Heselmann v. R., [1999] 4 CTC 2777

Beaubier T.C.J.:

This appeal pursuant to the General Procedure was heard at Toronto, Ontario on September 20 and 21, 1999. The Appellant testified. Her counsel called Richard Perdue, a lawyer and Stephen Clifford, a quantity surveyor who gave expert evidence. The Respondent’s counsel called the auditor, Vijay Nayyar.

In 1995 the Appellant, who has been a solicitor since 1988, claimed an allowable business investment loss on account of her shares in JMP Land Development Limited (“JMP”). The loss was claimed on the basis that it had occurred in 1991 when JMP became insolvent. She also placed the cost of acquisition of her shares at $140,000. She had 40 of 100 issued shares in JMP.

At the opening of the hearing, Respondent’s counsel stated that the appeal had now been reduced to two issues:

1. Did the Appellant own the shares in question?

2. What was her cost of the shares?

The Appellant’s father, Julius, was a drunk who physically beat his wife and the Appellant. In 1971 her parents separated. They had two girls — the Appellant, born in 1958 and her sister, born in 1968. In 1973 the Appellant moved into an apartment on Oriole Road, with her father. He was a small developer and builder in Toronto and the apartment was in a building that he had purchased to sell or develop in due course.

The Appellant worked for her father showing rooms to prospective tenants, fixing premises, advertising and leasing throughout her residency with him. She was not paid any salary. She finished high school. In the summers of 1977 and 1978 she worked in a delicatessen he operated from a building he owned at Yonge and Dundas without any salary.

The Appellant testified that her father had always promised that he would pay for her university and that was why she was not paid any salary. In 1976 she began her B.A. course at Yale University in the U.S.A. She graduated in 1981. She returned to Toronto and lived with her father and worked for him for the summers of 1976 — 1979. From the summer of 1978 through 1979 the Appellant attended the Sorbonne in France at her father’s urging. She returned in November, 1978 for a month and a half to work in the delicatessen. For two months, commencing in June 1979 she again worked for her father. That fall she split from her father and returned to Yale.

Her father had paid for the Appellant’s first year and one half at Yale. Thereafter, he would not pay. In the fall of 1979 he stated that he wanted her to work for him. The Appellant borrowed a total of $30,000 Canadian from Yale and through a loan her mother guaranteed at the Royal Bank of Canada. With this money coming in and by working while attending university, she completed her B.A. and graduated at Yale. She paid these loans off in 1991 or 1992.

The Appellant’s father attended her graduation in 1981 and persuaded her to return to Toronto and work for him. She did. She was paid a salary of $1,000 per month after Yale. At first she lived in one of his apartments on Carlton Street. In 1982 she moved in with her father on South Drive in Rosedale where she remained until 1984. Once again, her father abused her.

In the fall of 1983 the Appellant began attending law school at the University of Toronto. During early 1984 there were a few conversations between the Appellant and her father in which they discussed his failure to pay for her university. In one of these he promised her the “JMP shares” to get her money back. In June, 1984 the Appellant’s father beat her and she left Toronto and lived with friends in Montreal. She finished her law degree at McGill University in Montreal.

JMP was incorporated by a lawyer named Perdue on July 9, 1979 (Exhibit 32). In April, 1984 the Appellant, her father and a family friend, Dick Perdue, attended in the law office of Mr. Whittaker in Toronto where the Appellant, Dick Perdue and Darragh Elliott initiated JMP as an active corporation. They signed various documents respecting JMP. She signed a shareholders agreement in which she promised her father’s services to JMP free of charge in consideration for 40 shares issued to her. These services were in large measure provided by her father in the years that followed. The other two shareholders, Dick Perdue and Darragh Elliott, were to provide JMP with the money. JMP was proposed to acquire and develop property at 121 Parliament Street and adjacent properties on both sides of it in Toronto.

On July 6, 1984 the Appellant and her father had another meeting in a public place. In the course of the meeting Julius’ promises to pay her fees were discussed. Julius promised to pay them. She pointed out that he had not to date. He told her to put something in writing and he would sign it. She did so then and there and he signed it. It reads:

1 owe Christine Heselmann $140,000 for her losses on the farm, 300 Wellesley, and 2 Oriole Road, including estimated legal fees to be incurred by her in the litigation from those projects.

“J. H.”

Julius Heselmann

July 6, 1984

During the same meeting the Appellant drew up and signed Exhibit A-3 which reads:

TO: JULIUS HESELMANN

In consideration of 40% of the shares of JMP to me and the performance by you of all services required by JMP without compensation by JMP as described in the JMP shareholders’ agreement of April 20, 1984, I release you from the debt you owe me of $140,000 for the losses incurred by me at the farm (Georgina), 300 Wellesley (Toronto), and 2 Oriole Road (Toronto), projects, and the estimated legal expenses to be incurred by me in the litigation arising from these failed projects.

