Date: 000221
Docket: 97-3644-IT-G
BETWEEN:
PAUL PEROVICH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1] The Appellant appeals from assessments of income tax for the 1990 to 1993 taxation years. The appeals relate to the purchase and resale at a loss of a parcel of land known as the Milton property. The purchaser named in the Agreement to Purchase was Paul Perovich Company Inc. ("PPCI"), a corporation which did not exist at the time the agreement was made. From the time of the closing of the purchase in May of 1990 to the time of the closing of the sale in June of 1992, title to the Milton property was registered in the name of PPCI. The first issue in the appeals is whether the loss on the sale of the Milton property was incurred by PPCI, the corporation which ostensibly bought the property and later resold it at a loss or whether, as the Appellant contends, PPCI acted throughout as bare trustee for the Appellant with the consequence that it was the Appellant who incurred the loss. The second issue is whether the loss was of a capital or non-capital nature. The third issue relates to the timing of the Appellant's claim to deduct the loss.
[2] The Appellant was born in 1942 in Yugoslavia. He came to Canada in 1964. He quickly became a versatile and active entrepreneur. In 1966 he started a business involving the manufacture of precision parts. The business was incorporated under the name Truetech in 1982. Truetech manufactured tools for grinder wheels. In 1992 the corporate name was changed from Truetech to Budva. Budva was sold in 1996. The Appellant then entered the business of manufacturing bikini bathing suits.
[3] The Appellant gave evidence at the hearing of the appeals. He testified that he entered the business of buying and selling real estate for profit and he described the trading history in some detail. In 1987 the Appellant and his brother Peter acquired property in Scarborough. The Appellant stated that the property was purchased for occupation by Truetech. Very little of the purchase price was paid in cash. The property was sold six months later at a gain of approximately $250,000.00. The Appellant stated that the property proved to be too small for use by Truetech.
[4] In April of 1988 Perovic Holdings Inc. was incorporated. The issued shares in that corporation were divided equally between the Appellant and his brother, Peter Perovic. In September 1988 Perovic Holdings Inc. acquired five acres of vacant land in Pickering, Ontario at a cost of $550,000.00. The Appellant said that he intended to rezone and sell the property. The property was resold in January of 1989 for $1,075,000.00.
[5] At this point I will note that there appears to be little or no correlation between the corporate and individual names used to carry out the transactions referred to by the Appellant and the persons who, at least so far as the Appellant was able to remember in cross-examination, reported the gains for income tax purposes. The documentation pertaining to the Scarborough transaction indicates that the owners were the Appellant and his brother. The Appellant indicated that the gain on resale was not divided evenly between himself and his brother. He said, somewhat enigmatically, that he had a silent partner. The Appellant could not say how the transaction was reported in his return of income.
[6] The agreement to purchase the Pickering property named "P. Perovich in trust for a company to be incorporated" as purchaser. Title was taken in the name of Perovic Holdings Inc. According to the Appellant the profit on this transaction was reported as a capital gain by his sons, his brother and spouse. The reasons for so reporting the gain were not explained.
[7] It is against this background that the Milton property was purchased. The property was acquired pursuant to an agreement of purchase and sale formed in September of 1989. The purchaser named in the Agreement to Purchase was PPCI. The corporation bearing the name Paul Perovich Company Inc. was not incorporated until April 26, 1990, a few days before the closing of the purchase.
[8] The Appellant's evidence with regard to the identity of the purchaser of the Milton property was, in many respects, inconsistent and, I find, unreliable. He testified that the Agreement to Purchase the property was prepared by the real estate agent. He stated during the examination-in-chief that he always buys property in trust for a corporation to be incorporated and that, in the case of the Milton property, the agent mistakenly named PPCI as purchaser. He said that the vendor refused to allow him to correct the mistake. During cross-examination the Appellant reiterated that the Agreement had not been properly prepared and stated that the purchaser named in the Agreement should have been Paul Perovich in trust for a company to be incorporated. That testimony makes it very difficult to conclude that it was the Appellant's intention that he and not a corporation be the purchaser.
