Date: 20010608
Docket: 2000-1147-IT-I
BETWEEN:
JOSEPH CAPOGRECO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1] In computing income for the 1991 taxation year, the Appellant sought to claim a business investment loss in the amount of $410,082 resulting in a claim for an Allowable Business Investment Loss ("ABIL") of $307,562. The Minister of National Revenue ("Minister") assessed the Appellant for the 1991 taxation year and denied the deduction of the business investment loss. From this disallowance, the Appellant appealed to this Court.
[2] Joseph Capogreco testified that he initially had been granted the loss but that his accountant was contacted in April 1997 by Revenue Canada requesting more information. He visited their offices on Yonge Street and subsequently the loss was disallowed.
[3] He introduced a number of documents to assist in the proof of his claim in Exhibit A-1 which included a list of receivables and payables; the anticipated bank position of 719102 Ontario Limited (the "Company") as of September 1, 1989; various lists of accounts receivable and payable; various correspondence and documents with respect to various projects in which this company was involved; lawyers' letters; letters from Brampton Hydro; statements of accounts and other letters.
[4] Exhibit A-2 was a copy of the lease between 719102 Ontario Limited and 620705 Ontario Inc. and Dr. Ivan Majesky. Exhibit A-3 was a statement of defence and cross-claim between Altracon Construction Ltd. and 719102 Ontario Limited, Paul Delahunty and Brian Kenny. Exhibit A-4 was a letter from Allen & Savage Insurance Brokers Ltd. directed to Centre Park Medical Arts Developments Ltd., dated February 6, 1989 with respect to insurance on the property at 30-42 Vodden Street in Brampton, Ontario. Exhibit A-5 contained one cheque of the Company dated December 1, 1989 and two photocopies of cheques dated December 1, 1989 and January 1, 1990.
[5] The Appellant regarded these documents as evidence of business activity of 719102 Ontario Limited (the "Company").
[6] He testified that the Company was set up for the purposes of developing medical buildings and services in 1987. By the end of 1987, they had acquired a lease on Vodden Street in Brampton, Ontario. Approximately 10 to 12 doctors wanted to be in it so the Company started to construct a medical building on the property. The Appellant was a silent partner. There were two active partners. The Appellant stated that he gave $140,000 to Brian Kenny to allow the Company to proceed. The Company received approval from the municipality to proceed and they attempted to obtain tenants. They also obtained an X-Ray company to be their sub-tenant. This company paid $500,000 to the Company which was referred to as "key money". The amount of $250,000 of this money was up-front money, so-called, and $250,000 was to be paid on occupancy. The Company then looked for a pharmaceutical company. The Appellant approached a friend who said that he was interested in being a pharmaceutical tenant and he paid $250,000 as key money to the Company.
[7] After one to two months the three partners tried to obtain a mortgage for 100 percent of the financing required. They were unable to do so. The Appellant asked a friend of his to come in to the investment and he agreed to do so. He received 10 percent of the shares. Five per cent of the shares came from the Appellant and 2½ percent from each of the other two partners. The Company was able to obtain a mortgage from Confederation Trust for $3 million for bridge financing for the construction of the building.
[8] As the matter progressed they were told that they needed more money for expenses. The Appellant stated that he put $81,000 into the Company. They also interested another investor, Mr. D. Dienna, who received 10 percent of the shares from the other two partners and he put in $50,000.
[9] Within nine to ten months after construction started in October 1989, they were asked to put in more money. The Appellant put in $107.000, Mr. Fazio put $80,000, Mr. Dienna put in the same and Messrs. Kenny and Delahunty put in double that amount to finish the inside of the building. The Appellant said that he borrowed some money from the family and the Bank of Nova Scotia but at the end of the day he put in another $107,000.
