, to occur.* It was a liability (from which the purchasers admittedly could not unilaterally withdraw) to become subject to an obligation to pay the balance if, but only if, means certain to occur. The obligation was the uncertain event.

*The learned trial judge said:

What the purchasers actually did was to invest $150,000 in a highly risky business adventure with the knowledge that, even if it were not successful, they would benefit from substantial tax advantages while if, by some chance, it should prove to be highly successful then of course they would benefit by the profits from same.

In the case at bar, the appellant was not called upon to pay the sum of $151,250 during his 1985 taxation year, nor could he be compelled to pay it under the terms of the agreement governing his subscription. In the extremely unlikely event that the appropriate P.I.P. grant is ordered to be paid in the future then the Receiver could apply it to the balance of the purchase price and the appellant could file his tax return accordingly. However, as far as the appellant’s 1985 taxation year is concerned, the Minister correctly determined that the appellant’s Cumulative Canadian Exploration Expense at the end of 1985 was $151,250, the amount actually paid by the appellant pursuant to the agreement. The appeal is hereby dismissed.

Appeal dismissed.

Patrick Teevens v. Her Majesty The Queen (informal procedure)

[Indexed as: Teevens (P.) v. Canada]

Tax Court of Canada (Brulé, J.T.C.C.), April 6, 1994 (Court File No. 93-2421).

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

The appellant and his wife separated in November 1990. After the separation a preliminary separation agreement was prepared with the help of a lawyer but it was never signed. The main agreement between the appellant and his separated spouse was entered into on March 27, 1991. The appellant had, however, put money into a joint bank account from which his spouse could write cheques and have credit card charges paid for by the appellant. For the four month period from January 1, 1991 to April 30, 1991, the amounts totalled $4,660. In June 1991, a decree nisi was obtained ending the marriage. The issue was whether the amount of $4,660 representing payments to the separated spouse was deductible in the appellant’s 1991 taxation year.

HELD:

In order for the alimony payments to be deductible, there must be either a court order or a written agreement which requires such payment. In this case, there was neither. In addition, the payments were not made to the appellant’s spouse. The use of a joint bank account did not meet the requirements of the Act. Appeal dismissed.

Eldon Woolliams, Q.C., for the appellant.

John O'Callaghan for the respondent.

Cases referred to:

Hodson v. The Queen, [1988] 1 C.T.C. 2, 88 D.T.C. 6001.

Brulé, J.T.C.C.:—This appeal was brought under the informal procedure of the Tax Court of Canada Act, R.S.C. 1985, c. T-2. It involves the appellant’s 1991 taxation return in which the Minister of National Revenue ("Minister") has denied a deduction of $4,660 claimed on account of alimony.

Facts

The appellant and his wife contemplated separation and divorce in 1990. To this end they prepared, in rough form, possible monthly expenditures which approximated about $1,000 per month for the wife. After separation in November of 1990 a preliminary separation agreement ("agreement") was prepared with the help of a lawyer. This was not signed.

The main agreement between the appellant and his separated spouse was entered into on March 27, 1991. The appellant had put money into a joint bank account from which the spouse could write cheques and have credit card charges paid for by the appellant. For the four month period from January 1, 1991 to April 30, 1991 the amounts totalled $4,660.

In June of 1991 a decree nisi was obtained ending the marriage and making specific dollar payments for the former spouse and children.

Issue

The sole issue to be determined is whether the amount of $4,660 representing payments to the separated spouse is deductible in computing the appellant's income in the 1991 taxation year.

Appellant's position

The Court was told that the payments made from January 1, 1991 to April 30, 1991 should be allowable deductions under paragraphs 60(b) and (c) and subsection 60.1(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Counsel reasoned that the amounts placed in the joint bank account were specific payments from specific sources. Reference was made to paragraph 5(a) of the March 27, 1991 agreement which in Appendix A thereto contemplated expenses for the separated spouse and children, and generally the amounts set out were adhered to.

Specific reference was made to subsection 60.1(3) of the Act which deems amounts paid before an agreement is entered into are deemed to have been paid pursuant to the agreement. The payments into the joint account were periodic as opposed to random.

All of the payments by the appellant were said by his counsel to conform to the provisions of the Act and the appeal should be allowed.

Respondent's position

Counsel for the Minister allowed that the appellant made the payments for his separated spouse indirectly by means of the March 27, 1991 agreement. That agreement did not provide that either subsections 56.1(2) and 60.1(2) were to apply to any payments made pursuant to the agreement and that such payments paid by the appellant and received by the spouse were an allowance on a periodic basis. It was suggested that the amounts were not paid pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement. In addition the amount was not said to be paid for the maintenance of the recipient, children of the marriage, or both the recipient and children of the marriage. Finally, counsel contended that the amount was not payable on a periodic basis.

Analysis

There is no doubt that the appellant intended to properly care for his estranged family. Morally he was correct but not so legally. The Federal Court of Appeal considered such a situation in the case of Hodson v. The Queen, [1988] 1 C.T.C. 2, 88 D.T.C. 6001, wherein it was said by Heald, J. at page 5 (D.T.C. 6003):

Applying that approach to the paragraph in question, I conclude that the words employed by Parliament in paragraph 60(b) must be interpreted “in their ordinary grammatical sense". I am unable to ascertain anything in the context or purpose of the statute or the circumstances of use which would justify an interpretation different from that resulting from a literal interpretation. The language used is clear and unequivocal. In order for the alimony payments to be deductible, there must be either a court order or written agreement which requires such payment.

Also in this case the payments were not made to the appellant's spouse. The use of a joint bank account does not meet the requirements of the Act. In addition, the original monthly estimates of 1990 and those in Appendix A to the March 27, 1991 agreement do not conform to the actual expenditures which make up the amount of $4,660 as verified by Exhibit A-6. In the former there were amounts for mortgage payments which were not in the audited amount. In the latter payments were shown for a vehicle. There is no nexus between the two even though the resulting amounts are similar.

Finally the statute is quite clear and in this case the obligation turned out to be a moral one rather than a legal one and such is not sufficient to claim a deduction.

The appeal is dismissed.

Appeal dismissed.