Date: 20030123

Docket: 2000-2966(IT)G

BETWEEN:

SMX SHOPPING CENTRE LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Counsel for the Appellant: Michael Beninger

Counsel for the Respondent: Linda Bell

____________________________________________________________________

REASONS FOR JUDGMENT

(Delivered orally from the Bench on

October 4, 2002, at Vancouver, British Columbia)

McArthur J.

[1]      The Appellant seeks to deduct from income an expense of $1,180,542 in its 1994 taxation year, and management fees of $85,500 and $42,500 in the 1993 and 1994 taxation years, respectively. The Appellant, SMX Shopping Centre Ltd., a Canadian corporation, carried on a real estate development and construction business until about 1998 when it became somewhat inactive. Shahram Malekyazdi ("Shahram"), an officer of the Appellant, was the only witness. He was born in Iran, educated in the British Isles in business and finance, and has lived most his adult life in British Columbia.

[2]      Through the mid-1980s, SMX constructed and sold a shopping centre, realizing an approximate net profit of $5 million, $3 million of which was deposited in a Swiss bank account under the control of Amir Malekyazdi, the father of Shahram. Shahram, his brother, and two sisters each owned 25 percent of the issued shares of SMX. They also controlled five or six other Canadian or B.C. corporations, apparently all involved in construction and/or real estate development, including Armeco Construction Limited.

[3]      The Appellant's $3 million was pooled with other funds from related companies in the Swiss bank account. Shahram testified that commencing in January 1993, and over a six-month period, Amir withdrew the equivalent of $1,180,542 Canadian dollars to invest in Golbanoo Canning Company Limited in Tehran, Iran. Golbanoo carried on a business, amongst other activities, of importing aseptic drums from Spain in which it stored and preserved tomato paste, which it subsequently marketed. One of two active partners of Golbanoo was Amir's brother-in-law, or uncle to the witness Shahram, and his brother and sisters. It was not clear whether the money was withdrawn from the pooled account or transferred to a separate account in the Swiss bank in the name of Armeco Construction Limited, acting on behalf of SMX. There was no direct or effective tracing of the money. According to Shahram, a trustee in France, on the direction of Amir, forwarded the equivalent amount in Iranian funds to a bank in Tehran for Golbanoo. Subsequently, Amir reimbursed the trustee using French francs.

[4]      For his efforts in the Golbanoo investment, Amir charged the Appellant $85,500 in 1993 and $42,500 in 1994. The position of the Appellant, taken largely from his Notice of Appeal and closing submissions, includes that in the course of carrying on its business, the Appellant incurred various business expenses, including fees of $85,500 in 1993 and $42,500 in 1994 for consulting services provided by Amir, a non-resident, and also had a net loss of $1,180,542 from its Golbanoo business.

[5]      Counsel for the Appellant added the Golbanoo loss and part of the management fee were deducted in 1994 as a loss and carried back. The balance of the management fee of $85,500 was incurred in 1993. Essentially, what is at issue is a taxable income of $145,700 of SMX for 1993. Counsel added that the Golbanoo loss and management fees are deductible, based on the evidence adduced, and the Minister is statute-barred in reassessing the Golbanoo loss. Shahram also stated that the documents confirm that there was a business deal which was a joint venture. It was properly recorded as such in the Appellant's financial statements and tax return, as well as its internal accounting documents. It was clear that the Appellant had funds which it had made from prior business success and $930,000 US was directed to the Golbanoo joint venture.

[6]      The Respondent, in the Reply to the Notice of Appeal, submitted that the Appellant did not carry on a business through an entity known as Golbanoo joint venture and, if it did, the advances of $1,180,542[1] allegedly made through Armeco were not made or incurred. Further, the management fees of $85,500 claimed in 1993, and $42,500 claimed in 1994 were not incurred for the purpose of gaining or producing income from a business.

