Urquhart v. R., [1997] 1 CTC 2611 (Informal Procedure)

Sarchuk J.T.C.C.: — The appeals of Ronald Urquhart and June Urquhart are from assessments of tax with respect to the 1987, 1988, 1989, 1990 and 1991 taxation years. Both Appellants have elected the expedited procedure provided by section 18.1 of the Tax Court of Canada Act and by consent both appeals were heard together on common evidence.

The Appellant, Ronald Urquhart, in computing income for the 1987, 1988 and 1989 taxation years, deducted the amounts of $5,692.50, $18,372.00 and $21,844.60, respectively as allowable business investment losses (ABIL). The Minister of National Revenue assessed him for the 1987 and 1989 taxation years as filed. In 1988, income tax was assessed on the basis that an ABIL of $24,496.00 was allowed as requested by the Appellant subsequent to the filing of the return. Pursuant to that same request, the Minister further reassessed the 1987 taxation year to increase the deduction of ABIL from $5,692.50 to $18,497.00. In August, 1991, the Minister reassessed for the 1987, 1988 and 1989 taxation years to disallow the deductions of ABIL and permitted allowable capital losses to be claimed in the amounts of $4,062.50, $5,572.00 and $5,572.00, respectively. Following further representations by the Appellant’s accountants, the Minister again reassessed by disallowing the capital losses but allowing deductions for ABIL in the same amounts as the capital losses which had been previously allowed.

In computing income for the 1990 taxation year this Appellant deducted the amount of $23,879.40 as an ABIL. The Minister assessed as filed. Subsequently, in 1992 the Minister reassessed to disallow the deduction of ABIL but allowed a capital loss in the amount of $6,267.75. That same year the Minister further reassessed by deleting the allowable capital loss but allowing a deduction for ABIL in the amount of $6,268.00.

In computing income for the 1991 taxation year, this Appellant deducted the amount of $5,745.75 as an ABIL. The Minister assessed as filed.

The Appellant, June Urquhart, in computing her income for the 1987, 1988 and 1989 taxation years did not deduct any amounts as allowable business losses. The Minister assessed as filed. In 1991, at her request, the Minister reassessed to allow capital losses in the amounts of $8,125.00, $8,357.00 and $8,357.00, respectively. Subsequently, the Minister further reassessed for the three taxation years by disallowing the capital losses but allowing deductions for ABIL in the amounts of $4,063.00, $5,572.00 and $5,572.00, respectively.

In computing income for the 1990 taxation year, the Appellant again did not deduct any amounts as ABIL. The Minister assessed as filed. The Minister then reassessed to allow a capital loss in the amount of $8,357.00 and then at this Appellant’s request, further reassessed by disallowing the capital loss but allowing a deduction for ABIL in the amount of $6,268.00.

In computing income for the 1991 taxation year, the Appellant deducted from income the amount of $5,745.75 as an ABIL. The Minister again assessed as filed.

It should be noted that with respect to both taxpayers, the final reassessments for the 1987, 1988, 1989 and 1990 taxation years (that is disallowing the allowable capital losses but allowing deductions for ABIL) were the result of the Minister’s acceptance of offers to settle executed by both Appellants. Those are found in Exhibits R-l, R-2, R-4 and R-5.

The background relating to these assessments is as follows. Most of the assumptions of fact made by the Minister are not in dispute. In summary, the Appellants each owned 50 per cent of the shares of Sur-Leen Farms Limited (Sur-Leen). It had been in financial difficulties for a number of years and in July, 1985 the Canadian Imperial Bank of Commerce (the Bank) placed it into receivership. Negotiations took place culminating in an Agreement dated July 17, 1986 between the Bank, Price Waterhouse Limited (the Receiver), Sur-Leen, both Appellants and their son James

N. Urquhart. On July 31, 1986 Sur-Leen was indebted to the Bank for the principal amount of $701,264.31 plus interest in the amount of $124,677.53, for a total amount of $825,941.84. As well, on July 17, 1986 the Appellants had personal debt with the Bank to a total of $45,799.80. The Appellants had also guaranteed a portion of any shortfall on the part of Sur-Leen to honour its indebtedness to the Bank. The Agreement is Exhibit A-2 and the Guarantee is Exhibit A-1.

Pursuant to paragraph 6 of the Agreement, the parties agreed inter alia that the balance of the Urquhart and Sur-Leen indebtedness to the Bank “shall be deemed to have been $155,000.00” together with interest from July 17, 1986 at 11 per cent per annum, provided that the Appellants made payments to the Bank of not less than $1,000.00 per month commencing in August, 1986 to January, 1987 and thereafter $1,500.00 per month from February, 1987 to June 1991 with the balance to become due and payable on July 28, 1991. Two further facets of this Agreement are relevant to this appeal.

First, the Sur-Leen-Albion Agra Inc. transfer of shares. For the sake of ease I will refer to Sur-Leen-Albion Agra as Albion. It was incorporated by the Appellant Ronald Urquhart and a third party a number of years prior to the taxation years in issue. As of the date of the receivership, all of the shares of Albion were owned by Sur-Leen and had been pledged with the Bank as collateral for its indebtedness.

