Date: 20000721
Dockets: 97-1962-IT-G; 97-1799-IT-G; 97-2839-IT-G; 97-1801-IT-G
BETWEEN:
DAVID H. ARMSTRONG,MICHAEL BELL,W. RICHARD LOVE,P. KIMBALL SCALES,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx J.T.C.C.
[1] These appeals were heard together. They concern the 1991 taxation year for the Appellants Armstrong, Love and Scales and the taxation years 1991 and 1992 for the Appellant Bell.
[2] The question at issue is whether the acquisition by the Appellants of a co-tenancy interest was on business or capital account. The Appellants submitted that it was a speculative venture. The Minister of National Revenue (the "Minister") is of the view that it was of a capital nature.
[3] At the outset of the hearing, the parties informed the Court that they had reached an agreement on part of the issues. They told the Court that this agreement had taken place in view of a decision rendered by Bowman A.C.J.T.C.C., March 15, 2000 in Patricia Ann Grant, George Grant and Brian S. Markell, (Grant et al. v. The Queen, 2000 DTC 1985).
[4] The agreement reached between the parties is similar for the four Appellants except as to the amounts allowed. I will then reproduce the three paragraphs of the Agreement concerning the Appellant David Armstrong and the first one for the other Appellants:
A. APPEAL OF DAVID ARMSTRONG
1. Mr. Armstrong is entitled to deduct in computing income a business loss of $22,415 in the 1991 taxation year, being his portion of the loss sustained by the Rosemount Seniors' Residence Limited Partnership (the "Rosemount") on the inventory write-down in 1991.
2. Mr. Armstrong abandons his claims in paragraphs 53 through 58 of his Notice of Appeal regarding the validity of the Waiver and Reassessment in respect of his 1991 taxation year.
3. Mr. Armstrong abandons his claim in the alternative, in paragraph 62 of his Notice of Appeal, for an allowable business investment loss ("ABIL") with respect to the Wellington Centre for Seniors.
B. APPEAL OF MICHAEL BELL
4. Mr. Bell is entitled to deduct in computing income a business loss of $22,843 in the 1992 taxation year, being his portion of the loss sustained by the Rosemount on the inventory write-down in 1991.
...
C. APPEAL OF RICHARD LOVE
7. Mr. Love is entitled to deduct in computing income a business loss of $22,415 in the 1991 taxation year, being his portion of the loss sustained by the Rosemount on the inventory write-down in 1991.
...
D. APPEAL OF KIMBALL SCALES
10. Mr. Scales is entitled to deduct in computing income a business loss of $22,415 in the 1991 taxation year, being his portion of the loss sustained by the Rosemount on the inventory write-down in 1991.
...
[5] There remains the issue concerning the interests in a co-tenancy regarding a project known as the Wellington Centre for Seniors (the "Wellington Centre"). The subject of the co-tenancy was discussed in the above-mentioned Grant et al. decision regarding the Appellant Markell. He had claimed an allowable business investment loss (ABIL) regarding the Wellington Centre. The ABIL was dismissed on the ground that it did not comply with the legislated criteria required. As an ABIL is from a capital loss, the Appellants tried, in the course of the argument, to modify their claim into a business loss. This late change was not accepted.
[6] The pertinent facts described in the Notice of Appeal read as follows:
6. Besides marketing Rosemount, RPIM and Messrs. Lucas and Simpson were also involved in at least 17 other real estate limited partnerships, co-tenancies, subdivisions and other developments, including the Wellington Centre for Seniors (see below).
...
(b) The Wellington Centre for Seniors
21. The original proposal for the Wellington Centre for Seniors (the "Wellington") was to construct a 103-unit seniors' condominium complex with four commercial units.
22. The moving forces behind the Wellington were Glenn Lucas and Walter Wainman, each of whom, as mentioned in paragraph 2 above, has a lengthy and extensive history of real estate transactions.
23. The builder and manager of the Wellington was RPIM which, as mentioned in paragraph 4 above, was controlled by Mr. Lucas and was involved with numerous real estate projects.
24. Another guiding hand in the Wellington was Gary Simpson who, as mentioned in paragraph 5 above, was a shareholder of RPIM and has a history of transactions in real estate.