[10] The Appellant and some of the other partners approached the contractors to see the books and they were refused. There were expenditures that were not authorized. The Appellant alleged that they put the money into another company. Further, they took fees on the mortgage which were not agreed upon. It was the Appellant's position that the contractors took one half a million dollars out of the business. The partners decided to litigate and they received an injunction to freeze the accounts of the contractors and any further dealings by them. Consultations were held between the various lawyers to settle the matter, the injunction was lifted and the property was released. The building was taken over by Mr. Fazio and the Appellant. The settlement offer deteriorated. The Appellant and his partners suffered from stalling tactics, the case was put off, some of the defendants disposed of their assets and made no serious settlement offer. A settlement was reached with Mr. Delahunty for $265,000 and this money was put into the Company to finish the building. The accountant was attempting to obtain a lower mortgage rate but the mortgage rate went up to 17¼ percent from 13 percent. Confederation Trust took over the building.
[11] The Appellant and other partners attempted to obtain $500,000 from Brian Kenny but were unable to do so. He went bankrupt and the matter was discontinued.
[12] Near the end of 1990 or early 1991, Confederation Trust indicated that they were going to sue the Appellant and his partners for the shortfall. The Appellant had no money but Mr. Fazio did. He settled with the mortgage company. The interest rates went down.
[13] The Company had acquired a negative flow of $500,000. The building was losing money while being operated by the mortgage company. The mortgage company wanted to give the building back to the Company for $500,000 and to give them a mortgage for $3 million. Mr. Fazio said that he could not come up with his share of $250,000 so the Appellant turned his shares over to his godfather for $1. He "laid low" for months and then got back on his feet.
[14] In cross-examination the Appellant said that the loss occurred because he bought the shares and lost them. He confirmed that he put in $140,000 but he already had his shares at that time. He gave a cheque to Brian Kenny. He did not have the cheque with him and he has not seen Mr. Kenny since 1990. He had no other documents to show these facts. He filed his 1991 return in 1995.
[15] He put in a cheque of $81,000 into the Company in 1988. He did not have that cheque. This was put in to keep the Company going. He received no shares for that amount of money. They agreed that since they received the mortgage they would get their money back but they did not. He put in $107,000 in October 1989. Mr. Fazio was a witness but he could not come to Court on the first day of the trial. He had no other evidence of that fact.
[16] Exhibit R-1 was admitted by consent. This was a letter to Mr. Joe Capogreco from the Company requesting a capital injection due to a shortage of funds. The Exhibit also contained an invoice regarding the capital injection of $107,332. The Appellant said that he borrowed $50,000 from the Bank of Nova Scotia. Some of the money that he put into the Company was his own money and some was received from his father. He also received $90,000 from his sister. He had no documents to support this. He is now helping to pay the mortgage.
[17] His sister took out a mortgage for $81,000 but he had no records of it. He was asked if he requested his sister to come to the Court and he said that he did not. He did not think that he needed her. It was his position that Exhibits A-1 to A-5 showed Company activity in 1989, 1990 and 1991.
[18] At this point the matter was adjourned to May 11, 2001, at which time Exhibit R-2, the 1991 T1 General income tax return of Joseph Capogreco was admitted into evidence by consent. The Appellant said that this was the information he submitted in support of his claim for an ABIL and other information regarding his ownership of 20 shares of the Company.
[19] Anthony Fazio testified that he was introduced to the Company by the Appellant and that he received 5 percent of the shares and then an additional 5 percent. The reason he became involved was that the Appellant indicated to him that they were constructing a building which was to house a pharmacy. This witness paid $250,000 for rights to the pharmacy. It was intended to construct the building in 1987/1988. It was just under construction and the Company was looking for money. This witness was brought to a meeting of the Company which needed $500,000, of which this witness's share was $90,000 for his interest. He was also requested to guarantee a mortgage to Confederation Trust for approximately $3 million. The witness indicated that there was talk of fraud taking place when the contractors produced an interim statement with many unexplained expenses thereon and they were requesting more money.
[20] The witness was asked why he put more money in at that stage and he said that he already put money in so he wanted to get the building finished and then he would deal with the problems afterwards.
[21] In cross-examination he said that the $90,000 that he injected into the Company was not for additional shares. It was a capital investment. He admitted that in 1990 and 1991 the principal source of income for the Company was rent.
