Kendy’s Enterprises Ltd. v. Her Majesty the Queen, [1996] 3 CTC 2416, [1996] DTC 1636

Beaubier J.T.C.C.: — This matter was heard at Edmonton, Alberta on July 8 and 9, 1996 pursuant to the General Procedure. The Appellant called Ken Christiansen, who testified on behalf of the corporation; Ronald Harsma, the Appellant’s lawyer at the material times; and Robert McNally, C.A., who qualified as an expert. The Respondent called Alan Barkway, C.A., the accountant for Westcorp Inc. at all material times and Jacqueline Slupek, the tax auditor of the Minister of National Revenue on this file.

The Appellant has appealed an assessment for its 1989 taxation year and claims that $1,000,000 assessed as income was not its income in 1989. It further claims to be entitled to offset losses from 1991 against any 1989 income.

The parties filed an Agreed Statement of Facts which reads:

1. At all material times the Appellant’s taxation year end was December 31st.

2. The shareholders and directors of the Appellant are Ken Christiansen and Wendy Christiansen.

3. An agreement was entered into by “Hollyrood Joint Venture” (“Hollyrood”) and 393008 Alberta Ltd. (Alberta) to market condominium units owned by Alberta and known as Meadowlark Towers. The apparent date on the agreement is January 2, 1989.

4. Pursuant to the Agreement “Hollyrood” was to receive compensation of 8.25% of the selling price of each unit sold.

5. That compensation of approximately one million dollars was paid to “Hollyrood” in January of 1990.

6. In 1989, the Appellant and a corporation called Westcorp whose principal is Phil Milroy entered into a joint venture for the acquisition and marketing of certain properties purchased from Alldritt Development Limited (Alldritt Properties). The arrangement for the joint venture between the Appellant and Westcorp was by verbal agreement between Phil Milroy and Ken Christiansen. The precise commencement date of the joint venture is in issue between the Appellant and the Respondent.

7. The one million dollars paid to “Hollyrood’ was applied toward the purchase of some of the Alldritt Properties.

8. The Appellant and Ken Christiansen referred to the joint venture for the acquisition and marketing of the Alldritt Properties as “Hollyrood Joint Venture”.

9. Westcorp and Phil Milroy referred to the joint venture for the acquisition and marketing of the Alldritt Properties as ‘Townhouse Joint Venture”.

10. The joint venture was dissolved in 1991. After considerable negotiation beneficial ownership of certain of the Alldritt Properties were transferred to the Appellant and certain others were transferred to Westcorp.

The Minister of National Revenue’s assumptions read:

5. In reassessing the Appellant as he did, the Minister of National Revenue (“Minister”) relied, inter alia, upon the following assumptions of fact:

(a) at all material times, the Appellant acted under the name “Hollyrood Joint Venture” (“Hollyrood”).

(b) at all material times, the Appellant’s taxation year end was December 31 ;

(c) on January 2, 1989, Hollyrood entered into an agreement (the “Agreement”) with 393008 Alberta Ltd. (“Alberta”) in which Hollyrood was engaged to sell condominium units owned by Alberta;

(d) pursuant to the Agreement, Hollyrood’s compensation was 8.25% of the selling price of each unit sold;

(e) pursuant to the Agreement, Hollyrood was entitled to its compensation as each unit was sold;

(f) all the units were sold prior to December 31, 1989 except for 10 units which were retained for rental purposes by Alberta;

(g) Hollyrood’s compensation of 8.25% amounted to $1,000,000.00 in 1989;

(h) the $1,000,000.00 was receivable by Hollyrood in 1989;

(i) in January, 1990, Hollyrood received the $1,000,000.00 as compensation pursuant to its Agreement with Alberta;

(j) Holly rood rendered the account for its services to Alberta by invoice dated May 25, 1990;

(k) there was undue delay in Hollyrood’s rendering of its accounts;

(l) Hollyrood is required to account for its income on the accrual method but failed to do so in 1989 with respect to the compensation due under the Agreement;

(m) the $1,000,000.00 was income to Hollyrood in 1989;

(n) there were no subsequent transactions which would permit Hollyrood to exclude the $1,000,000.00 from income in 1989;

(o) Hollyrood had no ownership interest in any of the properties on which Alberta constructed the condominium units or in the condominium units themselves.

Subparagraphs (b), (d), (e), (f), (g), (h), (i), (j), (k), (1), (n) and (o) were not refuted. The agreement described in assumption (c) was signed in June of 1989. Any money accruing to or received by the Appellant through Holly rood in 1989 from that agreement is income. The essential questions for the Court are what was Hollyrood or who owned it and what income, if any, did the Appellant obtain from it in 1989.

The Appellant’s position is that Hollyrood was a joint venture between it and Westcorp and that no income was obtained from it in 1989. If any income was obtained from Hollyrood in 1989, one half of that income was Westcorp’s.

Both the Appellant and Westcorp were engaged in large and involved multimillion dollar real estate transactions in Edmonton. These included the acquisition and marketing of hundreds of condominium units, many of which were marketed in Ontario. Many of these were marketed through the “Hollyrood” name. Despite the size and number of these transactions and the experience of both corporations, there was no written and signed joint venture agreement.

In addition, the Appellant’s lawyer, Ronald Harsma, transferred the al- leged joint venture money to the exclusive credit of the Appellant at the time in question. This is confirmed by Exhibit A-1, Tab 19 which contains computer printouts prepared with the assistance of Ken Christiansen’s wife and by the Appellant’s accountant, Mr. Freckleton.

Ken Christiansen was evasive in cross-examination. He refused to commit himself as to the proportion of the alleged joint venture income to which the Appellant was entitled, even though it is alleged that it no longer exists. It is incredible that a man with his real estate and business experience would not know and insist upon his or the Appellant’s share of any income. It is equally incredible that when dealing with a similar firm such as Westcorp in deals of this alleged magnitude, a written joint venture agreement would not exist, if a joint venture in fact existed. As a result, Mr. Christiansen’s testimony is not accepted.

Therefore the Court finds that assumption (a) is correct. The money in question was income to Hollyrood and therefore assumption (m) is correct.

The Appellant’s claim to offset alleged 1991 losses will not be dealt with by this Court. Any 1991 losses are the subject of an assessment for 1991 which may be objected to and appealed, if necessary, to establish such losses and their amounts, if any.

The appeal is dismissed.

Each party made a number of motions. The Appellant’s motions were successful but were made very late. The Respondent’s motions were unsuccessful. The Respondent is awarded party and party costs, however the costs awarded do not include any costs respecting any motions.

Appeal dismissed.