25. The land on which the Wellington was to be constructed was purchased by Wellington Retirement Centre Inc., which was owned by Messrs. Lucas, Wainman, and Simpson and another individual.
26. In addition, several of the purchasers of interests in the Wellington had a history of dealing in real estate, and several more were involved in a number of other real estate transactions either as speculators or real estate agents.
27. Under the original proposal for the Wellington, each purchaser of an interest in the Wellington would make a deposit toward an individual condominium unit and would hold title to that unit once condominium registration took place and, in addition, each purchaser would be a tenant-in-common with all other purchasers and with Wellington Retirement Centre Inc. for any unsold interests in the lands.
28. It was intended that either the property as a whole or each purchaser's unit would be transferred as soon as possible after construction of the Wellington.
29. Acquisition of the land for the Wellington relied heavily on borrowed funds.
30. A building permit application was submitted to the City of Ottawa in March 1988, and a building permit for the Wellington was finally issued in or about December 1988.
31. In the meantime, the Ontario Government had changed the rules governing real estate projects like the Wellington, with the result that sales of the units of the Wellington, which had been required to fund the construction costs, ceased.
32. In addition, other seniors' residences had been built and began operating, and competition among them was fierce.
33. As a result of the factors mentioned in paragraphs 30 through 32 above, and because financing could not be arranged for construction, it was determined that construction of the Wellington as originally proposed could not begin.
34. In 1990, plans were put in place to sell the property to a real estate limited partnership to raise the funds to buy out the original purchasers and complete the project, however, not enough interest was generated and the limited partnership idea had to be abandoned.
35. Subsequently, in 1991, the first mortgagee foreclosed on its mortgage.
36. The Appellant had purchased his interest in the Wellington in or about November 1987, and had financed his purchase entirely with borrowed funds.
37. The intention of the Appellant was to sell his condominium unit in the Wellington as soon as possible after taking title to the unit, if the property as a whole was not sold first.
38. In his purchase of an interest in the Wellington and his participation in the project, the Appellant relied on the experience and know-how of Messrs. Lucas, Wainman and Simpson.
39. The Appellant, in his T1 tax return for the 1991 taxation year, deducted as a business loss amounts that he had paid in connection with the Wellington totalling $12,609.
[7] The pertinent parts of the Reply to the Notice of Appeal read as follows:
5. In answer to paragraph 6 of the Notice of Appeal, he admits that Real Property Investments and Management Ltd. ("RPIM") and Lucas were involved in the marketing of the Rosemount Seniors' Residence Limited Partnership and of the Wellington Centre for Seniors and that that Simpson was involved in the Wellington Centre for Seniors. He also admits that RPIM, Lucas and Simpson were involved in other real estate limited partnerships and developments. Otherwise, he has no knowledge of the allegations of fact therein.
The Respondent admitted paragraphs 21, 23, 25, 27 and 35 of the Notice of Appeal.
9. In answer to paragraph 22 of the Notice of Appeal, he admits only that Lucas and Wainman were involved in the Wellington Centre for Seniors. Otherwise, he has no knowledge of the allegations of fact therein.
10. In answer to paragraph 24 of the Notice of Appeal, he admits only that Simpson was involved in the Wellington Centre for Seniors. Otherwise, he has no knowledge of the allegations of fact therein.
11. In answer to paragraph 34 of the Notice of Appeal, he admits only that an attempt to raise funds through a limited partnership was made and abandoned. Otherwise, he has no knowledge of the allegations of fact therein.
12. In answer to paragraph 36 of the Notice of Appeal, he admits only that the Appellant purchased his interest in the Wellington in or about November, 1987. Otherwise, he has no knowledge of the allegations of fact therein.
13. In answer to paragraph 39 of the Notice of Appeal, he admits only that in filing his income tax return for 1991, the Appellant deducted $12,609 as a business loss, but says that this amount represented the amount invested plus expenses.
...
18. In reassessing the Appellant's 1991 taxation year, the Minister relied on the following assumptions of fact:
a) RPIM was incorporated in June 1984 to facilitate the purchasing and managing of properties located in the Ottawa and Kingston areas;
b) at all material times, RPIM was controlled by Glenn Lucas;
c) RPIM and its predecessor, Glenn T Lucas Financial Services, have managed single family homes, duplexes, triplexes and apartment buildings as well as resorts and construction projects;
d) RPIM and Glenn Lucas are in the business of promoting and managing tax shelters;
e) at all material times, the Appellant was employed at Drytex and was not in the business of buying and selling real estate;
...
