Date: 20020208
Docket: 1999-2159-IT-G
BETWEEN:
AJMER SINGH SIDDOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan J.
[1] In 1990, the Appellant was sued in the Supreme Court of British Columbia by two of his daughters and a son-in-law. Other defendants in the lawsuit were a daughter-in-law of the Appellant, two grandsons of the Appellant, and two family corporations. The lawsuit was settled in 1992. In the settlement arrangement, certain property was transferred to the two grandsons who were co-defendants with the Appellant in the lawsuit. The Minister of National Revenue concluded that the Appellant had realized capital gains on the transfer of the property to the grandsons; and the Minister assessed tax for 1992 with respect to those gains. The Appellant has appealed from the assessment and 1992 is the only taxation year under appeal.
[2] At the commencement of the hearing, the parties filed an Agreed Statement of Facts with many supporting exhibits all of which are admitted for the purpose of this appeal. The Agreed Statement of Facts ("ASF") is comprehensive and was marked as Exhibit 1. It contains details of the lawsuit, the settlement, and the transfer of property. For convenience, I shall set out all 30 paragraphs of the ASF but will refer to the supporting exhibits only as required.
Agreed Statement of Facts
The following facts are agreed to by the parties for the purposes of this appeal:
1. This appeal was brought from two assessments with respect to the Appellant's 1992 tax year;
(a) A reassessment dated September 22, 1994. A copy is attached as Exhibit "A" (the "First Reassessment");
(b) A reassessment dated July 25, 1996 (the "Second Reassessment");
2. The parties have agreed to settle the appeal in regards to the Second Reassessment. Thus only the appeal from the First Reassessment is now in issue;
3. Both the First and the Second Reassessments arose out of a settlement of a lawsuit commenced against the appellant and various other family members and companies by his two daughters and a son-in-law, for a share of the family properties;
4. By way of a Writ of Summons and Statement of Claim dated February 26, 1990 and amended on March 21, 1990 (the "Statement of Claim"), the two daughters of the Appellant, Narinder Kaur Chauhan and Mohinder Kaur Sandhu (the "Plaintiff daughters"), and the Appellant's son-in-law Gurmeet Singh Sandhu (collectively, the "Plaintiffs"), commenced proceedings in the Supreme Court of British Columbia, Vancouver Registry Number C901020 (the "Proceedings") against the Appellant, Siddoo Kashmir Holdings Ltd. ("Holdings"), Siddoo A.K. Investments Ltd. ("SAK Investments"), the Appellants' daughter-in-law Balbir Kaur Siddoo, and his grandsons Jasvir Singh Siddoo and Ravinder Singh Siddoo (collectively, the "Defendants").
5. The Plaintiffs' allegations were set out in the Statement of Claim which is attached as Exhibit "B". The Plaintiffs' allegations included allegations that the Plaintiffs held an interest in properties held by the Defendants as a result of contributions by the Plaintiffs of assets, including the value of their interest in the estate of their mother [the Appellant's wife] and their share of the income and sale proceeds of various properties, and valuable services which contributions were made in the expectation of receiving an interest in the properties held by the Defendants.
6. In early 1992 a settlement was negotiated. The intent of the settlement was that the Plaintiffs would obtain property with a value, based upon municipal tax assessments, of approximately one third of the value of the family properties.
7. The essential terms of the settlement were set out in writing in January 1992 (the "January Agreement"). The January Agreement is attached as Exhibit "C".
8. Detailed settlement documentation to implement the January Agreement was subsequently prepared (the "Settlement Documents" or "Settlement") and a closing took place on June 1, 1992. Certain of the Settlement Documents are attached as Exhibit "D".
9. The January Agreement and the Settlement Documents provided, inter alia, that certain of the Defendants would transfer or cause to be transferred specified property to the Plaintiffs and the Plaintiffs would provide releases and give up shares that they held in Holdings and the half interest that they held in an apartment building called the Kashmir Manor.
Provisions of the Settlement relating to the transfer by the Plaintiff Daughters of their shares in Holdings and interest in the Kashmir Manor
10. One of the agreements which formed part of the Settlement Documents was a Settlement Agreement dated June 1, 1992 (the "Settlement Agreement"), to be found at tab 20 of Exhibit D). Paragraph 4 of the Settlement Agreement provided that:
"The Plaintiffs, Mohinder Kaur Sandhu and Narinder Kaur Chauhan, will transfer to the Defendant Siddoo or such other transferees as he may direct, all of their shares of Holdings and all of their right, title and interest in 2355 West 2nd Avenue, Vancouver, B.C. ... ("Kashmir Manor") including all furniture and fixtures, in consideration for the payment by the Defendant Siddoo of the sum of $95,500, and the Defendant Siddoo shall be responsible for property purchase tax payable in respect of the transfer of Kashmir Manor to him. The Defendant Siddoo shall not be obliged, in any event, to pay more than $95,000 to the said Plaintiffs in consideration of the transfer of such shares and Kashmir Manor as hereinbefore provided."