[7]      I will attempt to set out some of the documents relied on by the Appellant, taken from Exhibit A-1 which consists of some 45 tabs and over a hundred documents. Tab 6 is a translation from Farsi and is on the letterhead of Golbanoo and dated December 22, 1992 and reads:

Armeco Construction Ltd. on behalf of SMX Shopping Centre Ltd. c/o Mr. Malekyazdi, 8, Rue Parmentier, 92800 Puteaux, France.

Subject: Proposal for investment in food making projects in Iran and the Middle East.

Further to our numerous discussions regarding your investment in food making projects in Iran and the Middle East during which you expressed an interest in investing in some of the profitable ones, we hereby inform you of one of our projects which is called "Golden Drum" and has the following specifications:

1.          Golden Drums are barrels with a capacity of approximately 200 litres which are used for the purpose of preserving food products such as tomatoe paste, dill pickles, compotes and fruit and vegetable concentrates.

2.          Golden Drum barrels can preserve foods for up to three years outside of cold storage without the need for preservatives.

3.          Golden Drum barrels are built in accordance with the American F.D.A. Standards and are accepted for export purposes by forty-two advanced countries, including those in North America and Europe.

Our company has signed a contract with a large French company called Van Leer, which is part of the Shell Petroleum Group and is a specialist in the manufacturing and sale of these barrels, to undertake the business of these barrels in two phases:

Phase One

Importing 5000 ready-made barrels from Europe to Iran on a trial basis.

Phase Two

Importing a factory for the purpose of manufacturing Golden Drum barrels in Iran or any other suitable location in the Middle East. The purpose of such a project is to save transportation costs related to bringing empty barrels to the Middle East from Europe with the result that the price of the barrels will be reduced by approximately a half.

Amir's office was in Puteaux, France. The head office of Golbanoo was in Tehran, Iran. Tab 7 is a translation of a letter (joint venture agreement) completed on the letterhead of Armeco in Puteaux - France, addressed to Golbanoo and dated January 18, 1993. It provides as follows:

In response to your proposal dated 22 December, it is hereby agreed that we will participate in Phase One of the project and will decide in due course about our involvement in Phase Two.

We shall pay the US $930,000 for our 50% share in three instalments as follows:

First Installment:

            Upon confirming your

            agreement by signing

            the bottom of this letter                                                  US $232,000

Second Installment:

            After receiving the Credit

            documents for 5000 barrels

            from Van Leer Co. and the

            arrival of the barrels in

            Bandar Abbas (or, in the event

            existing barrels are used, when

            their documents are presented,

            but in any event before

            10th April 1993)                                                                               465,000

Third Installment:

            After arrival of the barrels

            at the Tehran factory (or,

            in the event that the existing

            barrels are used, by 10 June

            1993)                                                                                               235,000

                                                TOTAL           US $930,000

If you are in agreement with this proposal, please sign this letter at the bottom and return same.

            (signed)

GOLBANOO CO. hereby agrees to the foregoing

            (signed)

[8]      Tab 8 is a translation of a Golbanoo receipt, prepared on Golbanoo letterhead and dated June 15, 1993. As stated, the managing director of Golbanoo was Amir's brother-in-law. The receipt provided as follows:

To:        Armeco Construction Ltd.

acting on behalf of S.M.X. Shopping Centre

We hereby verify that we have received the third instalment of your investment in the amount of $235,000 bringing the total amount we have received from you to a total of $930,000.

Yours truly,

GOLBANOO COMPANY

Managing Director

Jahangir Moussavizadeh

(signed)

[9]      Tab 9 is a translation of a letter from Golbanoo on its letterhead and dated December 20, 1993 as follows:

Subject:             Golden Drum project in which you

have invested US $930,000

It is with regret that we notify you that we have to date made a loss of US $1,500,000 in this project and your share of this loss is $750,000.

The reason for the loss is the hard economic situation in most countries of the world in particular North America and Europe who are amongst our major purchasers. Similarly, as you may be aware, the economic situation internally in Iran is very critical.

We not only do not think that our situation in 1994 will be better, but believe that it could be worse due to the fact that costs, bank interest charges, as well as other storage expenses, could increase our losses.

