Louis Landsman, in His Capacity as Executor of the Estate of Sam Landsman v. Minister of National Revenue, [1976] CTC 2017, 76 DTC 1025

Roland St-Onge:—This appeal is from a reassessment concerning the Estate of Sam Landsman who died on December 14, 1966.

In reassessing the said Estate, the Minister of National Revenue refused to include as liabilities one-third of an amount of $253,885.73 [sic] due by Louis Zbarsky and Sam and Louis Landsman to the Bank of Montreal. In addition to his one-third thereof, being $84,628, the late Sam Landsman owed another amount of $51,605.89 to the same bank at the time of his death. Besides refusing to deduct these two liabilities from the total value of the Estate, the Minister of National Revenue raised the value of the said Estate by adding to its assets shares that the late Sam Landsman had owned in 16 companies and by refusing to allow as bad debts loans that Sam Landsman had made to the said companies.

Here are the names of the companies with the value of the shares and the amounts of the loans:

As to the first liability of $84,628, the following documents were filed:

(1) Exhibit A-6 — A document dated May 7, 1954 and signed by Louis Zbarsky and Louis and Sam Landsman showing that they were jointly and severally responsible for the said debt of $253,888.73 to the Bank of Montreal.

(2) Exhibit A-7 — Judgment No 796524 of the Quebec Superior Court dated June 7, 1971, showing that Louis Zbarsky, Louis Landsman and the late Sam Landsman had to pay the sum of $253,888.73.

As the second liability of $51,605.89, the following documents were filed:

(1) Exhibit A-3 — Judgment No 759186 by Mr Justice Challies.

(2) Exhibit A-8 — Confirmation by the Bank of Montreal to the effect that the Estate was indebted to the Bank for the amount of $51,605.89 as of Feb 2, 1968.

At the hearing three witnesses were heard: Louis Landsman, brother of the late Sam Landsman, Mr S Raphael, a chartered accountant and auditor of the companies involved, and Michael Trépanier, assessor for the Department of National Revenue.

Mr Louis Landsman testified that his late brother Sam, Louis Zbarsky himself were shareholders in all the companies involved, each holding a one-third interest in each company; that his late brother Sam had an interest of 50% in Broadway Construction Co and had the responsibility of obtaining the financing for the erection of buildings, whereas Louis Zbarsky was in charge of the construction.

In the fall of 1966, it became difficult to obtain the necessary finances for the erection of the buildings by their different companies. Manhattan Dev Corp (hereinafter referred to as “Manhattan”) was erecting a large building in Montreal known as the Hamilton Building and was unable to complete it. He testified that his late brother Sam entered into negotiations to dispose of that building when he died. After the death of his brother, the witness learned that an offer to purchase had already been accepted by his brother. Consequently, he went through with the sale and thereafter “Manhattan” had no whatsoever at its disposal. To prove this fact a balance sheet was filed as Exhibit A-2.

Another company, Wentworth Development Corporation (hereinafter referred to as “Wentworth”), was erecting a shopping centre in Laval, the said project was financed by temporary loans. A judgment Justice Challies condemned the company to pay an amount of $400,000. His late brother tried, without success, to refinance the building and consequently after his death the said building was sold at a substantial loss. Financial Statement Exhibit A-4 was filed to show the loss.

Another company, Wentworth Development (Ont) Ltd, was erecting a building in Ottawa. Apparently an amount of $250,000 was due by the three partners and they had to sign a guarantee for that debt which was filed as Exhibit A-6. A Statement of Operation prepared on December 31, 1966 was also filed as Exhibit A-5 and shows a loss of $400,322.60. As already mentioned, a copy of a Judgment and a confirmation by the Bank of Montreal were filed to show that the Estate owed some $51,000 at the date of the death of Sam Landsman.

Upon cross-examination Mr Louis Landsman was shown Exhibits and A-8 and asked to explain why a promissory note which was the basis of the claim was signed in 1967. Apparently the promissory note was to prevent prescription and, according to Exhibit A-7, the co-debtors were sued but the plaintiff later dropped the action. He also explained that Lucky Investment Inc (hereinafter referred to as “Lucky”), in which his wife and Mrs Sam Landsman were shareholders, had lent $65,000 to “Manhattan” and that on February 1, 1966, the Hamilton Building (Exhibit R-1) was sold to “Lucky” for the sum of $3,250,000. He also testified that, one month after Sam’s death, “Lucky” sold back the Hamilton Building to “Manhattan” for the same amount and “Manhattan” sold it to Interprovincial Holdings for $3,485,000.

