Eidsvik v. The Queen

Eidsvik v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2006-05-11 Neutral citation 2006 TCC 253 File numbers 2004-4462(IT)I Judges and Taxing Officers Joe E. Hershfield Subjects Income Tax Act Decision Content Docket: 2004-4462(IT)I BETWEEN: JEAN-PAUL EIDSVIK, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on September 20, 2005 at Vancouver, British Columbia Before: The Honourable Justice J.E. Hershfield Appearances: Agent for the Appellant: Evelyn Lomba Counsel for the Respondent: Gavin Laird ____________________________________________________________________ JUDGMENT The appeal from the assessment made under the Income Tax Act for the 1996 taxation year is allowed, with costs, for the reasons set out in the attached Reasons for Judgment and the assessment is referred back to the Minister of National Revenue for reassessment accordingly. Signed at Ottawa, Canada, this 11th day of May 2006. "J.E. Hershfield" Hershfield J. Citation: 2006TCC253 Date: 20060511 Docket: 2004-4462(IT)I BETWEEN: JEAN-PAUL EIDSVIK, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Hershfield J. [1] The Appellant appeals a reassessment in respect of his 1996 taxation year which disallowed a deduction claimed of 50% of a business loss arising from the sale of time share interests in certain resort properties in Mexico. The remaining 50% was claimed by his spouse who is asserted to be a 50% partner in the business that incurred the loss. [2] The Respondent asserts that the Appellant did not carry on a business solely or in partnership and that any loss incurred was not incurred by the Appellant or by a partnership but rather was incurred by a Mexican company that owned the subject properties. [3] The Respondent relies on the following assumptions: (a) the Appellant, his spouse and two other individuals were shareholders of JJEM S.A. de C.V. ("JJEM"); (b) JJEM was a Mexican corporation; (c) Sunset Resorts Inc. ("SRI") was an Arizona company selling time shares in Puerto Escondido, Mexico; (d) in the 1996 taxation year JJEM was involved with SRI in the sale of time shares; (e) JJEM entered into contracts indicating an intent to rent time shares in 1997; (f) the Appellant did not solely or in a partnership, carry on a business in 1996; (g) the Appellant had no source of income respecting the loss; and (h) in confirming the Appellant's assessment, the Minister assumed that the loss was a loss of JJEM which did not have an expectation of profit at any material times. [4] There is no dispute that JJEM owned three condominium units located at a resort in Puerto Escondido, Oaxaca, Mexico and that a number of time share interests had been sold in respect of these units under the umbrella of a sales contract with SRI. The Respondent does not dispute that such sales activities constitute a business.[1] The Respondent submits however that that business and its attendant losses were those of JJEM. [5] The Appellant testified at the hearing. He was a resident of Canada trying to derive revenues from foreign real estate dealings. He clearly saw selling time share interests as a potential money-maker and saw opportunities for a strategy that places little or no emphasis on the ownership of real estate such as the units owned by JJEM. For example, he testified that to sell time share interests, all you needed to do was provide the purchaser with a particular type of unit for a particular period at a particular location - a specified week, for example, in a two-bedroom condo in Puerto Escondido, Oaxaca, Mexico. Even then, the purchaser might exchange the time share interest acquired for a similar time share unit at a different location, anywhere in the world where a linked time share facility was available. [6] The suggestion, as I understand it, was that limited access to, as opposed to ownership of, a unit was all that was needed to sell a time share interest. That is, the Appellant could operate a business without ownership or without providing access for more than the number of weeks sold as long as he could provide access to a unit of the type sold, at the same location, for the particular weeks sold. Six weeks sold would require access for six specified weeks to any of the JJEM properties or to any other properties that the Appellant could, by any means, make available as long as they met those specifications. If access was converted to occupancy, all six weeks could have been accommodated in any one of the JJEM properties or any one of any other suitable properties that the Appellant could make available. [7] However, the Appellant's evidence also clearly established that he could not sell time share interests without an agent whose business it was to do just that and whose business included linking the Appellant's units to a network of worldwide time share facilities. Accordingly, the Appellant retained SRI in December 1995 to play this role. SRI required assurance that units in respect of which time share interests were sold, were legally owned by the party selling the interest. This is where JJEM came into the picture. It was the legal owner of the units in respect of which SRI could fall back on when it sold time share interests in Puerto Escondido, Oaxaca, Mexico.