Yours truly,

GOLBANOO COMPANY

(signed)

[10]     Tab 13 is an invoice from Van Leer, who manufactured the drums for Golbanoo and Tab 19 is an invoice from Amir to the Appellant for management services. There is a also similar one for the 1994 year. Tab 19 provides as follows:

INVOICE

                                                                                                January 29, 1993

TO:       SMX Shopping Centre Ltd

            595 Burrard Street

            P.O. Box 49077

            Vancouver, B.C. V7X 1G5

For my services in negotiating the Golbanoo agreement including several meetings in Paris with Mr. Jahangir Mousavizadeh, the managing director of Golbanoo, making numerous phone calls to Iran, meetings with various persons familiar with the local and export markets for tomato paste, and for miscellaneous other disbursements and services related to the aforementioned.

           

9 months at $9500 per month = $85,500 in Canadian Funds

            The above amount is due and payable upon receipt.

            Amir Malekyazdi

                        (signed)

[11]     Much of Shahram's evidence was hearsay. He had no direct involvement in Golbanoo. He attempted to relate what he had been told by his father. He was not the author of most of the documents contained in the Appellant's book of documents (Exhibit A-1). He tried to piece together various bills of lading, contracts, agreements, accounting records, bank statements and the like, of which he had no personal knowledge. He spoke in generalities to the effect that this must have been what happened but he did not know firsthand, he was not there, he did not do it. He did not know the specific banking arrangements made by his father with the Union Swiss Bank. There were no cancelled cheques or drafts in evidence demonstrating that the $1,180,542 was paid. Many of the documents were written in Farsi and translated into English by Shahram. The Respondent accepts the accuracy of these translations.

[12]     I further find there was no solid corroborating evidence. An in-house accountant for the Appellant and related companies had prepared the trial balance and general ledger and worksheets for the Appellant. These, together with the Appellant's income tax returns, had been either reviewed or prepared by an outside accounting firm, Sheinin & Company. Neither the in-house accountant nor a representative of the accounting firm testified.

[13]     It is Shahram's understanding that the payments to Golbanoo were made through an intermediary, paid in US dollars and transferred to Iran to be converted into Iranian currency for the benefit of Golbanoo. This appears to be contradicted by one of the documents. Apparently, the aseptic drums were capable of preserving tomato paste for three years. It remains a mystery why the Appellant claimed the total loss of its investment after less than two years of operation.

[14]     Generally, the evidence of Shahram was unreliable and insufficient. Much of it was his surmising or guessing what took place. In some of these instances, he was not certain if the Appellant's money was held in a separate account or a pooled account when, through Armeco, it flowed to the intermediary. There were no cheques tracing the money. He believed that an intermediary paid the money to Golbanoo who subsequently was reimbursed by the Appellant. Again, this appeared to have been contradicted.

[15]     Other than offering surmises and generalities, he could not articulate with any certainty that Golbanoo could not repay the debt and why it could not, and where the money went. He stated his father was a careful and conservative investor, yet there is little documentation to support this. There was no security provided and no evidence of any efforts made to recover the money.

[16]     Dealing with the Appellant's statute-barred submissions, there is a three-year time limit for reassessing a taxpayer that can be extended in certain circumstances. It is conceded that the Minister's reassessment was beyond the three-year period. The Respondent relies on subparagraph 152(4)(b)(iii) of the Income Tax Act, which provides, in part, that the Minister may at any time make a reassessment only if the reassessment is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arms length. Also, subparagraph 152(4.01) states that notwithstanding subsection (4), a reassessment may be made to the extent that (but only to the extent that) it can reasonably be regarded as relating to the transaction referred to in paragraph 152(4)(b)(iii).

[17]     I believe the Appellant agrees that the Minister properly assessed the Appellant beyond three years with respect to the management fees. The Appellant's counsel submits, again taken from his submissions, the transaction referred to in paragraph 152(4)(b)(iii) is the joint venture itself, and that transaction is between the Appellant and Golbanoo, but that corporation deals at arms length with the Appellant so the exception cannot apply.