The witness was shown Manhattan’s 1966 balance sheet (Exhibit R-2) which indicates that, even if Manhattan did not own the Hamilton Building, it was still in the balance sheet for that year at a cost of $3,747,951.51 and on the 1967 balance sheet (Exhibit A-2) which reports a cost of $3,788,202.

Mr Louis Landsman explained that the increase in cost from 1966 to 1967 was due to the fact that the Hamilton Building was still under construction and that the transfer of the Hamilton Building between Manhattan and Lucky was done to protect the $65,000 loan.

Mr Sidney Raphael testified that the three main companies, ie Manhattan Development Corp, Wentworth Development Corporation and Wentworth Dev (Ont) Ltd, were engaged in construction but, because of the collapse of Atlantic Acceptance in July 1965, mortgage money became very scarce, and consequently the said companies faced financial difficulties. He also stated that Sam Landsman became very harassed by this situation and tried very hard to get the necessary finances elsewhere. According to the witness, after the collapse of Atlantic Acceptance, all the loans previously mentioned had no value whatsoever, and the surpluses in the companies found their way into the four major companies because of the numerous large losses. He further stated that the numerous companies could not repay their loans at the time of the death because they were all in financial difficulties. He admitted that the December 31, 1966 Wentworth balance sheets were not audited and explained that at the time the company could not afford a complete audit.

Mr Michael Trépanier testified that in 1970 he proceeded with the valuation of all the companies involved, the work in progress and the cost of the buildings. He could not find the relevant vouchers to establish the costs. He also verified all the cheques made by Manhattan for a sum of $2,900,000. Consequently, there was a difference of $800,000 between the cost of the building mentioned in the October 31, 1966 balance sheet and the cheques made by Manhattan. He also found that, at the time of the death, the Hamilton Building was registered at the Registry Office in the name of Lucky Investment Inc. According to those figures, he was of the opinion that there should not be any deficit but capital assets of $600,000. Consequently Manhattan was in a position to pay off its debts.

Counsel for appellant argued four points. With respect to the liability of $51,000, he claimed that this amount was due personally by Sam Landsman at the time of his death and consequently it was a valid liability of the estate.

As to the other liability of $84,628, he argued that there were 11 personal loans owed back to the estate which were lumped together in the same category; that a distinction should be made between persona! and intercorporate loans in order to appraise the value of the shares of private companies; that, because of the collapse of Atlantic Acceptance, Manhattan was unable to complete the Hamilton Building, which was sold at a loss; that consequently the shares of all the other companies had no value because Manhattan was not in a position to repay its loan to the said companies. According to him, at the time of the death, the fair market value of all the shares in these companies was nil.

He also argued that the Hamilton Building was sold at a price inferior to the cost and, if the said building was transferred to “Lucky”, it was only an “in and out” transaction to protect the $65,000 loan; that one should look at the fair market value at the time of the death, which means the price that could be realized for the shares and noi their face value; and that the surpluses in the companies were not considered and could not be taken into consideration to appraise the shares.

The other counsel for appellant argued that the valuation of the shares of a private company is quite different from that of a large public company which is listed on the Stock Exchange. He referred the Board to the case of Taylor Estate v MNR, [1967] Tax ABC 555; 67 DTC 405; and read the following extract from pages 557 and 406 respectively:

However, as Sogemines’ offer to purchase is on record, I agree with the respondent’s view that what a purchaser was willing to pay for the assets involved in the open market is a better guide to their true value than a computation of the shares’ value arrived at by taking the earnings into account, or attempting to appraise each separate class of assets.

He claimed that the same situation exists in the appeal at bar because one could take into consideration the offer from third parties to buy the buildings which were eventually sold at a loss. As to the accounts receivable, he referred to the same Taylor case (supra) in which the deceased had loaned $15,000 to her son on a promissory note. It was decided therein that, because it was not collectable against the son, it could not be considered as an account receivable and its value was nil. Similarly, in the case at bar, the accounts receivable could not be paid by the companies and consequently they had no value.

Counsel for the respondent argued that one-third of the debt, being $84,628, could not be allowed twice. Because it had already been taken into consideration as being a liability of Wentworth, it could not be allowed as a liability of the estate. If so, because the late Sam Landsman had an interest in Wentworth Development Corporation, the value of the shares therein would have to be increased in proportion to his interest. He also referred the Board to section 5 of the Estate Tax Act which says that one computes the aggregate value of the estate and deducts therefrom certain debts existing at the time of the death. Then he referred to section 6 of the same Act which reads as follows:

6. Notwithstanding section 5, no deduction may be made under that section

(f) for any debt incurred that became unenforceable either before or after the death of the deceased as a result of the operation of any statute or law limiting the time for bringing action thereon, and that has not been actually and bona fide paid.