[2] Failure to deliver occupancy could result in a cause of action against SRI. Accordingly, SRI, to protect itself and buyers, needed the legal owner of a suitable property to be responsible to buyers under the sales contracts. As will be noted later in these Reasons, this was effected by requiring JJEM to be a party to individual sales contracts. This is one of the ties that the Respondent asserts leads to the conclusion that SRI or the Appellant was the agent for JJEM. It was JJEM's business. [8] On the other hand, following the Appellant's assertions as to how this business can and did operate, he saw JJEM's ownership as the vehicle that provided him, on behalf of the partnership's business, not only the limited access he might need to operate the partnership's time share business, but more importantly it provided the essential legal back-up that SRI needed to work with the Appellant for the partnership's account. He did not, nor could he, assert that JJEM was a bare trustee of the units it owned as there were other interested shareholders in JJEM whose indirect interest in such properties was never challenged by the Appellant. It seems that the Appellant's view was that the particular use that he made of JJEM's property, as a "guarantor" or as the provider of limited access to units as required under time share sales contracts, did not impair the indirect interest of the other shareholder.[3] [9] Another aspect of this appeal upon which the Appellant relies, is that the business that incurred the loss did in fact, as alluded to above, encompass more units than those owned by JJEM. There were several additional properties in respect of which expenses were incurred in the subject year and which contributed to the losses. The Appellant, as illustrated by his own method of accounting for the losses, regarded these additional properties as inventories or potential inventories in the same time share sale business as that operated in respect of the units owned by JJEM. Similarly, the Respondent makes no distinction as between the activities that relate to the additional properties and those that were owned by JJEM. This helps narrow the question before me. Had the Respondent considered the activities of the additional properties separately, the income and expenses attributable to the business conducted by JJEM might have been carved out. However, since neither party has considered the separation of the businesses or activities, I have only two possibilities to consider, namely, whether the personal holdings of the Appellant (or partnership) attach to JJEM's business or whether the corporate holdings of JJEM attach to the business of the Appellant (or partnership). Of these alternatives, the latter one must prevail in my view. [10] In reaching this conclusion I have considered the following: − the background of JJEM's ownership of units; − the Appellant's additional property dealings; and − the contract with SRI. The JJEM Properties [11] In 1991 the Appellant along with Mr. John and Mary Ann Bernhardt invested in three condominium units located in Puerto Escondido, Oaxaca, Mexico, in a complex referred to as "Angel Bay Resort". While legal title rested with the developer, the Appellant was 50% beneficial owner of these units, with the other 50% beneficial ownership resting with the Bernhardts. [12] In the early 1990s, Mexico was experiencing economic difficulties, as were the Mexican developers of the above units. The Appellant testified that unbeknownst to him and the other unit holders in the complex, the developers had secured a mortgage against their units. After the developer was unable to pay the mortgage, the bank put a lien on the units and was going to foreclose. In order to save his interest in the three units the Appellant negotiated a loan with the bank, depositing money in trust and promising to pay the outstanding balance owed on these units, at the time being around $80,000.00 US, in exchange for the bank not proceeding with any further legal action against the units. [13] Around the same time that the foreclosure issue arose, the Appellant testified that the relationship between Mr. and Mrs. Bernhardt had disintegrated due to problems Mr. Bernhardt was suffering. The Appellant's primary concern was that Mr. Bernhardt could potentially affect his interest in the subject units by unauthorized dealings with the property. The transfer of legal title to these units to JJEM was effected to preclude any such possibility. [14] Therefore in February of 1995, the Appellant, his spouse and Mary Ann Bernhardt travelled to Mexico to incorporate JJEM to hold title to the units. After the incorporation and JJEM taking legal title to the units, the Appellant testified that the shares of JJEM held by him and his spouse (51% in his name and 49% in his spouse's name) were held in trust as to 50% for the Bernhardts.