[22] The Appellant was allowed to ask further questions and as a result of those questions the witness said that they hired a lawyer and obtained an injunction. One party settled and one did not pay anything, the injunction was released and the partners received nothing.
[23] After the building went bankrupt in 1990, a third party bought the building. This witness believed that Confederation Trust took it back for a period of time. This witness and another person put in more money and took back the building. As a result of a further question he indicated that he took the building over in 1990 or 1991.
[24] Peter Pugliese testified that he was the Appellant's brother-in-law. He took out a first mortgage on his property in July of 1987 to assist Mr. Capogreco in obtaining funds of $90,000. In August 1998, he took a second mortgage for $120,000 to raise money for Mr. Capogreco. He gave money to him. Exhibit A-6 was introduced by consent which contained the signature of Joseph Capogreco acknowledging receipt of $90,000 from Peter and Teresa Pugliese which resulted in an increase in their mortgage from $35,000 to $125,000 regarding the first mortgage on their house at 140 Simonston Blvd. in Thornhill, Ontario. An agreement assuming mortgage was also attached to this Exhibit and a copy of the charge/mortgage of land.
[25] Exhibit A-7 was a copy of a charge/mortgage of land in the amount of $120,000.
[26] In cross-examination he said that he acted through lawyers and that the documents were signed when indicated on them. The Appellant was to take over the mortgage payments and has paid as much as he was able to. At that point he did not know how much he had paid back. He said the Appellant was talking about investing in the medical building and that was all that he knew about what he was going to do with the money. The purpose was to help pay the expenses for the construction of the building.
[27] In response to a question directed to the witness by the Court, he said that the Appellant missed paying back $45,000 in payments. He paid back about $45,000. He still pays when it is possible for him to do so. This witness still considers him to be responsible for the balance.
[28] Mr. Ronald Bruce Love was a chartered accountant and had acted for the Appellant with respect to the facts surrounding this appeal. He advised him about filing his tax returns. He advised him to file under the voluntary disclosure program. There was a business loss involved. He suggested to the Appellant that he claim an ABIL realized in the 1991 taxation year.
[29] Mr. Love contacted Revenue Canada and arranged a visit to their offices in North York and on Yonge Street with the Appellant and they filed the returns for several years including the 1991 taxation year.
[30] The agent at Revenue Canada asked for particulars with respect to the ABIL claim and the witness said that they provided copies of the Supreme Court papers setting out the circumstances of the losses and details of the mortgage documents. There were no other questions asked by Revenue Canada of him at that time. The agent for Revenue Canada indicated that he was satisfied with the information provided at that time.
[31] In 1997 he was re-contacted by Revenue Canada about the ABIL claim for 1991.
[32] In cross-examination he said that he prepared the 1991 T1 General for Mr. Capogreco on the basis of information provided by him. This information was referred to on page 5 of the return. The claim was for three quarters of $410,082.90 or $307,562.18. This related to the acquisition by the Appellant of 20 shares of the Company. He said that the Supreme Court documents related to the loss of the investment.
[33] The Appellant received $210,000 from Mr. Peter Pugliese and $200,000 from his own resources. His notes indicated that the money was advanced to buy the shares. The Appellant was the registered owner of 20 percent of the Company effective May 21, 1987. He was not particularly certain about some of the other information and notes contained in his file. At one point, where the file indicated $138,000, he said that it should have been $188,000. He was not sure of the year.
Argument on behalf of the Respondent
[34] Counsel took the position that the ABIL claims were only available if specific requirements of the statutes were met. The burden is on the Appellant with respect to each and every requirement. He referred to subparagraph 39(1)(c)(iii) of the Income Tax Act ("Act") which required the Appellant to establish that the debt was owing to the taxpayer by a small business corporation. This entity is defined in subsection 248(1) of the Act as:
"Small business corporation", at any particular time means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time was attributable to assets that were
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
. . .
(c) assets described in paragraph (a) and (b),
and, for the purposes of paragraph 39(1)(c), includes a corporation that was at any time in the 12 months preceding that time a small business corporation;
Subsection 248(1) defines "Active business":
"Active business", in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business;
The Appellant must show that in 1990 and 1991 most of the assets were used in carrying on an active business. However, the Company was carrying on a specified investment business.