Pursuant to paragraph 7 of the Agreement the Bank and the Receiver undertook to transfer all of the shares of the capital stock of Albion held by Sur-Leen to the Urquharts, or either of them, as they may direct, upon receipt of a payment of $5,000.00 in addition to the sums to be paid by the Appellants pursuant to paragraph 6 of the Agreement. In 1987, the shares of Albion were transferred by the Receiver to the Appellant, Ronald Urquhart, for the amount of $5,000.00 and this amount forms part of the adjusted cost of the shares of Albion.

Second is what can be referred to as the Michigan Receivable. On July 17, 1986 the Appellant, Ronald Urquhart, was the sole shareholder in a corporation known as Michigan Livestock Technology Incorporated (Michigan). As of the date of the execution of the Agreement, July 17, 1986, Sur-Leen had substantial accounts receivable outstanding from Michigan resulting from sale of livestock to it. It was a condition of the Agreement that the amounts due to Sur-Leen amounting to $63,766.00 would be acknowledged in writing by Michigan, and would be repaid to Sur-Leen by way of payments from Michigan to the Receiver at the rate of not less than $1,000.00 (U.S.) monthly commencing on August 28, 1986 until paid in full.

According to Ronald Urquhart, Michigan never acknowledged the indebtedness to Sur-Leen in writing as required. It did however provide Sur-Leen with postdated cheques each for $1,000.00 (U.S.). The first two cheques so paid to the Receiver were returned NSF. As a result, according to Ronald Urquhart, the Receiver advised the Appellants that “they had to be personally sure that the payments were made”. Payments of $1,000.00 (U.S.) were thereafter made to the Receiver by the Appellants. The Appellant, June Urquhart, attended to these payments to the Receiver. As contrasted to payments made on their own behalf, the payments to the Receiver with respect to the Michigan receivable were by way of bank draft on which it was noted that they were being paid on behalf of “Michigan Livestock Tech”. I propose to deal with the issues raised in this appeal seriatim.

First, the Albion shares: It was the Appellants’ position that the amount of $5,000.00 paid to the Bank for the shares of Albion was deductible as an AB IL pursuant to the provisions of paragraph 39(1 )(c) and subsection 39(12) of the Act. The basis upon which this claim was being advanced was never precisely articulated in the pleadings, nor in argument, and their representative, in argument, stated that “There are some facts that came up there that today in Court I was not aware of’, and made basically no submissions on the Appellants’ behalf. I consider this issue to have been abandoned by the Appellants, and quite appropriately so since there was absolutely no basis in law for treating this amount as an allowable business investment loss within the meaning of the relevant provisions of the Act.

I turn next to the “Michigan Receivables”. It is the Appellants’ position that pursuant to paragraph 4 of the Agreement, the sums due to Sur-Leen by Michigan acknowledged to be $63,766.00 were to be paid by it to Sur-Leen by way of monthly payments to the Receiver of no less than $1,000.00 (U.S.). According to the Appellants when these payments were not made by Michigan they became their personal responsibility. As their representative put it, the payments were not made on behalf of Michigan because the Appellants had no legal obligation to pay these amounts. The only legal obligation was with respect to the debts of Sur-Leen which they had personally guaranteed. And, if I may say, that accordingly it was contended that by virtue of the Agreement the payments in fact had been converted to debts of Sur-Leen which had been guaranteed by them.

Three distinct submissions were made by the Appellants’ representative in support of this position. First, that since the Bank and the Receiver never executed the Agreement it had no legal binding effect and accordingly the Guarantee previously signed by the Appellants took priority, and I quote the Appellants’ representative, “Over an unsigned agreement with parties that had not all signed the agreement”. At best, he said, this Agreement was merely an arrangement to quantify numbers.

Second, he argued that the Agreement had been voided when Michigan defaulted on its payments and that as a result the operative document was the Appellants’ guarantee. This it was contended had the effect of cancelling the limit of $155,000.00 placed on the Appellants’ liability by the Agreement and made their personal assets subject to seizure pursuant to their guarantee.

The third submission was that the Agreement had but one purpose, being to ensure that the Bank collected all amounts pursuant to the Agreement and for that purpose contained provisions to confirm that those amounts would be paid by the Appellants personally, if necessary. He made specific reference to paragraph 4 and paragraphs 6 and 9 of the Agreement, which according to him when read together brought the amounts in issue within the scope of paragraph 39(12)(a) of the Act as amounts paid by these taxpayers in respect of a debt of the corporation, being Sur-Leen, under an arrangement under which the taxpayers would guarantee the debt.

The Respondent’s position, put most succinctly is, that the amounts in issue were paid by the Appellants on behalf of Michigan and were not in respect of Sur-Leen’s debt, which the Appellants had guaranteed. The amounts in issue were owed by Michigan to Sur-Leen and were to be repaid to it by way of payments to the Receiver, and accordingly the amounts paid by these Appellants were not in respect of a debt of the corporation under an arrangement under which they had guaranteed the debt.