[4] JJEM's authorized officers included only the Appellant and Mrs. Bernhardt. The Appellant was the principal officer with broad authority and Mrs. Bernhardt was an officer with limited authority. [15] All the costs and maintenance fees relating to these units, both prior to and after the incorporation of JJEM, were paid from the same bank account held jointly by the Appellant, John and Mary Ann Bernhardt. The Additional Properties [16] As noted, there were several additional properties to those held by JJEM in respect of which expenses were incurred in the subject year and which contributed to the losses. [17] The Appellant produced a variety of documents showing that he personally was involved in attempting to buy or secure options to buy condominium units in Puerto Escondido, Oaxaca, Mexico in both the Angel Bay Resort complex and in another complex located in the same area referred to as Hotel Flor de Maria. I am satisfied that through his efforts the Appellant acquired beneficial ownership to at least one additional unit in the Angel Bay Resort complex which was sufficiently tied-up to constitute inventory in the time share sales business in the sense that it could be used to satisfy occupational requirements arising out of the contract with SRI. I am also satisfied that that was the purpose for the acquisition. Payments in respect of this additional unit are documented from his personal account, and a joint account with his spouse. These corroborate that they paid maintenance fees on this one unit. He and his spouse were also making option payments on another unit located in the same complex. The option interest acquired appears broad enough to constitute inventory in a business that seeks only limited access opportunities. [18] I also note that the nature of his interest in these additional properties (beneficial ownership) explains why there are no title documents showing legal ownership as there are in the case of JJEM's properties. [19] Another suggested contributing explanation for the absence of legal title documents in respect of the additional properties was land transfer restrictions under Mexican law. A legal opinion, expressed in a letter tendered by the Appellant, noted that the sale of residences for habitation in certain restricted areas (such as ocean front properties) was not allowed. On the other hand purchases for resale as time shares were treated as a commercial use, not a restricted habitation use, as long as the condominium association rules expressly permitted this and the purchase contract expressly stated such commercial usage. It is possible then that legal transfers were not possible in respect of additional units. The Partnership [20] The Appellant testified that he and his wife formed a partnership in 1995 to carry on business under the name Angel Bay Vacations to sell time shares in Puerto Escondido. [21] Revenues and expenses in respect of this activity were accounted for on his income tax returns on behalf of this partnership.[5] There is no dispute that the expenses giving rise to the losses were funded directly by the Appellant and/or his spouse but there is no partnership agreement or other formal recognition of the existence of a partnership. There is no evidence of a partnership bank account. The business name of the partnership, of which there is no evidence of registration, appears to take on different variations. For example, in sales contracts arising out of the Appellant's relationship with SRI, the Appellant represents himself as the signing authority for JJEM and "Angel Bay Vacations Club" not "Angel Bay Vacations". [22] While a better documentary basis for claiming that a partnership exists would be preferable, I have no reason to find that it did not exist. The Appellant's spouse was at the hearing and while she did not technically testify, I have no hesitation in suggesting that she would be more than a little taken aback if I were to suggest she was not a partner in the activities. She contributed financially and was a shareholder in JJEM. She and the Appellant filed as a partnership. That there are aspects of this entire case that suggest some slight of hand (in terms of both the time share interest sales business and the disregard of the Bernhardt's potential economic interest in the business), for the purposes of the administration of the tax system, I have little reason not to accept that the Appellant and his spouse were partners in this enterprise. The Business and SRI Contract [23] The Appellant, as noted and as illustrated by his own method of accounting for the losses, regarded the additional properties as inventories or potential inventories in the same time share sales business as any operated in respect of the units owned by JJEM. Similarly the Respondent made no distinction as between the activities that relate to the additional properties and those that were owned by JJEM. Such was their common approach. [24] Further, the Appellant's testimony was that the Bernhardts did not participate in the business at any level. The suggestion was that funds dealt with from the joint bank account maintained with the Bernhardts did not relate to the business. Still, it seems probable, and I have no evidence to the contrary, that the Bernhardts were indirectly, in making contributions to JJEM for regular maintenance, supporting a company that was using its title to properties, if not the actual use of its properties for some limited periods, for the benefit of the other shareholders. That such benefit raises civil issues amongst shareholders, corporate law issues in