Weaver v. The Queen

Weaver v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2006-10-31 Neutral citation 2006 TCC 566 File numbers 2004-2307(IT)G Judges and Taxing Officers David W. Beaubier Subjects Income Tax Act Decision Content Docket: 2004-2307(IT)G BETWEEN: KEVIN WEAVER, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard together on common evidence with the appeal of Jennifer Weaver (2004-2300(IT)G) on October 4 and 5, 2006, at Victoria, British Columbia Before: The Honourable Justice D.W. Beaubier Appearances: Counsel for the Appellant: D. Laurence Armstrong Counsel for the Respondent: Gavin Laird ____________________________________________________________________ JUDGMENT The appeal from the reassessment made under the Income Tax Act for the 1998 taxation year is dismissed in accordance with the attached Reasons for Judgment. The Respondent is awarded its party and party costs for this appeal throughout except that, in respect to the hearing itself, Kevin Weaver is to pay one-half of one set of costs. Signed at Kelowna, British Columbia, this 31st day of October, 2006. "D.W. Beaubier" Beaubier, J. Docket: 2004-2300(IT)G BETWEEN: JENNIFER WEAVER, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard together on common evidence with the appeal of Kevin Weaver (2004-2307(IT)G) on October 4 and 5, 2006, at Victoria, British Columbia Before: The Honourable Justice D.W. Beaubier Appearances: Counsel for the Appellant: D. Laurence Armstrong Counsel for the Respondent: Gavin Laird ____________________________________________________________________ JUDGMENT The appeals from the reassessments made under the Income Tax Act for the 1996 and 1998 taxation years are allowed to the extent that the Respondent conceded to the Appellant's claim to a non-capital loss carry back as set out in paragraph [3] 2. of the attached Reasons for Judgment, and the reassessments are referred to the Minister of National Revenue for reconsideration and reassessment in accordance therewith. Page 2 The Respondent is awarded its party and party costs for this appeal throughout except that, in respect to the hearing itself, one half of one set of costs to be paid by Jennifer Weaver. Signed at Kelowna, British Columbia, this 31st day of October, 2006. "D.W. Beaubier" Beaubier, J. Citation: 2006TCC566 Date: 20061031 Docket: 2004-2307(IT)G BETWEEN: KEVIN WEAVER, Appellant, and HER MAJESTY THE QUEEN, Respondent. AND BETWEEN: Docket: 2004-2300(IT)G JENNIFER WEAVER, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Beaubier, J. [1] These appeals pursuant to the General Procedure were heard together on common evidence by consent of the parties at Victoria, British Columbia on October 4 and 5, 2006. Kevin Weaver testified and the Appellants also called Daniel Giesbrecht, C.G.A., who was qualified as an expert witness in preparing a net present value of a lease which he valued at $902,000. The Respondent called Robert Malcolm, who had been a co-director of Songhees Retirement Park Ltd. (S.R.P.) with Kevin Weaver; Alfred Wescott, C.A. (retired), who had been retained as the chartered accountant for S.R.P.; Sandro Lecato, B.A., auditor of Canada Revenue Agency on these files; and Brian Norman, C.M.A., Canada Revenue Agency's appeals officer on these files. Page 2 [2] The files are essentially twins and Kevin's pleadings were used for the purposes of the hearing. Paragraphs 9 to 16, inclusive, of the Reply to Kevin's Notice of Appeal set out the particulars of the dispute. They read: 9. The Minister reassessed the Appellant for the 1998 taxation year by Notice dated April 14, 2003 to disallow the capital gains deduction of $85,498.00, resulting in a taxable capital gain of $85,498.00 and to include a shareholder benefit of $10,938.00. 10. The Appellant filed a Notice of Objection on July 10, 2003. 11. The Minister confirmed the reassessment by Notice dated March 4, 2004. 12. In so reassessing and confirming, the Minister relied on the same assumptions, as follows: a) the facts admitted and stated above; b) at all material times, the Appellant was a shareholder of Songhees Retirement Park Ltd. (the "Company"); The Loan c) taxation year, the Appellant borrowed $10,938.00 from the Company (the "Loan") in his capacity as shareholder; d) the Appellant did not repay the Loan to the Company; e) the Company forgave the amount of the Appellant's Loan; f) the Company expensed the amount of the Loan; Page 3 The Property g) at all material times, the Company operated Songhees Retirement Park (the "Property"); h) the Property was located on part of the Songhees First Nations land in Victoria, British Columbia; i) the Property consisted of 93 manufactured homes located on pads; j) at all material times, the Company leased the land on which the Property was situated from her Majesty the Queen in right of Canada as represented by the Minister of Indian Affairs (the "Crown"); k) the Company collected pad rents from the owners of the manufactured homes; l) the pad