T K Sales LTD v. Minister of National Revenue, [1972] CTC 2339, 72 DTC 1295

Roland St-Onge:—This appeal was heard at Victoria, Province of British Columbia on November 4, 1971 by the Tax Appeal Board as it was then constituted. The appellant is a company duly incorporated under the laws of the Province of British Columbia. On January 31, 1967 it purchased a business known as the Brentwood Auto Court at a cost of $73,743.75, and on December 1, 1967 sold it at a substantial profit.

The respondent contended that the appellant acquired the business for the purpose of realizing a profit; that it advertised and made efforts to sell and consequently sold it in its taxation year ending March 31, 1968; that in the course of selling the motel the appellant company accepted as part payment a property known as the British Public Schools Club in the City of Victoria which it also sold at a profit on February 29, 1968; that the appellant company realized a total profit of $31,058.36 which the Minister added to the appellant’s 1968 taxable income.

At the hearing the parties agreed: that the appellant’s principal shareholder, Mr Thomas W Kaye, had personally bought and sold enough income-producing properties to be qualified as a trader in real estate; that the appellant acquired and sold the motel business; and that the only question at issue is whether or not the gain realized on the sale is taxable.

The evidence shows that the motel was acquired in the middle of winter in a run-down condition and had only a 40% occupancy. After its acquisition, Mr Kaye spent considerable time and money in renovating and painting 23 of the motel units as well as the main office and washrooms. He also had to repair the furnace and septic tanks. In other words, he did with the appellant’s asset what he had done personally when he was dealing with his own real estate transactions. He used to buy properties, improve them, and sell or exchange them for other assets. In the case at bar, the only difference between Mr Kaye’s course of conduct and that of the appellant company was that the latter purchased the asset because Mr Kaye’s money was already in the said company. Mr Kaye mentioned many reasons for selling the motel. He had trouble with the furnace and septic tanks, and also experienced some difficulties with the motel employees, but his main reason was his wife’s illness.

The Board agrees with counsel for the appellant that a trader can have a capital gain, but the onus upon him to show that a particular transaction was entered into for investment purposes is much greater than the onus on a non-trader because the trader must prove beyond a doubt that the transaction he considers non-taxable is not coloured by his regular business activities.

In the present instance, a run-down motel was purchased and sold shortly thereafter in a much improved condition for an attractive price. When Mr Kaye was in the used car business, he used to accept all kinds of trade-ins such as houses and land in order to sell his automobiles. Here, to realize his sale, he had to accept the British Public Schools Club as an equity payment on account of the Brentwood Motel. As may be seen, nothing really changed as there was no difference between Mr Kaye’s course of conduct and that of the appellant company. Each case cited to me by the appellant has one particular circumstance similar to the case at bar, but this is not sufficient for the Board to allow the present appeal.

For the above reasons, the appeal is dismissed.

Appeal dismissed.

MARILOU E SHIRLEY, Appellant,

and MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (J O Weldon, QC), March 10, 1972.

Income Tax Act, RSC 1952, c 148—3, 4, 139(1)(e)—Real estate transaction

In 1965 the appellant purchased, as an investment, a 20-acre parcel of vacant agricultural land. The St Lawrence Cement Co, acting on its own initiative, made an application to her in 1967 for a right-of-way across her property. Compensation in the amount of $3,000 was agreed upon and an agreement for the right-of-way was signed in April 1967.

In 1969 the Minister issued reassessments against the appellant in respect of 1967, and also 1965 and 1966 (the latter two reassessments being for the purpose of allowing interest and taxes as expenses) on the basis that the appellant was engaged in a business in connection with the property.

HELD:

The Minister had acted precipitously and without justification. Prior to the granting of the right-of-way, the Minister could only speculate what Mrs Shirley was going to do with her property. The granting of that right did not commit her to a particular course of action in the future, and it could not be treated as the sale of a portion of the property. The appeal should be allowed and the relevant assessments vacated. Appeal allowed.

J R Caskey for the Appellant.

R B Thomas for the Respondent.