The Wellington Centre for Seniors (the "Wellington Centre")
z) the original proposal for the Wellington Centre was to construct a 103-unit seniors' condominium complex with four commercial units;
aa) the builder and manager of the Wellington Centre was to be RPIM;
bb) the land on which the Wellington Centre was to be constructed was purchased by Wellington Retirement Centre Inc., which was owned by Glenn Lucas, Walter Wainman, Gary Simpson and another individual;
cc) the land was situated at 951 Wellington Street In Ottawa;
dd) in November 1987, interests in the Wellington Centre were sold to four individuals, one of whom was the Appellant, as tenants-in-common;
ee) the funds from the sale of these interests were used to finance the purchase of the land and initial design and development costs;
ff) attempts to sell additional interests as tenants-in-common were unsuccessful;
gg) an attempt was then made to raise funds through the sale of partnership units in the Wellington Retirement Centre Limited Partnership;
hh) this attempt also failed;
ii) the Offering Memorandum of the Wellington Retirement Centre Limited Partnership, dated June 21, 1991, advised potential investors, inter alia, that:
i) The Wellington Retirement Centre Limited Partnership was formed to acquire lands in the City of Ottawa, Ontario and to develop, construct, own and operate on the Property a retirement home facility to be known as Wellington Centre for Seniors;
ii) in the future the Partnership may, but need not, decide to register the Project as a condominium under the Condominium Act (Ontario). In that event a Limited Partner may become entitled, upon certain conditions, to exchange an Interest for a specific condominium unit. For the purpose of any such exchange a specific suite (the "Designated Suite") is identified with each Interest;
iii) investment in Partnership Interests in the Partnership will give Limited Partners an opportunity to earn income from the operation of the Project, to enjoy capital appreciation, and to use provisions of the Income Tax Act (Canada) permitting tax deferral and deduction;
iv) there is no market for the Interests and investors may not be able to resell their Interests. This investment should be considered only by those investors who are able to make a long term investment. Investors should consider the merits of the investment in addition to the expected income tax benefits;
jj) the Limited Partnership intended the Wellington Centre to be treated as a capital property and not as inventory;
kk) no construction ever took place;
ll) in 1991 the first mortgagee foreclosed on its mortgage;
mm) the land was eventually sold in 1993 through power of sale;
nn) each of the original four investors, referred to above in subparagraph (dd), in computing their tax for 1987, claimed a deduction against their employment income amounting to almost one-half of their investment with respect to their share of the initial development costs;
oo) in 1991 the investors claimed an income tax deduction equal to the amount invested plus expenses, minus the 1987 tax deduction; and
pp) the intention of the investors, including the Appellant, at the time of purchase of their interests, was to earn income from property over a long period of time.
Appellants' Arguments
[8] No evidence was adduced by the Appellants. Their counsel presented to the Court a document entitled Appellants' Summary of Admitted Facts. It is from these admitted facts and from the finding of facts made by Judge Bowman in the afore-mentioned Grant et al. decision that she argued her case.
[9] Although it may appear repetitive, I will reproduce most of the facts described as admitted in counsel's summary:
1. Real Property Investments and Management Ltd. ("RPIM"), Glenn Lucas ("Lucas") and Gary Simpson ("Simpson") were involved in the Wellington Centre for Seniors. RPIM, Lucas and Simpson were also involved in other real estate limited partnership and developments.
2. RPIM was controlled by Lucas.
3. RPIM was the builder and manager of the Wellington Centre for Seniors.
4. The original proposal for the Wellington Centre for Seniors was to construct a 103-unit seniors' condominium complex with four commercial units.
5. The land on which the Wellington Centre for Seniors was to be constructed was purchased by Wellington Retirement Centre Inc., which was owned by Lucas, Simpson, Walter Wainman and another individual.
6. The land was situated at 951 Wellington Street in Ottawa.
7. Under the original proposal for the Wellington Centre for Seniors, each purchaser of an interest in the Wellington Centre for Seniors would make a deposit toward an individual condominium unit and would hold title to that unit once condominium registration took place and, in addition, each purchaser would be a tenant-in-common with all other purchasers and with Wellington Retirement Centre Inc. for any unsold interests in the lands.
