Date: 20000203
Docket: 98-2643-IT-I
BETWEEN:
LEE MONACO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1] When Lee Monaco (the Appellant) filed her income tax return for the 1996 taxation year, she claimed to be entitled to deduct an allowable business investment loss (ABIL) in the amount of $18,750, arising out of an investment of $25,000 in the shares of Anmill Homes Ltd. (Anmill). This claim was disallowed by the Minister of National Revenue (the Minister) for two principal reasons. First, the Minister was of the belief that the Appellant did not purchase shares of Anmill, and second, in the Minister's view, Anmill did not meet the definition of a "small business corporation" found in subsection 248(1) of the Income Tax Act (the Act).
[2] To establish a claim for an ABIL a taxpayer must satisfy the requirements of paragraph 39(1)(c) of the Act which, so far as it is relevant to this appeal, reads as follows:
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
...
of any property that is
(iii) a share of the capital stock of a small business corporation, or
The expression "small business corporation" is defined:
248(1) In this Act,
...
"small business corporation", at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a "payer corporation" within the meaning of that subsection), or
(c) assets described in paragraphs (a) and (b),
including, for the purpose of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation, and, for the purpose of this definition, the fair market value of a net income stabilization account shall be deemed to be nil;
[3] The Appellant's claim arises in the following way. In the late 1980s, a company named Sherwood Forest Holdings Limited (Sherwood Forest) held a parcel of 87 acres of potential development land (the land) in the region of Durham, on the outskirts of the city of Oshawa, Ontario. The shares of Sherwood Forest were owned 50% by Southview Investments Inc. (Southview), and 50% by Anmill. The shares of Anmill, in turn, were owned by Shelley Macdonell, the wife of Larry Macdonell, who appears to have been the driving force behind Sherwood Forest and the efforts to develop the land. The land was encumbered by a first and several subsequent mortgages, the total amount of which exceeded its value. At some point late in 1994 or early 1995 (the evidence does not reveal exactly when), the first mortgagee exercised the power of sale in the mortgage and sold the land for proceeds which left a significant surplus after payment of all money owing under the first mortgage. A number of investors represented by a solicitor named Arthur Smith apparently took proceedings intended to establish the invalidity of the second and subsequent mortgages, on the basis that no funds had been advanced under them.
[4] Mr. Smith, who is now retired, acted as agent for the Appellant at the hearing of this appeal, and was also the principal witness. Due to a personal relationship between him and the Appellant, he was not a disinterested witness. His evidence was vague and difficult to follow. I accept it only to the extent that it is corrobated by the documentary evidence. His evidence, as I understood it, was to the effect that Lee Monaco joined in the attack on the second and subsequent mortgages, and that she invested $25,000 towards that end. It is her contention that in the fall of 1994 she purchased 25% of the 100 shares in Anmill that were owned by Shelley Macdonell. A number of documents were submitted in evidence to support this position.
[5] A letter on the letterhead of Anmill, signed by L.P. Macdonell, president, and addressed to Arthur Smith, begins with this sentence:
This letter outlines the terms of an agreement between us with respect to the shares of Anmill Homes Ltd.
The letter is dated August 24, 1994, and below Mr. Macdonell's signature appears the words: "The contents of this letter are agreed to this 3rd day of October 1994". Below that appears the signature of Arthur Smith in Trust. The first paragraph of the letter recites that Anmill Homes owns 50% of the outstanding shares of Sherwood Forest, that Sherwood Forest owns approximately 87 acres of land under development in Oshawa, and that the land "is being redesignated in the City of Oshawa's 'Taunton Heights Secondary Plan' to permit retail, commercial and residential uses". It further recites that redevelopment of the lands will greatly increase their value, and that the shares of Anmill are owned by Shelley Macdonell. The letter then goes on to provide as follows:
The land is presently encumbered by a number of mortgages. It is my belief that a number of these mortgages are suspect and that no monies were advanced on account of the mortgages. You have requested a transfer of shares so that you may attack the validity of these mortgages. Shelley Macdonell is prepared to do so on the following basis:
1. The transfer of shares of Anmill Homes Ltd. is subject to the terms of this letter of agreement.
2. You agree to bear the costs of any proceeding to attack the validity of the mortgages on the 87 acres in Oshawa owned by Sherwood Forest Holdings Inc.
