Tax Court of Canada Judgments

Docket: 2001-1835(IT)G

BETWEEN:

ABTAR SINGH BAINS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on January 29, 2003 at Victoria, British Columbia.

Before: The Honourable Judge Gerald J. Rip
Appearances:
Counsel for the Appellant:	William S. Johnson
Counsel for the Respondent:	Bill J.S. Basran

____________________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1994, 1995 and 1996 taxation years are dismissed with costs.

Signed at Ottawa, Canada, this 3rd day of April 2003.

"Gerald J. Rip"

J.T.C.C.

Citation: 2003TCC211

Date: 20030403

Docket: 2001-1835(IT)G

BETWEEN:

ABTAR SINGH BAINS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Rip, J.

[1]      The appellant Abtar Singh Bains appeals the following assessments:

a)    for 1994, in which the Minister of National Revenue ("Minister") denied the appellant's deduction in computing income of an amount he was ordered to pay by the British Columbia Supreme Court as damages for deceit plus interest and special costs; and also added to the appellant's income shareholder benefits conferred on him by A.S. Bains Developments Ltd. ("Bains Co.");

b)    for 1995 and 1996, in which the Minister added to the appellant's income benefits conferred on him by Bains Co.; and

c)    for 1997 and 1998, in which the Minister did not permit the appellant to carry forward any non-capital loss from 1994 to 1997 and 1998 on the basis there was no non-capital loss in 1994.

[2]      Mr. Bains is the sole shareholder, director and president of Bains Co. At all relevant times Bains Co. was in the land development business and built residential and commercial buildings in and about Victoria, British Columbia. Bains Co. was Mr. Bains's investment vehicle.

Payment of Damages

[3]      Sometime in 1987 Mr. Bains, Dennis Bristow and George Jerome discussed a business venture involving the manufacture and installation of pay telephones. Mr. Bristow owned a business named Interior Design Management ("IDM"). IDM was a tenant in one of Bains Co.'s buildings. In April 1987 Mr. Bains introduced Mr. Ragbier Bhandar, whom he had known socially as a friend for over 40 years, to Mr. Bristow. Mr. Bhandar was told of the plans for the pay telephone business and was invited to invest in the venture. The business, the "pay phone venture", was to be carried on by a corporation and consist of manufacturing pay telephones and installing them in favourable locations. A corporation owning the pay phone business would be listed on a stock exchange and it was hoped that soon after listing the corporation would be "taken over" by another corporation for a hefty profit to shareholders.

[4]      Mr. Bristow informed Mr. Bhandar that the business was "ready to go on the Vancouver Stock Exchange but was short $150,000 or so". At trial, Mr. Bains asserted that he "knew nothing about the company"; Mr. Bristow was the knowledgeable person. Mr. Bains insisted at trial that at the meeting in April 1987 he told Mr. Bhandar not to rely on him because he knew nothing about the potential investment.

[5]      Mr. Bains confirmed that Mr. Bhandar was told that for an investment of $150,000 he would receive a four per cent interest in the venture. He agreed that Mr. Bristow estimated that the shares issued to Mr. Bhandar in the yet to be incorporated company would be worth over $2,000,000 once the company was listed and the shares started trading.

[6]      Mr. Bhandar asked Messrs. Bristow and Bains what were their investments in the pay phone venture. Mr. Bains told him, he recalled, that he invested $380,000 in cash, Mr. Bristow's investment was represented to Mr. Bhandar at $600,000. At trial, Mr. Bains denied that he had informed Mr. Bhandar that he invested $380,000. This was in direct conflict with his evidence on discovery. In fact, neither Mr. Bains nor Mr. Bristow had invested any money at the time. Mr. Bhandar agreed to invest in the venture: he invested $134,000 between April and June 1987; $435,994 between January and March 1988 and $674,868 during the period from April to August 1988 for a total of $1,244,862. Mr. Bains or Bains Co.'s first infusion of cash to IPC was in about August 1988.

[7]      On May 8, 1987, the corporation later known as International Payphone Corp. ("IPC") was incorporated according to the laws of British Columbia. The controlling shareholders at time of incorporation were Messrs. Bristow and Jerome. In February 1988 Messrs. Bains and Bhandar gained control of IPC.

[8]      While Messrs. Bains and Bhandar controlled IPC, a corporation was formed in West Virginia to manufacture and install the pay phones. Mr. Bhandar took a very active role in the U.S. Corporation, a wholly owned subsidiary of IPC. Mr. Bhandar moved to West Virginia to oversee the U.S. company's activities. I understand that to the extent telephones were manufactured, the manufacturing was by the U.S. Corporation in the United States. IPC maintained an office in a building owned by Bains Co. in Victoria.