rents were paid to the Company monthly; m) the Company paid Equitex Corporation a fee to manage the Property and collect the rents; n) the pad rents were deposited directly to the Company's bank account; o) the Company's revenue from the Property was rental income; The Deduction p) in the 1998 taxation year, the Appellant sold 25 shares of the Company for proceeds of disposition of $214,498.50; q) the Appellant reported the adjusted cost base of the shares to be $100,000.00 and outlays and expenses of $500.00, resulting in a gain of $113,998.50 and a taxable capital gain of $85,498.88. Page 4 r) the Appellant claimed an enhanced capital gains deduction in his tax return for the 1998 taxation year in respect of shares of a qualified small business corporation in the amount of $85,498.88 (the "Deduction"); s) at all material times, the Company was a Canadian-controlled private corporation, as defined by subsection 125(7) of the Income Tax Act, R.S.C. 1985 c. 1 (5th Supp.), as amended (the "Act"); t) at all material times, the Company was not a small business corporation, as defined by subsection 248 of the Act; u) the Appellant sold the shares of the Company on December 10, 1998; v) as of December 10, 1998, the assets of the Company were as follows: Asset Amount Cash $ 6,658.00 Accounts Receivable $0 Income Taxes Receivable $0 Investments in Marketable Securities $58,000.00 Work in Progress $0 TOTAL ASSETS: $64,658.00 w) the future value of the 45-year lease between the Company and the Crown is in respect of rental income; x) at all material times prior to December 10, 1998, the Company's assets were used to generate rental income; y) as of December 10, 1998, the Company had no active business assets on the books; and Page 5 z) as of December 10, 1998, the Company's only assets related to the generation of rental income. B. ISSUES TO BE DECIDED 13. The issues are whether: a) the Minister properly included the amount of the Loan as a shareholder benefit in the Appellant's income for the 1998 taxation year; and b) the Minister properly disallowed the Deduction in the 1998 taxation year; C. STATUTORY PROVISIONS RELIED ON 14. He relies subsections 15(1), 15(1.2), 15(2.4), 110.6(1), 110.6(2.1), 125(7), 248(1) and paragraph 125(1)(a) of the Act. D. GROUNDS RELIED ON AND RELIEF SOUGHT 15. He respectfully submits that the Minister properly disallowed the Deduction in the 1998 taxation year on the basis that, at the time of disposition, the shares of the Company did not meet the requirements of paragraph (a) of the definition of a "qualified small business corporation share" in subsection 110.6(1) of the Act, as the Company was not a "small business corporation" as defined in subsection 248(1) of the Act, as all or substantially all of the fair market value of the Company's assets at that time were not attributable to assets that were used principally in an active business, as defined in subsections 248(1) and 125(7) of the Act. 16. He further submits that the Minister properly disallowed the Deduction in the 1998 taxation year on the basis that, at the time of disposition, the shares of the Company did not meet the requirements of paragraph (c) of the definition of a "qualified small business corporation share" in subsection 110.6(1) of the Act, as throughout the 24 months immediately preceding the sale of the shares, not more than Page 6 50% of the fair market value of the assets of the Company were attributable to assets used principally in an active business, as defined in subsections 248(1) and 125(7) of the Act. [3] At the outset of the hearing, the parties abandoned the following issues: 1. Kevin abandoned his claim that the loan described in issue 13a) was not a shareholder benefit in his income for the 1998 taxation year. 2. The Minister abandoned its disallowance of a claim to a non-capital loss carry back from the 1998 to the 1996 taxation year by Jennifer. [4] None of the assumptions were refuted, except that: 12g) - After Equitex Realty Ltd. commenced its management contract dated 4 November 1998, it could not be said that the Appellant "operated" the property. Rather, it "owned" the Property. 12w) - This assumption was made by the appeals officer, not the auditor. In addition to the value of the lease, the value of the marketable securities could affect the future value of the company, if only to a minor extent. That possibility was not raised in evidence or argument. However, with this exception, the assumption is correct on the basis of the evidence. [5] S.R.P.'s year end was October 31. [6] The parties filed an Agreed Statement of (Partial) Facts which reads: AGREED STATEMENT OF (PARTIAL) FACTS 1. On or about December 12, 1993, Songhees Retirement Park Ltd. ("Songhees") entered into a Lease dated effective November 1, 1993 with Her Majesty the Queen in Right of Canada as represented by the Minister of Indian Affairs and Northern Development (the "Head Lease") in and with respect to certain lands on Songhees First Nations Territory, Victoria, B.C. ("the "Lands"). Page 7 2. The Head Lease is listed by the Respondent as Respondent's Document 14 in the subject Appeals, and a true copy of the Head Lease has been provided by the Respondent to the Appellant in these Appeals. 