J O Weldon:—This appeal with respect to the appellant’s 1965, 1966 and 1967 taxation years was heard at London, Ontario on September 16, 1971 under the Tax Appeal Board as it was then constituted. The parties were represented by counsel as follows: J R Caskey, Esq for the appellant and R B Thomas, Esq for the Minister.

The facts leading up to this appeal are simple, straightforward and not in dispute. In 1965, the appellant Mrs Shirley purchased a 20-acre parcel of vacant agricultural land located immediately to the south of the existing boundary of the City of London, known as part of Lot 14, Concession 3, Township of Westminster. That was done by the taxpayer on the advice of her husband S J Shirley who advised her to purchase the land (back in 1965) so that if anything happened to him “she would have something to fall back on”. Mr Shirley is the president of Shamrock Chemicals Limited which manufactures pesticides, herbicides, fertilizers and general agricultural products in a plant also located in the south end of London. The purchase price of the above- mentioned property was paid partly in cash but the larger portion thereof was secured by a mortgage on the said property in favour of the vendor.

At the commencement of her examination-in-chief by Mr Caskey, Mrs Shirley stated that she purchased the said property as an investment but did not have any plans for the property at that time and still does not have any plans for it except to hold it. When being cross- examined by Mr Thomas, the appellant made it clear beyond question that she purchased the said property as “something to hold and let appreciate”, and that she was really not thinking of obtaining revenue therefrom at the time. In that regard, Mrs Shirley steadfastly and con-

vincingly maintained throughout the hearing of the appeal: that the only plan she had for the property was to hold it for a long time; that she was not planning on selling it, and that she has never done anything with or to the property since she purchased it about six years ago except that she was required to cut the weeds thereon a few weeks prior to the hearing of this appeal. Since the appellant draws a salary as an employee of Shamrock Chemicals Limited, she has been personally making the monthly payments required under the above- mentioned mortgage out of her own funds. Her evidence was clear that, in computing her income in 1965 and 1966, she did not take into account either the real property taxes or the mortgage interest paid by her in connection with the said property.

While Mrs Shirley was peacefully sitting holding her 20-acre parcel of land located immediately to the south of the City of London, the St Lawrence Cement Co — acting completely on its own initiative — made application to her early in 1967 for a right-of-way across her said property for the purpose of connecting its property (which lies to the south and west of Mrs Shirley’s property) with the CNR line running from London to Port Stanley by constructing therefrom a spur line on the proposed right-of-way. Mr Shirley acted along with his wife, the appellant herein, in the negotiations with the St Lawrence Cement Co which were given a push by a representative of the Township of Westminster. Compensation in the amount of $3,000 was finally agreed upon and an agreement providing for the right-of-way containing a lengthy surveyor’s metes and bounds description thereof was signed on April 15, 1967. The said agreement contains the following provisions:

PROVIDED that this Agreement to be subject to the Purchaser obtaining title to Part of Lot 14, in the Third Concession of the said Township as owned by Charles Cousins, of the Township of Westminster, in the County of Middlesex, Insurance Agent, lying immediately adjacent to the west of the hereinbefore described right-of-way and easement.

PROVIDED FURTHER that the within Agreement to be subject to the Purchaser obtaining a right-of-way and easement from the Township of Westminster in, over and upon a strip of land approximately Sixty-six (66) feet in width lying immediately adjacent to the east of the hereinbefore described right-of-way and easement described as “firstly” above.

PROVIDED FURTHER that the within Agreement is subject to the Purchaser obtaining the approval of the Committee of Adjustments of the Township of Westminster, or other relevant municipal body, to the within grant of right- of-way and easement as well as to the conveyances to be obtained from the said Charles Cousins and the Township of Westminster as referred to in the two preceding paragraphs.

And in further consideration of the Vendor granting to the Purchaser the aforesaid easement the Purchaser agrees to permit the Vendor at her own cost to connect such spurlines as she requires at such locations as she desires, without remuneration to the purchaser, leading from the railway line to be erected upon the easement hereinbefore granted.

