Date: 19971020
Dockets: 96-1323-IT-G; 96-1597-IT-G; 96-1325-IT-G; 96-1324-IT-G
BETWEEN:
KENNETH MALCOLM EDWARDS, GRACE EDWARDS, CINNAMON LODGE LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] These appeals pursuant to the General Procedure were heard together on common evidence by consent of the parties at Kamloops, British Columbia, on October 6, 1997.
[2] The Appellant, Kenneth Malcolm Edwards ("Mr. Edwards"), his wife, Grace Edwards ("Mrs. Edwards") and Donald Schneider testified. Mr. Schneider was the accountant for all of the parties during the years in question. Mr. Edwards appealed reassessments for his 1992 and 1993 taxation years (96-1323(IT)G) and for his 1994 taxation year (96-1597(IT)G). Mrs. Edwards appealed assessments for her 1991 and 1992 taxation years. Cinnamon Lodge Ltd. ("Cinnamon") appealed an assessment for its 1994 taxation year.
[3] The appeals are in respect to the following:
1. Mr. Edwards
1992 rental losses of $16,648.76 disallowed.
1993 failure to report net logging income of $123,330.99.
1994 reduction of capital gains exemption claimed by election.
2. Mrs. Edwards
1991 rental losses of $31,084.99 disallowed.
1992 rental losses of $16,648.79 disallowed.
3. Cinnamon Lodge Ltd. (March 31, 1994 fiscal year end)
1994 loss claimed of $511 disallowed.
[4] Mrs. Edwards worked at Tranquille Residence in Kamloops, British Columbia in 1983. It was a provincially owned residence for the retarded. In 1983 it was announced that it would be closed. She purchased a large water heated house at 3875 Tranquille Road ("3875") with the intention of fixing it up in a form suitable for the care of 10 residents being allocated from Tranquille Residence. She had completed 95% of the renovations when a fire occurred. Tranquille Residence closed in January, 1985, but Mrs. Edwards did not complete her fire repairs and a boiler repair until 1989. By then the reallocation of retarded residents had been completed.
[5] On April 2, 1988 Mr. and Mrs. Edwards were married. On March 21, 1989, Mrs. Edwards caused Cinnamon to be incorporated (Exhibit R-5). On April 14, 1989, Mr. and Mrs. Edwards allegedly signed Exhibit R-3, which reads:
April 14, 1989
To Whom It May Concern
As of this date, I, Grace Edwards, agree to transfer 49 shares of Cinnamon Lodge Ltd. to Kenneth Malcolm Edwards in consideration of the use of his Barriere property as collateral for the necessary start-up costs for Cinnamom Lodge Ltd.
I, Grace Edwards, am the registered owner of 20 - 2960 (3875) Tranquille Road, Kamloops, B.C. V2B 8B6.
Description of Property
Lot 2, District Lot A, Group 2
Kamloops (Formerly Lytton) Division Yale District
Plan 19072
As of this date, I am relinquishing ownership to Cinnamon Lodge Ltd. and will as soon as possible arrange to register the property as a joint ownership between Kenneth Malcolm Edwards and Grace Edwards. The beneficial holder will remain as Cinnamon Lodge Ltd.
Kenneth Malcolm Edwards and Grace Edwards will be holding the above land in our personal names in trust for Cinnamon Lodge Ltd. due to ongoing litigation with INA Insurance Company.
"signature" "signature"
Witness Grace Edwards
"signature" "signature"
Witness Kenneth Edwards
[6] Mrs. Edwards testified that a licence to operate a residence was issued to Cinnamon in 1989. However, the provincial government never granted funding for staff, so no residents ever lived in 3875. Staff had to be hired before any residents could be admitted.
[7] On April 1, 1993 the Edwards allegedly signed Exhibit R-4 which reads:
April 1, 1993
TO WHOM IT MAY CONCERN:
I Kenneth Edwards, am the registered owner of
DESCRIPTION OF MANUFACTURED HOME
1974 Paramount, Registration No. 13573
and
DESCRIPTION OF PROPERTY
Lot 1, District Lot 163, Kamloops
Division Yale District, Plan 29730
Barriere, B.C. VOE 1E0
and as of this date am relinquishing ownership to Cinnamon Lodge Ltd.
In the next few months I will be arranging to register the property as a joint ownership between Grace Edwards and myself. The beneficial holder will remain as Cinnamon Lodge Ltd. Grace Edwards and myself, Kenneth Edwards will be holding the above land in our personal names in trust for the company due to ongoing litigation with I.N.A. Insurance Company.
"signature" "signature"
Witness Kenneth Edwards
"signature" "signature"
Witness Grace Edwards
On June 29, 1994, Mr. Edwards received 49 common shares of Cinnamon. Mrs. Edwards retained 51 common shares of Cinnamon.
[8] The only business ever attempted to be operated at 3875 after 1988 was the special care home. Cinnamon received the licence in 1989 and never transferred it. Mr. and Mrs. Edwards never had a licence to operate the home. Therefore, they could not incur any business expenses respecting 3875 since they could not operate the business.