3. The legal relationship and the rights and obligations of Songhees and Her Majesty respecting the Lands were governed by the terms and provisions of the Head Lease. 4. The facts stated as Recitals in page 2 of the Head Lease were true and correct on November 1, 1993. 5. The Head Lease contained, as a schedule thereto, a form of Sublease, a true copy of which the Respondent has produced and listed as Respondent's Document 15 (the "Sublease"). 6. Songhees developed the Lands into 95 Lots, on which were constructed 93 serviced manufactured home pads (the "Pads"), plus common areas and services, and constructed manufactured homes ("Manufactured Homes") on each Pad. 7. The final 12 Lots were in Phase III and were covered by a different Head Lease and Sub-Leases which were essentially similar to those in the previous Phases. 8. Songhees was incorporated on March 30, 1992 under the name 423066 B.C. Ltd. The name was changed to Songhees Retirement Park Ltd. on October 2, 1992. 9. As of December 10, 1998, 100 Common Shares of Songhees were issued and outstanding. 10. The Appellant was, at all relevant times prior to the sale thereof, the registered and beneficial owner of 25 Common Shares in Songhees (hereinafter the "Songhees Shares"). 11. The Appellant was the registered and beneficial owner of the Songhees Shares for more than two years prior to December 10, 1998. Page 8 12. The adjusted cost base for the Songhees Shares, as of December 10, 1998, was $100,000.00. 13. On or about December 10, 1998, the Appellant sold the Songhees Shares to Malcolm Construction Ltd. for $214,498.50 pursuant to a Share Purchase Agreement dated December 10, 1998, a true copy of which is listed by the Respondent as Document #13. 14. There were outlays and expenses from disposition of $500.00. 15. The capital gain on the disposition of the Songhees Shares was $113,998.00. 16. The lands were, and are, located on an Indian Reservation. 17. The Manufactured Homes were subsequently purchased by third parties (the "Subtenants") who, effective the date of purchase, entered into subleases with Songhees in the form of a Sublease. 18. The legal relationship and the rights and obligations of the respective Subtenants and Songhees respecting the Lands were governed by the terms and provisions of the actual Subleases, which are substantially identical to the Sublease. 19. The Head Leases, together with the Subleases, provided for the payments of rent by Songhees and the Subtenants respectively. 20. At all relevant times, all the Shareholders of Songhees, including the Appellant, were residents of Canada, and Songhees was a Canadian Controlled Private Corporation. 21. In calculating the asset value of Songhees, the auditor, by omission, failed to assign any value to the Head Lease and the 93 Subleases. That value was significant. Page 9 22. The auditor valued the assets of Songhees at $64,658.00 based on his review of Songhees' general ledger and the fair market value of the marketable securities owned by Songhees on December 10, 1998. 23. The last manufactured home to be sold by Songhees was sold by Songhees within the first three months of 1998. 24. During the initial five year period of the Head Lease (the period ending October 31, 1998, Songhees paid the government $90,000 per year as rent under the terms of the Head Lease ("Rent"). 25. At the beginning of the second five year period of the Head Lease (the period beginning November 1, 1998), Songhees was obligated to pay the government $98,953.98 per year as Rent under the terms of the Head Lease. 26. In the first fiscal year ending October 31, 1999, Songhees paid the government $98,953.98 as Rent pursuant to the Head Lease. 27. Payments from the Subtenants to Songhees in November 1998 were made as pad rental payments (the "Pad Rental") and as maintenance fees (the "Maintenance Fees"). 28. Pad Rentals paid by the Subtenants to Songhees in November 1998 varied between a 'low' of $155 and a 'high' of $360. 29. Maintenance Fees paid by Subtenants to Songhees in November 1998 varied between a 'low' of $55 and a 'high' of $75. 30. The aggregate of the Pad Rentals paid by Subtenants to Songhees in November 1998 was $16,795. 31. The aggregate of the Maintenance Fees paid by Subtenants to Songhees in November 1998 was $6,420. Page 10 32. The variation between the 'low' of $55 and the 'high' of $75 for Maintenance Fees reflected, amongst other things, differences between the different Pads. 33. Bob Malcolm handled the financing and bookkeeping for Songhees prior to Kevin Weaver's departure. 34. Vic Westcott was the accountant for Songhees. 35. Kevin Weaver initially handled the maintenance work for Songhees without pay ("no money to speak of"). 