Date: 19991101
Docket: 96-4119-IT-G
BETWEEN:
JAMES ALBRIGHT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan J.T.C.C.
[1] In the years 1989, 1990 and 1991, the Appellant deducted in computing income certain rental losses connected with a property in Orangeville, Ontario. After that property was sold, the Appellant deducted "carryover" losses in computing taxable income for 1992 and 1993. The Minister of National Revenue issued reassessments for all five years disallowing the deduction of such losses. The Appellant has appealed from those five reassessments and the issues are (i) whether the property was owned by the Appellant and Richard Walker or by a company with they incorporated; and (ii) whether there was a reasonable expectation of profit in renting the property.
[2] In the late 1980s, Richard Walker operated a video rental business out of leased premises in Orangeville, Ontario. The Appellant operated a refrigeration and air conditioning business in the same town. The Appellant and Mr. Walker knew each other. Mr. Walker was anxious to expand his business and move into larger premises. At the same time, the real estate market in southern Ontario was very active and prices were rising. There was a property for sale at 279 Broadway Avenue in downtown Orangeville. The Appellant and Walker decided to buy the property; demolish the existing building; and construct a new commercial building in which Walker would lease the whole lower floor for his expanded video rental business. They planned to find one or more tenants to lease the second story.
[3] On September 9, 1987, the Appellant and Walker purchased the property at 279 Broadway Avenue ("the Property") at a price of $175,000. The deed (Exhibit R-13) described the purchasers as the Appellant and Walker "in trust, for a company to be incorporated". The Appellant and Walker put second mortgages on their respective homes and borrowed money from the bank in order to complete the purchase. They demolished the building which had been on the Property but there was a delay in obtaining a building permit for the proposed new building. The permit was obtained in the summer of 1988. The Appellant testified that National Trust would not advance mortgage funds for the new building unless the Property was owned by a corporation. On August 26,1988, the Appellant and Walker conveyed the Property to 780441 Ontario Limited ("the Company") for a nominal consideration of $2.00. The deed is Exhibit R-14 and the Affidavit of Land Transfer Tax attached to the deed states: "conveyance from bare trustees to beneficial owner". The deed (Exhibit R-14) appears to complete the original purchase (Exhibit R-13) when the Appellant and Walker were described as buying "in trust, for a company to be incorporated".
[4] Exhibit R-15 shows the mortgage advances from National Trust which commenced on August 26, 1988 and continued to May 3, 1989 when a total of $551,228 was loaned to the Company. The new building was well advanced in the late fall of 1988 and Walker was able to move his video rental business into the ground floor in early December 1988. Unfortunately, the real estate market in southern Ontario started to fall in the winter and spring of 1988-1989 and it was very difficult to find tenants for commercial premises. The Appellant and Walker were not able to find a single tenant who would lease any space at all in the new building other than the ground floor leased by Walker himself for his video rental business. The financing of the new building was based on the assumption that all of the building would be leased to tenants who would provide a reasonable flow of rental income. The rental income from Walker's video store, by itself, was not sufficient to carry the mortgage from National Trust.
[5] The real estate market continued to fall through 1989 and the Canadian economy was in a recession. National Trust started foreclosure proceedings and obtained a power of sale with respect to the Property. There was no actual foreclosure but National Trust put pressure on the Appellant and Walker to find a purchaser for the Property. On July 23, 1990, the Property was sold at arm's length to Chidon Corporation for $660,000. The deed (Exhibit R-16) showed the Company as the vendor. Also, the Site Plan Agreement (Exhibit R-17) showed the Company as owner as did the mortgage to National Trust (Exhibit R-18).
[6] The Company filed its first corporate tax return for the fiscal period ending June 30, 1989 (Exhibit R-6) showing a loss of $64,355 resulting from rental revenue of $24,000 and expenses of $88,355. In that income tax return, the Company described its business as "rental and lease units". The return was filed on December 29, 1989. The Company filed an amended income tax return on March 2, 1990 (Exhibit R-7) for the same fiscal period showing a reduced rental loss of $35,155. The Company filed a second amended income tax return on March 21, 1990 (Exhibit R-8) in which it described itself as a "Trustee Corporation" and showed nil income. This was about the time that the Appellant would ordinarily be preparing his personal income tax return for 1989.