He contended that because of Article 2260(4) of the Civil Code, this debt, being a commercial matter, is prescribed after a period of five years and this is the reason why the amount was not allowed.

As to the $51,000 liability, he referred the Board to what is now subsection 30(1) of the Estate Tax Act (RSC 1970, E-9) to say that, because the late Sam Landsman was a minority shareholder in a related group, he is, for the purposes of the Estate Tax Act, considered as a majority shareholder. Having said that, he referred to a list of loans payable and the related companies to which they were owed. Manhattan owed loans in the amount of $249,000 to Broadway Construction Co, Colony Dev Corp, Newtrend Dev Corp, Twin Development Corp, etc. On the other hand, the late Mr Sam Landsman’s loans receivable are due from the companies to which one of the main companies owed money. Consequently, respondent’s counsel submitted that, if the loans from Manhattan are considered to be bona fide, the late Mr Sam Landsman’s accounts receivable must also be bona fide.

As to the valuation of shares, he claimed that the fact of having no liquid assets is immaterial, and that, if the assets equal the liabilities, the loans receivable by the late Sam Landsman are valid.

Having shown that the financial statements were unaudited, counsel for respondent referred to Manhattan’s balance sheet of October 31, 1966, which indicates a building cost of $3,740,000. At that time, as previously mentioned, the Hamilton Building was no longer in the name of that company. It was held by “Lucky”, having been sold for $3,250,000. It follows that income tax-wise, when the sale price in those circumstances is less than the fair market value, the latter is deemed to have been received. According to him, $3,740,000 should appear as an asset for Manhattan, which constitutes a spread of $500,000 between the transfer price or the sale price and the declared cost. Besides this discrepancy, when Mr Trépanier visited Manhattan, he never found any vouchers to substantiate the cost but only cheques for an amount of $2,900,000, which shows an even greater spread of $800,000 (taking into consideration the declared cost of the building). In other words, there is a company by the name of Manhattan, the husbands’ company, which absorbs the cost of a building which belongs to the wives.

Counsel for respondent terminated his argument by saying that because the appellant cannot substantiate the cost of the buildings the Minister cannot let him take a loss, and without a loss there is no deficit and the loans can be paid.

According to the evidence adduced, the main question at issue is whether the respondent was right in refusing to allow the estate to take a substantial loss because there was no evidence to substantiate the cost of the Hamilton Building. As already stated, different figures were mentioned concerning the said building:

(1) $3,740,000 is indicated as a building cost in Manhattan’s balance sheet of October 31, 1966 (although the building had been in Lucky’s name for eight months).

(2) $3,250,000 (being the sale price of the building by Manhattan to Lucky on February 1, 1966) and

(3) $2,900,000 (being the cost of the building substantiated by cheques only).

As may be seen, those figures do not reflect favourably the appellant’s transactions and there is no evidence whatsoever on its behalf to explain why Mr Trépanier did not find any vouchers but only cheques for $2,900,000. There is something strange about this whole affair, and the appellant, which had the onus to show that everything was carried out aboveboard, failed to do so. The Board is far from satisfied with the explanations given by the appellant’s witnesses. For instance: there is no evidence to prove that the Hamilton Building was sold for less than its cost. As a matter of fact, there were no vouchers to substantiate the cost of the said building. Also there was no expert evidence to enable the Board to appraise the value of the shares. It is obvious that without a loss there is no deficit and that Wentworth can pay its debts to the numerous companies which, in turn, can repay their loans to Mr Landsman’s estate.

It follows that at the time of the death the loans were valid and the shares in the 16 companies were worth their face value.

As to the liabilities, taking into consideration sections 5, 6 and 30 of the Estate Tax Act, no deduction should be made because those liabilities did not become “unenforceable either before or after the death of the deceased”.

As to the liability of $84628, there is evidence to show that it had already been taken into account as being a liability of Wentworth, and consequently it could not be allowed as a liability of the estate because the Wentworth shares were valued by taking into consideration the total liability of $253,885.73 as being that of the company. If the respondent were to allow the estate a deduction of $84,628, he would have to increase the Wentworth shares in the same proportion because the estate cannot have it both ways. As a matter of fact, it was more consistent for the respondent to proceed the way he did.

As to the other liability of $51,605.89, a promissory note was signed in 1967 after the death of the deceased and later the plaintiff which had sued the co-debtors dropped its action against them.

It is clear from the above evidence that both the liabilities of $84,628 and of $51,605 were enforceable either before or after the death of the deceased and there is no evidence to show that they were statute-barred.

Consequently, the case of Taylor Estate (supra) cited by the appellant has no application whatsoever in the case at bar.

For these reasons the appeal is dismissed.

Appeal dismissed.