Date: 19971223
Dockets: 94-649-IT-G; 94-1021-IT-G; 94-1748-IT-G; 94-3050-IT-G
BETWEEN:
DR. WILLIAM N. CAMPBELL, ALLAN N. RAUW, DR. GERALD E. GAVELIN, DR. WILLIAM N. CAMPBELL PROFESSIONAL CORPORATION,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUES:
[1] There are two issues in these appeals:
1. The quantum of losses incurred by certain partnerships and claimed by the Appellant members of those partnerships all arising out of failed real estate inventory development activities, and
2. The deductibility of certain amounts of interest said to have accrued in respect of two of the four partnerships under examination.
PARTNERSHIP MEMBERSHIPS:
[2] Each of the Appellants was a member of one or more of five general partnerships, each of which was established for the purpose of constructing and selling a building in the City of Calgary. The partnership and membership therein was as follows:
1. Dr. Gerald E. Gavelin was a member of 1000-5TH AVE. S.W. PARTNERSHIP ("5th Avenue"), the 555 PARTNERSHIP ("555"), the 9TH AVENUE S.W. PARTNERSHIP ("9th Avenue") and THE ODESSA PARTNERSHIP ("Odessa"). The taxation years under appeal are 1986, 1987 and 1988.
2. Dr. William Campbell was a member of the 12TH AVENUE GENERAL PARTNERSHIP ("12th Avenue")[1] and 9th Avenue. The taxation years under appeal are 1987 and 1988.
3. Dr. William Campbell Professional Corporation was a partner in Odessa. The taxation years involved are 1986, 1987 and 1988.
4. Allan N. Rauw was a partner of Odessa. The taxation years involved are 1984, 1985, 1986, 1987, 1989 and 1991.
It was agreed that the venture of each partnership was inventory.
5TH AVENUE:
FACTS:
[3] 5th Avenue was established in 1981. It acquired land in Calgary and contracted with Teacher's Investment and Housing Cooperative ("Teacher's") to construct and deliver a completed building to it at a cost of $22,250,000. It obtained a demand construction loan through Western Capital Trust ("WCT"), the land constituting security for the loan. In addition, the partners personally guaranteed payment of this loan. Construction commenced and continued until June, 1982 when the lenders stopped making advances and demanded repayment. This resulted in litigation.
[4] By agreement dated August 31, 1983 5th Avenue agreed to pay $500,000 to the lender and to consent to an Order Nisi/Order for Sale. It also agreed to facilitate a judicial sale or foreclosure by agreeing to the necessary Consent Order and by refraining from filing a Statement of Defence or a Demand of Notice. In exchange, WCT would discontinue the action against the partnership (other than against the managing partner) and release all members of the partnership from any liability. By a Release dated October 19, 1983 WCT agreed to release and discharge the partners:
from any claim, action, cause of action or demand of every nature and kind arising out of a covenant or covenants executed by the releasees, or any of them, wherein the releasees or any of them promised or agreed that they would pay or cause to be paid to WCT the principle (sic) and interest and all other monies secured by a mortgage granted by the Odessa Development Group Limited in favour of WCT.
(emphasis added)
[5] WCT took no further steps either by foreclosure or judicial sale after receipt by it of the aforesaid $500,000. The property continued to be registered in 5th Avenue's name until it was sold to a third party in October, 1988 for the sum of $750,000. This amount was paid to 5th Avenue and then to WCT. There was no evidence indicating that this sum had been paid as interest. The following exchange took place at the hearing, namely:
HIS HONOUR: Well, do you call that interest?
MR. GOLDENBERG: I'm not sure. The funds were paid to the partnership and the partnership, in turn, had an arrangement with the lender that in exchange for the receipt of the funds, the lender would discharge its mortgage so that the purchaser --
MS. MOON: I don't recall that evidence, Your Honour. I don't recall that evidence.
HIS HONOUR: You say 750,000 was paid to the partnership.
MR. GOLDENBERG: That's right. They were the vendors of the transaction.
HIS HONOUR: And it paid this to the lender?
MR. GOLDENBERG: Right.
HIS HONOUR: But my question was and I understood that, there is no allocation of that amount, it may not matter --
MR. GOLDENBERG: In the sense that was money all to go to interest, for example?
HIS HONOUR: Yes.
MR. GOLDENBERG: Versus principal?
HIS HONOUR: If there is no allocation, then it's up to the recipient to determine what it was ...
Mr. Goldenberg made no further submissions in this regard.
It appears that the fiscal year end of the partnership was December 31 in each of the years in question.