[9] There was entered in evidence a photostatic copy of a declaration of trust referring to the Milton property. It is on this document that the Appellant relies as proof that the Milton property was to be held in trust for his sole benefit. The document reads in part:
KNOW YE ALL MEN BY THESE PRESENTS that the undersigned, Paul Perovich Company Inc., Trustee, do hereby acknowledge, covenant, agree and declare that whatever interest it holds in Part Lot 15, Concession 2, Town of Milton is held in trust for an for the sole benefit of the following:
Paul Perovich 100%
...
IN WITNESS WHEREOF the parties have hereunto caused to be affixed their signatures duly attested to by the wtinesses' co-signatures this 13th day of September, 1989.
BENEFICIARY TRUSTEE
PAUL PEROVICH COMPANY INC.
"Paul Perovich" Per: "Paul Perovich"
It will be observed that the trustee named in the Declaration did not exist on the date which the document bears.
[10] The Declaration of Trust does little to clarify matters. At one stage in his testimony the Appellant asserted that the document was prepared not on the date which it bears but rather some nine months later at or about the time of closing. By that time, of course, the supposed corporate trustee had been incorporated. At another stage the Appellant stated that the document was executed on September 13, 1989. Obviously the Declaration could not serve to create or evidence a trust formed in September of 1989 because the trustee did not then exist. No clear and convincing explanation was given for the supposed execution in May of 1989 of a backdated document. I doubt that it happened then.
[11] I note that it is difficult to reconcile the alleged role of PPCI as trustee with the declared intention of the Appellant to purchase in trust for that corporation.
[12] The position, as I see it, is governed by section 21 of the Business Corporations Act, S.O. 1982, C. 4. Subsections (1), (2) and (3) provide:
(1) Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof.
(2) A corporation may, within a reasonable time after it comes into existence, by any action or conduct signifying its intention to be bound thereby, adopt an oral or written contract made before it came into existence in its name or on its behalf, and upon such adoption,
(a) the corporation is bound by the contract and is entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto; and
(b) a person who purported to act in the name of or on behalf of the corporation ceases, except as provided in subsection (3), to be bound by or entitled to the benefits of the contract.
(3) Except as provided in subsection (4), whether or not an oral or written contract made before the coming into existence of a corporation is adopted by the corporation, a party to the contract may apply to a court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation, and, upon such application, the court may make any order it thinks fit.
As I see it, PPCI adopted the contract which had been made in its name when it completed the Agreement to Purchase the Milton property and took title to the land in its name. As a consequence paragraphs (a) and (b) of subsection (2) apply to the transaction and exclude the Appellant from rights or benefits under the contract.
[13] For purposes of the Income Tax Act the profits or losses from a business are the income or loss of the proprietor. Thus, where the business takes the form of an adventure in the nature of trade, it is necessary to identify the person who, as a consequence of the purchase of the property which was the subject of the adventure, stood to earn profit or suffer loss from the anticipated resale. In the present case that person was PPCI.
[14] In making the assessments in issue the Minister proceeded on the basis that PPCI did not purchase the Milton property in trust for the Appellant. The onus was on the Appellant to establish on the balance of probabilities that that assumption was wrong. The Appellant has failed to discharge that onus. I can derive no assistance from the testimony of Timothy Saloma. He stated that he was the Appellant's solicitor until 1996 when he ceased to practice law. Mr. Saloma was unable to give any lucid explanation for the use of the Declaration of Trust. At one stage he asserted that the document was prepared to indicate that the Appellant was sole owner of the property because the Appellant's brother was recorded as owner of one common share of PPCI. When asked why the vendor could not have been directed and authorized to convey title to the Appellant rather than PPCI, Mr. Saloma pointed out that a direction would have to come from PPCI and that it had not been incorporated and therefore could not sign the direction to the vendor. The evidence established that PPCI was incorporated prior to closing. I regret that I cannot find Mr. Saloma's evidence to be any more reliable than that of the Appellant.
[15] Since it has not been established that it was the Appellant who sustained a loss on the purchase and sale of the Milton property, it is not necessary to consider the issues with respect to the nature of the loss and the timing of the loss.
[16] For the foregoing reasons the appeals will be dismissed with costs.
Signed at Toronto, Canada, this 21st day of February 2000.
"Michael J. Bonner"
J.T.C.C.