Date: 20010326
Docket: 1999-512-IT-G; 1999-513-IT-G
BETWEEN:
SHARANJIT RANDHAWA and SURJIT MANN,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellants: The Appellants themselves
Counsel for the Respondent: Christine Mohr
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Toronto, Ontario, on January 12, 2001)
McArthur J.
[1] These appeals were heard together on common evidence concerning the Appellants' 1996 taxation year. The Appellants represented themselves and called no witnesses. The Minister disallowed the Appellants' claims for allowable business investment losses for Mr. Randhawa in the amount of $48,750 and for Mr. Mann, in the amount of $69,750. The Appellants acknowledge that their appeals are for the 1996 taxation year only. By amended 1997 income tax returns, they withdrew any claims for ABILs in the 1997 taxation year.
[2] The evidence presented was somewhat disjointed and confusing. It was difficult to discern how much money was invested by the Appellants, with whom, and for what purpose. I do not doubt that they advanced substantial funds through Gurmez Singh Bains to one of several corporations which funds have become for the most part uncollectible. The major issue is whether the money was advanced to qualifying Canadian corporations pursuant to sections 38, 39, 50 and 248, paragraph 40(2)(g) and subsection 125(7) of the Income Tax Act. While the facts are similar in both appeals, they should be reviewed individually.
[3] Mr. Randhawa is a 50-year old steelworker with Co-Steel Lasco in Oshawa, Ontario where he earned approximately $70,800 in 1996. In 1987, he met Mr. Bains who he understood was in the land development business. In that year, he loaned Mr. Bains the amount of $25,000 with interest at 40% per annum for one year. The principal and interest were repaid in a timely fashion. No documentation of any sort was presented to substantiate this transaction. Mr. Bains was a respected member of the Appellants' community and they both trusted him explicitly. Mr. Bains was involved with several corporations including Akal Construction Ltd., Akal International Inc., Akal Properties Limited, possibly Mieracle/Akal, and Private Investors Cartel.
[4] In October 1990, Mr. Randhawa and his wife advanced $25,000 to Akal Construction which was to be blended to form part of a $3,500,000 mortgage registered against property owned by Akal Construction and located in the County of Oxford. This is evidenced by a copy of a Loan Commitment to be secured by Mortgage, Trustee Agreement, Promissory Note dated October 25, 1990.[1] I am told the interest rate was 30% per annum. There was no evidence by way of a cancelled cheque, bank debit, receipt or any other document that the monies were advanced and not repaid. Yet, I believe the Appellant and accept this fact. I accept that Akal Construction was an Ontario corporation having its head office in Toronto, Ontario and that Mr. Bains was the president. Given the articles of incorporation dated October 1, 1986[2] for Akal Construction Ltd. and other corporate documents filed at the hearing, there is sufficient evidence to draw this inference. Although the Appellants claimed 100% of the losses, I find there was sufficient evidence to conclude that the monies were advanced in both instances by the Appellants and their spouses in equal amounts.
[5] The Appellant (Mr. Randhawa) and his wife further advanced the sum of $25,000 in US funds to Private Investors on March 17, 1992 upon representations made to him by Mr. Bains that one of his corporations was to be listed on the NASDAQ Stock Exchange in the US. The Appellants had no idea what business, if any, Private Investors was in. There was evidence to conclude that it was a US corporation operating out of Denver, Colorado. The only documentation with respect to Private Investors is a statement of account for the period ending December 31, 1992[3] filed by Mr. Mann and it appears to indicate that he held 13,670 shares of Akal International with a market value of $401.
[6] In 1988, both Appellants received a payment (Mr. Randhawa approximately $1,800 and Mr. Mann's amount was unclear) apparently from Ronald Wilson who was an inmate of the Florida Department of Corrections and he had been ordered by a Florida Court to make restitution for the fraudulent sale of Akal Mieracle stock. Neither Appellant had any idea who Ronald Wilson was. Mr. Mann completed an affidavit as a victimized investor[4] which stated that in April 1992, he had purchased $100,000 US in Mieracle/Akal securities. The inference is that the $100,000 paid in US funds to Private Investors was to purchase Mieracle/Akal which probably carried on no business and was part of a sham or fraudulent scheme. I have no difficulty concluding that the $25,000 US of Randhawa and the $100,000 US of Mann advanced on March 17, 1992 do not qualify for an ABIL for the reasons that follow.