The Plaintiff Daughters' shares in Holdings will be referred to as the "Shares" and their interest in the Kashmir Manor as the "Interest in the Kashmir Manor".
11. On June 1, 1992, as part of the closing of the Settlement, the Shares and the Interest in Real Property were transferred from the Plaintiff Daughters to the Grandsons. The transfer documentation for the Shares is to be found at tabs 69, 70, 71, 72, 73, 74 and 75 of Exhibit D. The transfer documentation for the Interest in Real Property is to be found at tab 76 of Exhibit D.
12. On June 1, 1992, the Shares had a fair market value of $66,000 and the Interest in Kashmir Manor had a value of $550,000.
13. The Appellant paid to the Plaintiff Daughters the sum of $95,500 referred to in paragraph 4 of the Settlement Agreement. The cheque is found at tab 77 of Exhibit D.
14. In addition, the Appellant also paid to the Minister of Finance for British Columbia the sum of $9,000 being the property purchase tax for the transfer of the Interest in Kashmir Manor. The cheque is to be found at tab 79 of Exhibit D.
Other material provisions of the Settlement Documents
The Haro Street transaction
15. Prior to May 29, 1992 the Appellant was the registered owner of 2 Class "B" common shares in SAK Investments, which constituted all the issued shares in that company.
16. SAK Investments owned an apartment building at 1655 Haro Street, Vancouver, B.C. ("Haro Street"). Prior to the settlement the Appellant caused SAK Investments to divest itself of all other assets and liabilities.
17. On May 29, 1992:
(a) The Appellant converted his 2 common shares to 2 Class B Non-Voting Preferred shares and froze the value of those shares in SAK Investments at $5,200,000, representing the directors' estimate of the fair market value of the shares at that date. The Minister of National Revenue has never sought to challenge that value and does not take issue with that value in this appeal.
(b) The Appellant also arranged for SAK Investments to issue 100 Class A Voting Common shares to each of two companies owned by the Plaintiffs (the "Plaintiff's Companies"), such shares representing control of SAK Investments and an entitlement to all increases in value of SAK Investments over $5,200,000.
(c) The preferred shares were redeemable by the Appellant at any time for $5,200,000.
(d) The preferred shares issued to Mr. Siddoo had no right to dividends except as declared in the sole discretion of the directors of SAK Holdings, who would be appointed by the Plaintiffs' Companies as the shareholders with voting control of SAK Investments.
18. At the closing of the Settlement on June 1, 1992, the Appellant provided to each of the Plaintiff Companies a promissory note which provided that if he redeemed his preference shares he promised to pay each of them $2,600,000 (the "Promissory Notes"). The Promissory Notes are at tabs 66 and 67 of Exhibit D.
19. At the closing the Appellant also entered into an agreement in which he agreed to transfer his preferred shares to the Plaintiffs' Companies on his death (the "Share Purchase Agreement"). The Share Purchase Agreement is at tab 55 of Exhibit D. The purchase price payable by the Plaintiffs' Companies pursuant to the Share Purchase Agreement for the preferred shares on Mr. Siddoo's death was the amount of income tax payable by Mr. Siddoo's estate on the deemed disposition of the preferred shares immediately before his death pursuant to subsection 70(5) of the Income Tax Act.
20. The effect of the delivery by the Appellant of the Promissory Notes and the Share Purchase Agreement on the closing of the Settlement was that the Appellant would receive no further benefit from his shares in SAK Investments (or from Haro Street which it owned) after the settlement, other than the promised payment by the Plaintiff Companies on his death in the amount of the taxes arising from that disposition and that the Plaintiffs would receive all of the income of SAK Investments, all of the increase in value of the company and, upon the Appellant's death, all of this interest in the company.
Il Mercato Transaction
21. On June 1, 1992 the Appellant was a shareholder of Holdings.
22. Prior to the Settlement, Holdings owned a shopping centre known as the Il Mercato (the "Il Mercato").
23. Pursuant to the Settlement Agreement, at the close on June 1, 1992, Holdings transferred the beneficial ownership of the Il Mercato to the Plaintiffs or companies owned by them. At the date of the transfer, the value of the beneficial interest was $2,855,339. Holdings also paid the property purchase tax in the amount of $219,980. The total benefit to the Plaintiffs of the transfer of the Il Mercato from Holdings was thus $3,075,319 (the "Value of the Il Mercato Transaction").
