Ferracuti Estate v. R., [1998] 3 CTC 2883, 98 DTC 2190

Teskey T.C.J.:

Italia Ferracuti (“Italia”), in her lifetime, filed the Notice of Appeal herein, which appeal is carried on by her trustees. This appeal is from an assessment of income tax in the amount of $148,168.25, made pursuant to section 160 of the Income Tax Act (the “Act”).

Facts

John David Ferracuti, Diane Mary Ferracuti and Sandra Antonutti are the trustees of the Estate of the late Italia who died on the 19th day of December 1996.

Italia was the widow of the late Ralph Ferracuti (“Ralph”) who died on the 23rd day of January 1990.

It is admitted that Ralph at the relevant time had a tax liability under the Act at least equivalent to the amount assessed against Italia pursuant to section 160.

Ralph entered into an undated contract for sale and purchase of real property with a Leonore H. Katz to purchase a condominium known as Unit 4B, The Mariposa Condominium at 2001 South Surf Road, Hollywood, Florida (the “Unit”) for $185,000. All dollar amount therein is in U.S. dollars.

Paragraph 4 thereof reads:

If this contract is not executed by seller and buyer on or before April 27, 1989, at .tn., the deposit shall, at the option of the buyer be returned to him and this agreement shall be null and void...

I therefore find that the contract, although undated was executed on or before April 27,1989.

The closing date is stated to be January 15, 1990.

At the time the contract was entered into, a $10,000 deposit was given. The contract was conditional upon the purchaser obtaining a first mortgage for $138,000 which would form part of the consideration together with the further sum of $37,000 on closing. Thus the total consideration due on closing subject to adjustments was the sum of $175,000.

Paragraph 7 on page one under heading “Special Clauses” reads “by December 10, 1989”. The last paragraph of page 4 of the contract under the same heading “Special Clauses” reads:

Items to be removed from the apartment listed on the attached list shall be countersigned by buyer prior to this contract being binding.

The buyer is stated to be Ralph and/or Assigns.

Both Ralph and Italia executed General Powers of Attorney in favour of their three sons Remo Ferracuti (“Remo”), Antony Ferracuti and John Ferracuti dated December 13, 1989. The affidavit of execution is sworn on the 14th day of December 1989.

These Powers of Attorney were prepared by James S. Reycraft, a solicitor and witnessed by him.

On December 15, 1989, James Reycraft as a first director caused articles of incorporation to be issued in the name of 872908 Ontario Inc. (the “Corporation”). Paragraph 5 thereof reads:

The business of the corporation is limited to the ownership management and control of a single property having a municipal address of 2001 South Surf Road Apartment 4B, Hollywood, Florida, U.S.A. and shall have all ancillary powers required to manage, lease, repair, mortgage, sell and dispose of the said property.

To hold personal use property for the benefit of the shareholders.

From reading the agreement of purchase and sale and in particular the clauses referred to above, I am satisfied that it was not until the first part of December 1989 that the agreement became binding, and thus I conclude that is what prompted the appointment with solicitor Reycraft and on his and/or the Goldfarb’s advice, the Corporation was obtained. Goldfarb is a chartered accountant who acted for Ralph and the Corporation.

I did not find Remo to be a credible witness and I reject most of his testimony, as well his statement that he authorized the formation of the Corporation on his father’s instructions to follow Goldfarb’s advice.

It is just not credible that Ralph and Italia would attend Reycraft’s office on either the 13th or 14th of December 1989 and the Corporation is formed on the 15th day of December 1989 on instructions from Remo.

Remo says his father instructed him to follow.the accountant’s advice. This may be true, but I conclude that the taking of the title into an Ontario Corporation was all done and decided upon by Ralph, Italia, Reycraft and Goldfarb at the time the Powers of Attorney were authorized and or executed.

Remo claims that no shares were ever issued from the Corporation’s treasury. I do not accept this as factual. No Minute Book was produced.

The Appellant did not call Reycraft and Goldfarb as witnesses. I have been asked to draw an adverse conclusion from their non-appearance and I do so. I assume that their testimony would have been detrimental to the Appellant’s appeal. If the Corporation’s tax returns and the Minute Book had been produced, the question of what were their instructions from Ralph and or Italia would have been answered. I assume someone has been filing the required Ontario Corporation Tax Returns, or the Corporation would have lost its charter and the asset been forfeited to the Ontario Government. I would assume this is not so as the asset is very valuable, probably in excess of C$300,000 today.