8. The Appellants at all material times were employed at Drytex and were not in the business of buying and selling real estate.
9. In November 1987, each Appellant purchased an interest in the Wellington Centre for Seniors as tenant-in-common.
10. Wellington Retirement Centre Inc. acted as bare trustee for the benefit of the purchasers.
11. The funds from the sale of these interests were used to finance the purchase of the land, and initial design and development costs.
12. Each Appellant, in computing his tax for 1987, claimed a deduction against his employment income amounting to almost one-half of his investment with respect to his share of the initial development costs.
13. Attempts to sell additional interests as tenants-in-common were unsuccessful.
14. An attempt was then made to raise funds through the sale of partnership units in the Wellington Retirement Centre Limited Partnership.
15. Wellington Retirement Centre (1990) Inc. was incorporated on February 6, 1990 for the purpose of acting as General Partner of the proposed partnership.
16. Wellington Retirement Centre (1990) Inc. was an inactive, bare trustee corporation.
17. The attempt to raise funds through the limited partnership failed and was abandoned.
18. No construction ever took place.
19. Subsequently, in 1991, the first mortgagee foreclosed on its mortgage.
20. The land was sold in 1993 through power of sale.
21. Mr. Armstrong, in filing his T1 tax return for the 1991 taxation year, deducted $12,609 as a business loss. This amount was equal to the amount invested plus expenses minus the 1987 tax deduction, as mentioned in paragraph 12 above.
22. Mr. Bell, in filing his T1 tax return for the 1991 taxation year, deducted $12, 609 as a business loss. This amount was equal to the amount invested plus expenses minus the 1987 tax deduction, as mentioned in paragraph 12 above. Mr. Bell also deducted as a business loss accounting and legal expenses that he had incurred in connection with the Wellington Centre for Seniors totalling $1,316.
23. Mr. Love, in filing his T1 tax return for the 1991 taxation year, deducted $13,057.50 as a business loss. This amount was equal to the amount invested plus expenses minus the 1987 tax deduction, as mentioned in paragraph 12 above.
24. Mr. Scales, in filing his T1 tax return for the 1991 taxation year, deducted $12,803 as a business loss. This amount was equal to the amount invested plus expenses minus the 1987 tax deduction, as mentioned in paragraph 12 above.
[10] Counsel for the Appellant referred, among others, to paragraphs 8, 13, 14 and 15 of Judge Bowman's decision in Grant et al. (supra), where he found that the Appellants were traders in real estate in view of the motives and intentions of the dominant partners:
[8] I have recited this litany of projects, most of which were disasters for the investors, because it establishes beyond peradventure of a doubt that Lucas, Simpson and their company were traders in real estate. Their method of operation was the quick flip. Whatever may have happened to the unfortunate investors to whom they sold a project, they usually ensured that they got their profit up front.
[13] How then does one apply the well-known principles embodied in these cases to a partnership, or a co-tenancy where the individual investors may well have widely disparate expectations and intentions? One co-owner or partner may hope for a quick profit, another may be looking to a long-term investment.
[14] We must start by looking at the nature and structure of the partnership itself. In a limited partnership the general partner has control of the operations. The limited partner's role is a passive one, but if the partnership carries on a business so does the limited partner: The Queen v. Robinson et al., 98 DTC 6065; Grocott v. The Queen, 96 DTC 1025.
[15] In determining whether the partnership, considered as a notional separate person, is engaged in an adventure in the nature of trade, one must look at what the partnership actually does and at what the motives and intentions of the persons who in fact run the partnership are. I do not mean necessarily the persons with the largest number of votes or largest share of the partnership interest. Rather I am referring to the dominant partners who are the driving force and motivation behind the partnership. In some cases this may be a difficult question to answer, but in this case I have no difficulty. Clearly it was Lucas and Simpson, and their company RPIM. It was they who effectively made the decisions in these partnerships. Lucas and RPIM, in which Simpson had an interest were the promoters. The situation is not dissimilar to that which existed in M.N.R. v. Lane, 64 DTC 5049 where Noël J. said at pages 5054 to 5055:
It would appear from this that the Syndicate's non-active members were quite content to leave the handling of the Syndicate's activities to the executive committee who had carte blanche to handle the business of the Syndicate as they thought best and because of this situation, the passive members here would be in no different position than that of the active members. Indeed, if the transactions are business transactions, any profit derived therefrom from any of the members would be taxable.