[7] Actually, the Appellant did not file his 1989 income tax return (Exhibit R-1) until June 1992 in which he reported a rental loss of $20,218. This was one-half of a net loss of approximately $40,255 which he shared with Walker. The Appellant's 1989 return enclosed a financial statement for the Company as trustee showing a loss of $40,255. The Appellant claims that the Company held the Property in trust for him and Walker in equal (50-50) portions. The Appellant's income tax return for 1990 (Exhibit R-2) shows a rental loss of $28,258 which is one-half of a net loss of $56,516 shown by the Company as trustee on its financial statements for the fiscal period ending June 30, 1990.
[8] The Appellant's income tax return for 1991 (Exhibit R-3) shows a rental loss of $64,330. According to the financial statements of the Company as trustee filed with that return, a net loss of $128,661 was shared 50-50 with Walker but I am astonished at the source of that loss. Exhibit R-16 proves that the Property was sold on July 23, 1990 to Chidon Corporation for $660,000. The financial statements of the Company as "Trustee" are attached to the Appellant's 1991 income tax return and the "Statement of Earnings" begins with the proceeds of sale at $660,000. The deductions include the cost of the Property at $734,372 plus a realty commission of $24,000 and other expenses to produce a net loss of $128,661. This is not a statement of earnings at all, in the profit and loss sense, but a computation of the capital loss on the disposition of the Property without regard to the identity of the beneficial owner of the Property. Under no circumstances is the purported loss of $128,661 in 1991 deductible in computing anyone's income.
[9] According to the Appellant's income tax returns for 1992 (Exhibit R-4) and 1993 (Exhibit R-5), the losses carried forward to those years were derived from the portion of the 1991 purported loss which was not absorbed in computing the Appellant's income for 1991. The rental losses claimed by the Appellant in 1989 and 1990 were absorbed by the Appellant's income from other sources in those years. Therefore, the purported loss for 1991 has been applied by the Appellant to reduce his income in 1991 and his taxable income in 1992 and 1993. I have no hesitation dismissing the Appellant's appeals for 1991, 1992 and 1993 because the amounts which he deducted in those years were not losses on revenue account, in the profit and loss sense, but portions of the capital loss realized on the sale of the Property in July 1990.
[10] Exhibit R-9 is a declaration of trust dated July 15, 1988 in which the Company purported to declare that it held the Property in trust for the Appellant and Richard Walker. The Appellant was questioned closely on this document and admitted that it was prepared in June 1995 to satisfy certain questions raised by Revenue Canada.
[11] Exhibit R-12 is a reporting letter dated November 8, 1990 from Margot Hornseth who acted for the vendor on the sale of the Property on July 24, 1990. Ms. Hornseth addressed the letter to the Company and there is no indication in the letter that the Company was holding the Property in trust for the Appellant and Walker or for anyone else. I infer from Exhibit R-12 that Ms. Hornseth thought that the Company was the beneficial owner of the Property.
[12] The Appellant cannot succeed in his appeals for 1989 and 1990 because he has failed to prove that he and Richard Walker were the beneficial owners of the Property at any time. All of the land registration documents entered in evidence (Exhibits R-13, R-14, R-16, R-17 and R-18) show that the Company was intended to be or was in fact the beneficial owner. Miss Hornseth's reporting letter (Exhibit R-12) indicates that she looked upon the Company as the vendor. The Company's original tax return for 1989 (Exhibit R-6) reported a rental loss, as did the first amended return for 1989 (Exhibit R-7). It is only in the second amended tax return for 1989 (Exhibit R-8) that the Company showed nil income and described itself as a "trustee corporation". This second amended return was filed on March 21, 1990 in the midst of National Trust's power of sale proceedings and just four months before the sale to Chidon on July 23, 1990.
[13] In March 1990 (see Exhibit R-8), the Appellant and Mr. Walker and their advisors would have known that the Company was insolvent; that the Company was going to lose the Property; and that there would be no other income in the Company to absorb the rental losses. The attempt by the Appellant to show the Company's rental losses in 1989 and 1990 as belonging to him and Richard Walker is an after-the-fact attempt to allocate losses to taxpayers who have other source income which might absorb those losses for income tax purposes. The appeals for all five years are dismissed, with costs, because the Property was beneficially owned by the Company at all relevant times.
Signed at Ottawa, Canada, this 1st day of November, 1999.
"M.A. Mogan"
J.T.C.C.