Bell T.C.J.:
1 The taxation years under appeal are 1987, 1988 and 1989.
Issues:
2 The issues are:1. Whether, under subsection 15(1) of the of the Income Tax Act (the “Act”), a benefit was conferred by Billvest Ltd. (“Billvest”) on its sole shareholder, the Appellant, in the total amount of $1,039,243,
2. Whether the Appellant is entitled to deduct the amount of $500,000 in computing his income for his 1988 taxation year,
3. Whether penalties were property imposed under subsection 163(2) of the Act, and
4. Whether the Appellant is entitled, under section 120.2 of the Act to a minimum tax carry-over in respect of his 1989 taxation year.
3 In a STATEMENT OF AGREEMENT FACTS filed at the commencement of the hearing, the following statement was made,
The Appellant's argument set out in paragraph 3 of the Reasons portion of the Notice of Appeal, should prevail if the appeal is allowed in all other respects. It is the position of the parties that the disposition of this issue shall follow disposition of the other issues in the case, that is, the minimum tax carry-over should be allowed if the appeal is allowed with the consequence that the Appellant Billingsley is required to pay minimum tax in the 1987 and 1988 taxation years.
Accordingly, it appears that the resolution of this issue will follow the decision in the other matters.Related Appeal:
4 The evidence in this appeal applies to the appeal of Sunroot Energy Ltd. (“Sunroot”). Although the Reasons in this appeal will apply substantially to Sunroot, a separate statement of Reasons for Judgment will issue simultaneously with these Reasons.
Facts Respecting Issue No. 1:
5 Billingsley (the “Appellant”) was the principal founder of BCM Technologies Ltd. (“BCM”) in 1980. It built a chemical facility whose success led to Canadian Occidental Petroleum Limited (“COPL”) deciding to purchase all outstanding shares of BCM. Although the sale price was determined as $16,000,000, the net amount paid was reduced to $14,504,962 because of the obligation to pay the difference to another bidder who had an option to purchase shares. A working paper allocating that sum among the BCM shareholders on the basis of shares owned, allocated the sum of $1,659,439 to Billvest and $880,997 to the Appellant. Because Billvest owned 20,000 Class C shareswhich were worth $10 per share, its entitlement was increased by $200,000 to $1,859,439. Therefore, that sum plus the amount allocated to the Appellant totalled $2,740,436.
6 The Appellant testified that he was not satisfied with the foregoing allocation because he had to give COPL representations and warranties which other shareholders would not do. He stated that “COPL wanted me on the hook”. He testified that in respect of the purchase of the shares of Sunroot from BCMhe had to give an indemnity to COPL and BCM. He assumed BCM's obligations under a project management agreement. In addition, as a director of Sunroot, he assumed he could possibly become liable in respect of claims arising from environmental damage caused by Sunroot. He also assumed all of BCM's obligations with respect to funding the Sunroot limited partnership (“partnership”). The Appellant concluded that because he was providing warranties and covenants and assuming other potential obligations which could be substantial, he was entitled to a larger portion of the sale proceeds. Therefore, he caused Billvest, in a document signed by him, to send a notice to THE SHAREHOLDERS OF BCM TECHNOLOGIES LTD. That document stated that he was prepared to accept the offer from Canadian Occidental Petroleum Ltd. to the shareholders of BCM for the purchase of all of the shares of BCM as set forth in COPL's letter offer dated November 8, 1987. This Billvest document stated
I am prepared to accept the Offer on behalf of Billvest Ltd. subject to the following:
Billvest will sell to Canadian Occidental all of the Common Class ‘A’, ‘B’, ‘C’ and ‘D’ Shares of BCM owned by it for $550,000.00 which is to be paid to Billvest on closing in 1987.
7 On the same day Billingsley wrote to THE SHAREHOLDERS OF BCM TECHNOLOGIES LTD., saying,
I am prepared to accept the Offer subject to the following:
I agree to sell all of my Class ‘A’ and Class ‘D’ shares to Canadian Oxy for $70,000.00 which is to be paid to me on closing in 1987.