[35] Subsection 248(1) of the Act defines "Specified investment business" as:
"Specified investment business" has the meaning assigned by paragraph 125(7)(e);
Paragraph 125(7)(e) defines "Specified investment business".
"Specified investment business" carried on by a corporation in a taxation year means a business (other than a business carried on by a credit union or a business of leasing property other than real property) the principal purpose of which is to derive income from property (including interest, dividends, rents or royalties), ...
The Company here derived its income from rental of property and the other exemptions referred to in paragraph 125(7)(e) do not apply here.
[36] Counsel referred to the case of Gill v. Minister of National Revenue, 1998 CarswellNat 1725 (T.C.C.) at page 1 where the Court decided that the corporation was not a small business corporation within the meaning of subsection 248(1) of the Act as the corporation was not carrying on an "active business", but was involved in a "specified investment business". The only income earned by the corporation there was rental income, and the principal purpose of the corporation was to derive income from property. The same can be said of the case at bar.
[37] In that case, Judge Brulé also considered the cases of Prosperous Investments Ltd. v M.N.R., [1992] 1 C.T.C. 2218 (T.C.C.) and Ben Barbary Company Limited v. M.N.R., 89 DTC 242 (T.C.C.) where the learned trial judge stated at page 244:
In determining the "principal purpose" of a business carried on by a corporation the stated object of the person who carries it on is not necessarily the only, or even the most important, criterion. Of critical importance is what the corporation in fact does and what its sources of income are.
In Gill, supra, the Court said:
Therefore, on the evidence before the Court, it is the Court's opinion that the "principal purpose" of Homebank was to derive income from property.
[38] In 1990 and 1991, the Company in question in this case leased a building and the only source of income was rental income. It was carrying on a "specified investment business" and not an "active business".
[39] Further, the Appellant has not proven what he paid into the Company. The Respondent accepted that he put $210,000 into the Company only but he must show that he put it in to acquire shares that related to a debt that was lost and he has not done that. There was some evidence that he already had the shares when he put the money in and there was no evidence that the Company promised to pay the money back.
[40] Only Exhibit R-1 asks for a capital injection but it does not say that he will get any shares for it and it does not say that it will be considered to be a debt of the Appellant.
[41] Counsel also referred to Wierbicki v. R., 1996 CarswellNat 2202 (T.C.C.) at page 1 where the appeal was dismissed and the Court found that "the taxpayer failed to establish that there was an indebtedness to him by S. that was capable of becoming a bad debt for the purposes of section 50 of the Income Tax Act. Moneys were put into S. to keep it afloat and not with any intention or expectation of creating an indebtedness."
[42] Counsel also referred to Eynan v. R., 2001 CarswellNat 302 (T.C.C.) at pages 6-7 where Judge Lamarre Proulx said:
The appellant had the burden of showing that he had incurred an ABIL within the meaning of paragraph 39(1)(c) of the Act, which reads:
. . . . .
Among other conditions he was required to meet, the appellant had to show that he incurred a loss from a disposition of a share of the capital stock of a small business corporation or of a debt owing to him by a Canadian-controlled private corporation. None of this was proven by the appellant as there was no evidence adduced on that particular issue. The appellant put the money into the project but he has not established that the loan was made to a corporation of the type described above. The appellant, therefore, is not entitled to an allowance business investment loss for 1992.
[43] In the case at bar, the Appellant has not been able to establish on a balance of probabilities that the requirements of paragraph 39(1)(c) had been met.
[44] It is true that the Appellant did say that he hoped to get the money back, but what he meant by that was that he would be able to earn income from it when it flourished and not that he considered it to be a debt.
[45] This appeal should be dismissed.
Argument on behalf of the Appellant
[46] The Appellant argued in his summation that he put the money in but he did so to get the shares and that he fully intended to get the money back. He then said: "I understood that we were to get the money back".
[47] He also said that the Company was an active business in that it not only had rental income but that it also intended to obtain other companies and other businesses to occupy the premises and this was an active business. He then admitted that in 1990 and 1991 the Company's only income was rental income.