1 confirm that I will pay to you an amount equal to any net recovery I may receive in the litigation referred to above from any net return to me from my 40% shares in JMP.

6/7/84

Christine Heselmann

The $140,000 is made up of the following three sums:

The Appellant testified in detail concerning these sums. Her testimony satisfied the Court that these sums were owed to her by her father. The essential facts of the University expenses have been reviewed and the Court finds that Julius did owe the Appellant $30,000 on this account when her university had been completed.

The tale of the Oriole, Wellesley and Farm monies of $100,000 emphasizes the almost pathological relationship between the Appellant and her father. The first $24,000 was advanced by the Appellant to permit her father to renovate #2 Oriole Road so that it could be sold to Dr. Zaputovich. This deal fell through and the property was sold by the mortgage company on a power of sale. The further sums of $10,000 and $30,000 were monies that the Appellant borrowed from her relatives in Germany which she lent to her father. The first $10,000 was lent to him in June of 1982 to assist in purchasing a farm in the Appellant’s name which was lost under a power of sale. The $30,000, another $10,000 she borrowed from Eilers and monies she borrowed on an operating line of credit together with earnings from third parties were invested by the Appellant in two improvement contracts which were undertaken by Julius under the Appellant’s name on properties at 300 Wellesley and #2 Oriole (which Julius had lost under power of sale) for the subsequent purchasers. Christine’s deal with her father was that he would repay her loans on the projects and use part of the projects’ profits to repay her student fees. Both projects failed. The final $10,000 was their joint estimate of legal costs which he would pay her. The reason these projects were not in Julius’ name is the constant litigation in which he was engaged with suppliers and creditors.

These sums were calculated by Julius and Christine for the purposes of third party litigation before their July 6, 1984 meeting. At that meeting Julius committed himself in writing to Christine for the first time and gave Christine Exhibit A-2. Christine in turn gave Julius Exhibit A-3. They constituted the written confirmation of Julius’ promise respecting the JMP shares which he made before Christine signed the corporate documents in April, 1984.

It is not suggested that all of this was logical. However, the relationship between Julius and Christine was neither normal nor rational. The findings of the Court are made on the basis of Christine’s credibility. Her testimony is believed. She shed tears during both her examination in chief and her cross-examination. One long answer in cross-examination was so emotional that the Respondent’s counsel required an adjournment to collect his thoughts.

On two occasions, during sharply contested litigation, Christine was found by the Ontario Supreme Court to own her JMP shares in her own right (see Exhibits A-9 and A-14). On her testimony and the evidence reviewed, this Court finds that she owns the JMP shares in her own right and that they were not, in any way, owned by Julius Heselmann.

Christine acquired the shares from JMP in return for Julius’ services. Pursuant to his commitment made before April 1984, they fixed the value of those services at $140,000 by written documents exchanged by them on July 6, 1984. This value, and the values of the financial services of Messrs. Perdue and Elliott were not recorded in JMP’s balance sheet. It may be that their contributions cannot be quantified, but the services which Christine provided were quantified by Julius and Christine. Their calculations constituted the value of service that Christine rendered to JMP in return for becoming a shareholder.

It is clear from Christine and Richard Perdue’s evidence that Julius did not keep records. His history is that he never kept records or made records. He paid wages in cash and he paid many suppliers with cash. The evidence also indicates that Julius Heselmann did not put things in writing. He did not pay creditors and he committed and counselled fraudulent acts. These practises of Julius verify Christine’s testimony respecting her father’s various promises to pay for her tuition, his failure to meet these commitments and other commitments to her and the lack of any writing from him to support her testimony. They also confirm his obviously reluctant “J.H.” on Exhibit A-2.

The Court accepts Christine’s evidence respecting the cost of her shares in the amount of $140,000. She offered supporting documents. The fairness of the figure from a market point of view was verified by Mr. Clifford. Moreover, the explanation that she filed for an ABIL in 1995 rather than 1991 is accepted for the reasons she gave, but particularly because that is the year in which she first received an accountant’s advice respecting the availability of an ABIL when JMP became insolvent. She had previously believed that she had to dispose of the JMP shares before claiming a loss.

Therefore the appeal is allowed in full and this matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.

The Respondent’s counsel reduced the time of trial by restricting the dispute to the ownership of shares and the cost of the shares at the opening of the hearing. However, Christine’s ownership of the JMP shares was determined on two separate occasions by the Ontario Supreme Court by different judges in Exhibits A-9 and A-14. In this Court’s view, that issue should have been concluded by those determinations before reassessment. There was no allegation by the Respondent of a subsequent discovery of fraud whereby Christine did not own the shares. The issue of ownership took up half of the time this required in Court and it coloured the litigation from its beginning. For this reason, the Court awards costs to the Appellant in the fixed amount of $15,000.

Signed at Ottawa, Canada this 28th day of September 1999.

Appeal allowed.