[9] The record of deductions claimed by Mrs. Edwards in respect to 3875 is as follows:
|
Taxation Year |
Income |
Expenses |
Net Income (Loss) |
|
1983 |
$3,420.00 |
$8,474.00 |
|
|
1984 |
$3,000.00 |
$16,961.00 |
$13,961.00 |
|
1985 |
$3,125.00 |
$20,881.00 |
$17,756.00 |
|
1986 |
Nil |
$10,404.00 |
$10,404.00 |
|
1987 |
Nil |
$8,100.00 |
$8,100.00 |
|
1988 |
Nil |
$14,443.00 |
$14,443.00 |
|
1989 |
Nil |
$9,324.00 |
$9,314.00 |
|
1990 |
Nil |
$17,376.00 |
$17,376.00 |
|
1991 |
Nil |
$31,084.00 |
$31,084.99 |
|
1992 |
Nil |
$33,297.53 |
$33,297.53 |
[10] Mrs. Edwards lived at 3875 most of the time. She applied for the home owner grant for 3875 in some years, and for property in the name of Mr. Edwards at Barriere, British Columbia in other years. She had a personal interest in 3875 as her residence.
[11] She rented rooms in 3875 to roomers for the first three years that she owned it although she never made a profit. After that it was never rented out, never had any patients for care and was never in use for any purpose except as her residence. Mrs. Edwards had worked as a caregiver, but there is no evidence that she ever managed a business. There is no evidence of any plan or projection for a profit. The only evidence is that she applied continuously for provincial government grants to operate a care home and commenced a court action for that purpose without any success. There is no evidence that the home could be operated at a profit after charging capital cost allowance. Thus, even if the Edwards had the licence, there is no evidence that they had a reasonable expectation of profit from the operation of 3875 during the years in question. But they never had the licence so they had no right to be in the business in the years in question.
[12] Mrs. Edwards' appeals for 1991 and 1992 as to 96-1325(IT)G are dismissed in their entirety.
[13] Mr. Edwards' appeal in respect to his claim to deduct rental losses for 1991 is dismissed.
[14] Mr. Edwards has appealed his assessment for a failure to report income in 1993 of $123,330.99 from the sale of logs on the Barriere property. The logs were sold in June of 1993 (See Exhibit R-14).
[15] The sale of the logs was by "Jack of All Trades", a trade name owned as a business by Mr. Edwards that made an income bucking logs. Mr. Edwards started bucking logs in 1987 or 1988. It is alleged by Mr. Schneider that Jack of All Trades was transferred to Cinnamon. However, Mr. Edwards did not testify that he had transferred that business to Cinnamon. When asked about his income from Jack of All Trades in 1993 and 1994, Mr. Edwards had to leave the answers up to Mr. Schneider. He did not testify that he had transferred the business to Cinnamon or to anyone else. No transfer document or registration of the trade name "Jack of All Trades" was entered in evidence.
[16] Weyerhaeuser Canada Ltd. signed the agreements to purchase logs with Mr. Edwards. It delivered the cheques to Mr. Edwards in the name of "Jack of All Trades". He cashed the cheques personally.
[17] Assumptions 7(i), (l) and (k) of the Reply to his appeal 96-1323(IT)G read:
i) the Appellant's sole proprietorship, Jack of All Trades was not transferred to Cinnamon Lodge Ltd.;
j) the income earned by the proprietorship was not the income of Cinnamon Lodge Ltd. but was the income of the Appellant;
k) the Appellant did not report the income from the proprietorship in his 1993 taxation year.
The Appellant has failed to disprove the assumptions respecting this assessment. His appeal respecting his assessment of income in the sum of $123,330.99 in 1993 is dismissed.
[18] With respect to Mr. Edwards' capital gains election for his 1994 taxation year, paragraphs 7 and 8 of the Reply to his Notice of Appeal in appeal #96-1597(IT)G read:
7. By Notice dated March 7, 1996, the Minister reassessed the Appellant in respect of his 1994 taxation year and revised the capital gains deduction to $44,279.00 calculated as follows:
Adjusted Cost Base $55,000.00
Designated Proceeds of $155,000.00
Disposition
Capital Gain before Reduction $100,000.00
Reduction for Non-Qualifying Real
Property $21,239.00
Elected Capital Gain $78,761.00
Cumulative Net Investment Loss $14,791.00
Allowable Capital Gains Deduction $44,279.00
8. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions:
a) the Appellant owned property at the end of February, 1994 located at Barriere, B.C.(the "Property");
b) the Property was acquired by the Appellant in September, 1984 and at the time of the election, he had owned it for a total of 113 months;
c) the Property had a fair market value as of the end of February, 1994 of $155,000;
d) the adjusted cost base of the property was $55,000;
e) the non-qualifying period was 24 months; and
f) the Appellant's cumulative net investment loss was $14,791, based on the following:
1989 taxation year - rental loss claimed $4,601.00
1990 taxation year - rental loss claimed 6,432.00
1991 taxation year - rental loss claimed 3,396.00
1993 taxation year - investment carrying charges 181.00
1994 taxation year - investment carrying charges 181.00
cumulative net investment loss $14,791.00
The Appellants did not lead evidence which refuted the particulars of paragraphs 7 and 8. For this reason, Mr. Edwards' appeal respecting this matter is dismissed.
[19] The evidence respecting the assessments of Cinnamon Lodge Ltd.'s claim of a loss of $511 in 1994 was given by Mr. Schneider. In his testimony he agreed that on review of the calculations, the matter is no longer in dispute.
[20] For the foregoing reasons the appeals are dismissed in their entirety.
[21] The appeals were heard together. The documents for the appeals were consolidated by both parties. Therefore, the Respondent is awarded party and party costs against each Appellant but only one set of costs is to be levied on account of the hearing, however that set of costs is found jointly and severally against all of the Appellants.
Signed at Toronto, Ontario, this 20th day of October, 1997.
"D.W. Beaubier"
J.T.C.C.