IT IS AGREED that the above Agreement is conditional on the Purchaser obtaining approval of all necessary regulatory authorities to construct a railway siding across the said sixty-six (66) foot right-of-way between the easterly boundary of the hereinbefore described lands and the westerly limit of the lands of the Canadian National Railways. If such approval is refused the above Agreement shall be null and void at the option of the Purchaser.

About two years after granting the right-of-way outlined above, the Minister jumped to the conclusion that Mrs Shirley was engaging in some kind of a business in connection with her 20-acre parcel of land and issued reassessments all dated March 6, 1969 not only against her 1967 taxation year but also against her 1965 and 1966. taxation years. The pertinent portions of the three reassessments mentioned above issued pursuant to sections 3 and 4 and paragraph 139(1 )(e) of the Income Tax Act, RSC 1952, c 148 as amended, are as follows:

From my standpoint, it should be observed: that, prior to the granting of the aforesaid right-of-way to the St Lawrence Cement Co, the Minister could speculate but had no way of knowing what Mrs Shirley was going to do with her property; that the granting of the said right- of way per se clearly did not commit the taxpayer to any particular course of action in the future; that the granting of the said right-of-way cannot properly be treated as tantamount to the sale of a portion of Mrs Shirley’s property; that it is worth noting that the appellant has reserved the right to herself in said agreement dated April 15, 1967 to connect at her own cost without remuneration to the St Lawrence Cement Co such spur lines leading from the railway line as she requires at such locations as she desires to be erected upon the right-of- way and easement granted under the said agreement; that the Minister still does not know what Mrs Shirley is going to do with her said property and, according to her evidence, she does not know herself; that it is patently obvious that the Minister has acted precipitously and without justification in this matter in issuing the disputed assessments, and that the appellant has, in the result, succeeded in demolishing the basis of the said assessments.

For the reasons and observations set out above, the appeal with respect to the 1965, 1966 and 1967 taxation years should be allowed and the relevant assessments vacated.

Appeal allowed.

ESTATE OF EWART C ATKINSON, Appellant,

and MINISTER OF NATIONAL REVENUE, Respondent.

Tax Review Board (Roland St-Onge, QC), March 20, 1972.

Amount advanced to company by lawyer—Whether amount to be included

The deceased, a lawyer in partnership with his son, owned 1 share of a woodworking company to which he advanced money part of which came from his law firm’s general revenue. The Minister treated the sum in question as an amount owing to the deceased and his firm by virtue of the fact that his income was reduced by the amount in question. For the appellant it was contended that the sum in question was part of the company’s debt (which the deceased treated as his own) and that because part of his business was moneylending the amount should be a deductible loss.

HELD:

The amount did not constitute a deductible loss. The deceased lent money to the company (which was a separate entity) not as a moneylender but as incidental to his practice. Appeal dismissed.

B R Guss, QC for the Appellant.

L P Chambers for the Respondent.

Roland St-Onge:—This appeal was heard on July 16, 1971 at Saint John, New Brunswick by the Tax Appeal Board as it was then constituted, and deals with an assessment dated May 8, 1970 in respect of income for the 1965 taxation year.

In reassessing the appellant for the said year the respondent acted on the following assumptions:

(a) prior to his death of September 29, 1967, Ewart C Atkinson (hereinafter referred to as “the deceased”) carried on the practice of law with his son Francis Atkinson in Fredericton, New Brunswick under the firm name i Atkinson and Atkinson, on the basis that the profits from the practice were to be shared by the deceased and his son in such shares as were determined by the deceased;

(b) in the 1965 taxation year the common shares of J C Risteen Company Ltd, a company carrying on the business of woodworking in Fredericton, New Brunswick, were beneficially held as follows:

Ewart C. Atkinson	1 common share
Francis Atkinson	175 common shares
Florence Atkinson	16 common shares;

(c) in the 1965 taxation year the deceased caused $30,373.59 to be loaned to J C Risteen Company Ltd, of which $13,040.51 came from the Trust Account maintained by the firm of Atkinson and Atkinson, $10,800.84 from the deceased’s personal bank account and $6,532.21 from the general revenue of the firm of Atkinson and Atkinson;