[9]      The pay phone venture was not successful. Mr. Bhandar lost his investment. Mr. Bhandar sued Mr. Bains and Mr. Bristow in the British Columbia Supreme Court for deceit claiming that Mr. Bains and Mr. Bristow had purposely misled[1] him with respect to whether he had invested any cash in the pay phone venture in order to induce him into investing. The trial took five days. On June 29, 1992, Lowry J. gave judgment in favour of Mr. Bhandar. Mr. Justice Lowry concluded ". . . without hesitation, Mr. Bains deliberately permitted Mr. Bristow to mislead Mr. Bhandar about his and Mr. Bains' investment to induce Mr. Bhandar to invest in the project. . . . Mr. Bristow may have made the statements but Mr. Bains knew they were untrue and would mislead Mr. Bhandar. His conduct was dishonest . . ." Mr. Bhandar "was deliberately deceived" by Messrs. Bains and Bristow. Mr. Bhandar was awarded judgment in the amount of $569,994 with interest and costs.

[10]     The action against Mr. Bains personally was not the only litigation arising out of the pay phone venture.[2]

[11]     The action by IPC against Bains Co., Mr. Bains and Shirley Thompson, the "in house" accountant for IPC, was to recover amounts of rent arrears from money belonging to IPC. Apparently Messrs. Bains and Bristow caused IPC to write cheques in aggregating $42,800 to IDM, Mr. Bristow's company. These funds were contributed to IPC by Mr. Bandhar. At trial Mr. Bains denied any knowledge. The action by IPC was dismissed when Mr. Bains agreed to pay $42,800 to IPC.

[12]     The action by the Sidhu Estate was brought on the same basis as Mr. Bhandar's action against Mr. Bains and Mr. Bristow. Ms. Sidhu was Mr. Bhandar's sister and she also invested in the pay phone venture. As in Mr. Bandhar's action, Mr. Bains was named as a defendant by the Estate in his personal capacity and not as a director, officer or employee of Bains Co. Bains Co. was not a party in the action.

[13]     In the actions by Mr. Bhandar and IPC, the trial judges preferred Mr. Bhandar's evidence to that of Mr. Bains. Mr. Bains' testimony lacked credibility. After observing both of these persons, I agree. Mr. Bains was not a credible witness. I do not believe, for example, that he did not induce Mr. Bhandar to assume that he invested $380,000 in the pay phone venture. This denial contradicts his evidence on discovery.

[14]     Mr. Bains was questioned with respect to Bains Co.'s 1989 financial statements. The corporation's fiscal year end is August 31. On August 31, 1988 Bains Co. had a loan receivable from IPC in the amount of $239,000; on August 31, 1989, the loan receivable was nil. It appears from Bains Co.'s Statement of Operations and Deficit for the years ended August 31, 1988 and 1989, a loan of $1,121,405 to IPC was written off in 1989. Bains Co.'s Statement of Changes in Financial Position for these periods does show a loan receivable to IPC of $239,000 for 1989. Mr. Bains explained that he did not know how to prepare the statements. The statements were not audited but were prepared by a chartered accountant. In any event, Bains Co. claimed an allowable business investment loss of $747,603 on its loan of $1,121,405 to IPC in filing its 1989 tax return. The allowable business investment loss was denied by the tax authority on the basis that the money loaned was not used in a business carried on in Canada. A capital loss was recognized.

[15]     Also, according to Bains Co.'s balance sheet as at August 31, 1989, the corporation owned no shares in IPC. According to IPC's share register prepared by Ms. Thompson, Mr. Bains, who, on July 15, 1988, subscribed for $4,376,604 shares of IPC for one dollar transferred 2,971,485 shares to Bains Co. on November 30, 1988. (There are alterations on the share register which have not been explained to my satisfaction. Mr. Bains said the alterations are in Ms. Thomson's hand.) In Mr. Bains' view, Bains Co. "was entitled" to shares. There is no other explanation for this discrepancy.

Legal Expenses

[16]     Mr. Bains was questioned whether he deducted legal expenses of $25,000 from the $42,800 he agreed to pay IPC. His answer was that he "can't say but it is possible".

[17]     In its 1994 income tax return, Bains Co. included a Project Management Fee Statement of Business Income and Expenses that reflected gross sales of $421,000, net purchases of $569,994 and an interest expense of $359,006 for a resulting business loss of $508,000. Mr. Bains could not explain or describe the sales nor the purchases. He acknowledged that the "net purchases" represented the amount of damages Bains Co. paid to Mr. Bhandar in 1994; it was, he said, the payment of a court order in the action by Mr. Bhandar against him and had nothing to do with any project management fee. The interest expense of $359,006 was the amount of interest allowed by the court in the same action. Mr. Douglas Davies, who prepared Mr. Bains' 1994 tax return, said he considered that these funds were being "effectively paid back to Bhandar his advance to IPC".