ISSUE:
[6] The issue in respect of 5th Avenue relates to the deductibility of interest as aforesaid. Specifically, the Appellant Gavelin claims entitlement to deduct his share of 5th Avenue's accrued interest with respect to the mortgage loan as follows:
Pre-1983 $ 473,394
1983 $ 707,803
1984 $ 862,546
1985 $ 858,820
1986 $ 953,899
1987 $1,106,522
January 1, 1988-October 31, 1988 $1,327,827.30
ANALYSIS AND CONCLUSION:
[7] The Appellant's claim fails. From the date of the Release no amount was owing by any partner of 5th Avenue in respect of the principal or interest obligation under the WCT mortgage. Accordingly, there was, as required by paragraph 20(1)(c) of the Income Tax Act ("Act"), no
... amount paid in the year or payable in respect of the year ... pursuant to a legal obligation to pay interest on ... borrowed money used for the purpose of earning income from a business...
It is clear that interest payable by 5th Avenue in respect of its business operation would initially be deductible. At the commencement of business there would have been no question about the reasonable expectation of profit affecting interest deductibility. The evidence is not compelling as to such expectation being alive in 1982. Mr. Roger MacDonald ("MacDonald"), President of the managing partner, stated that after the cessation of funding by WCT,
We were looking for a replacement lender, we were looking at core tenants. We were in a position of looking at a joint effort to continue the construction of a multi-million dollar product.
However, even if interest were deductible for 1982[2] the effect of the Release would be that such amount would be included in income in the year of the debt cancellation.
[8] The result is that no amounts of interest in respect of 5th Avenue are deductible.
12TH AVENUE:
[9] The only issue before the Court dealt with the amount of the proceeds of disposition of 12th Avenue's property. Early in the hearing, the parties agreed that the proceeds of disposition for same would be $1,248,000. This matter needs no further comment here.
555:
FACTS:
[10] 555 was established in March, 1981, acquired raw land and obtained a loan from the Mercantile Bank ("the Bank"). This loan was a demand mortgage and was supported by guarantees. In August, 1982 the Bank demanded payment of the loan and litigation ensued.
[11] As part of the court application for acceptance of a tender for $1,781,000 made by Mercantile Bank, an affidavit of value showed a fair market value of the property of $1,781,000 effective January 9, 1984. The bank obtained a Consent Order Confirming Sale And Vesting Order on August 13, 1984 accepting the bank's tender and directing that title to the property vest in the name of the Mercantile Bank free and clear of all encumbrances.
[12] The Consent Order Nisi/Order for Sale dated June 15, 1984 was signed by Code Hunter, solicitors for the partners, including this Appellant, Gavelin. The Order Confirming Sale and Vesting Order dated August 13, 1984 was also consented to by Code Hunter. These Orders were signed by the Master in Chambers of the Court of Queen's Bench of Alberta.
[13] In February, 1987 555 obtained an appraisal of the property as at August, 1984 from a Mr. J. Owsley showing a fair market value of $780,000. The partnership then, through its managing partner, prepared new financial statements and distributed same to the partners. This resulted in a claim by Dr. Gerald Gavelin for 1986, 1987 and 1988 of his share of increased non-capital loss arising therefrom.
ISSUE:
[14] The sole issue is whether the proceeds of disposition for tax purposes from the sale of the property are $780,000 as contended by the Appellant, or $1,781,000, the judicial sale price, as contended by the Respondent.
ANALYSIS AND CONCLUSION:
[15] The question of whether an order of the Court of Queen's Bench of Alberta is binding upon an Appellant affected thereby must be considered in an appeal to this Court. In Dale v. R., 97 DTC 5252, Robertson, J.A. of the Federal Court of Appeal said,
As a matter of law, both the Tax Court and this Court are required to give effect to orders issued by the superior courts of the provinces.
At page 5255 the learned Justice said:
In determining whether a legal transaction will be recognized for tax purposes one must turn to the law as found in the jurisdiction in which the transaction is consummated. ... As for the Minster, he must accept the legal results which flow from the proper application of common law and equitable principles, as well as the interpretation of legislative provisions. This leads me to the question of whether the Minister is bound by an order issued by a superior court, which order has its origins in the interpretation and application of the provisions of a provincial statute.
In the Court below, the Minister argued that the Order of the Nova Scotia Supreme Court might be binding as between the taxpayers and the Dale Corporation but not on him. Judge Bowman rejected that argument, and in my opinion rightly so ...
