James E. Clark v. Minister of National Revenue, [1991] 2 CTC 2507, 91 DTC 1460

Dubienski, D.T.CJ.:— The appellant is the president of a conglomerate of companies under the corporate name of Jecco Group (hereinafter referred to as "Jecco"). This group carried on many businesses, including real estate developments and the assisting of financing of certain corporations.

During years previous to the taxation years in question here, namely 1981, 1983 and 1984, Jecco had advanced certain moneys to one Robert Owen Edwards ("Edwards') who had failed to repay the moneys or to bring the enterprises to successful positions so that profit-sharing could be realized as a consideration of the Jecco advances.

It was established between Edwards and Jecco that Jecco would accept $250,000 in settlement of the losses that had resulted as a result of Edwards' failures, that is, business failures.

Edwards and Clark made an arrangement whereby the appellant would personally recover the sum of $250,000 as a result of a new enterprise to be entered into which consisted of the purchase of the business known as Westline Ranch Ltd. ("Westline") that projected an operation that would repay the appellant the said sum.

An agreement was entered into between Edwards and the appellant that was never reduced to writing, a situation which will be commented upon later; however, the evidence of the appellant was to the effect that he was to purchase the business and would supply the day-to-day financing of the ranch, and thereby would hold 100 per cent of the equity of Westline. Edwards would assume the day-to-day operations and business control of the enterprise.

It was agreed that as soon as Westline had repaid to the appellant $250,000, and paid compensation in the amount of $250,000 to the appellant to repay him for the risk of financing the enterprise, Edwards would then become entitled to 50 per cent equity in the ranch business, for a nominal amount to he established.

The appellant purchased the business in a somewhat complicated manner in his dealings with the vendor and the outstanding creditors, all of which financial manoeuverings are not relevant, except as will be referred to later on.

The taxpayer alleges that he borrowed the money that he advanced from Jecco, converted some into preferred shares and gave a note to the vendor.

The only documents of any kind that were available was a copy of some notes that were made on February 10, 1983, and March 15, 1983. These notes appear to be notes prepared by the taxpayer to indicate questions to be decided for the purposes of this enterprise. During the course of his evidence, the taxpayer tried to explain what the notes meant.

The evidence concerning these notes to some extent indicate the intention of the taxpayer, but appeared to be limited to the obtaining of control, that is, 50 per cent to himself, management agreement with Edwards that some of the debts could be paid off from a portion of the annual profits, that title to the land would be in Clark's name personally. There was to be negotiated an exit strategy. It is not clear whether it was for the taxpayer alone or for both parties, and the terms of repayment of the advances to be made by the taxpayer. The stated objective was "Owen says to be there for the next 25 years". Although a joint venture, the taxpayer says that it was only Edwards’ objective; however, it goes on to say that they would ultimately have a facility for 1,000 head which was to create the income necessary to pay the money back to the taxpayer.

The memorandum goes on to show that they set up the structure and that the partners would each hold 100 Class A common shares. Edwards' shares would be in escrow until all of the B and C shares had been redeemed. The B and C shares were $225,000 non-interest bearing redeemable shares to cover the indebtedness to Jecco through the taxpayer, and $200,000 preferred shares at ten per cent, three years redeemable refund preferred in support of the moneys owing by the taxpayer to the vendor.

There is little else of a documentary nature that can assist the Court in any way in coming to its decision.

The taxpayer, in his evidence, stated that his objective was to make this investment and get out as fast as possible. He should be able to do it in five years but relied on the prospects of saleability.

However, in his evidence, the taxpayer advised that the document referred to was not the ultimate deal that was completed, and explained that because no documents were concluded, that it was a verbal deal because they had a good relationship. No documents had been completed because the bank did not co-operate, and therefore there was a considerable delay in getting into operation and that both parties were busy and they had no time to put the deal in writing.

The projections of the business indicated that there would be a profit of $750,000 over five years. His evidence was that his objective was to convert the debt into equity, to maybe buy more land, and to make partnerships with other third parties to raise cattle from which they would receive fees, etc.