[7] Mr. Mann has been a labourer with General Motors in Oshawa for 25 years. He is married with three children. His income from General Motors in 1996 was $72,900. During the 1980s, he earned under $50,000 annually. As was the case with Randhawa, he also advanced $25,000 at 40% interest to Mr. Bains in 1987 which was paid off. He advanced a further amount of $25,000 to Akal Construction in 1988 or 1989. This amount was not repaid. There is no doubt Mann lost considerable capital, but it is all but impossible to discern from the evidence how much. I do not think it serves a useful purpose to try to make a calculation in light of my decision.
[8] In 1996, the Appellants and their wives together with friends and fellow investors, Sarbjeet Malhi and Nirmaljit Malhi, commenced an action in the Ontario Court General Division against Akal Construction, Akal International and Mr. Bains.[5] The Malhis claimed $414,862, the Manns claimed $965,966 and the Randhawas claimed $174,537. The claims of the Appellants and their spouses as set out in the Statement of Claim apparently had been completed by their accountants, which claims were as follows:
Mann Claim
a) U.S. $100,000.00 Canadian $137,500.00 loaned on March 17, 1992;
b) Interest on above at the rate of 30% from March 17, 1992 to July 31, 1996 $180,369.86;
c) $115,423.00 lent on promissory note on December 31, 1993;
d) Interest on above amount from December 31, 1993 to July 31, 1996 at 30%, $89,460.73;
e) Principal balance of R.R.S.P. $3,391.64 outstanding as of at April 30, 1993;
f) Interest on above at 18% from April 30, 1993 to July 31, 1996, $1,985.34;
g) Principal amount of $3,362.00 outstanding as at April 30, 1993;
h) Interest on above at 18% from April 30, 1993 to July 31, 1996, $4,317.91;
i) Principal amount of $3,362.00 outstanding as at April 30, 1993;
j) Interest on above at 16% from April 30, 1993 to July 31, 1996, $1,749.34;
k) Self directed R.R.S.P. principal outstanding as at February 28, 1993, $20,435.55;
l) Interest on above at 22% from February 28, 1993 to July 31, 1996, $414,140.27;
m) Self directed R.R.S.P. principal outstanding as at February 28, 1993, $62,428.33;
n) Interest on above at 22% from February 28, 1993 to July 31, 1996, $43,196.97;
o) Principal amount of loan outstanding on June 30, 1993, $90,423.00;
p) Interest on above amount from June 30, 1993 to July 31, 1996 at 30%, $81,455.02;
q) Shares for $13,670.00;
r) $70,000 (Seventy thousand) lent on promissory note on September 23, 1994;
s) Interest on above amount from September 23, 1994 to July 31, 1996, $38,950.68.
Randhawa Claim
a) Money loaned on March 17, 1992 $25,000 Canadian or $43,750 U.S.
b) $25,000 worth of Mortgage at 30% per annum dated 19-06-1990.
c) Int. on above amount $45,863.01 up to 31-07-96.
d) R.R.S.P. principal outstanding as at December 31, 1993 $41,875.64
e) Interest on above at 18% from December 31, 1993 to July 31, 1996 $18,048.69.
B) Pre-Judgment interest at the rate of 30% from July 31, 1996
C) Post judgment interest in accordance with the court of Justice Act 1990 c.S. 43 as amended.
D) Cost of this action.
E) Such further relief as this Honourable Court may deem just.
Strangely, there is no amount in the Statement of Claim earlier than the $100,000 US by way of bank draft[6] on March 17, 1992, payable to Private Investors. This money was apparently used to purchase the units of Mieracle/Akal stock that was the subject of the fraudulent sale that had Mr. Wilson sent to jail with an order for restitution. We have no evidence of what Mieracle/Akal was, if anything, but a sham. There is sufficient evidence to draw an inference that it was not a Canadian corporation investment.