[18]     In 1990, Bains Co. claimed an allowable business investment loss of $97,410. IPC became insolvent in 1989. It is not clear from Bains Co.'s Statement of Allowable Business Investment Losses for 1990 whether the loss was on account of shares it owned in IPC or loans to IPC. Bains Co.'s Statement of Operation and Deficit for the year does reflect that Bains Co. wrote off a loan of $97,410 to IPC in its 1990 fiscal year. Mr. Bains appears to suggest that if Bains Co. incurred a business investment loss, then so did he.

Argument and Analysis

[19]     Mr. Bains' positions in these appeals are as follows:

a)       Mr. Bains promoted the pay phone venture as director of Bains Co. and not in his personal capacity. Mr. Bains was defending himself against a claim, which arose as a result of his duties as "an employee, officer or director" of Bains Co. Any amounts in issue that Bains Co. paid to him were reimbursements of amounts incurred by him as director of Bains Co. Thus, no shareholder's benefit was conferred on him by Bains Co. The appellant also submits that the legal expenses incurred by Bains Co. for the years 1994, 1995 and 1996 in the amounts of $84,321, $44,449 and $57,350, respectively, are deductible expenses incurred by and for Bains Co. and not a taxable benefit to him.

b)       Mr. Bains testified that Mr. Bhandar "claimed tax deductions for a portion of his investment" in IPC. He revealed he saw Mr. Bhandar's tax return for 1988 or 1989 that was prepared by Ms. Thompson. Accordingly, since Mr. Bains "reimbursed" Mr. Bhandar in 1994 for his losses in the pay phone venture, he "stepped into the shoes" of Mr. Bhandar and is therefore in the same position as Mr. Bhandar as to the tax deductibility of amounts advanced by him to Mr. Bhandar for tax purposes; in other words, Mr. Bains ought to be allowed to deduct the amount of "$929,000 expended by [him]" in 1994 as a non capital expenditure.

c)       The appellant argues that as he is entitled to carry forward his non-capital loss in 1994 to 1997 and 1998.

[20]     Lowry J, of the Supreme Court of British Columbia[3] found that Mr. Bains was liable in damages to Mr. Bhandar and awarded Mr. Bhandar judgment against Mr. Bains. This, appellant's counsel argued, is similar to what transpired in McNeill v. Canada[4] where the Federal Court of Appeal, relying on the reasoning of the Supreme Court in 65302 British Columbia Ltd. v. Canada,[5] held that if a fine or penalty for breach of a law is deductible because nothing in paragraph 18(1)(a) of the Income Tax Act ("Act") precludes it, it follows that court ordered damages for breach of contract should also be deductible.

[21]     In McNeill, supra, the appellant agreed in an agreement of sale of his accounting practice not to practice in a certain area for five years. When the purchaser terminated the contract in the first year on the basis that the appellant failed to provide certain services provided for in the agreement, the appellant set up practice outside the restrictive covenant area, but provided services to clients within it. In 1994 the B.C. Supreme Court found the appellant in breach of the restrictive covenant and ordered him to pay damages in the amount of $405,908. Boyd J. held that "the damages are the result of blatant and continuous breach of the agreement". The appellant deducted that amount in 1994 pursuant to paragraph 18(1)(a) of the Act. This Court held that the appellant's actions were carried out for the purpose of keeping his clients and business. The Court of Appeal thus held that the damages were incurred to produce income and therefore deductible in computing income.

[22]     Mr. Johnson, appellant's counsel, argues that in both McNeill and the case at bar, claims were for damages arising out of a breach of contract, both are as a result of the deliberate steps found to be taken by each of these individuals giving rise to the damage claims. Counsel acknowledges that while Mr. McNeill's expenditure was a cost of doing business, Mr. Bains' expenditure is somewhat different. Mr. McNeill's damages were the aggrieved party's loss of profits due to Mr. McNeill's behaviour. The damages Mr. Bains paid to Mr. Bhandar were not loss of profits but loss of capital.

[23]     Appellant's counsel submits that if Mr. Bhandar was permitted to deduct his losses in the pay phone venture, then so should Mr. Bains.[6] He refers to the reasons of Lowry J.[7] that damages recoverable for deceit "will serve to return the innocent party to the position he would have been in if the misrepresentation upon which he relied had not been made". Counsel concludes from this comment that Mr. Bains must assume the position of Mr. Bhandar as to the advancement of funds to the pay phone venture. Counsel declares that, "with the payment of the damage award, [Mr. Bains] steps into the shoes of Mr. Bhandar and the issue of whether the funds were expended for the purposes of earning an income and therefore are deductible have to be determined at the time Mr. Bhandar advanced his funds".