[16] On June 25, 1992 the Corporation obtained from the Supreme Court of Nova Scotia an order declaring that its authorized capital had been amended retroactively effective as at December 28, 1985 and that the preference shares in question had been validly issued and were outstanding as at December 31, 1985.[3]
[17] Robertson, J.A. then referred to the Supreme Court of Canada decision in R. v. Wilson, [1983] 2 S.C.R. 594, saying, at 5256:
That decision establishes the general rule that an order of a superior court cannot be attacked collaterally unless it is lawfully set aside. In Wilson, the Supreme Court was called on to determine whether a provincial court judge could look behind the apparently valid search order of a superior court and rule inadmissible the evidence obtained thereunder. In the course of delivering its reasons for judgment, the Supreme Court made some general statements of the law concerning the binding effect of orders issued by superior courts.
[18] In Wilson, Mr. Justice McIntyre referred to the statement of O'Sullivan, J.A., (Manitoba Court of Appeal) at 599:
In my opinion, where there is an authorization granted by a superior court of record, it cannot be collaterally attacked in any court and it cannot be attacked at all in an inferior court.
The learned Justice McIntyre then said, at 599:
In the Manitoba Court of Appeal, Monnin, J.A. said:
The record of a superior court is to be treated as absolute verity so long as it stands unreversed.
McIntyre, J. then stated that he agreed with that statement and said further, at 599 and 600:
It has long been a fundamental rule that a court order made by a court having jurisdiction to make it stands and is binding and conclusive unless it is set aside on appeal or lawfully quashed. It is also well settled in the authorities that such an order may not be attacked collaterally -- and a collateral attack may be described as an attack made in proceedings other than those whose specific object is the reversal, variation, or nullification of the order or judgment. Where appeals have been exhausted and other means of direct attack upon a judgment or order, such as proceedings by prerogative writ or proceedings for judicial review, have been unavailing, the only recourse open to one who seeks to set aside a court order is an action for review in the High Court where grounds for such a proceeding exist. Without attempting a complete list, such grounds would include fraud or the discovery of new evidence.
[19] In Brill et al v. The Queen, 96 DTC 6572, Mr. Justice Linden of the Federal Court of Appeal said, at page 6574 and 6575:
In this case, a specific amount was received by the taxpayer as a result of a "Rice Order" which led to a judicial sale of the property. It is clear to me that a sale is a sale, whether it is done voluntarily or pursuant to a Court order. This is so because the sale price is determined by the Court. It is a definite amount that is paid and received. It leaves nothing to be ascertained later.
[20] Having regard to these decisions, I conclude that the sale price was $1,781,000. The Appellant consented to the order fixing those proceeds of disposition and cannot now alter that figure entitling him to greater losses.
9TH AVENUE:
FACTS:
[21] 9th Avenue was established in June, 1981, acquired property and obtained a loan from Morguard Trust ("Morguard"), on behalf of five lenders, in the amount of $8,000,000. This was secured by a demand mortgage and other security. The lenders demanded payment in September, 1982 and litigation ensued. A settlement agreement between the lenders and 9th Avenue was concluded on December 21, 1984. This required the payment of $1,850,000 to settle the deficiency and a consent to an order for sale of the property to the lenders at the price tendered by them. In exchange, the lenders agreed to release the partners and guarantors from any liability. The lender attempted to sell this property on three different occasions, the first two attempts producing no tenders. On the third tender, the lender made the only submission, namely, a bid of $4,361,500.
[22] Code Hunter, solicitors for 9th Avenue, consented to an order of sale made by the Master in Chambers in The Court of Queen's Bench of Alberta on June 10, 1983. They also consented to a Consent Order in a mortgage foreclosure action on March 15, 1985 accepting the tender and vesting title. This order provided that the tender submitted by Morguard Trust Company in the sum of $4,361,500 for the purchase of the subject lands be approved and accepted. It also provided that payment into court be dispensed with, that the existing certificate of title covering the lands be cancelled and that a new certificate of title in the name of Morguard Trust Company be delivered.
[23] In computing income for the 1985 taxation year, 9th Avenue reported for accounting purposes the extinguishment of the liabilities due to the lender by reducing the cost of the property by $4,361,500, and treating the balance as forgiveness of debt. In February, 1987 9th Avenue obtained an appraisal of the property effective as at March, 1985 from Mr. J. Owsley producing a fair market value of the property at $1,190,500. 9th Avenue then, through its managing partner and through revised financial statements, requested the Department of National Revenue to reduce the proceeds of disposition to $1,190,500 as at December 31, 1985.