3. Any recovery of funds from the Oshawa property will be allocated as follows:
a. firstly, to payment of all legal fees and expenses associated with the cost of any proceedings to attack the validity of the mortgages on the Oshawa property;
b. the remainder of funds will be paid on the following basis:
Arthur Smith in Trust - 50%
Shelley Macdonell - 25%
Edward Hachey - 25%
4. Upon full payment of all proceeds from the Oshawa Property, you will transfer the shares of Anmill Homes Ltd. to Shelley Macdonell.
[6] On October 3, 1994, Larry Macdonell, as the sole director of Anmill, executed a resolution approving the transfer of 100 common shares from Shelley Macdonell to Arthur Smith in Trust. Also on October 3, 1994 Shelley Macdonell executed a document which reads as follows:
ANMILL HOMES LTD.
TRANSFER OF SHARES
FOR CONSIDERATION AS OUTLINED IN THE ATTACHED LETTER OF AGREEMENT, I hereby sell, assign and transfer unto Arthur Smith in Trust 100 common shares in the capitol, of Anmill Homes Ltd. registered in my name and do hereby irrevocably constitute and appoint the Secretary of the Corporation attorney to transfer the said shares on the book of the Corporation with full power of substitution.
DATED this 3rd day of October, 1994
"Shelley Macdonell"
Shelley Macdonell
The attached letter of agreement referred to in this document is the letter dated August 24, 1994, written by L.P. Macdonell and agreed to by Arthur Smith in Trust on October 3, 1994, to which I have referred above.
[7] The final two documents in this series are an Acknowledgement of Transfer of Shares which is signed by Arthur L. Smith and Schedule "A" to it, an Assignment of Interest dated November 11, 1994, and signed by Shelley Macdonell and Lee Monaco. I reproduced these in their entirety:
To: Lee MONACO
Acknowledgement of Transfer of Shares
Re: Lee Monaco purchase of 25 common shares of
Anmill Homes Ltd. from Shelley Macdonell
I, Arthur L. SMITH, acknowledge that I hold 25 common shares of Anmill Homes Ltd. in trust for Lee Monaco pursuant to Schedule "A" attached hereto dated November 11th, 1994.
Dated at Toronto the 18th, day of November, 1994.
"Arthur L. Smith"
Arthur L. Smith
SCHEDULE "A"
ASSIGNMENT OF INTEREST
SHELLEY MACDONELL hereby assigns her twenty-five per cent (25%) share in the Oshawa property, to which she is entitled pursuant to the Agreement dated October 3, 1994, attached hereto as Schedule "A", unto LEE MONACO in consideration of the sum of TWENTY-FIVE THOUSAND ($25,000.00) DOLLARS to be paid by LEE MONACO to SHELLEY MACDONELL.
Of the said TWENTY-FIVE THOUSAND ($25,000.00) DOLLARS, the sum of TEN THOUSAND ($10,000.00) DOLLARS is to be paid on the 11th day of November, 1994, and the balance of FIFTEEN THOUSAND ($15,000.00) DOLLARS is to be paid on the 18th day of November 1994.
LEE MONACO and SHELLEY MACDONELL agree that after LEE MONACO has received the sum of ONE HUNDRED THOUSAND ($100,000.00) DOLLARS on account of the said 25% share in the Oshawa property, SHELLEY MACDONELL will then receive ten per cent (10%) of all monies subsequently received by LEE MONACO on account thereof.
DATED at Toronto this 11th day of November, 1994.