I agree to sell all of my Class ‘B’ shares to Canadian Oxy for $2,112,477.00 payable as follows:
$ 422,495.00 on closing in 1987, and $1,689,982.00 on or before January 31, 1988.
Acceptance of the Offer by me is conditional upon the above allocation.
He then entered into an agreement with Billvest, wholly owned by the Appellant, reciting the Appellant's acceptance to assume BCM's liabilities and responsibilities with respect to Sunroot and the partnership and also Billvest's unwillingness to accept any obligations or responsibility with respect thereto. That agreement provided that Billvest would agree to sell its shares of BCM to COPL for $550,000 and Billingsley agreed to indemnify Billvest with respect to all potential actions relating to the sale of BCM to COPL and relating to the activities of Sunroot and the partnership.8 It appears that Billvest received approximately $550,196 as proceeds of disposition and the Appellant received $2,190,240, the total of these two sums being $2,740,436.
9 The total sale price was receivable in 1987 and 1988. The Minister of National Revenue (“Minister”) assessed the Appellant on the premise that all amounts received by him in excess of his allocated share of sale proceeds, namely, $880,997 and the sum of $550,196 paid to Billvest, in the words of the Reply to the Notice of Appeal,
...constituted benefits conferred on the Appellant qua shareholder in his 1987 and 1988 taxation years, respectively;
The total of the above two amounts, namely $1,431,193, when subtracted from the sale proceeds of $2,740,436 leaves $1,309,243, the amount assessed as a subsection 15(1) benefit. The apparently reconstituted Notices of Reassessment for the years in question unfortunately do not explain adequately the basis of the assessment. The irritating failure of the Department of National Revenue to issue comprehensive Notices of Assessment and Explanations of Change is a self-perpetuating phenomenon which leaves anyone reviewing same with more questions than answers. When will the Minister begin informing a taxpayer, in the reassessing documents, precisely as to how and why a reassessment is made? One interested observer of such documents is the Court which should be able to examine reassessments and know exactly what amounts are in issue, on what basis they are computed and why they were made. A schedule attached to the Reply to the Notice of Appeal computes, without clarity, the sums said to be, in each of 1987 and 1988, an “Appropriation from Billvest Ltd.” The amount for 1987 was $158,369 and the amount for 1988 was $1,150,884, the total being $1,309,243. I refer to the lack of description of how these amounts were treated by the Minister because Respondent's counsel submitted in her Book of Authorities a copy of subsection 15(1) which does not apply to the 1987 taxation year and does not apply to the entire 1988 taxation year. The Court should not be left guessing about the appropriate tax legislation sought by the Respondent to be applied to the issues under examination.Analysis and Conclusion:
10 The photocopy of subsection 15(1) presented by Respondent's counsel, which was substituted by 1988, c. 55, s.8 applicable with respect to benefits conferred after June 1988 reads, in part, as follows:
Where, in a taxation year, a benefit has been conferred on a shareholder...the amount or value thereof shall...be included in computing the income of the shareholder for the year.
The former subsection read, in part, as follows:Where in a taxation year(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,
(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or
(c) a benefit or advantage has been conferred on a shareholder by a corporation,
the amount or value thereof shall ... be included in computing the income of the shareholder for the year.
There was no evidence as to when the 1988 payment was received and no submission was made with respect to what subsection of the Act applied. Accordingly, it is not possible to know which of the foregoing subsections is applicable. The result, however, is the same in each case.11 Appellant's counsel submitted that the allocation was altered and an increased amount was received by the Appellant by virtue of his having provided the warranties, representations, covenants and indemnities. He referred to section 42 of the Act which reads as follows:
In computing a taxpayer's proceeds of disposition of any property for the purposes of this subdivision, there shall be included any amount received or receivable by the taxpayer as consideration for any warranty, covenant or other conditional or contingent obligation given or incurred by the taxpayer in respect of the disposition, and in computing the taxpayer's income for the taxation year in which the property was disposed of and for each subsequent taxation year, any outlay or expense made or incurred by the taxpayer in any such year pursuant to or by virtue of the obligation shall be deemed to be a loss of the taxpayer for that taxation year from the disposition of a capital property.