relation to corporate opportunity and shareholder benefit issues under the Income Tax Act (the "Act"),[6] need not suggest that the Appellant was acting for JJEM in his dealings with SRI. Indeed it is clear that he did not intend the company to have any interest in such dealings. The revenues went directly to him and, as I will address later in these Reasons, JJEM, although a party to sales contracts, was not a party to the agreement with SRI. [25] As noted, the Appellant admitted that he had no experience selling time shares and that he needed SRI to act as a sales agent on the sale of time share interests. SRI is an Arizona company specializing in the marketing and sale of time share interests. [26] The Appellant's plan was to incorporate a Canadian company, JJEM Canada, to own shares in JJEM and to incorporate a Barbados company, JJEM Barbados, to operate the business using the units owned by JJEM and presumably the additional properties. It was the Appellant's idea at the time that he could divert profits to a Barbados company and thereby enjoy tax advantages. Neither JJEM Canada nor JJEM Barbados was ever incorporated. I draw no inferences from events that may have occurred, or not, had the incorporations taken place. [27] However, it was with this structure in mind that the agreement with SRI was entered into. It is a pre-incorporation contract entered into by the Appellant on behalf of JJEM Barbados (yet to be incorporated). It is a sales and marketing agreement (the "SRI Agreement") executed on December 18, 1995 between SRI and JJEM Enterprises Ltd.[7], a company yet to be formed in the Barbados (i.e. JJEM Barbados). The SRI Agreement was signed by the president of SRI and by the Appellant as the Owner/Financial Officer of the yet to be incorporated JJEM Barbados. No other parties signed the SRI Agreement. [28] The SRI Agreement specified in an opening paragraph that "the collateral for this Agreement is provided by and guaranteed by JJEM, a subsidiary of JJEM Enterprises Inc.". JJEM Enterprises Inc. was to be incorporated in Canada and is the company referred to above as JJEM Canada. The SRI Agreement does not set out any of the obligations of JJEM as guarantor and the provider of collateral. It is only mentioned at the outset as having that capacity. Further, as stated, JJEM is not a signatory to the Agreement. [29] It is clear under the SRI Agreement that the Appellant himself is regarded personally as a key player under the Agreement as it provided that if the principal of JJEM Barbados, namely the Appellant, should become deceased, SRI had the option to terminate the SRI Agreement. Further, the SRI Agreement provided that no party could assign the agreement without consent. It was known to SRI that JJEM Barbados was yet to be incorporated. SRI proceeded to deal with the Appellant arguably on the basis that it was contractually bound to do so or perhaps, more simply, on the basis that it was in its best business interests to do so. Such dealings are illustrated by the fact that SRI succeeded in the sale of six or more time share interests. Payments were made to the Appellant as Angel Bay Vacations. [30] As noted earlier in these Reasons, all the sales contracts with particular buyers were signed by JJEM as a seller. This appears to be the way that JJEM provided its guarantee as it was not a party to the SRI Agreement and no other documents were put in evidence. I accept there were likely no other documents in existence. That JJEM was a signatory to the sales contracts does not make it a party to the SRI Agreement. [31] In addition to JJEM, the sales contracts relating to the sale of time share interests refer to "Angel Bay Vacations Club" as a seller. The status of Angel Bay Vacations Club was not made clear. As was noted earlier in these Reasons, it might be a reference to the partnership but I have no evidence to that effect. Nonetheless, there is clearly recognition here that SRI, even in the sales contracts, was dealing here with a party other than JJEM. As stated, payments did not go to JJEM but went to the Appellant as Angel Bay Vacations and were reported as partnership income. This tends to substantiate the Appellant's assertion that JJEM was named on the sales contract and made a signatory of it in order to protect SRI and the buyers. It was the only entity that had legal ownership of a unit as generally described in the sales contracts. It mattered not to SRI that property other than that owned by JJEM would or could be the property actually used to satisfy the terms of the sales contract, if such use was required at all. Having JJEM as a signatory on the sales contracts was the way in which SRI had JJEM act as guarantor as provided under the SRI Agreement. [32] As should be apparent by now, it is necessary that I make a finding as to the legal consequences of the SRI Agreement including a party that never came into existence. In this regard, I asked the parties to this appeal to make submissions on the governing law concerning pre-incorporation contracts and on the implications of that law on the outcome of this appeal. The SRI Agreement expressly designated United States law and Arizona state law to govern all questions relating to its validity, construction and endorsement, so the question posed to the parties was "What is the law governing the SRI Agreement and if it is foreign law, what is the relevant foreign law?" The submissions were of little assistance in that they seemed to presume Canadian law prevailed. Such presumptions were correct but I will elaborate on the reasons for this conclusion. [33] Foreign law is a question of fact which must be specifically pleaded by the party relying on it and proven to the satisfaction of the Court since, generally, a Canadian court cannot take judicial notice of foreign law. Where foreign law is not pleaded, or is insufficiently proven, it is assumed to be the same as the lex fori, here, Canadian law.