Date: 19981127
Docket: 95-3554-IT-G
BETWEEN:
ROBERT A. PAPINEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUES:
[1] The issues in this appeal are:
1. Whether mortgage debt of a partnership of which the Appellant was a member was extinguished in his 1989 taxation year. The Minister of National Revenue ("Minister") reassessed the Appellant for that year adding capital gain in the sum of $84,499 and adding recaptured capital cost allowance in the sum of $31,275; and
2. Whether the Appellant had a "allowable business investment loss" in respect of his shareholdings of and loan to "small business corporation".
GENERAL:
[2] All references to sections relate to provisions of the Income Tax Act ("Act").
FACTS:
[3] 1. First issue respecting mortgage debt:
[4] The Appellant was a member of T-West Estates Limited Partnership ("partnership") which owned land and building known as "Landmark". The Appellant's interest in this partnership was 1.805583%. The Court was advised that Orange Elk Industries Ltd., the general partner of the partnership was a subsidiary of a corporation known as T-West Estates Ltd. ("Ltd.") which, in turn, was owned by the credit union which had advanced mortgage monies to the partnership in respect of Landmark.
[5] In a written agreement described as having been made "as of" February 9, 1989 among the Appellant, Ltd., and the general partner of the partnership, it was recited that the general partner had entered into an agreement with Mastercraft Investments Corporation ("Mastercraft") to sell Landmark for a net purchase price of $7,175,000 subject to the acquisition by Ltd. of units in the partnership. As part of the purchase price, the purchaser agreed to assume all obligations of the Appellant to pay "Limited Partners Cash Flow Deficiency Contributions" and to "release the Vendor from obligations to pay such amounts from February 1, 1989". In addition, the general partner agreed to pay to the Appellant a formula-determined amount.
[6] As shown by schedules to the Reply to the Notice of Appeal, the Appellant's share of recaptured capital cost allowance was $39,799. This was reduced by the amount of $8,523 shown on one such schedule as "Operating loss – partnership". The net amount of $31,275 was added by October 25, 1993 reassessment with the curious description:
Increase to rental income
[7] That assessing document referred to an attached schedule which was not, in fact, attached.
[8] One of the schedules to the Reply to the Notice of Appeal shows the Appellant's share of capital gain on the disposition of Landmark as $88,301.00, which, reduced by the Minister's calculation of capital loss of $3,802, resulted in the aforesaid figure of $84,499. The capital gain was computed by the Minister on the assumption that the cost of land, buildings and chattels was reduced by an amount described as "Debt forgiven" in the sum of $5,909,704[1]. The Notice of Assessment added two-thirds of the sum of $84,499 as "taxable capital gain" in the aforesaid assessment.
[9] The sale closed on July 14, 1989.
[10] The financial statements for the partnership for the year ended December 31, 1989 are described as "unaudited". The REVIEW ENGAGEMENT REPORT of Deloitte & Touche, who prepared the financial statements, reads as follows:
We have reviewed the balance sheet of T-West Estates Limited Partnership as at December 31, 1989 and the statements of loss and partners' deficiency and of changes in financial position for the year then ended. Our review was made in accordance with generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to us by the general partner.
A review does not constitute an audit and consequently we do not express an audit opinion on these financial statements.
Based on our review, nothing has come to our attention that causes us to believe that these financial statements are not, in all material respects, in accordance with generally accepted accounting principles.
[11] The balance sheet for 1988 shows long term debt of $11,260,000 that is described in a note to the financial statements as being made up of a first mortgage due January 1, 1991 and shown as an obligation for the 1988 year as $8,000,000. It also shows a second mortgage due January 1, 1991 of $3,260,000 for the 1988 year. No amount is shown as owing for the 1989 year. However, the current liabilities on the December 31, 1989 balance sheet show a balance unpaid on the first mortgage of $5,909,704. That is described in another note to the financial statements as follows:
The proceeds from the sale of the property were applied to the mortgage and interest indebtedness to Pacific Coast Savings Credit Union, resulting in a shortfall of $5,909,704.
[12] The Appellant, a chartered accountant who represented himself, explained that any such amount which is owing within a year is properly describable as a current liability and not as long term debt. No evidence was adduced by the Respondent to negate that assertion.
[13] 2. Second issue respecting allowable investment business investment loss:
[14] The Appellant also claimed in his 1989 taxation year an "allowable business investment loss" arising out of a loan of $65,000 made by him to 59468 Manitoba Ltd. ("Manitoba"). He stated that he had been approached by one Bruce McLeod to invest money with other persons for certain purposes. He stated that McLeod and a lawyer, Richard Shead, used the money to finance debts of McLeod and his companies. Both were subsequently convicted and sentenced to jail. The Appellant said that although Manitoba had been defrauded, it had purchased a mortgage or two and several notes. He said that these were held by Shead and turned over to the bank as security for its loan to Manitoba. Manitoba had not registered any documents in its name at the Land Titles office. The Appellant then said that he had documents that would substantiate the acquisition and ownership of assets by Manitoba but they were not produced in Court. The Appellant also stated that he had records available in his office for inspection by the tax auditor. However, he did not attend with that auditor during examination of documents and, accordingly, did not take advantage of an opportunity to point out relevant documentary facts to that auditor.
ANALYSIS AND CONCLUSION:
[15] Section 80 provides that when an obligation of a taxpayer to pay an amount is settled or extinguished without payment by him, the amount unpaid shall be applied to reduce
the capital cost to the taxpayer of any depreciable property and the adjusted cost base to him of any capital property.
(emphasis added)
It was on the assumption that the sum of $5,909,704 was extinguished that the reassessment respecting the mortgage debt was made.