Releases and other provisions
24. At the closing of the Settlement the Plaintiffs provided releases of all claims to Holdings and to all the other Defendants. The releases are at tabs 52 and 81 of Exhibit D.
25. Paragraph 14.6 of the Settlement Agreement also provided, inter alia, that:
"The arrangements made herein are contemplated by the Defendant Siddoo, and acknowledged by the Plaintiff, to be in substitution for any inheritance the Plaintiff would otherwise receive from the estate of the Defendant Siddoo, on his death, or would have otherwise received from the estate of the Defendant Siddoo's wife Jaswant Kaur Siddoo, at the time of her death.
The Closing of the Settlement
26. At the closing of the Settlement on June 1, 1992 all the documents to be delivered at the closing were to be tabled and held in escrow until all parties agreed to terminate the escrow. The following documents, among others, were then delivered simultaneously:
(a) the two Promissory Notes and the Share Purchase Agreement in regards to the Haro Street Transaction;
(b) the documents that effected the transfer of the Il Mercato;
(c) the Settlement Agreement;
(d) the documents effecting the transfer of the Shares and the Interest in Kashmir Manor;
(e) the releases.
The second reassessment and the settlement of the appeal from that reassessment
27. In the Second Reassessment, the Minister added the Value of the Il Mercato Transaction ($3,075,319) to the Appellant's income as a shareholder benefit conferred upon him in the 1992 year by Holdings.
28. The appeal from the Second Reassessment has been settled on the basis that the shareholder benefit to the Appellant from the transfer of the Il Mercato be reduced by one half to $1,537,659.
The First Reassessment
29. For the 1992 taxation year, Revenue Canada's initial assessment of tax payable by Mr. Siddoo was $369,828.14.
30. The First Reassessment was issued on the basis that Mr. Siddoo acquired the Shares and the Interest in the Kashmir Manor or alternatively, the right to acquire them, from the Plaintiffs and then disposed of them for no consideration to his Grandsons, so that he realized capital gains of $520,500 in total, calculated as follows:
|
Fair market value of shares in Holdings |
$66,000 |
|
Portion of $95,500 allocated to shares |
10,232 |
|
Capital Gain |
$55,768 |
|
Fair market value of Interest in Kashmir Manor |
$550,000 |
|
Portion of $95,500 allocated to Interest in Kashmir Manor |
85,268 |
|
Capital Gain |
$464,732 |
[3] The litigation within the Appellant's family is at the heart of this appeal because the transfers of property upon the settlement of that litigation are the cause of the assessment which is under appeal. All parties to the litigation are described in the table below. Because the Appellant appears to be the patriarch of the family and was the principal defendant, all other parties are described as individually related to the Appellant.
|
Plaintiffs |
Defendants |
|
1. Narinder Kaur Chauhan ("Narinder") daughter |
1. Ajmer Singh Siddoo ("Appellant") |
|
2. Mohinder Kaur Sandhu ("Mohinder") daughter |
2. Balbir Kaur Siddoo ("Balbir") daughter-in-law |
|
3. Gurmeet Singh Sandhu ("Gurmeet") son-in-law |
3. Jasvir Singh Siddoo ("Jasvir") grandson |
|
4. Ravinder Singh Siddoo ("Ravinder") grandson |
|
|
5. Siddoo Kashmir Holdings Ltd. ("Holdings") family company |
|
|
6. Siddoo A.K. Investments Ltd. ("SAK Investments") family company |
[4] Paragraph 10 of the ASF above quotes from paragraph 4 of the Settlement Agreement (Tab 20 of Exhibit 1). I propose to restate paragraph 4 in the hope that I can extract and describe only the transfers and payments:
(i) Mohinder and Narinder will transfer to the Appellant (or such other person as he may direct):
all of their shares of Holdings; and
all of their interest in 2355 West 2nd Avenue, known as "Kashmir Manor";
(ii) the Appellant will pay $95,000 to the Plaintiffs;
(iii) the Appellant will be responsible for the property purchase tax payable upon the transfer of Kashmir Manor to him.