WITNESS: )
)
Unreadable ) "Shelley Macdonell"
(as to the signature of ) SHELLEY MACDONELL
Shelley MacDonell) )
)
Unreadable ) "Lee Monaco"
(as to the signature of ) LEE MONACO
Lee Monaco )
[8] As I have already said, the evidence of Mr. Smith was at best imprecise, and the documents are somewhat conflicting on their face. However, I have to discern, as best I can, the nature of the transaction between Shelley Macdonell and Lee Monaco. In my view, it was an assignment by Shelley Macdonell to Lee Monaco of her share of the proceeds, if any, to which she might become entitled under the letter agreement of October 3, 1994 up to $100,000, and 90% of the proceeds beyond that amount, for an immediate payment by Lee Monaco to Shelley Macdonell of $25,000, with the transfer of a 25% shareholding in Anmill from Shelley Macdonell to Arthur Smith in Trust for Lee Monaco to secure the transaction. The Appellant, therefore, has not established that she purchased the shares of Anmill. It follows that she could not have sustained a capital loss from a disposition of shares of Anmill, and she therefore does not satisfy the requirements of paragraph 39(1)(c) of the Act, and is not entitled to an ABIL.
[9] Even if I am incorrect in this conclusion, the appeal must fail. For her to be entitled to an ABIL, her capital loss must be sustained in connection with an investment in a small business corporation. By reason of the definition of that term, the corporation must be one, all, or substantially all, of whose assets, are used principally in an active business carried on primarily in Canada, or are shares of a company connected with it which satisfies the definition of a "small business corporation".
[10] The Appellant's case is predicated upon the theory that Sherwood Forest, which is connected with Anmill, satisfies the active business requirement of the definition on the basis that its assets consisted entirely, or almost entirely, of the land, and that the land was being used in an active business of land development. The evidence as to the business of Sherwood Forest is even more vague and unsatisfactory than the evidence concerning the dealings with the shares of Anmill. The only evidence, other than Mr. Smith's vague assertions on the witness stand, is a letter sent to him on January 19, 2000 by Richard Szarek, a planner with the Regional Municipality of Durham. The substantive part of that letter is found in the following two paragraphs:
Further to your letter dated January 18, 2000, we wish to confirm that an application for a draft plan of subdivision was submitted on August 5, 1988 by Sherwood Forest Holdings Inc. for the above-noted property, which is also described as the north-east corner of Wilson Road and Taunton Road in the City of Oshawa.
In accordance with the Retention By-law of the Region of Durham, all subdivision files which have been closed for a period in excess of 10 years are to be destroyed. Hence, the above-noted plan of subdivision file is no longer available.
The obvious inference to be drawn from this letter is that the application for a draft plan of subdivision submitted on August 5, 1988 by Sherwood Forest had been either rejected or abandoned, and the file therefore closed, prior to January 19, 1990, almost five years prior to the time at which the Appellant asserts that she made an investment in Anmill. Neither Larry Macdonell nor Shelley Macdonell gave evidence at the hearing of this appeal, and there was no explanation offered for the failure to call them, although they clearly would be the persons most knowledgeable as to the business, if any, of Anmill and Sherwood Forest. I conclude therefore that their evidence would not have been helpful to the Appellant.
[11] I should add that in the facts assumed by the Minister when assessing the Appellant included the following:
7. In so assessing the Appellant, the Minister made the following assumptions of fact:
...
(l) Sherwood was incorporated on or about March 3, 1988, and surrendered its charter on or about October 29, 1994;
(m) Sherwood has never filed income tax returns since its corporation;
(n) Sherwood owned undeveloped land in the Oshawa, Ontario area which was sold under power of sale on or about February 14, 1995;
(o) Anmill did not carry on an active business;
(p) Sherwood did not carry on an active business;
The evidence has not rebutted any of these assumptions.
[12] The Appellant has failed to establish either that she made an investment in Anmill, or that either Anmill or Sherwood Forest carried on an active business in November 1994, or at any time in the twelve months preceding that date. The appeal is therefore dismissed.
Signed at Ottawa, Canada, this 3rd day of February, 2000.
"E.A. Bowie"
J.T.C.C.