Jean-Marie Déom v. Her Majesty the Queen, [1996] 3 CTC 2190, 97 DTC 170 (Informal Procedure)

Bowman J.T.C.C.: — These are appeals from assessments for the 1989 and 1991 taxation years.

Mr. Chénier, the appellant’s agent, informed me that the parties had settled the matter with respect to the 1989 taxation year. There therefore remains only 1991, the only question in respect of which is whether a debt became bad during that year.

The facts are as follows. Mr. Déom purchased a land prior to 1988 for the sum of $115,000. In June 1988, he sold it to a company, Construction Ma-Hé Inc. (“Ma-Hé”), for $825,000 and he thus realized a capital gain of $710,000. He indicated a reserve of $630,000 for 1988 as a result of which he reported a capital gain of $80,000 for 1988. He did not declare any part of this reserve in computing his income for the subsequent years.

According to the reply to the notice of appeal, the Minister made the following adjustments in assessing the appellant for the 1989, 1990 and 1991 taxation years:

[Translation.]

Since 1991 is the only year before me, the only point at issue is the taxable capital gain of $56,708. Clearly nothing was added to the income reported for the 1989 and 1990 taxation years. No one explained to me the manner in which the Minister made the computations set out in the reply and I therefore assume that they are mathematically correct, subject to the contention that the debt became bad during 1991.

The relevant provisions of the agreement of sale are as follows (Exhibit A-3):

Price

This sale is transacted at the price of EIGHT HUNDRED AND TWENTY- FIVE THOUSAND DOLLARS ($825,000.00) on account of which the vendor recognizes that he has received the sum of FIFTY THOUSAND DOLLARS ($50,000.00) and a release is given therefor.

As to the balance of SEVEN HUNDRED AND SEVENTY-FIVE THOUSAND DOLLARS ($775,000.00), the purchaser undertakes to pay it to the vendor as follows:

(a) The sum of FIFTY THOUSAND DOLLARS ($50,000.00), on or before December eight nineteen eighty-eight (December 8, 1988), on which date any balance outstanding as principal, interest, charges and incidental expenses will become payable in full without notice or demand.

The said sum of FIFTY THOUSAND DOLLARS ($50,000.00) or any outstanding balance will bear interest at a rate one and a half per cent (11/2 per cent) less than the prime rate, calculated on a semi-annual basis, not in advance, starting on the date hereof, which interest will be payable at the same time as the sum of FIFTY THOUSAND DOLLARS ($50,000.00), that is, on December 8, 1988.

(b) The sum of SEVEN HUNDRED AND TWENTY-FIVE THOUSAND DOLLARS ($725,000.00), which the purchaser undertakes to pay to the vendor two years after the date of the start of the service infrastructure work on the land, on which date any outstanding balance as principal, interest, charges and incidental expenses will become payable in full without notice or demand.

The said sum of SEVEN HUNDRED AND TWENTY-FIVE THOUSAND DOLLARS ($725,000.00) or any outstanding balance owed will bear interest at a rate one and a half per cent(l l/2percent) less than the prime rate, calculated on a semi-annual basis, not in advance, starting on the date of the start of the infrastructure work, which interest will be payable semi-annually and will begin to accrue at the commencement of the infrastructure work.

Interest arrears will bear interest at the same rate after their due date without notice or demand. In the event of the disposition of the immovable hereby sold by any method of transfer, the vendor hereto will have the right to require immediate payment of the balance of the selling price.

Advance Payment

Despite the term agreed upon, the purchaser will have the privilege of paying the balance of the selling price in advance without prior notice or compensation. No partial payment shall be less and One Thousand Dollars ($1,000.00) (or multiples of that amount).

Vendor Privilege

To guarantee payment of the balance owed him, in addition to the other guarantees which the purchaser grants him, the vendor reserves his privilege in respect of the principal and interest in accordance with Article 2122 of the Civil Code.

Mortgage and Additional Mortgage

The purchaser mortgages the immovable for an amount not exceeding the balance owed to the vendor.

He also mortgages the immovable for an additional sum equivalent to twenty per cent (20%) of the original amount of this sale in order to guarantee payment of any other amounts paid by the vendor to protect his mortgage claim, including insurance premiums, taxes, legal costs, notarial costs and other incidental expenses.

[Translation.]

It is important to note that, in paragraph (b) of the original text, the words “December fifteen, nineteen eighty-nine (December 15, 1989)”, after the expression “which the purchaser undertakes to pay to the vendor”, have been struck out and replaced by the following words written by hand:

..two years after the date of the start of the service infrastructure work on the land....