On January 20th, 1990, a cheque for $148,168.26 drawn on Ralph’s bank account was prepared by Remo and signed by him as Ralph’s attorney and deposited in a bank account owned by Italia. This money, it is alleged was the amount in Canadian funds required to close the Florida condo deal. However, the agreement calls for $175,000 on closing. There is no evidence of where the other funds came from.

Remo either alone or with the aid and consent of his brothers, acting as Italia’s attorney (agent), withdrew money to close the condo deal. The bank records were not produced. I conclude that the cheque from Ralph to Italia for $148,168.26 (drawn just prior to Ralph’s death) was to close out his account in order to save probate and legal fees and to get the funds into Italia’s hands. What amount Remo sent from his mother’s account to Florida has not been established to my satisfaction as there had to be more than C$150,000 (rounded) sent to Florida to complete the purchase. There is no evidence a U.S. mortgage was obtained, thus a $175,000 had to be sent to Florida to complete the purchase which was completed on March 1st, 1990.

When Remo was asked who owned his mother and father’s matrimonial home and if it was joint, the answer was “his mother”. This obviously would be a significant asset which Ralph had no problem having in Italia’s name. Remo also at one time said that his mother inherited everything, notwithstanding that Ralph’s last will and testament gave Italia only a life interest therein.

Placing title to the Florida condo in an Ontario Corporation back in late 1989 or 1990 was a common manoeuvre to avoid high inheritance taxes in Florida and probate costs. Remo alleges that no shares were ever issued or directors elected but that he was president and his two brothers were vice- president and secretary treasurer. He then argued that ownership would be in Ralph’s estate. I do not accept this. James Reycraft was the first director by signing the articles of incorporation. Ralph was heavily indebted to Revenue Canada. He obviously deliberately chose to buy a Florida condo for $185,000, rather than pay Revenue Canada, so that the ownership of the Corporation has either been deliberately smuged or was placed into Italia’s name in an attempt to keep the money hidden. I conclude that the instructions were to place the ownership of the Corporation into Italia.

All the acts of possession and usage of the condo and Italia’s Florida bank account are as consistent with outright ownership of the Unit as Italia having a life interest in the Unit. In either case, Italia would have the right to exclusive use thereof and the right to the rents and profits thereof.

Remo stated that he instructed a secretary at the family business, known as Ralph Ferracuti and Sons Builders Ltd. in which Ralph was the sole shareholder, to prepare a lease for his mother. This again is rejected. Even if Ralph’s estate had been the owner of the Corporation, Italia by the terms of the will had a life interest in the Unit. No lease was needed and I do not believe one ever was requested, prepared or executed.

I am satisfied that Italia knew what was being done, how and why. She probably left financial matters up to her husband in his lifetime and to Remo on Ralph’s death. That, however, does not demonstrate no knowledge. In any event, when the money (whatever amount) was withdrawn out of her bank account to close the condo transaction, she is deemed to know about it as it was done by her attorney (agent) pursuant to the General Power of Attorney that she executed in December 1989.

The simple matter is that in January 1990, Ralph owed Revenue Canada in excess of C$150,000 (in round figures). Ralph in his lifetime made available some of the funds to purchase a Florida condo, only the C$10,000 deposit and C$150,000 has been demonstrated. I conclude that Italia put up the rest of the money which she would have gotten from Ralph in prior years. If ownership of that condo had been in Ralph’s estate, Remo and his brothers as executors of Ralph’s estate have deliberately chosen not to liquidate the condo and pay Ralph’s indebtedness to Revenue Canada but to have the family in a broad sense have the use of the money at the expense of the Canadian taxpayers. Remo stated he did not know if the Corporation still exists. This is a very cavalier attitude to an asset which undoubtedly has an equity value in Canadian dollars, probably of at least $300,000. If this statement is true, then it can only be because he knows that Revenue Canada is entitled to all the equity or a major share of it.

Analysis

Based on these facts, there was a transfer of the money by Ralph in his lifetime to Italia with her full knowledge, which money, together with other of her funds were used to purchase the Florida condo title which rested in the Corporation, which she was the sole shareholder or who the Corporation held title as trustee for. On these facts, as I have found there is no need to go into the various legal arguments presented to the Court, the appeal is dismissed, with party and party costs to the Respondent.

Appeal dismissed.