[8] Considering then that foreign law was neither pleaded nor proven (indeed the submissions on the question made no attempt to argue in favour of the application of foreign law), I am satisfied that Canadian common law must apply. [34] The general common law rule is that an agent will be personally liable where, considering all the circumstances, the pre-incorporation contract discloses an intention to be bound.[9] I am satisfied that the intentions of the parties created a binding contract between the Appellant and SRI. Benefits under the contract would also flow to the Appellant if he caused adequate performance which in this case was ensuring that JJEM entered into the time share interest sales contracts. This however does not suggest that the Appellant was not an agent for another, such as the partnership as he asserts, or JJEM as the Respondent asserts.[10] In this context, the positions of the parties can be restated. [35] Even though the Respondent did not dispute that the Appellant, and his spouse, funded the various expenses claimed in arriving at the loss claimed and never asserted or assumed that such funding passed through the hands of JJEM, the Respondent's theory is that such funding was advanced by the Appellant on behalf of JJEM. The inventory that gave rise to sales revenue was the property of JJEM and further the business was carried out by SRI or by the Appellant on behalf of JJEM. The Appellant or the Appellant together with his spouse had no business. The outlays funded by the Appellant and his spouse must be regarded as shareholder loans to JJEM. [36] As stated the Appellant's position is that the losses were partnership losses. [37] Considering the Appellant's position, he asserts in effect that, whether correct in law or not, he dealt with JJEM's property as if it were his own personally. Further, he made it abundantly clear that under no circumstances would JJEM hold title to any of the additional properties he acquired in Puerto Escondido as inventory for the time share sales business. It was not a business to be linked to the Bernhardts, even as to the use he made of JJEM's property in terms of using its legal title status to guarantee his performance of the sales contracts entered into by the partnership. Conclusions [38] As noted above I have no evidence as to the actual occupational use of the JJEM units versus the use of the additional units - if there was any occupational use at all in the subject year. Further, while expenses might be allocable as between the JJEM units and the additional units, I have no way of allocating revenues as between the two. The revenues related to the sale of time share interests in unspecified properties that may never have been occupied. Allocating revenues between two property owners in these circumstances would be a challenge. The need to resolve the challenge is obviated by the parties having accepted that there is but one business. As stated earlier in these Reasons the issue comes down then to my determining who operates that business as between JJEM and the partnership. The Appellant had a contract with SRI and was the agent for one of these parties. He denies being the agent for JJEM and there is sufficient evidence in my view to support that assertion. [39] The Respondent's position derives from the assumptions made at the time of the assessment. The Respondent assumed that JJEM entered into the sales contracts. It is true that JJEM was a party to these contracts but there is another party shown on these contracts as well which tends to corroborate the Appellant's assertions as to the nature of JJEM's role. It was a guarantor and had property that could presumably be used to satisfy obligations under the sales contracts. However there is no evidence to suggest that such properties would be used over the additional properties if occupation was required by a time share interest buyer. There is no specific unit needed or sold. The units owned by JJEM were not the subject matter of the sales contracts. That JJEM is a party to such contracts tells us little in terms of identifying the principal of the business. That payments were made to the Appellant suggests SRI saw the Appellant, indeed saw the partnership, as the vendor; i.e. the principal of the business. Telling evidence of this is sales invoices from SRI which were addressed and issued to Angel Bay Vacations, not JJEM. [40] The Respondent assumed the Appellant did not carry on a business. I am satisfied that the Appellant's activities in