[24]     I cannot agree that by paying damages to Mr. Bhandar, Mr. Bains, in effect, adopts Mr. Bhandar's tax position. Mr. Johnson was unable to provide me with any authority for this position and I think none exists. Whatever Mr. Bhandar's tax position is with respect to money he invested with IPC, is irrelevant to the appeals at bar. I am not interested in Mr. Bhandar's tax returns.

[25]     If Mr. Bains stepped into Mr. Bhandar's shoes on paying damages to Mr. Bhandar, he simply repaid Mr. Bhandar the capital Mr. Bhandar invested in the pay phone venture and IPC. It may well be that on payment of damages to Mr. Bhandar, Mr. Bains was subrogated in any creditor rights Mr. Bhandar may have had against IPC. Assuming this is so - and there is no evidence - Mr. Bains was ordered to pay the damages in 1994 when IPC was insolvent and may have ceased to exist.

[26]     Also, if Mr. Bhandar owned shares in IPC which, according to IPC's share register, he did, he retained ownership of the shares when he received the payment for damage from Mr. Bains. Mr. Bains did not become the owner of Mr. Bhandar's shares in IPC. And there is also no evidence that Mr. Bhandar assigned his interest to Mr. Bains in any loans to IPC. In such circumstances it cannot be said that Mr. Bains laid out the money representing the damages for the purpose of gaining or producing income from property that may be shares or loans to IPC.

[27]     Mr. Bains was not carrying on a business when he and Mr. Bristow met with Mr. Bhandar to promote the pay phone venture. There is no evidence that Mr. Bains' efforts to obtain Mr. Bhandar's money by deception was paid of a business then carried on by him or a venture in the nature of trade. There is no evidence before me as to Mr. Bains' true purpose or intent in causing Mr. Bhandar to invest in the pay phone venture. Was it for a bona fide investment or for something else? The damages paid to Mr. Bhandar by Mr. Bains represented a personal expense of Mr. Bains within the meaning of paragraph 18(1)(h) of the Act. As such, it is not deductible in computing Mr. Bains' income in 1994 and he had no non-cpaital loss in 1994 when he was compelled to pay the damages after the Court of Appeal confirmed the judgment of Lowry J. There is no non-capital loss carry-forward to 1995 and 1996.[8]

[28]     Iacobucci J., acknowledged that if a fine is not incurred for the purpose of gaining or producing income, it cannot be deducted. He also cautions

that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income[9] . . .

[29]     I have found that the damages paid by Mr. Bains were not incurred to gain or produce income. However, even if I erred in so concluding, the actions of Mr. Bains in usurping money out of Mr. Bhandar is the egregious or repulsive breach that Iacobucci J. states could not be justified as being incurred for the purpose of producing income.

[30]     As far as the legal fees paid by IPC are concerned, there is no evidence that Bains Co. authorized Mr. Bains as an officer, employee, or director to do what he did as its agent. Further, Mr. Bains' acts were ultra vires the powers of a director of a British Columbia corporation. There is no evidence that Bains Co. incurred the legal fees to defend its trade practices, its business reputation or anything to do with its business as a going concern nor did it incur legal expenses to defend an employee, officer or director for having committed an illegal or wrongful act in the course of carrying on its business. Lowry J. cited Mr. Bains' disreputable conduct. He did not suggest that Bains Co. was involved. Bains Co. was not a defendant in the action. I do not believe Mr. Bains when he states that he was acting in his capacity as director when he committed the deceitful actions for which he was personally liable in damages. The legal fees paid by Bains Co. were for the benefit of Mr. Bains and ought to be included in his income for each of the years 1994, 1995 and 1996.

[31]     The appeals are dismissed with costs.

Signed at Ottawa, Canada, this 3rd day of April 2003.

"Gerald J. Rip"

J.T.C.C.

CITATION:

2003TCC211

COURT FILE NUMBER:

2001-1835(IT)G

STYLE OF CAUSE:

Abtar Singh Bains v. The Queen

PLACE OF HEARING:

Victoria, British Columbia

DATE OF HEARING:

January 29, 2003

REASONS FOR JUDGMENT BY:

the Honourable Gerald J. Rip

DATE OF JUDGMENT:

April 3, 2003

APPEARANCES:

Counsel for the Appellant:

William S. Johnson

Counsel for the Respondent:

Bill J.S. Basran

COUNSEL OF RECORD:

For the Appellant:

Name:

William S. Johnson

Firm:

Barristers & Solicitors No. 309 - 895 Fort Street Victoria, British Columbia V8W 1H7

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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