[18]     I find that the exception does apply for the reasons given by Respondent's counsel. Again I refer to the submissions where the Respondent's counsel stated:

The Minister's position is that even if the transaction was the joint venture, as submitted by the Appellant, the joint venture involved SMX Shopping Centre, as represented by its agent Armeco, and Golbanoo Canning Company Limited. Both corporations are beneficially owned by Shahram and his brother and sisters. The shares are legally owned by his father and mother.

The shares of Golbanoo are owned 50 percent by the brother-in-law of Amir, who is the uncle of the witness and his brother and sisters. On the basis of section 251 of the Income Tax Act, these two corporations are related because of the relationship between the parties who control those companies and own the shares. Therefore, they are deemed to be dealing, by virtue of section 251, at arms length and they come within the exception of (iii).

I agree with this reasoning.

[19]     To be entitled to deduct the million-dollar-plus losses, the Appellant must show that it expended the money and establish that the money was lost, or not recoverable. For reasons given by Respondent's counsel, I find that the Appellant has not established either obligation. I draw an adverse inference from the fact that Amir Malekyazdi did not testify. He is the one who apparently investigated Golbanoo, entered into a joint venture agreement, advanced the money, and decided it was not recoverable, not the witness Shahram, who was in B.C. when the venture transpired in Europe and the Middle East. Shahram's evidence was, for the most part, as I have stated, hearsay. He tried to repeat what his father had told him.

[20]     The Respondent's second position that there was no or insufficient evidence that the money was lost, if in fact it had been advanced, I find is even a stronger reason for disallowing the deduction of the $1.180 million. Shahram testified that Golbanoo, which had been in existence for 15 years, had other activities in addition to the alleged SMX joint venture. The evidence relied on by the Appellant is a letter from Amir's brother-in-law saying Golbanoo lost $1.5 million, together with a ledger account of the Golbanoo Corporation and not the alleged joint venture.

[21]     There is nothing to tie the losses to the joint venture. Golbanoo refers to Armeco, as agent for the Appellant, as a temporary debtor and not a joint venture. Perhaps the transaction, if any, is more accurately described as a loan from Amir to Golbanoo.

[22]     There is insufficient evidence to support a loss of the money. I do not accept that Amir performed services to the Appellant as set out in the invoices. In evidence, we have inadequate invoices and the generalities of Shahram who could only guess what his father might have done. Particularly, in such a non-arms-length transaction, direct evidence from Amir at least is required to satisfy the Appellant's onus to establish that the services were rendered and the fee was recoverable. The evidence provided is that Amir entered into an agreement with his brother-in-law, the terms of which were not respected by either party, and after advancing over a million dollars, he decides it is uncollectable within less than two years. There was no security, and that was the end of the money without any further explanation. It remains a mystery what happened to it, if anything. From the evidence presented, it is very doubtful that the Appellant in fact lost the $1.180 million.

[23]     In conclusion, there is insufficient evidence presented by the Appellant to meet its burden of proof that there was a joint venture, that $1.180 million was advanced. Even if the Appellant got over that hurdle, there was absolutely insufficient evidence that it was not recoverable. The Appellant's statute-barred argument does not succeed because the Minister properly reassessed under the exception provided in subsection 152(4) because the parties were not dealing at arms length.

[24]     The appeals are dismissed, with costs.

Signed at Ottawa, Canada, this 23rd day of January, 2003.

"C.H. McArthur"

J.T.C.C.

COURT FILE NO.:

2000-2966(IT)G

STYLE OF CAUSE:

SMX Shopping Centre Ltd. and Her Majesty the Queen

PLACE OF HEARING

Vancouver, British Columbia

DATE OF HEARING

October 2 and 4, 2002

REASONS FOR JUDGMENT BY:

The Honourable Judge C.H. McArthur

DATE OF JUDGMENT

October 8, 2002

APPEARANCES:

Counsel for the Appellant:

Michael Beninger

Counsel for the Respondent:

Linda Bell

COUNSEL OF RECORD:

For the Appellant:

Name:

Michael Beninger

Firm:

Bull, Housser & Tupper

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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