ISSUE:
[24] The issue is, therefore, whether the proceeds of disposition from the sale of the property should be $4,361,500 based on the judicial sale price as contended by the Respondent or $1,190,500 as contended by the Appellants.
ANALYSIS AND CONCLUSION:
[25] The reasoning in respect of 555 applies so that the Appellants, Dr. Gerald E. Gavelin and Dr. William Campbell, will be unsuccessful in this regard.
ODESSA:
[26] Odessa was established in December, 1980 and acquired property. It then entered into a contract with Teacher's and Donray Investments to construct a building for them at a cost of $28,000,000. It had a construction loan from Crown Trust and other lenders in the sum of $20,000,000. The loan was secured by a demand mortgage and guarantees and an assignment of Odessa's rights to the agreement with Teacher's. The building was completed but the sale to Teacher's did not take place and the lenders commenced an action for specific performance. This litigation continued until November, 1985 when Teacher's went into voluntary receivership. Finally, the dispute was settled with the receiver for Teacher's paying $1,600,000 to the lender. A Settlement Agreement between the lender and Odessa was entered into on March 5, 1986, the relevant provisions of which were:
(a) Odessa would release the lender from any liability in connection with any matter arising out of the property or the legal action between the lender and Teacher's;
(b) The lenders would commence legal proceedings to effect a judicial sale of the property and arrange for the submission of a tender in the amount of $16,100,000. If the partnership defended the action or if there was a significant delay in the proceedings as a result of any act on the part of the partnership, the lenders were to be discharged from any obligations under the settlement agreement, and,
(c) The lenders would release Odessa from the remaining balance due and owing under the mortgage upon payment of the sum of $60,000 in cash upon execution of the agreement. That amount was paid.
[27] The lender commenced a foreclosure action against Odessa in March, 1986 and filed an Affidavit of Value and Valuator's Report with the Court on March 18, 1986 showing a fair market value of the property of $10,750,000. The property was advertised for sale but no tenders were received. By application to the Court of Queen's Bench on April 30, 1986 the lender made an offer to purchase the property for $16,100,000. This was accepted by the Court. Odessa was not represented in court and did not consent to that order.
[28] In or about March, 1986 Odessa obtained an appraisal of the property from Linnelle & Associates Ltd. showing a fair market value of $6,400,000.
ISSUE:
[29] The issue is twofold:
(1) Are the proceeds of disposition from the sale of the property $6,400,000 as contended by the Appellant or $16,100,000 based on the judicial sale price as determined by the Respondent?
(2) Is Odessa entitled to deduct 1986 interest expenses in the amount of $1,784,878?
ANALYSIS AND CONCLUSION:
[30](1) For the reasons discussed in 555, the proceeds of disposition cannot be altered from the figure fixed in the Court of Queen's Bench of Alberta proceedings. Although the partners did not consent to the order, they acquiesced in same.
[31](2) With respect to the claim for 1986 interest expenses, the lenders, Crown Trust Company, Central Trust Company, Canadian Cooperative Credit Society Limited and Canada Deposit Insurance Corporation executed a release described as being so executed in 1986 but lacking day and month in the signature clause. By this document, those parties:
... release and forever discharge The Odessa Partnership and each of the partners, and Odessa-Durbin Developments Ltd. from any and all causes of action, liabilities, claims and demands whatsoever at law or in equity which the undersigned had, or hereafter can, shall or may have for any matter whatsoever arising out of or in connection with the Emerson Centre, the mortgage granted by Crown Trust Company to Odessa-Durbin Developments Ltd., the guarantees given by the partners in connection thereto and all matters in connection with the Emerson Centre and in connection with The Court of Queen's Bench Action No. 8301-09434.
There being no liability of the Appellants at the end of their 1986 taxation year, arising from Odessa, the Appellants cannot succeed in their claim.
DISPOSITION:
[32] Dr. William Campbell's appeal in respect of 12th Avenue will be allowed to the extent that the proceeds of disposition were agreed to be $1,248,000.
The appeals of the other Appellants are dismissed.
Dr. Campbell will be entitled to costs in respect of 12th Avenue.
The Respondent will be entitled to costs in respect of all other matters.
Signed at Ottawa, Canada this 23rd day of December, 1997.
"R.D. Bell"
J.T.C.C.
[1] This matter was settled between the parties at the hearing.
[2] This relates to the "Pre-1983" amount of $473,394.
[3] In respect of an election under the Income Tax Act the taxpayers transferred an apartment building to a corporation on a "rollover" basis on December 30, 1985. Part of the consideration was to be preference shares the issue of which was not then permitted by the corporation's authorized capital.