[Translation.]

In addition, in the following paragraph, the word “hereof’, after “starting on the date...”, has been struck out and replaced by:

…Of the start of the infrastructure work...

[Translation.]

At page 7, the following words have been added by hand:

In the event of the disposition of the immovable hereby sold by any method of transfer, the vendor hereto will have the right to require immediate payment of the balance of the selling price.

[Translation.]

The changes and additions have been initialized by the parties.

The infrastructure work was never started and the purchaser, Ma-Hé, paid nothing except the two $50,000 amounts cited above.

In 1991, Mr. Déom realized that Ma-Hé had ceased its activities and that it had moreover transferred the land to the notary Zsolt Pogany “in trust”. He then served on Mr. Pogany and Ma-Hé a 60-day notice, the relevant portions of which are as follows (Exhibit A-2):

By notarized agreement entered into before Zsolt Pogany on June 20, 1988, and duly registered under number 366890 in the registry division of L’Assomption on June 23, 1988, the plaintiff sold to the mise-en-cause Les Constructions Ma-Hé Inc. the immovable described below situated in the Town of Mascouche for the sum of $825,000.00, the purchaser making a down payment of $50,000.00, but leaving an outstanding balance of $775,000.00, which sum has not been paid to this date;

More specifically, the following clause appears at page 7 of the said agreement:

In the event of the disposition of the immovable hereby sold by any method of transfer, the vendor hereto will have the right to require immediate payment of the balance of the selling price.

Pursuant to a second notarized agreement of sale entered into on November 5, 1990, before Nathalie Dionne and registered under number 415667 in the registry division of L’Assomption on November 7, 1990, the mise-en-cause Les Constructions Ma-Hé Inc. sold to the defendant Zsolt Pogany “in trust” fully and entirely the immovable that it had purchased from the plaintiff pursuant to the aforementioned notarized agreement entered into on February 15, 1990;

The plaintiff was never consulted with respect to that sale, never entered into the agreement executed before Nathalie Dionne on November 5, 1990, never waived his right to require payment of the outstanding balance of $775,000.00 pursuant to the first agreement entered into before Zsolt Pogany on June 20, 1988, and never received payment either from the defendant or the mise-en-cause Les Constructions Ma-Hé Inc. of the said sum as of this date;

The plaintiff, availing himself of this right to require immediate payment of the balance of $775,000.00, accordingly informs the defendant Zsolt Pogany “in trust” and the mise-en- cause Les constructions Ma-Hée Inc. that:-

(a) unless the amount owed including the principal of $775,000.00 plus interest, if any, is paid within sixty (60) days of the service and registration hereof, or

(b) unless, at expiry of the aforementioned time period, he has signed before a notary a deed of giving in payment of the immovable mortgaged to the plaintiff, whereby he undertakes to deliver the immovable free and clear of all charges, mortgages and liens registered subsequent to the registration of the claim;

The creditor JEAN-MARIE DÉOM will then request that the immovable mortgaged to him become and be his absolute and non- transferable property through a giving in payment;

The Registrar of the registry office of L’Assomption is asked to notify of the registration of this notice every person who may be entitled thereto by the Act.

The Registrar of the registry office of L’Assomption is asked to register this notice against this immovable known and designated as:...

[Translation.]

Mr. Déom did not exercise the legal remedies available to him pursuant to the 60-day notice and, in particular, he did not take back possession of the land.

Mr. Déom made the following allegation in his notice of objection:

There was a mortgage foreclosure in 1991 and resale in 1992.

The computation of the taxable amount should therefore be consistent with the statement appended hereto.

[Translation.]

In the document appended to the notice of objection, he computed a taxable capital gain in 1992 of $94,500 as a result of the fact that there had been a foreclosure in 1991.

Mr. Trottier, the chartered accountant who drafted the notice of objection, testified that he had made an error and that there had not been a foreclosure in 1991 and that he should have said that the debt became bad in 1991.

I accept that there was no foreclosure in 1991, but I am not convinced that the appellant established that the balance of the selling price, i.e. the sum of $725,000, became a bad debt in 1991.

On May 12, 1992, Mr. Déom and Zsolt Pogany “in trust” entered into the following agreement (Exhibit A-6):

1- The sixty (60) day notice registered at the registry office of L’Assomption on May 6, 1991, under number 424081 will be suspended.