[48] With respect to the question of whether an active business existed, he referred to the case of Geropoulos v. R., [1998] 3 C.T.C. 2384 (T.C.C.) which was apparently a Tax Court of Canada case for which he did not have the citation and which may not have been reported. After a reference was made to the case, the Appellant then added that the Company was incorporated for other purposes than earning rental income. He said that it was not just a specified investment business and the appeal should be allowed.
Analysis and Decision
[49] There are two issues which arise in this case. One issue is whether or not the Appellant has established on a balance of probabilities that he invested the money in the shares of the Company that he said he did amounting to $410,082. The second issue is whether or not, on the basis of the evidence adduced before the Court, the Appellant is entitled to an ABIL in the year 1991.
[50] Although the evidence introduced on the first point was somewhat sparse, in light of documentation that the Appellant did provide, in light of some corroboration of the amount that the Appellant put into the Company; on the basis of the evidence of the accountant and the other two witnesses who testified; and based upon the credibility that the Court attaches to the evidence of the Appellant himself, the Court is prepared to accept the evidence that the Appellant had put into the Company the amount of $410,082 as he indicated.
[51] However, the Appellant's problem does not stop at that point. The more difficult issue for him is whether or not the evidence establishes on a balance of probabilities that the Appellant has met the requirements of paragraph 39(1)(c) which will allow him to be entitled to the ABIL which he seeks. Unfortunately for the Appellant, the evidence on that issue falls far short of that which is required in a case of this nature.
[52] As referred to by Judge Lamarre Proulx, in the case of Eynan, supra, the Appellant in the case at bar must establish that the reassessments in this regard are in error. This onus can be discharged by the Appellant adducing evidence that satisfies the Court on a balance of probabilities of the existence of such error. However, as in that case, this Court is in agreement with the submissions made by counsel for the Respondent in argument that there was no satisfactory substantiation of the existence of the alleged ABIL.
[53] This Court is satisfied that the arguments of counsel for the Respondent are well taken and the evidence of the Appellant himself at the end of the day indicated that the only income that the Company had in 1990 and 1991, or for which it had any prospect, was income from rental. Although this position was somewhat diluted at the end of the argument put forward by the Appellant, there can be no doubt that even the thrust of what he said was that in the years 1990 and 1991 the Company's only income was rental income. Consequently, the Court is satisfied that in the year in question, on the evidence before the Court, that the "principal purpose" of the Company was to derive income from property.
[54] Further, this Company was carrying on a "specified investment business" under the provisions of paragraph 125(7)(e) and none of the exceptions referred to therein apply to the business of the Company.
[55] The Court is also satisfied that the Appellant has failed to establish that there was an indebtedness to him by the Company that was capable of becoming a bad debt for the purpose of section 50 of the Act. There is no doubt that monies were put into the Company but these monies were put in to keep it afloat and there was insufficient evidence to establish that they were put in with the intention or expectation of creating an indebtedness. As in the cases referred to, no documentary evidence was adduced to this effect. This Court must make its decision based upon the evidence before it.
[56] In the end result then, the Court is satisfied that the Appellant has not made out a case which will entitle him to the ABIL as claimed. The appeal is dismissed and the Minister's assessment is confirmed.
Signed at Ottawa, Canada, this 8th day of June 2001
"T.E. Margeson"
J.T.C.C.
COURT FILE NO.: 2000-4733(IT)I
STYLE OF CAUSE: Ken Taylor and Her Majesty The Queen
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: April 24, 2001
REASONS FOR JUDGMENT BY: The Honourable T.E. Margeson
DATE OF JUDGMENT & REASONS FOR JUDGMENT: June 8, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Margaret McCabe
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1147(IT)I
BETWEEN:
JOSEPH CAPOGRECO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 11, 2001, at Toronto, Ontario, by
the Honourable Judge T.E. Margeson
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Meghan Castle
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1991 taxation year is dismissed and the Minister's assessment is confirmed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 8th day of June 2001.
|
"T.E. Margeson" |
J.T.C.C.