[11] Counsel for the Appellants submitted that the latter embarked on an adventure in the nature of trade with respect to the Wellington Centre and therefore the loss that each of them suffered constituted a fully deductible business loss. They were all participants in the real estate project which was put together by the same three persons as in the Grant et al. decision (supra): Gary Simpson, Glenn Lucas and the company they owned Real Property Investment and Management Limited or RPIM. The Grant et al. (supra) appeals featured extensive testimony from Gary Simpson who was a key player in all of the real estate projects. Counsel for the Appellants submitted there was no reason to call upon Mr. Simpson to provide the same extensive testimony to this Court. To do so, in her view, would constitute re-litigation of the same issues and a waste of the Court's time. Those issues had a full airing before the Court. Judge Bowman had issued a judgement with his findings of fact concerning the Simpson, Lucas and RPIM real estates projects.
[12] Counsel for the Appellants explained that Mr. Markell's appeal, which was heard and dismissed by Judge Bowman, concerned funds which Mr. Markell advanced with respect to the Wellington Centre and for which he claimed an allowable business investment loss or ABIL. The Appellants in the present appeals have claimed a fully deductible loss from an adventure in the nature of trade, not an ABIL. Judge Bowman had rejected Mr. Markell's claim for an ABIL.
[13] Counsel for the Appellants referred to paragraph 34 of the Grant et al. decision where Judge Bowman stated that he could not determine whether Mr. Markell even acquired an interest in the land. She submitted that the Appellants had purchased in 1987, as tenants-in-common, an interest in the Wellington Centre and all that the Appellants had were interests in land. The other major co-tenant was Wellington Retirement Centre Inc. So as more co-tenants were recruited and bought interest in the land, the interest of Wellington Retirement Centre Inc. would be reduced. Counsel for the Appellants stated that the Respondent had admitted that the Appellants were tenants-in-common. She referred to the Black Law Dictionary which defines a tenant-in-common as tenants who hold the same land together by several and distinct titles but by unity of possession. That was the first point of divergence with Mr. Markell's position, according to counsel for the Appellants who made the three other following distinctions. The second point of divergence is that the Appellants' claims are not based on a limited partnership. Mr. Markell's claim was based on a limited partnership, however, the limited partnership never came into existence. The third point of divergence, it is an admitted fact that the Appellants' funds were used to purchase the land and initial design and to cover development costs. Further, each Appellant in computing his taxes for 1987, claimed a deduction against his employment income amounting to almost one-half of his investment with respect to his share of the initial development costs. The fourth point of divergence with Mr. Markell, the Appellants did not claim an ABIL. The Appellants claimed a fully deductible business loss.
[14] Counsel for the Appellants submitted that the losses of the Appellants in the Wellington Centre arise from their interests in the land. It is submitted that the land was inventory and the decision of Judge Bowman in Grant et al. should be followed.
[15] Counsel for the Appellants pointed out that the Respondent's position in determining the loss as a capital loss was based on the Wellington Centre being capital property, that is property held for the purpose of a long-term investment. In her view that was not the finding made in Grant et al. (supra) where it was found that quick profit was the motive.
Respondent's Arguments
[16] Counsel for the Respondent submitted that there was no evidence before the Court to enable the Appellants to succeed in their claim. The assumptions of fact cannot be demolished in the absence of any evidence. Really that was the full answer to the appeal. Counsel for the Respondent referred to the following assumption made in the Reply to the Notice of Appeal:
jj) the Limited Partnership intended the Wellington Centre to be treated as a capital property ...