relation to the additional properties was part of a business that was intended by him to be on behalf of the partnership. I accept the Appellant's credible and staunch denial that any efforts relating to securing the additional properties for inventory were on behalf of JJEM. That is, I accept that the additional properties were inventories of the partnership. Since there is only one business, it follows that the involvement of JJEM was to facilitate that business of the partnership. [41] While there are inconsistencies in the Appellant's case and while better documentary evidence would have been preferred, the Appellant's position is further supported by the way in which he filed returns in Canada. All efforts relating to the additional properties and to the JJEM properties were reported as a single business venture belonging to the partnership. Other issues such as shareholder benefits, corporate opportunities and arguably lax practises in the time share industry, do not change the reality that the losses incurred here were from a business carried on by and for the partnership. [42] I am satisfied that the underlying purpose for creating JJEM was to hold title to the properties and to solve issues with the Bernhardts surrounding control of the properties. The Respondent argued that I should draw a negative inference from the fact that the Appellant did not call the Bernhardts to testify that they agreed, or understood, that JJEM was not the principal of the business. I am satisfied that the Appellant has satisfied the burden of proof placed on him in this regard and accordingly I draw no such negative inference. The Respondent might have anticipated that I would accept the testimony of the Appellant and called on the Bernhardts to testify. The Minister cannot always rely on the burden staying on the Appellant in cases such as this and should anticipate that the testimony of a third party might be necessary to refute the assertions of an appellant credibly presented at trial. [43] Before concluding these Reasons, I note that I have not addressed what is in my view the Respondent's most compelling argument. The absence of documentation in this case is troubling. There should be better documentation of the partnership. There should be documentation of the arrangement between JJEM and the partnership. Had there been documentation of the arrangement between JJEM and the partnership, shareholder benefit provisions of the Act might have been assessed. Loose arrangements such as those employed in this case leave the Canada Revenue Agency without an accurate picture of the appropriate assessing position they should take. Taxpayers might easily suffer the consequences of such looseness by being denied expenses they might otherwise be entitled to. Further, there is a possibility here that the expenses as claimed might have been claimed differently had things worked out differently. The Appellant had thought through a tax plan in the structuring of the SRI Agreement in late 1995. Indeed, arguably, the Appellant himself may not have known on whose behalf he was incurring expenses. Accounting for the expenses may well have been a work in progress. Income tax considerations (such as going ahead with the incorporation of JJEM Barbados) could ultimately have dictated the accounting for the revenues and expenses after the fact as opposed to the structure dictating the accounting treatment. Respondent's counsel suggested the proper law to apply in these circumstances is that reflected by Justice Linden in The Queen v. Friedberg:[11] If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be attained, even though the main reason for these arrangements may be to save tax (see Canada v. Irving Oil Limited, [1991] 1 C.T.C. 350, 91 DTC 5106 per Mahoney J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might not otherwise not have to pay. [44] While this passage does strike at the heart of the Respondent's problem with the Appellant's lack of documentation, the real flexibility in this case arises not so much from that as from the law relating to pre-incorporation contracts. Generally at least, under corporate law, expenses are transferred to a corporation adopting a pre-incorporation contract. It is my understanding that tax law would follow that transference.[12] This gives a promoter such as the Appellant some flexibility which results from corporate law. [45] If there is any doubt in my determinations in this case I have decided to give the Appellant the benefit of it. In spite of my having reservations as the nature of the business and the manner in which it was performed, he was a credible witness. [46] To conclude then, the law respecting pre-incorporation contracts dictates the results in this case. The application of that law puts the business activity on the shoulders, and in the hands, of the Appellant and there is sufficient corroboration of his testimony to enable me to find that he was acting in partnership with his spouse in relation to these activities. [47] Accordingly, the appeal is allowed with costs. Signed at Ottawa, Canada, this 11th day of May 2006. "J.E. Hershfield" Hershfield J. CITATION: 2006TCC253 COURT FILE NO.: 2004-4462(IT)I STYLE OF CAUSE: Jean-Paul