[16] With respect to the taxable capital gain and recaptured capital cost allowance added to the Appellant's income, the assumptions of fact in the Reply to the Notice of Appeal read as follows:
(e) it was a term and condition of the aforementioned agreement that upon disposition, the partners would be relieved of any further debt obligation with respect to the property and would receive 50% of the proceeds should the sale price of the property be between $6,400,000 and $8,000,000;
(f) on October 4, 1988, the property was sold to T-West Estates Ltd. ("Ltd") for the amount of $7,976,119 with a closing date of July 14, 1989;[2]
(g) on July 14, 1989, the Appellant disposed of his share in Estates to Ltd. in consideration for the sum of $1.00 which disposition was a condition of the said agreement;
(h) the forgiveness of the indebtedness by the Lender under the terms of the said agreement resulted in a reduction in the adjusted cost base of the property in the amounts set forth in Schedule "A" hereto;
(i) as a result of the foregoing, Estates incurred recapture with respect to the building and chattels portion of the property, and a capital gain in the amounts set forth in Schedule "A";
[17] The 1989 financial statements prepared by Deloitte & Touche show no long term debt for that year, a fact that was used by Respondent's counsel to assist him in establishing that there had been an extinction of the loan. However, the outstanding mortgage in the sum of $5,909,704 was shown as a current liability. The fact that this amount is shown on the balance sheet at the end of 1989 indicates that the amount had not been extinguished. Respondent's counsel submitted that the assumptions in the Reply to the Notice of Appeal had not been negated or altered by the Appellant and that, accordingly, the assumptions must be regarded as fact with the result that the loan amount must be considered to have been forgiven. That simply cannot be accepted in light of the Appellant's evidence and no contradictory evidence from the Respondent.
[18] Having in mind the non-arm's length relationship of the mortgage company, Mastercraft and the general partner, it may well be that the loan was not intended to be forgiven in 1989. It is not useful to speculate on what could have happened or what did happen. However, I do not accept the Respondent's position that the loan had been forgiven. The reliance by Respondent's counsel on the fact that no long term debt was shown for 1989 has little weight when the very amount it claims was forgiven is shown as a current liability on the company's balance sheet for that year. The balance sheet was included in financial statements prepared by Deloitte & Touche.
[19] It is not known whether the limited partner would be subject to the rules in section 80 of the Income Tax Act ("Act") respecting debtor's gain on settlement of debts. No evidence was presented concerning the obligation of the Appellant to pay "Limited Partners Cash Flow Deficiency Contributions". Accordingly, even if his obligation was extinguished, the amount applicable to him is unknown. Assuming some amount respecting his obligation was so extinguished, that amount is, by section 80 to be applied to reduce
the capital cost to the taxpayer of any depreciable property and the adjusted cost base to him of any capital property.
There is no evidence, that the Appellant had any capital cost of the partnerships depreciable property or capital property. It may well be, without needing to form a conclusion in this regard, that the assessment was ill-founded as far as the Appellant not having had a cost of partnership assets is concerned.
[20] I have not, been persuaded that the debt of $5,909,704 was extinguished in the 1989 year.
[21] With respect to the allowable business investment loss, the relevant provisions in the Act are as follows:
Paragraph 39(1)(c) defines a business investment loss from the disposition of property as
the amount of capital loss from the disposition of a share of the capital stock of a small business corporation or a debt owing to the taxpayer by a small business corporation.
Paragraph 50(1)(a) states that
where a debt owing to a taxpayer at the end of a taxation year is established by that taxpayer to have become a bad debt in the year, and the taxpayer elects in his return of income to have that subsection apply in respect of the debt, the taxpayer shall be deemed to have disposed of the debt for nil amount.
The term "small business corporation" is defined in section 248 of the Act as
a Canadian-controlled private corporation, all or substantially all of the assets of which were used in an active business carried on primarily in Canada.
[22] An "allowable business investment loss" for the year in question was two-thirds of the business investment loss.[3]
[23] No evidence was offered to establish that this was a Canadian-controlled private corporation. In the absence of the status of Manitoba having been challenged on that basis, I will assume that it was a Canadian-controlled private corporation.
[24] With respect to the company using its assets in an active business, I do not accept the Respondent's suggestion that the assets would have to have been registered in the company's name. However, the Appellant's evidence was so skimpy with respect to assets owned by Manitoba that I cannot conclude that it carried on an active business with its assets. He stated that he had documents with respect to the assets acquired by Manitoba but none were produced. The auditor who examined his documents said that he found no proof of ownership of assets. This underlines once more the folly of a non-lawyer representing himself or herself when, if such evidence did exist, it could have been presented it in its best light to the Court.
[25] Based on the foregoing, the Appellant has no capital gain and has no recaptured capital cost allowance in respect of the disposition by the partnership of its property, Landmark. However, because of the Appellant failing to meet the onus that rested upon him to destroy the assessment in respect of the allowable business investment loss, he cannot succeed with that claim. It will remain, as assessed, as a capital loss of the Appellant.
[26] No costs are awarded.
Signed at Ottawa, Canada this 27th day of November, 1998.
"R.D. Bell"
J.T.C.C.
[1] This was comprised of $1,151,996 allocable to land, $4,689,275 allocable to building and $68,433 allocable to chattels.
[2] Although an agreement of February 9, 1989 recites that the general partner entered into an agreement with Mastercraft to purchase Landmark, the Vendor's Statement of Adjustments described 360203 B.C. Ltd. as the purchaser. It may have been an assignee of Mastercraft. In any event it seems clear that Landmark was sold.
[3] paragraph 38(c) of the Act.