(d) the disbursement of the said $6,532.21 was recorded in the books of account of the firm of Atkinson and Atkinson in such a way as to reduce the firm’s reported fees and therefore its and the deceased’s income;

(e) the said amount of $6,532.21, as well as other amounts which the deceased had in his lifetime loaned to J C Risteen Company Ltd, were at the time of the deceased’s death debts owing and repayable to the firm of Atkinson and Atkinson or to the deceased or to his estate and formed part of the assets of the estate;

(f) neither the said amount of $6,532.21, nor any other amount of the said debts, have been established by the deceased or his estate to have become bad debts in the 1965 taxation year, and had in any event not been included in computing the Appellant’s or the firm’s income for the 1965 taxation year or a previous taxation year;

(g) neither the said debt of $6,532.21 nor the aggregate of the said debt and the other said debts arose from loans made in the ordinary course of business of the deceased, no part of whose ordinary business was the lending of money in any event;

(h) the said amount of $6,532.21 was not laid out by the firm of Atkinson and Atkinson or by the deceased for the purpose of gaining or producing income from its or his property or business.

On the other hand, the appellant contended: that the deceased and J C Risteen Company Ltd (hereinafter referred to as “Risteen”) were one and the same because there were no meetings of the company held and the latter was bankrupt; that the deceased had treated the company’s debt as his own because he had personally guaranteed its debt and also because he had been using other people’s money to finance it. The appellant also claimed that the deceased was a moneylender and, consequently, he or his estate had to absorb the company losses.

Heard as a witness, Mr Francis Atkinson explained: that his father had been operating his law firm and the company’s business in a very peculiar manner; that his father was the only one who made the decisions, and to such an extent that he was called and known in the Fredericton area as “the boss”; that he had to sign documents his father asked him to sign; that everyone dealing with Risteen, especially the suppliers, had to see his father and nobody else; that his father did not hold any meetings of the company and used to finance the building of houses when the contractors were ready to purchase the building materials from Risteen and had given him the legal work. The Risteen property consisted of a big old wooden structure built in 1870 situated on leasehold land and the machinery in the building was obsolete. Mr Atkinson, Sr used to pay the fire insurance premiums personally and also other debts because the company was always insolvent. After his father’s death, the son sold the machinery for only $2,500.

The father, during the course of his business, used to lend money on mortgages. This attracted many clients and over the years was an important factor in increasing his law practice. When the son started to practise with his father in 1949, he suggested that they incorporate a separate company to handle the said mortgages and instead of getting only the interest thereon and the legal work, the law firm would also be able to charge a finder’s fee. Although his father agreed with this suggestion, he never did anything about it.

At times he advertised that he was in the moneylending business on mortgages and got into difficulties with the Law Society. In addition to lending money on mortgages he also lent money on chattel mortgages and promissory notes as a means of getting paid for his legal work in connection with divorce cases or bailing people out of gaol on Sunday mornings. When he did not have sufficient personal funds from which to lend money, he used client’s money and charged finder’s fees. This course of conduct contributed greatly towards attracting many people to his law office and was the main reason for his success. One day the father condescended to listen to his son’s criticism of the way in which he was handling Risteen and decided to transfer the said company to him, but apparently this transfer did not change anything since people at Risteen continued to take orders from the father and did not pay any attention to his son. Before the father died he had pledged himself to pay a Risteen debt of $6,532.21. This amount was paid by the estate without any hope of getting anything back from the company because of its insolvency. In 1967, after the father’s death, Risteen showed a loss of $60,000.