2- The agreement of sale between the party of the first part and Construction Ma-Hé Inc. dated June 20, 1988, is amended as follows:

(a) a sum of THIRTY THOUSAND DOLLARS ($30,000.00) will be paid by the party of the second part upon the signing hereof, which amount will be applied to the principal owed to the party of the first part such that the said balance will then amount to SIX HUNDRED AND NINETY-FIVE THOUSAND DOLLARS ($695,000.00);

(b) the said sale balance of SIX HUNDRED NINETY-FIVE THOUSAND DOLLARS ($695,000.00) will bear interest at the rate of 2.5 per cent per annum starting on June 1, 1992, in the event the infrastructure work has not commenced by that date, which interest will be payable every six months, the first payment becoming due on December 1, 1992;

(c) the party of the first part may on June 1, 1996, demand payment of the entire sum owed it under the aforementioned agreements if by that date the infrastructure work has not commenced.

The parties hereto agree that, except for the aforementioned undertakings, the agreement of sale between the party of the first part and Construction Ma-Hé Inc. dated June 20, 1988, which obligations were subsequently assumed by Zsolt Pogany in trust on November 5, 1990, by agreement of sale executed before Nathalie Dionne will be binding on the parties.

[Translation.]

Lastly, on June 27, 1994, the matter returned to its starting point in a deed of reconveyance (Exhibit A-7) entered into by Fermes Mathers Inc., transferor, and Mr. Déom, transferee.

This document contains an account of the rather tortuous chain of title of the land in issue, which appears as follows:

(1) June 20, 1988 - from Jean-Marie Déom to Ma-Hé;

(2) November 5, 1990 - from Ma-Hé to Zsolt Pogany “in trust”;

(3) May 6, 1991 - 60-day notice served by Mr. Déom on Zsolt Pogany “in trust”;

(4) May 12, 1992 - from Zsolt Pogany “in trust” to Serge Cadieux “in trust”;

(5) December 22, 1993 - Serge Cadieux “in trust” states that he was acting in the matter on behalf of Centre Sportif International Mathers Inc.;

(6) April 22, 1994 - Serge Cadieux “in trust” amends his statement, saying that he was acting not on behalf of Centre Sportif International Mathers Inc., but rather on behalf of Fermes Mathers Inc.

By that document, Ferme Mathers Inc., transferred the land to Mr. Déom, who, in consideration thereof, gave a complete release of all the mortgages registered on the land in his favour.

I have no difficulty agreeing that the matter turned out badly for Mr. Déom. After six years, he again found himself in possession of the land that he thought he had sold in 1988 for the sum of $825,000. Furthermore, although the evidence was weak, it would appear that the land that he recovered in 1994 was worth much less than in 1988.

However, the only question to be decided is whether the balance of the selling price became a bad debt [1] during 1991.

A number of provisions in the Income Tax Act concern bad debts: paragraph 20(1 )(p), subsection 20(4) and section 50. Furthermore, section 79 concerns mortgage foreclosures. The only section that concerns us in this case is section 50, which is part of Subdivision c of Division B of Part I of the Act which concerns capital gains and capital losses.

The greatest obstacle the appellant had to overcome was the fact that, in 1991, he still had a mortgage on the land that he held as a guarantee of payment of the balance of the selling price. I find it hard to see how a debt may be considered bad when that debt is guaranteed by a mortgage. One can conceive of a situation in which the value of the mortgaged property might become nil and the debtor insolvent. It is possible in such a case that the creditor could establish that the debt was bad, but that is not the situation with which we are concerned here. I can imagine that the land was worth less in 1991 than the amount of the debt, but there is no conclusive evidence on this point. Even in 1992, the appellant continued to negotiate with Mr. Pogany with the intention of solving the problem.

There is another problem. I agree that Ma-Hé was likely insolvent. However, after purchasing the land, Zsolt Pogany “in trust” had assumed liability for the debt, either personally or as the agent of a third party, and there is no evidence respecting the ability of Mr. Pogany, or of the person whom he represented, to discharge the obligations of the debt.

In these circumstances, I conclude that it was not established that the debt became bad in 1991.

It is highly possible that the provisions of section 79 applied in 1994, when the appellant reacquired ownership of the land. According to the terms of that section, Mr. Déom is deemed to have reacquired the land:

... at the amount, if any, by which the cost at that time of the taxpayer’s claim exceeds the amount described in subparagraph (e)(i) or (ii), as the case may be, in respect of the property;

In respect of 1991, the appeal is dismissed.

Appeal was dismissed.