Garden Investments LTD v. Minister of National Revenue, [1974] CTC 2013

The Chairman (orally: September 11, 1973):—These appeals by Garden Investments Ltd are against reassessments of the Minister of National Revenue for the taxation years 1968, 1969 and 1970.

It was agreed at the outset that the evidence applicable to the appeal for any one of the three years in question will be the evidence for all, and the outcome of the appeal in any one year would be the same as in the other two years.

The appeals arise out of the interpretation of losses that can be carried forward under paragraph 27(1 )(e) of the Income Tax Act, and the appellant has claimed such losses that occurred in the year 1965 as a deduction from its income for each of the years under appeal. The claim has been disallowed by the Minister, the Minister basing his case mainly on the fact that the appellant cannot qualify by virtue of subsection 27(5a) of the said Act.

The appellant company was incorporated as a Manitoba company on April 2, 1958 with a general investment clause in its objects. On the evidence of Mr Levin, who is president and was a 50% shareholder at all the material times up to 1965, it is clear to me that from 1958 on the company was engaged in building, renting and investing in investment properties. The building aspect was necessary, of course, to obtain the buildings to rent. I presume the company carried on its own construction rather than purchasing ready-built buildings because it owned raw land. Difficulties arose, apparently, in 1964, and as is evidenced by an agreement entered into by Garden Investments Ltd, the appellant, with City Lumber Company, the latter company, which was controlled by Mr Levin, acquired the assets, or the interest, in Garden Investments Ltd, which included the writing-off of some $116,000 in debts and the assumption of the mortgages on the apartment buildings in question.

The actual date of the document filed as Exhibit R-1 is difficult to pin down, but I am satisfied in my own mind, by reference to the schedule and from listening to the evidence of Mr Levin that the document was effective at least as of the first day of December 1964, and, in any event, the fiscal year of the company ends on March 31 and its financial statement shows that on March 31, 1965 all the assets of the appellant company had been disposed of.

The evidence further indicates, by respondent’s exhibits R-2 and R-3, that the company had no assets in the 1966 or 1967 taxation years. The evidence of Mr Levin is that he was not prepared to continue the business. The other 50% “partner”, Mr Golden and Garry Builders Ltd, the company vehicle through which Mr Golden operated, was not only unable to meet its 50% share of the operating costs, but, further, it was not able to meet its obligations with respect to other outstanding debts.

Mr Levin says that he was not prepared to do anything in a formal business way to affect or commit the appellant company in any way between January 1, 1965 and August of 1967, when he acquired, and had registered in his name, the balance of the shares of the appellant company. This, he indicated at the time he gave evidence, was a sound business approach to the proposition. Whether or not it was a sound approach from an income tax point of view remains to be seen.

As pointed out by counsel for the appellant at the outset, the question is whether or not this company at any time ceased to carry on business. In addition to invoking the provisions of subsection 27(5a), the respondent has argued that this company was not carrying on the same business in the taxation years 1968 and 1969 and 1970 that it was carrying on in the year that the loss was incurred, but I have indicated that I do not accept that, because by their own evidence and in the documents they have filed and in the evidence of Mr Levin, it is clear to me that this was always intended to be and was a rental company for some years prior to the year 1965 and continued to be one after the purchase of some duplexes some time after March 31, 1967, which would fix the acquisition and the reactivation, if there was a reactivation, of the company in its 1968 fiscal year.

What I must decide is whether or not the company ceased to do business and discontinued its operations, within the meaning of the Income Tax Act, between January 1, 1965 and some time after April 1, 1967 because, as I have said, there is no doubt in my mind, and I find it as a fact, that in 1968, 1969 and 1970 it was carrying on the same business as it carried on in the fiscal year 1965. Therefore I must look at the evidence presented by the appellant, to which I have referred, as well as at the documentation contained in the many exhibits filed.

I have been inundated by case law, upon which I make the comment that, except in cases where an overriding principle is clearly established, in tax law as in any other type of law, the cases depend primarily on the facts. Although the cases are of some influence on given points, I think that this case depends entirely on its own set of facts, and with those facts I must come to my conclusion.

As I have said, it is clear from the documentation and from the oral evidence of Mr Levin that at the end of the 1965 fiscal year there was a terminal loss of $9,000 and, in round figures, because the figures do not really matter in the interpretation of the section, a loss of about $10,000 existed after the assets had been disposed of.

It is urged upon me by the very able counsel for the appellant that the appellant merely became inactive for a period of time before the difficulties between Garry Builders and City Lumber could be ironed out and formal control passed to Mr Levin. He says, in effect, that this was a prudent manner for Golden and Levin to settle their differences, and that neither they nor the appellant company should be penalized because of the manner in which it was done, which was a much more satisfactory solution than if they had each dug in their heels and resorted to declaring a formal bankruptcy of the business.

The facts are inescapable that, from December 1964 until some time after March 1967, the company owned nothing with which to do business, and I have before me a copy of Webster’s Twentieth Century Dictionary, volume 1, which I happen to have on hand as a result of a case yesterday, where “business” is described as:

Employment, occupation, profession, calling, vocation, means of livelihood, that which occupies the time, attention and labour of men for the purpose of profit or improvement.

If I am to take the ordinary, everyday meaning of words in interpreting the Income Tax Act—and I think I must, because, complicated though it may seem, it is alleged to have been written for the layman to understand—then by no stretch of the imagination can I find that this company was carrying on business in the period that I have outlined, because it had nothing to sell, it had nothing to rent, and nothing with which to produce profit or improvement for itself, because it had disposed of all its assets. Mr Levin had signed a corporate income tax return (R-3), which shows the nature of the business as “nonoperating”, and he says he signed that, as I am sure he did, because his auditors put it before him, and he signed it without questioning it because he assumed that they knew what they were doing. I think I am entitled to make the same assumption, as the balance sheets attached to R-2 and R-3 for 1966 and 1967 as well as the balance sheet for the 1965 taxation year show no assets of a nature to assist this company in producing revenue or in carrying out the ordinary everyday definition of business that I have just given.

I cannot on all the evidence find that the mere keeping alive of this company by carrying out the formalities required by the Provincial Companies Branch, such as the filing of annual information returns, or the turning of the company from a public into a private company, or doing the normal things that would keep it from losing its charter, are sufficient, either individually or taken as a whole, to overcome the requirement that the Income Tax Act places upon those who would take advantage of the loss provisions of section 27.

In my view, this business was discontinued for a period of time at least, between January 1, 1965 and April 1, 1967 and therefore the appeal must fail. It is therefore dismissed.

Appeal dismissed.