[9] Filed in evidence was a photocopy of a promissory note dated December 31, 1993,[7] wherein Akal International promises to pay Mr. and Mrs. Mann the sum of $115,423. Mann testified that this was for money advanced by him in 1991 for which he received no documentation until the end of December 1993. Also in evidence is a photocopy of a hand-written note[8] from Akal International signed by Bains to Mann dated 1994 wherein it stated, "Whenever we get the money from the island, we will provide you with $70,000 CAN out of those funds". Mr. Mann had no idea what the "island" was and nor do I.
[10] On March 2, 1989, Mr. Mann transferred the approximate amount of $33,000 from his RBC Dominion Securities RRSP to Morgan Trust Company of Canada.[9] He again had no idea what this was all about. Also, a statement of account as of June 30, 1991[10] referred to the amount of $4,307 advanced from Mr. Mann's RRSP to Akal Properties. In addition, there was filed a copy of a cheque dated March 31, 1992[11] being payment from Akal International to Mann in the amount of $153,394 with the indication noted thereon: principal $115,000 and interest $38,394. Mann acknowledged having received that amount.
[11] The Appellants relied heavily on the advice of their accountant who unfortunately, was not in Court. They did not seek legal assistance nor did they make extraordinary efforts to retrieve and produce documentation that would have been of assistance in determining the amounts advanced to whom and for what purpose. On at least two occasions during the hearing, I informed the Appellants that I would grant an adjournment in order that they may arrange to call witnesses and further evidence. They informed me that they were similarly advised during a pre-hearing conference; they admitted that they were faulty in not keeping documents; and that it was too late to obtain cancelled cheques from their bank. They stated that they had enough of these dealings and wanted to proceed with the hearing without further delay. Unfortunately, they did not have a strong grasp of the issues involved and were unclear as to what money was advanced and to whom and for what purpose.
[12] I am left to put the pieces of the puzzle together. Both Appellants acknowledge they did not keep documents; they did not read brochures or agreements because they would not have understood them; and they realized there was a risk with their money. They trusted Mr. Bains. He has apparently disappeared. For the most part, they have little or no idea where the money was going.
[13] In early 1990, Mann was at Bains' residential property development site in the Oshawa area. He did not understand exactly what the business was. On another occasion, I believe it was March 17, the Appellants attended the offices of both Akal Construction and Akal International at 330 Bay Street, Toronto. There was indication that it was the offices of both companies which had many employees occupied at computers. They had no idea what the business was. They trusted Bains to see that they were paid principal along with what I can only describe as outrageous interest rates.
[14] The Appellants had only a shallow grasp of the relevant law. There is no evidence to assist in determining what business Akal International was in, if any. There is the following evidence, however, that it was not a Canadian corporation. The Appellant Randhawa stated he believed it to be a US corporation and the Appellant Mann in submitting a hand-written note[12] wherein Bains was signing authority for Akal International referred to money coming from the island, although that could mean almost anything. The money that the Appellants advanced to Akal International was in US funds. Akal International appears to be linked to Private Investors with an address in Colorado. There was evidence that Akal International was to be listed on the NASDAQ Stock Exchange in New York, although it is clear this never happened. The Appellants received little money from the Florida State Corrections on behalf of Ronald Wilson. The only evidence that Akal Construction and Akal International were insolvent is the 1997 Default Judgment[13] issued by the Ontario Court General Division and statements of the Appellants that they were unable to collect any money.
[15] The relevant sections of the Income Tax Act read in part as follows:
38 For the purposes of this Act,
...
(c) a taxpayer's allowable business investment loss for a taxation year from the disposition of any property is 3/4 of the taxpayer's business investment loss for the year from the disposition of that property.
39(1) For the purposes of this Act,
...
(c) a taxpayer's business investment loss for a taxation year from the disposition of any property is the amount, if any, by which the taxpayer's capital loss for the year from a disposition after 1977
(i) to which subsection 50(1) applies, or
(ii) to a person with whom the taxpayer was dealing at arm's length
of any property that is
(iii) a share of the capital stock of a small business corporation, or
(iv) a debt owing to the taxpayer by a Canadian-controlled private corporation ...
40(2) Notwithstanding subsection (1)
...
(g) a taxpayer's loss, if any, from the disposition of a property, to the extent that it is
(i) a superficial loss,
(ii) a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length.
...