Eidsvik and Her Majesty the Queen PLACE OF HEARING: Vancouver, British Columbia DATE OF HEARING: September 20, 2005 REASONS FOR JUDGMENT BY: The Honourable Justice J.E. Hershfield DATE OF JUDGMENT: May 11, 2006 APPEARANCES: Agent for the Appellant: Evelyn Lomba Counsel for the Respondent: Gavin Laird COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada [1] At trial, the Respondent did not pursue the source argument and in written submissions clearly abandoned it entirely. Similarly, the Respondent made no submissions with respect to the application of the reasonable expectation of profit doctrine. [2] If SRI required legal titles to underlie all its sales, and I accept that as the case, it would be limited to selling 156 time share interest weeks regardless that the Appellant may have had additional properties that could have actually been provided. Aside from this legal requirement to protect SRI and buyers, buyers of time shares had no legal right to claim occupation of any one of JJEM's properties so long as any other suitable property was made available. [3] The Appellant did argue he could have set up a trust that would have obviated any concern as to whom the time share sales business belonged. He testified that title to the property (units) could have been held by a Mexican bank trust (feidicomiso). Under a bank trust, legal title is placed in the name of a Mexican bank, in trust, under a permit from the Secretary of Foreign Relations. The bank holds the title to property for the buyer/beneficiary of the trust, the non-Mexican who purchased the trust rights in the property. The bank then administers the property in accordance with the instructions of the buyer/beneficiary who enjoys the same rights of ownership as does a Mexican national. While a trust may have raised different considerations, I am not faced with a trust and further the issue of whether the trust might have been considered more than a bare trust is not as clear as the Appellant might believe. [4] It appears that the share interest acquired by the Appellant's spouse resulted from a transfer of a portion of his interest to her. This might raise attribution issues, but such issues are not of import to this appeal. As to the trust arrangement for the Bernhardts, the Appellant testified that Mary Bernhardt was to be a shareholder, presumably holding her shares for her and her husband, but she left before completing the requisite documents. [5] Revenues are primarily from the sale of time share interests for six weeks occupation in unspecified units in Puerto Escondido. There is no evidence to show if any units (JJEM units or additional property units) were occupied in the year or any later year. [6] Clearly there is a section 15 taxable benefit issue in this case. Same was not assessed. [7] I have italicized "Ltd." in JJEM Enterprises Ltd., and later "Inc." in JJEM Enterprises Inc. to draw a distinction between these two entities: JJEM Enterprises Ltd. is JJEM Barbados, and JJEM Enterprises Inc. is JJEM Canada. [8] Parties may waive impliedly the application of foreign law by omitting to plead and prove it, in which case the lex fori will apply: Tolofsen v. Jensen, [1994] 3 S.C.R. 1022, at 1053. [9]Kelner v. Baxter (1866), L.R. 2 C.P. 174. While Canadian legislation now sets out statutory provisions governing pre-incorporation contracts, it is unlikely, in my view, that any such provisions would apply in this case. Firstly, that the corporation never came into existence points to the application of common law principles. While the authorities are divided as to whether these statutory provisions only apply where a corporation comes into existence (compare for example the decisions of Westcom Radio Group Ltd. v. MacIsaac (1989), 70 O.R. (2d) 591 (Div. Ct.) and Szecket v. Huang, (1998) 42 O.R. (3d) 400 (C.A.)), in the circumstances of this case, I am compelled to conclude that the better view is that the common law applies. Secondly, even if the Canadian legislation is to be considered, the statutory provisions to be considered would be those with a jurisdictional nexus to this case; namely, British Columbia's legislation. That legislation differs substantially from the governing legislation in other jurisdictions such as that governing federally incorporated corporations. Under British Columbia's provisions it is unclear whether the Appellant would be entitled to the benefit of the contract. That being the case, applying that legislation would be of no assistance to the Appellant which is to say that my favouring common law gives the Appellant the benefit of any doubt. In any event, I am satisfied that for the purposes of this informal proceeding the Appellant must be regarded as liable under and having the benefit of the contract with SRI. [10] Respondent's counsel also encouraged me to find that JJEM was a party to the contract. There is no basis at all upon which I could make such a finding. [11] 92 DTC 6031 at p. 6032. [12] See for example Interpretation Bulletin IT-454, entitled "Business Transactions Prior to Incorporation", dated August 11, 1980, and CRA Views - Interpretation, external 2005-0159391E5, dated February 15, 2006, also concerning "Business Transactions Prior to Incorporation".