Upon cross-examination, the son stated that he started to work for Atkinson and Atkinson in 1949 at a salary of $50 a week. According to his 1965 return, he received $16,000 from ‘the firm’s income. He did not pay any law office expenses because all expenses were pooled and all income from fees was pooled, and each partner received his snare of the net income. The company still exists; it has never been wound up. According to its 1965 financial statements it has $1,203.62 in its own bank account; $60,677.15 in accounts receivable less an allowance of more than 10% for doubtful accounts; $18,730.82 as inventory at cost (items that the company had for sale), and $1,668.34 as prepaid expenses. Under fixed assets it has $133,286.76 for lands, building, machinery and equipment, less accumulated depreciation in the amount of $29,808.59. There was also a fairly new building, Class 6, at $35,922.78 which the son used for his office, and automobile equipment at $4,644.35. The company’s liabilities, endorsed by the father, were as follows:

$1,580.21 — overdraft for NSF cheques

40,000.00 — bank loan

36,972.63 — mortgage on the new building

20,990.83 — trading account

According to a 1965 record, $88,370.59 represented the amount that the company owed the father as at the end of 1965. Apparently, when needed, the father advanced money to the company and this was registered in a loan account. The said account was reduced or increased to the extent that the father put money in or took money out.

In his testimony, the son implied that his father might have paid out of the clients’ trust account or his own account some debts on behalf of the company which were not reported in the company loan account. However, this was only an assumption on his part and no evidence whatsoever was adduced in that respect.

According to the son, his father loaned a great deal of money to many people but according to the evidence adduced he only reported the income from his moneylending on mortgages. For instance, in 1965 a list of 28 mortgages was filed showing an interest income from same of $6,038.08. There is not a tittle of written evidence to show that the father reported any income from his other moneylending activities. The son also stated that he had had many long-outdated promissory notes which had been made out to his father but his law office burned in 1968 and many things were destroyed. The witness seemed to magnify the importance of his father’s moneylending activities, but could not give a single instance to prove the magnitude of such activity. He made various assumptions which he could not prove, and could not even say for what purpose the amount of $6,532.21 under review was spent.

Miss Hazel McMinniman, who used to be his father’s secretary, corroborated the son’s testimony and stated that the ads in the newspapers were prepared and published for the purpose of lending money on mortgages only. It was brought out that when the father got into difficulties with the Law Society of New Brunswick, he was only asked to delete the word “Barrister” which he had used in his ads. Miss McMinniman had prepared a great many documents for the purpose of lending money on mortgages, and stated that a proportion of 80 or 90% of the people coming to see the father came to borrow money.

Mr. Kenneth B Brown, the law firm’s bookkeeper, testified that he had nothing to do with Risteen except that when money was transferred to the said company either from Mr Atkinson’s personal funds, the law firm or other companies, he would record same on the Atkinson and Atkinson books as being paid to Risteen, but he could not tell whether these amounts represented any earned interest.

Mr John Page, a chartered accountant, who prepared the financial statements for Risteen from 1965 to 1969, agreed that Mr Atkinson, Sr was stubborn and did things in a very peculiar manner. He-stated that he had advised him to close Risteen which was in bankruptcy. According to him, the amount of $6,532.21 could in no way whatsoever be considered as an asset for Risteen and no one including Atkinson and Atkinson could get it back. He did not approve of the manner in which the said amount was treated and in order to prevent the law firm or the estate being caught with this amount he would have had to resort to a different type of accounting to express more adequately the situation. He knew Mr Atkinson, Sr very well and he had no hesitation in saying that the manner in which he managed Risteen and his law firm was something in the nature of a partnership.

Mr J H Steele, an auditor with the Department of National Revenue, explained that the amount of $6,532.21 was included in the appellant’s return because the fees recorded on the law firm’s statements were actually net fees after deducting payments made on behalf of clients including those to Risteen. Because those payments were not connected with the law firm he decided to disallow them. According to him, those payments were more in the nature of a loan to Risteen and he stated that after examining the loan account of the said company he traced the said amount to that account. For the taxation year 1965 Risteen showed money due to shareholders in the amount of $88,370.59 which included the $6,532.21 under review. He also declared that Mr Atkinson, Sr never implied that Risteen did not exist as a separate entity; that, as a matter of fact, the said company filed its own income tax return each year and paid the employees’ wages and benefits in a total amount of $33,278.97 in the year 1965; that the law firm also filed its own income tax return and had never reported any interest income other than interest on mortgages, bonds or debentures, nor did it claim an amount on account of bad debts.