50(1) For the purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a taxation year ... is established by the taxpayer to have become a bad debt in the year, ...
and the taxpayer elects in the taxpayer's return of income for the year to have this subsection apply in respect of the debt or the share, as the case may be, the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year for proceeds equal to nil and to have reacquired it immediately after the end of the year at a cost equal to nil.
125(7) In this section,
"Canadian-controlled private corporation" means a private corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation) or by any combination thereof;
248(1) In this Act,
"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;
Analysis
[16] The Appellants' pleadings are of little assistance and they have presented little or nothing by way of submissions. What evidence was presented was difficult to follow. I accept that Mr. and Mrs. Randhawa advanced $25,000 to Akal Construction and $25,000 US to Private Investors. I accept that Akal Construction was a Canadian corporation and meets the requirements of the legislation. I believe it was also insolvent in 1996. I find that 50% of the $25,000 being $12,500, advanced to Akal Construction in October 1990 qualified as an ABIL. The allowable portion for Randhawa's 1996 taxation year is 75% or $9,375.
[17] While it is a more rough and ready numerical calculation for Mr. and Mrs. Mann, I am satisfied that they advanced a similar amount to Akal Construction, a qualified Canadian corporation, and the Appellant Mann is entitled to an ABIL of $9,375, as stated above for Mr. Randhawa. There is sufficient evidence to conclude that after 1988, Mann and his wife advanced $25,000 to Akal Construction. Bains had gone to Mann's home on several occasions and had taken Mann to residential lands in Oshawa that were described as being "developed by Akal Construction".
[18] While I am satisfied that both Appellants advanced additional funds, it would be stretching the evidence and the legislation far beyond reason to award anything further. For the reasons ably set out by counsel for the Respondent which I will briefly summarize, I find that other than the amounts of $12,500 allowed to each Appellant, the appeals with respect to all other amounts fail.
[19] To promote Canadian-controlled private corporations, legislation permits the deduction of 3/4 of money invested by a taxpayer under certain circumstances, and this is described as an allowable business investment loss. The investment has to be disposed of in the year that the loss is claimed. Pursuant to section 39, taxpayers must establish that there was a debt owed to them which became a bad debt.
[20] As previously stated, each Appellant advanced one-half of $25,000, their wives having advanced the remaining 50% to Akal Construction, the Canadian-controlled private corporation that meets the definition in subsection 125(7) of the Act. I conclude from the facts, that the Appellants acquired this debt for the purpose of gaining and producing income from a business or property pursuant to paragraph 40(2)(g) of the Act. Akal Construction was a Canadian-controlled small business corporation pursuant to paragraph 39(1)(c) to which the Appellants each advanced $12,500 for the purpose of earning 30% interest. The debt was a bad debt in 1996 evidenced by the efforts of the Appellants to collect their money and a Default Judgment being issued in February 1997. All other amounts were advanced by the Appellants to Akal International, Akal Property or Private Investors or unknown persons or corporations.
[21] With respect to all other funds, the Appellants have not established that they were owed a debt from a Canadian-controlled corporation and that all other corporations to which money was advanced were not Canadian controlled. There was insufficient evidence to conclude that the trilogy of companies, Akal International, Akal Property and Private Investors met the subsection 125(7) definition of "Canadian controlled private corporation" or the section 248 definition of "active business". The Appellants have not shown that the three corporations carried on a business and pursuant to subsection 50(1) of the Act, the Appellants have not established that the debt owed, whatever the amount, became a bad debt in 1996. In fact, Ronald Wilson was making payments in 1998.
[22] The Appellants chose not to call witnesses. Surely, their accountant and perhaps the former solicitors for Bains or others could have been of assistance, together with bankers. At least $25,000 by Randhawa and $100,0000 by Mann was advanced in US funds to a US corporation, Private Investors, and was being paid back by an inmate in the Florida State prison. Mann was also repaid $153,394 by Akal International. To conclude, the Appellants are each allowed to claim a business investment loss of $12,500 and the ABIL being $9,375. In all other respects, the appeals are dismissed and no costs are awarded.
Signed at Ottawa, Canada, this 26th day of March, 2001.
"C.H. McArthur"
J.T.C.C.