[17] By not adducing evidence, the Appellants have failed to make out their case and the appeals have to be dismissed. Although no more should be said according to counsel for the Respondent, he added that the land in question was purchased by the Wellington Retirement Centre Inc. and not by the four Appellants. They purchased an interest in Wellington Centre as tenants-in-common but Wellington Retirement Centre Inc. held the land. It was the registered owner of the land and its role was that of a bare trustee. That is, it would transfer the registered title at some point on receiving a direction from the beneficial interest. Counsel for the Respondent referred to the specific investment made by the Appellants. The original proposal for the Wellington Centre was to construct a 103-units seniors condominium complex with four commercial units. Had the project been realised each of the Appellants would have been the registered owner of one of those 103 condominium units and would be a tenant-in-common with respect to the unsold condominium units and the common areas. According to counsel for the Respondent, the promoters had one motivating interest, that was to obtain the land, hold the land for a period of time and sell it at a profit to the co-tenancy. There was no evidence that this was the Appellants' intent. Counsel for the Respondent concluded that the paucity of evidence before the Court was an absolute bar to any of the ministerial assumptions of facts from being in any way reversed.
Conclusion
[18] I will begin by two foreword notes: 1) Counsel for the Appellants mentioned the fact that the Appellants had deducted part of their losses on their investment in the taxation year 1987. However, counsel for the Appellants provided no explanation as to the basis for these deductions. Therefore it is not to be further discussed. 2) Regarding the Summary of admitted facts made by counsel for the Appellants, it was not disputed by counsel for the Respondent and I accept that it was accurately made.
[19] Counsel for the Appellants submitted, as an explanation on not adducing evidence, that it would constitute re-litigation of the same issues and a waste of the Court's time. It is my view that the proper means of not wasting the Court's time would have been for the Appellants and the parties in Grant et al. to be jointly heard. By not having done so, evidence has to be adduced. Judicial findings made in another court proceeding are inadmissible as evidence supporting facts in subsequent proceedings which involve different parties. Cross on Evidence, Sixth Ed. p. 103. See also Canada v. Pompa, 94 DTC 6630. Each appeal has to be determined in accordance with the evidence adduced before the Court during the hearing of an appeal, unless there is agreement as to the facts between the parties.
[20] Were the facts admitted by the Respondent sufficient for the Court to allow the appeals? There was one admission that the Appellants were tenants-in-common. Counsel for the Appellants referred to the definition found in Black's Law Dictionary for "tenants-in-common" and cited at paragraph 12 of these Reasons to affirm that the Appellants had acquired an interest in land. Respondent did not admit that the Appellants had acquired an interest in land as proposed by counsel for the Appellants. One of the assumptions of fact in the Reply was that the land was the property of a corporate entity and not that of the Appellants. Without contrary documentary evidence adduced at trial this assumption must stand. Even if the Appellants had acquired an interest in land, they would still have to adduce evidence on the circumstances of its acquisition and of its holding.
[21] In his argument, Counsel for the Respondent only referred to one of the Minister's assumptions of fact, namely that concerning the long term investment purpose of the intended limited partnership. However, that partnership never came into existence. Nevertheless, I believe that its purported goal may be of some significance in that it confirms the Minister's assessment. Counsel for the Respondent could have referred to the gist of the Minister's assumptions of fact, that the Appellants did not have a speculative intent in their acquisition of an interest in a co-tenancy. That assumption was not defended by counsel for the Appellants since the Appellants relied on the speculative purpose of Messrs. Lucas and Simpson which was admitted by the Respondent.
[22] This admission of the speculative intent of Messrs. Lucas and Simpson has no meaning unless proper evidence is adduced to show that the circumstances, in this case, are such that this intent should categorise the Appellants' intent. The Appellants knew the circumstances in which they had invested, the documents they had signed and the role of the other investors and participants. They knew the manner in which the business was carried on, if any was carried. If they wanted to proceed with the part of the appeal which the Respondent had not agreed on, then they should have been present for the hearing of their appeals and explain the purpose of the acquisition or investment and the manner in which the business was carried on.
[23] Evidence is essential in determining whether the Appellants were involved in an adventure in the nature of trade or whether they were carrying on a business, from which they would have incurred business losses. In the absence of proper evidence having been adduced and for all the reasons stated above, the part of the appeals having to do with the Appellants' interests in the Wellington Centre cannot succeed. The appeals are allowed for the part consented to by the Respondent and described at paragraph 4 of these Reasons. Costs are in favour of the Respondent.
Signed at Ottawa, this 21st day of July, 2000.
"Louise Lamarre Proulx"
J.T.C.C.