Date: 19991102
Docket: 97-3290-IT-G
BETWEEN:
SYDNEY THOMAS FULLJAMES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1] These are appeals by Sydney Thomas Fulljames (the Appellant) from assessments of tax with respect to his 1991 and 1992 taxation years. In computing income for those years, the Appellant reported income of $26,543 and $35,811, respectively. In reassessing, the Minister revised the Appellant's taxable income to $104,158 and $92,540 on the basis that he realized additional taxable capital gains of $100,098 and $64,050 in 1991 and 1992 as calculated pursuant to subsection 38(a) and paragraph 39(1)(c) of the Income Tax Act.
[2] Gold Ridge Resources Inc. (Gold Ridge) was incorporated in 1986 and was a publicly listed company on the Vancouver Stock Exchange during the taxation years in issue. The Appellant, one of the founding partners, was at all times a shareholder, director and the president of Gold Ridge. He was also the single largest shareholder by 1991 owning approximately 25% of the five to six million shares issued. He was directly involved in its daily operating, financing and investing activities and it is fair to say that throughout, he effectively controlled its operations and was aware of its financial circumstances.
[3] In or about 1991, Gold Ridge ran into financial difficulties. By the end of 1992, the Appellant had advanced approximately $259,000 to Gold Ridge which amount was reflected in his shareholder's loan account. Notwithstanding that fact, Gold Ridge continued to have financial problems and during that period, according to the Appellant, the directors decided that "one way to get money into the company was to do a shareholder's loan of stock to the company". The Appellant testified that he "signed off" 600,000 shares of Gold Ridge of which 574,000 shares were then utilized by the company in the 1991 and 1992 taxation years in payment of its creditors and to pay for services rendered or to be rendered necessary to the continued development of the mine. During this period, the Appellant also disposed of Gold Ridge shares to his RRSP and in the open securities market. The number of shares disposed, the transferees and the proceeds of disposition in those taxation years can be summarized as follows:[1]
1991 1992
|
Transferee |
Shares |
Amount |
Shares |
Amount |
|
To Creditors |
268,750 |
$158,750 |
256,024 |
$115,662 |
|
Brokerage Sales |
30,500 |
$12,520 |
18,000 |
$7,328 |
|
To RRSP |
Nil |
Nil |
130,000 |
$53,600 |
[4] The Minister further assumed that the gross proceeds received by the Appellant for the disposition of the shares in the 1991 and 1992 taxation years were $171,270 and $176,590 and that their adjusted cost bases (ACBs) were $37,806 and $51,691, respectively.[2] The Minister calculated that in those two years, the Appellant thereby realized capital gains of $133,464 and $124,899. Although the Appellant questioned the Respondent's calculation with respect to the average cost of the shares, he produced no evidence capable of demonstrating that the Minister's calculation of the ACBs was wrong.
Appellant's Position
[5] The Appellant contends that he and the other directors acted on the basis that the provision of the Gold Ridge shares to the Company was in fact a loan. In his view, and that of the directors, there was no difference between this transaction and a cash loan to the Company.
[6] The Appellant also takes the position that in or about 1994 in the course of a financing proposal by Rembrandt Gold Mines (RGM), it was agreed that the Appellant would be "reimbursed" for the shares he had given to Gold Ridge in 1991 and 1992 by the issuance to him of 574,000 replacement shares. It is the Appellant's position that this transaction reflected and confirmed his understanding that the initial transaction was in effect a loan by him to Gold Ridge of that number of shares.
Respondent's Position
[7] The Respondent contends that the disposition of the shares by the Appellant in the taxation years in issue was a disposition of property within the meaning of section 54 of the Income Tax Act whereby the Appellant received proceeds of disposition as described in that section. The Respondent further contends that the Appellant realized additional taxable capital gains of $100,098 and $64,050 in those taxation years, respectively, as calculated pursuant to subsection 38(a) and paragraph 39(1)(c) of the Act and that these amounts were correctly included in his income for the years under appeal.
Conclusion
[8] The issue is whether the transfer by the Appellant of 574,000 shares in Gold Ridge to that Company constituted a disposition for the purposes of subsection 54(c) of the Act. The evidence with respect to this aspect of the matter is crystal clear. The records of Gold Ridge do not disclose any directors' resolutions or other documentation relating to taxation years 1991, 1992 or 1993 which support the Appellant's position that he was lending the shares to Gold Ridge and/or that it would replace the shares at some future date. As well, the Appellant testified that Gold Ridge was entitled to do whatever it wished with these shares. No restrictions had been placed on those shares as between Gold Ridge and the Appellant nor were any in place when the Company transferred the shares to its creditors in payment for work performed or to be performed. Indeed, in cross-examination, the Appellant conceded that with respect to these shares he gave up title, possession and use thereof.
[9] On the evidence, no other conclusion can be reached but that the transfer of the shares from the Appellant to Gold Ridge constituted a disposition pursuant to the provisions of paragraph 54(c)(i) of the Act. The proceeds of disposition from the foregoing transaction was the "sale price" of the shares transferred in the amount of $286,912 which was reflected by the debt owed by Gold Ridge to the Appellant as a result thereof.
[10] The exceptions to the definition of disposition of property found in paragraphs 54(c)(iv) and 54(c)(v) are not applicable to the Appellant's situation. There is no evidence that the transfer was for the purpose "only of securing a debt or a loan" since in this particular instance it is clear that the Appellant had the intention of absolutely giving up ownership and did so. The Appellant did not retain the power of recovery and it is clear that Gold Ridge intended to acquire absolutely the shares and utilize them for its own purposes.[3] With respect to paragraph 54(c)(v), there is no evidence that the transfer by the Appellant of his interest in the shares constituted a change in the legal ownership without any change in the beneficial ownership thereof. It was clear from the Appellant's testimony that the transfer of the right to the shares was unrestricted. There was no right of reversion nor any evidence to indicate the retention of a beneficial interest.
[11] The Appellant placed a good deal of emphasis on the issuance to him of 574,774 shares in 1995 and argued that they represented a return of the shares which he had loaned to Gold Ridge. The documentary evidence does not support him.[4] The issuance of these shares in 1995, in my view, constitutes different property than that disposed of by the Appellant in the course of his transfer of shares to Gold Ridge in 1991 and 1992. Those specific shares were transferred by Gold Ridge to its creditors in 1991 and 1992. The issue of shares to the Appellant in 1995 was a separate transaction and while it was intended to eliminate the debt owing by Gold Ridge to the Appellant, it does not alter the fact that this debt arose from the disposition of shares by him to the company in 1991 and 1992. These were separate and distinct transactions and must be accounted as such.
[12] The transfer of the Gold Ridge shares by the Appellant to the Company in the taxation years in issue constituted a disposition under subsection 56(c) of the Act. Accordingly, the appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 2nd day of November, 1999.
"A.A. Sarchuk"
J.T.C.C.