[5] On June 1, 1992, as part of the closing of the settlement of the litigation, the following transfers and payments were made:
(i) Mohinder transferred 5 shares of Holdings to Ravinder;
Cancel Share Certificate No. 8
Issue Share Certificate No. 13
Tabs 69, 70, 71, 73 and 75
(ii) Narinder transferred 5 shares of Holdings to Jasvir;
Cancel Share Certificate No. 7
Issue Share Certificate No. 12
Tabs 69, 70, 71, 72 and 74
(iii) Narinder and Mohinder transferred an undivided one-half interest in Kashmir Manor (2355 West 2nd Avenue, Vancouver, legally described as Lot 16, Block 212, District Lot 256, Plan 1076) to Ravinder (an undivided one-quarter interest) and to Jasvir (an undivided one-quarter interest);
Tab 76, Land Titles Act, Form A
(iv) The Appellant paid $95,500 to Mohinder and Narinder with respect to the transfer of their one-half in Kashmir Manor;
Tab 77, Appellant's cheque
(v) The Appellant paid $9,000 to the Province of British Columbia with respect to the property purchase tax on the transfer of one-half interest in Kashmir Manor;
Tab 79, Balbir issued cheque on Appellant's account
[6] Paragraphs 27, 28, 29 and 30 of the ASF describe the positions taken by the Minister of National Revenue on the first reassessment of September 22, 1994 and second reassessment of July 25,1996. The issues arising out of the second reassessment were settled prior to the commencement of the hearing of the appeal; and the terms of the settlement are described in paragraphs 27 and 28. The issues arising out of the first reassessment were not settled but are the subject of this appeal. The aggregate capital gains of $520,500 which are in dispute are described in paragraph 30 of the ASF.
[7] The Appellant claims that the settlement of the lawsuit within the Appellant's family was a package deal. The parties agreed in paragraph 26 of the ASF that all documents delivered at the closing of the settlement on June 1, 1992 were held in escrow until the parties agreed to terminate the escrow; and at that time the documents were delivered simultaneously. Under this scenario, the Appellant claims that the properties (10 shares in Holdings and a one-half interest in Kashmir Manor) which were transferred to the grandsons (Ravinder and Jasvir) were never owned by the Appellant.
[8] The Respondent claims that the settlement was not a package deal. Specifically, the Settlement Agreement of June 1, 1992 (Tab D-20) isolates the transaction concerning the Il Mercato Centre in paragraphs 1, 2 and 3 of Tab D-20 from the transactions concerning a one-half interest in Kashmir Manor and the 10 shares in Holdings in paragraph 4 of Tab D-20. The release at Tab 52 concerns only the defendant Holdings and relates to the Il Mercato Centre whereas the release at Tab 81 concerns the other five defendants and relates to Kashmir Manor and the shares in Holdings.
[9] The Respondent's position is summarized as follows at paragraph 17 of the notes of argument submitted by Respondent's counsel:
17. The Respondent respectfully submits, however, that the property disposed of by the Appellant as a result of the settlement was the Shares (i.e. 10 shares in Holdings) and 50% interest in the Property (i.e. Kashmir Manor). For it is submitted by the Respondent that upon execution of the Settlement Agreement, the Appellant became beneficial owner of the Shares and the 50% interest in the Property and as the Shares and 50% interest in the Property eventually ended up in the grandsons hands, this was the property disposed of by the Appellant in 1992.
The Settlement Agreement under which the Appellant "became beneficial owner" of the 10 shares in Holdings and of a one-half interest in Kashmir Manor (according to the Respondent's argument) was an all-encompassing agreement comprising 18 pages (Tab D-20) in which the three plaintiffs were the parties of the first part and the six defendants were the parties of the second part.
[10] I cannot accept the Respondent's argument. There is no document in evidence which conveys a property interest in Kashmir Manor to the Appellant. The only relevant conveyance with respect to Kashmir Manor is the direct transfer of a one-half interest from Narinder and Mohinder to Ravinder (a one-quarter interest) and Jasvir (a one-quarter interest). See Tab D-76. On the evidence before me, the Appellant never had a property interest in Kashmir Manor which could be conveyed, transferred or disposed of to the grandsons Ravinder and Jasvir.
[11] Similarly, there is no documentary evidence that the Appellant ever had a property interest in the 10 shares of Holdings which were transferred to Ravinder and Jasvir. The only relevant documents are corporate proceedings of Holdings (Tabs D-69, 70 and 71) and share certificates (Tabs D-72, 73, 74 and 75). Those documents demonstrate that 10 shares of Holdings were transferred directly from Narinder to Jasvir (5 shares) and from Mohinder to Ravinder (5 shares). The Appellant never had a property interest in the 10 shares of Holdings which he could convey, transfer or dispose of to the grandsons Jasvir and Ravinder.