He then submitted that the additional proceeds received by the Appellant should be included as part of the proceeds of disposition of the shares of BCM. He reasoned that if two taxpayers are selling property, one not giving warranties and one giving warranties, then the taxpayer providing warranties is entitled to a greater price. He submitted that, by reason of subsection 4(4) of Act, no other provision of the Act could apply to increase the Appellant's income as a result of the share sale. Accordingly, in his analysis, subsection 15(1) could not apply to include the amount assessed.12 I cannot accept that argument. Section 42 does not apply in the present circumstances. It seems intended to apply to situations where a vendor receives consideration from the purchaser for warranties or like undertakings. That section requires the inclusion of “any amount received ... as consideration for any warranty...”. There is no evidence here to support any submission that that was the case. It is implicit in the evidence to which I was referred that COPL paid all amounts that were received by the Appellant. The Appellant controlled Billvest. Accordingly, Billvest had no choice but to do the Appellant's will. The Appellant stated that he received no tax advice respecting the capital gains deduction claimed by him. Such deduction is available to individuals but not to corporations. It is reasonably inferred that the Appellant must have known about that deduction because he took advantage of it. The amount allocated to Billvest on the basis of shareholding entitlement was reduced from $1,859,439 to $550,196. This sum is almost equal to its adjusted cost base of the shares of BCM shown on the aforesaid schedule as being $549,948. The agreement between the Appellant and Billvest respecting the allocation of $550,000 to Billvest as share sale proceeds was wholly the decision of the Appellant. The Appellant owned all the shares of Billvest. He clearly caused Billvest to agree to payments being made to him.
13 Appellant's counsel made an alternative submission as to why the assessment was incorrect. He stated that the Appellant
could have been in almost the exact same position if he had gone along with the allocation of the proceeds that had supposedly been agreed upon by the other shareholders.
He discussed the concept of tax integration and came to the conclusion that had the purchase price been paid to the Appellant and Billvest as initially computed the tax result would have been generally the same as that sought by the Appellant filing his income tax return as he did. The Appellant cannot succeed with this argument. The Courts have been clear that the acts of a taxpayer, not the possible acts of a taxpayer, are taken into account in determining taxability.14 I conclude, with respect to the first issue, that subsection 15(1) of the Act, in either form set forth above, applies to the Appellant and that the reassessment in this regard must stand.
Facts Respecting Issue No. 2:
15 The Appellant testified that he had, some substantial time before the taxation years in question, purchased a farm, grown corn and built up and sold a purebred Charolais herd. He also stated that he had developed Jerusalem Artichokes, a member of the sunflower family, whose unique properties were thought to be the basis for production of ethanol. Specifically, he had developed eighty varieties of these Artichokes, some as high as eighteen feet.
16 In 1982, he and his father founded Sunroot. He said at that time that the Government of Canada was on a crash course to explore new sources of energy and that they had been asked to do research using Jerusalem Artichokes. Sunroot was formed to receive an initial grant of $250,000. He stated that BCM acquired 75% of Sunroot in 1985. He also said that Sunroot was the general partner of a limited partnership formed in 1986 to finance further developments in fuel (ethanol) and to build a pilot plant. Meanwhile, he continued the farming operation. He testified that they had a farm loss followed by farming income of $200,000 from the sale of Artichokes. They were sold to Sunroot whose intent was to plant them near the potential ethanol plant location. He said that the Ontario Government would be subsidizing this feed stock operation. The Appellant also said that he rented land from his brother and that his plan was to grow Jerusalem Artichokes on that land. He stated that in the spring of 1988 the partnership decided not to build a plant for Jerusalem Artichokes but for a more sure method using corn. He stated that this would be detrimental to his sale of Jerusalem Artichokes and he therefore agreed to provide services to gain information respecting the design of a plant for Jerusalem Artichokes so that he could enhance his chances of selling same. He entered into an agreement with Sunroot to this end. Sunroot agreed to search for business opportunities for the purchase of existing ethanol plants in the U.S.A., to review sites for possible plant construction in the U.S.A., and to study the technical feasibility of an ethanol plant based on Jerusalem Artichoke feed stock, et cetera. In exchange, the Appellant had agreed to pay $250,000 to Sunroot for those services. The agreement also provided that if Sunroot began construction of its proposed corn-based ethanol plant in 1988, it would study and review the process design and material, mass and balances and provide the Appellant with such information usable in a corn-based ethanol plant in the U.S.A. If those conditions were fulfilled before December 31, 1988, the Appellant agreed to pay an additional $250,000 to Sunroot.