The farm operation did go into bankruptcy at the instigation of the bank, the chief creditor. The result was that the taxpayer still owes the vendor on the note; he repaid the moneys advanced by Jecco; and had a total loss of $275,804.

The taxpayer alleges that because he had the right of first refusal, as apparently did the other partner, that was evidence of intention not to have retaining interest on a long-term basis, and that a sale of his interest could be contemplated at any time.

The taxpayer called as a witness the vice-president of the Jecco Group who gave evidence that he did the paperwork with regard to the various deals and documented them to the extent that he was aware of what was contemplated, but acknowledged that the deal was never finalized.

He considered the financial projections, the problems with the bank, and viewed it as a long-term investment, much the same as those of the Jecco Group.

He advised that in 1983, the real estate holdings of the Jecco Group were in difficulty, the Canadian Commercial Bank had pulled out its support, and this had in turn caused hardships for the Jecco Group to finance the sub-divisions and subsidiary. They had severe cash problems. He never had any negotiations or any dealings with Edwards.

In his opinion, although the deal fit as a long-term holding, he was sceptical of successful financial results from the deal.

On the basis of the evidence, the taxpayer argued that the taxpayer's actions were consistent with a venture in the nature of trade. The Minister argued that the loss by the appellant was an allowable business investment loss since the appellant had acquired his interest in the Westline Company, not in the course of a business investment, but as a capital property whereby he hoped to realize a profit from his investment as a result of the profitability of the corporation.

To substantiate his position, the appellant argued that in his testimony, it was his stated position that his actions amounted to an adventure in the nature of trade because his purpose in purchasing the company was to make it profitable, always bearing in mind the fact that he could sell at any time, if possible for a profit.

For the Court to come to a conclusion with regard to this fact, it is necessary to look at all of the evidence to find more than merely a subjective appreciation of this intention and to find some objective evidence that can substantiate this averment.

At the outset concerning the appellant’s evidence, I would state that I have great difficulty in placing any confidence in what he says.

The exhibits above referred to do contain contemplated conditions and proposals for agreement, but none of them are able, even with the explanation of the appellant, to satisfy me of the allegation that the purchase was of acquiring an interest in the business for the purposes of selling that interest for a profit.

The Court finds that the lack of evidence, the uncertainty of the terms of the transaction, and the evidence as a whole, leads the Court to only one conclusion—that the transaction was developed in such an informal way that one can only come to one conclusion—that the investment and the advancement of working and expense capital was in the usual way and that was for the purposes of developing a business having a profitable future.

It is difficult to conceive of a transaction developed between a party, the moving force and Jecco Group, the corporation, at the time having $250,000,000 in assets to proceed without concluding documents, other than to arrive at the conclusion that it was as stated a joint venture, partnership, as was usual apparently in Jecco dealings, eventually to be clothed with the corporate mantle and to operate for profit.

The only terms and conditions that seem to be clear is the fact that the appellant in his personal capacity was to endeavour to recoup losses that his company had suffered in previous dealings with Edwards and to receive a substantial amount of money for his personal day-to-day financing, ultimately ending up as a 50 per cent owner of the business.

The Court cannot say that the evidence of the appellant is in a sufficient way substantiated by the evidence of the witness who, in fact, painted a gloomy picture of the financing of the business and stated in his opinion it was a longterm proposition, and he was sceptical of its viability.

While the Court will not go as far as rejecting the evidence of the appellant entirely, but looks upon it as insufficient to satisfy that the appellant has discharged the onus of establishing his intention that the proposed investment was the adventure in the nature of trade within the meaning of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

From all of the evidence, I am satisfied that the taxpayer intended to profit from the transaction as stated previously, firstly to obtain $250,000 to reimburse Jecco, secondly to receive $200,000 as payment for assuming the risk of financing the enterprise, and thirdly, the ultimate of a 1/2 interest in the enterprise, all of which satisfied me in my finding that the loss sustained by the taxpayer was a business investment loss and his appeal is hereby dismissed.

Appeal dismissed.