[12] According to the transfers of property and documents described in paragraphs 10 and 11 above, it is two of the plaintiffs (Narinder and Mohinder) who are transferring property to two of the dependents (Jasvir and Ravinder). According to the ASF, however, it was the intent of the settlement that the plaintiffs would obtain property with a value of approximately one-third of the value of the family properties. See paragraph 6 of the ASF. One must look elsewhere to find property flowing from one or more defendants to one or more plaintiffs. Paragraphs 1, 2 and 3 of the Settlement Agreement (Tab D-20) describe the transfer of a shopping centre identified as "Il Mercato" from Holdings to SAK Investments at a purchase price of $11,099,000.
[13] Paragraph 2 of the Settlement Agreement required the purchase price of $11,099,000 to be paid as follows:
(a) SAK Investments assumed a mortgage on the Il Mercato payable to Canada Life Assurance Company in the amount of approximately $8,644,000; and
(b) The plaintiffs or their designated recipient of a fractional beneficial interest in the Il Mercato delivered to Holdings a release in the form found at Tab D-52.
As I interpret this method of paying the purchase price, the plaintiffs appear to have received a financial advantage of approximately $2,455,000 (being $11,099,000 less $8,644,000) because under clause (b), they delivered only a release with respect to value of approximately $2,455,000.
[14] I return to paragraph 6 of the ASF. If the plaintiffs were to obtain additional property having a value of approximately one-third of the value of all family properties, it was only through the "purchase" of the Il Mercato that they obtained additional property. It was not really a purchase because the equity in the Il Mercato (valued at $2,455,000) was transferred to SAK Investments in exchange for what was, in substance, the plaintiffs' release to Holdings which had been the owner of the Il Mercato. From paragraph 3 of the Settlement Agreement (Tab D-20), I infer that the plaintiffs controlled SAK Investments because paragraph 3 begins with the words:
3. The Plaintiff will cause Investments to enter into an agreement (the "Assumption Agreement"), pursuant to which Investments shall assume the obligations of Holdings and the Defendant Siddoo, as mortgagor and guarantor, respectively, under the Canada Life Mortgage and of Holdings under the assignment of rents collateral thereto, ...
[15] It seems to me that the quid pro quo of the settlement was that the plaintiffs, in substance, would transfer to the defendants a few (10) shares in Holdings plus a one-half interest in Kashmir Manor (valued at $550,000 - see Tab D-76) in exchange for the equity in Il Mercato (valued at $2,455,000). It is not clear to me how the plaintiffs could control SAK Investments if it was a named defendant but, as stated above, paragraph 3 of the Settlement Agreement implies that the plaintiffs do control SAK Investments.
[16] I accept the Appellant's argument that the whole settlement of the family litigation was a package deal. Not one property transferred in accordance with the Settlement Agreement would have been transferred unless all other property transfers and payments had been made at the same time. That was one of the purposes of the escrow arrangement. I cannot trace any property flowing from the plaintiffs to the Appellant and then from the Appellant to the two grandsons, Jasvir and Ravinder. The Appellant and the grandsons were only three of six defendants. I can find no facts on which to conclude that the Appellant disposed of 10 shares in Holdings or a one-half interest in Kashmir Manor to the grandsons. The appeal is allowed, with costs.
Signed at Ottawa, Canada, this 8th day of February, 2002.
|
"M.A. Mogan" |
J.T.C.C.
COURT FILE NO.: 1999-2159(IT)G
STYLE OF CAUSE: Ajmer Singh Siddoo and
Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: January 14, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge M.A. Mogan
DATE OF JUDGMENT: February 8, 2002
APPEARANCES:
Counsel for the Appellant: Mark D. Andrews
Counsel for the Respondent: Robert Carvalho
COUNSEL OF RECORD:
For the Appellant:
Name: Mark D. Andrews
Firm: Russell & DuMoulin
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-2159(IT)G
BETWEEN:
AJMER SINGH SIDDOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 14, 2002, at Vancouver, British Columbia, by
the Honourable Judge M.A. Mogan
Appearances
Counsel for the Appellant: Mark D. Andrews
Counsel for the Respondent: Robert Carvalho
JUDGMENT
The appeal from the assessment of tax made under the Income Tax Act for the 1992 taxation year is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that, in connection with the settlement of the family lawsuit on June 1, 1992, the Appellant did not dispose of or otherwise transfer to his two grandsons (Jasvir and Ravinder) either (i) 10 shares in Siddoo Kashmir Holdings Ltd.; or (ii) a one-half interest in Kashmir Manor.
Signed at Ottawa, Canada, this 8th day of February, 2002.
|
"M.A. Mogan" |
J.T.C.C.