17 Appellant's counsel produced a Confidential Offering Memorandum dated May 24, 1988 respecting the partnership formed for the purpose of conducting scientific research and developing the engineering and technology necessary to determine the commercial viability of manufacturing fuel-grade ethanol from Jerusalem Artichoke tops. The business of the partnership was amended to include the construction of facilities for the production of industrial, food and fuel-grade ethanol from Jerusalem Artichoke tops, corn and other sources of biomass. It provided further that the net proceeds of the offering would be used to assist the financing of the acquisition of land for, the purchase of equipment for, and the construction of a plant for the commercial production of, industrial grade ethanol with an initial capacity sufficient to produce nine million litres of ethanol per year. Counsel also produced a CROSS LICENSE AGREEMENT made on April 26, 1988 between the Appellant and DELTA-T CORPORATION in Virginia, U.S.A. where the Appellant acquired the exclusive right to market its technology for MSED MOLECULAR SIEVE ETHANOL DEHYDRATORS in relation to Jerusalem Artichoke production of ethanol in Canada. He also entered into a joint venture agreement as of June 29, 1989 with Delta-T Corporation respecting the development and commercial exploitation of Jerusalem Artichokes and technology and know-how with respect to the production of fuel-grade ethanol. Other activities with respect to this subject matter were conducted by the Appellant and various other persons.
18 The Appellant paid the $500,000 above referred to and deducted that sum in computing his income for the 1988 taxation year. The Minister assessed him disallowing the deduction of that amount.
Analysis And Conclusion Respecting 2nd Issue:
19 I accept the Appellant's submission that this amount is properly deductible. The Appellant was, understandably, seeking to establish a market for Jerusalem Artichokes which he had been producing in his farming operation for a number of years. Respondent's counsel submitted that those costs were not associated with any business which was already being carried on by him and which was a source of income to him. That submission, having regard to the evidence which was not challenged and which I accept, is groundless. He was simply seeking to find a market for the very product that the business he had conducted for some time was producing.
Facts Respecting Issue No. 3 - Penalties:
20 The Minister assessed penalties under section 163(2) of the Act. That subsection provides that
Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under the Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer ... filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of...
I have absolutely no hesitation in concluding that the Appellant is not subject to a penalty under this subsection. There was clear disclosure of the sums of money which were received by him and by Billvest from COPL. The Minister may not have liked the allocation made by the Appellant but that in no way can be categorized as an activity which falls under the penal provisions of subsection 163(2). The imposition of this penalty, given the extremely heavy penal nature of the assessments of the Appellant and Billvest, was aggressive and unwarranted.Facts Respecting Issue No. 4:
21 As stated initially, this issue is to be resolved upon the outcome of the other three issues. No submission having been made other than what was contained in the Agreed Statement of Facts, it is left to the Minister to make the correct determination based upon the other conclusions in these Reasons.
22 The result of the foregoing is:(a) The Appellant has received a benefit or an appropriation within the meaning of subsection 15(1) of the Act to the extent of $158,359 in the 1987 year and $1,150,884 in the 1988 taxation year;
(b) The Appellant is allowed the deduction of $500,000 aforesaid in his 1988 taxation year;
(c) The penalties assessed must be deleted;
(d) The Minister will be directed to make an appropriate assessment with respect to minimum tax carryover for the 1989 taxation year based upon the other conclusions reached in these Reasons.
23 No award of costs is made.
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