Counsel for the appellant argued that Mr Atkinson, Sr’s business was a three-pronged affair — law, lending money and dealing with Risteen and other companies; that he used them indiscriminately, and that it would be unfair to segregate one from the other because it was

a one-man affair. He referred the Board to the following cases: Reid’s Brewery Co Ltd v Male, [1891] 2 QB 1; MNR v Henry J Freud, [1969] SCR 75; [1968] CTC 438; L Berman & Co Ltd v MNA, 61 DTC 1150; [1961] CTC 237; Maritime Lumber Distributors Ltd v MNR, 53 DTC 296; 9 Tax ABC 1; Associate Investors of Canada Limited v MNR, [1967] 2 Ex CR 96; [1967] CTC 138.

Counsel for the respondent argued that whether the corporate entity as such existed or did not exist is a question of fact, and that the evidence adduced showed that:

(1) this was a corporate structure employing people and paying them through its own bank account;

(2) it owned personal property as well as depreciable property;

(3) it sold building materials and issued invoices therefor;

(4) it issued cheques in the name of the company in payment of its accounts;

(5) it owned trucks on which the name “J C Risteen Company Limited” was painted;

(6) the income tax returns were prepared under the name of the company and profits computed for the said company as an entity.

He also stated that when Mr Atkinson, Sr would pay certain amounts of money directly to the suppliers on behalf of the company, these payments were always credited to his account with the said company as amounts owing to him. The question of the law firm and the company being the same enterprise is not well-founded since all transactions were carried out independently from each other. They had different bookkeepers, different bookkeeping systems, and the services rendered were completely different. He relied on the New Brunswick Companies Act to maintain that the acts done by Risteen were not ultra vires of the company, and that the corporation was actually a separate entity having its own existence and being vested with all property, rights, etc requisite to the carrying on of its business. On this question, he referred the Board to the following jurisprudence: MNR v Stewart & Morrison Limited, [1970] CTC 431 (Exch); [1972] CTC 73 (Can SC); United Geophysical Company of Canada v MNR, [1961] Ex CR 283; [1961] CTC 134; Ralph J Sazio v MNR, [1969] 1 Ex CR 373; [1968] CTC 579; Salomon v Salomon, [1897] AC 22.

The law firm or the estate of Ewart Atkinson can in no way whatsoever deduct the amount of $6,532.61 as a loss because the said loss does not belong to them but to Risteen, and the contention that Risteen and Mr Atkinson, Sr was a one-man business is irrational — especially in income tax matters when taxpayers incorporate separate businesses to protect their personal belongings.

Furthermore, according to the evidence adduced, whenever Mr Atkinson, Sr advanced money to the company, each transaction was registered in his own books of account and he was credited in the Risteen accounting records for the amount of money he advanced. Whether or not he used the money in the clients’ trust accounts for the company business neither he, the law firm, nor his estate would be permitted to deduct the loss, and if there was any loss from these advanced moneys, the clients themselves should be permitted to deduct such losses. There is no doubt that Risteen existed as a separate entity because there was ample evidence adduced to show that it was operating as a corporate structure, employing people, paying them through its own bank account, owning personal as well as depreciable property, selling building materials and issuing invoices therefor, paying its accounts with its own cheques, having its own accounting system, and, finally, filing its own income tax returns. Therefore, such a company cannot be said to be one and the same with Mr Atkinson, Sr. What Mr Atkinson, Sr did was lend money to the said company and nothing more.

Furthermore, Mr Atkinson Sr was not in the moneylending business since the only income reported in that respect came from loans on mortgages which is more in the nature of long-term and well-secured investments. According to the evidence, the other alleged loans were only incidental to his law-firm practice, and whatever income was derived from those loans was never reported as taxable income. Such incidental income from loans could be considered as incidental to his professional fees and could be branded as such.

The relationship between the son and the father is irrelevant when considering the course of conduct of Mr Atkinson, Sr and that of his company. The Board, to set the facts in their proper perspective, must look at them in the light of reality. No matter how insolvent the company may have been, it was at all times a separate entity, having its own responsibilities and its own losses.

For the above reasons, the appeal is dismissed.

Appeal dismissed.