Let me first deal with the representative’s first two submissions regarding the validity of the Agreement. The Agreement was signed by the Appellants on their own behalf and on behalf of Sur-Leen, but apparently not by the Bank and not by the Receiver. Neither Appellant was able to explain this omission. It was signed, however, in the office of the Bank’s solicitors with the Appellants’ solicitor present. Ronald Urquhart referred to this Agreement as the operative document. His testimony and that of his wife satisfies me that the terms set out in that document clearly and unequivocally reflected the settlement reached by the parties.

The purpose of the Agreement was to deal with a number of disparate issues. The first was to compromise and settle the Sur-Leen debt to the Bank which had been secured by security instruments charging its assets and the Appellants’ guarantees. Second, to deal with the personal debt of the Appellants to the Bank which also had been secured by various security instruments charging the Appellants’ personal property. Third, to collect amounts due or potentially due to Sur-Leen from Michigan, Jim Urquhart and others. And fourth, to deal with the transfer of shares of Albion to the Appellant, Ronald Urquhart.

It is a fact that the Appellants paid and the Bank accepted as full payment the amounts stipulated in paragraph 6 in respect of their debts and those of Sur-Leen which they had guaranteed. Ronald Urquhart’s purchase of the Albion shares from the Bank was carried out and completed in accordance with this Agreement. Jim Urquhart carried out the terms of the Agreement referrable to him by repaying his indebtedness to Sur-Leen by way of payments to the Receiver in stipulated amounts.

From the evidence it is clear that Sur-Leen’s receivable from Michigan was paid to the Receiver as required albeit by the Appellants on behalf of Michigan. I am satisfied that the terms set out in the document filed as the Agreement were valid and binding; had never been voided as argued; and were carried out by all parties.

Subsection 39(12) of the Income Tax Act stipulates a number of requirements which must be met if an amount is to be deemed a debt owing to the taxpayer by a small business corporation for the purposes of paragraph 39(1)(c). The most relevant requirement is found in paragraph 39(2)(a). It reads:

The amount paid by the taxpayer must be in respect of a debt of the corporation under an arrangement under which a taxpayer guaranteed the debt.

The Appellant has not been able to establish that this was the case with respect to the Michigan receivable and so in concluding I find as follows:

The amount in issue was at all relevant times a receivable to Sur- Leen from Michigan. It was not at any time a debt of Sur-Leen which had been guaranteed by the Appellants. The amounts paid by the Appellants on behalf of Michigan were not paid pursuant to paragraph 6 of the Agreement which dealt with Sur-Leen’s debts, the Appellants’ personal debts and their potential and actual responsibility with respect to Sur-Leen’s debts. These payments were made pursuant to paragraph 9 of the Agreement. The Appellants had in essence obligated themselves to ensure that all persons, whether parties to the Agreement or not, complied with the terms of the Agreement. That made it necessary for the Appellants to ensure that Sur- Leen collected its receivable from Michigan. They chose to comply with this provision by advancing the necessary funds on Michigan’s behalf.

No doubt the potential invocation of paragraph 9 of the Agreement by the Bank which might have put the Appellants’ personal assets at risk, encouraged the Appellants to take the steps they did, but that does not change the nature of the transaction which was in effect, the collection of a receivable on behalf of Sur-Leen and the payment of those funds over to the Receiver.

The fact that Sur-Leen’s receivable from Michigan and its debt to the Bank were addressed in the same Agreement does not result in Sur- Leen’s receivable being converted into a debt from another party. In my view the argument advanced by the Appellants’ representative that the provisions of the Agreement, and in particular paragraphs 4, 6 and 9 can be read to bring these payments within the ambit of subsection 39(12) is not tenable.

The Appellants further take issue with respect to the Minister’s allocation of the business losses on a 50/50 basis to each of the Appellants. It was contended by their representative that this allocation was arbitrary in that subparagraph 39(12)(l)(a) requires the amount of AB IL be determined on the basis of the actual amount paid by each taxpayer. It was argued that since in the taxation years in issue Ronald Urquhart had greater income than June and therefore contributed a greater percentage of the deposits to their joint account, from which the payments were made to the Bank, as required by their Agreement, it followed that a reasonable application would have been 72 per cent for Ronald Urquhart and 28 per cent to June Urquhart. I am not satisfied that the Appellants can succeed on this issue. Each Appellant owned 50 per cent of the issued shares of Sur-Leen. All payments made pursuant to the Agreement were made jointly on behalf of both and receipts were issued by the Receiver to both. There is no evidence before this Court to support a different allocation other than the fact that his income was greater than hers in the years in question. The fact that the Minister may have reassessed on a different basis in subsequent years is not germane to the issue.

Finally, it must be noted that the Offer of Settlement made by the Appellants and accepted by the Minister stipulated that the allocation of losses be on a 50/50 basis. This came from the Appellants and not from the Minister. He had no reason not to act on it.

The onus is on the Appellants to establish both that the Minister’s allocation was wrong and a sound basis for a different allocation. That onus has not been met. The appeals of both taxpayers with respect to all taxation years are dismissed.

Appeal dismissed.