36. Kevin Weaver ceased to do the maintenance work for Songhees by the end of November 1998. 37. In December 1998, Songhees started to use an entity called Equitex Realty Ltd. ("Equitex") to manage Songhees. 38. Equitex came in during the period that Kevin Weaver was leaving Songhees (i.e. the beginning of December 1998). 39. Equitex took over from Kevin Weaver in managing the park. 40. Kevin Weaver's understanding is that Equitex was getting paid a fee when it took over from him. 41. Kevin Weaver does not know what fee Equitex was getting paid when it took over from him. Note: The foregoing applies to each of the Appellants in each respective appeal. DATED: October 3, 2006 (signature) (signature) ______________________ ________________________ D. Laurence Armstrong, Gavin Laird, Counsel for the Appellant(s) Counsel for the Respondent Page 11 [7] In argument at the end of the hearing, Respondent's counsel set out Canada Revenue Agency's argument that the Appellants were unable to meet two criteria required to enable them to obtain an "enhanced" capital gains deduction. They are: a. First, (as stated in Paragraph 15 of the Reply) the shares of Songhees did not meet the requirements of paragraph (a) of the definition of a "qualified small business corporation share" in subsection 110.6(1) of the Act [Resp. Bk of Auth, Tab 4, page 771] as the Company was not a "small business corporation" as defined in subsection 248(1) of the Act because "all or substantially all of the fair market value of the Company's assets at that time were not attributable to assets that were used principally in an active business, as defined in subsections 248(1) [Resp. Bk of Auth, Tab 8, page 1484] and 125(7) [Resp. Bk of Auth, Tab 7, page 889 and 890 (active business and specified investment business") of the Act and 125(7) (the "90% Test"); and b. Second, (as stated in Paragraph 16 of the Reply) the shares of Songhees did not meet the requirements of paragraph (c) of the definition of a "qualified small business corporation share" in subsection 110.6(1) of the Act, [Resp. Bk of Auth, Tab 4, page 771] as throughout the 24 months immediately preceding the sale of the shares, not more than 50% of the fair market value of the assets of Songhees were attributable to assets used principally in an active business, as defined in subsections 248(1) [Resp. Bk of Auth, Tab 8, page 1484] and 125(7) [Resp. Bk of Auth, Tab 7, page 889 and 890 (active business and specified investment business") of the Act (the "50% Test"). Thus, the issues before this Court are: 1. What were the assets of Songhees on December 10, 1998; 2. Were all or substantially all of the fair market value of the assets at that time attributable to assets used principally in an active business; Page 12 3. What were the assets of Songhees in the 24 month period preceding December 10, 1998; 4. Of the assets in the 24 month period preceding December 10, 1998, was more than 50% of the fair market value of the assets attributable to assets used principally in an active business. These Reasons will concentrate on these criteria. [8] The manufactured homes were built by a contractor "Don Guest" who warranted them and the equipment installed in the manufactured homes, such as furnaces, were warranted by their manufacturers or dealers according to trade custom. Equitex Realty Ltd. was contracted to manage the leases for the period after November 30, 1998. The evidence is that after November 30, 1998, S.R.P.'s only assets were the Head Lease, the Subleases, some cash in the bank or on hand and some marketable securities which it held as investments. [9] In the Court's view, Respondent's argument "a" is correct. The evidence is that at the determination time, December 10, 1998, S.R.P. was merely earning income from property; the number of its employees at that time was not established by the Appellant, but it appears to have been less than five. It follows that S.R.P. was a "specified investment business", not an "active business" as defined in subsection 125(7). Therefore, it was not a "small business corporation" as defined in subsection 248(1). Accordingly, the shares were not "qualifying small business corporation shares" as defined in subsection 110.6(1). The result is that the gain from the sale of the S.R.P. shares does not qualify for the capital gains exemption under subsection 110.6(2.1). For this reason, it is not necessary to deal with Respondent's argument "b". [10]The appeals are dismissed except insofar as issue [3] 2. may apply to Jennifer, in which case [3] 2. is referred to the Minister of National Revenue for reconsideration and reassessment insofar as it may be applicable. The Respondent Page 13 is awarded its party and party costs for each appeal throughout except that, in respect to the hearing itself, only one set of costs is awarded which is to be divided equally between both Appellants. Signed at Kelowna, British Columbia, this 31st day of October, 2006. "D.W. Beaubier" Beaubier, J. CITATION: 2006TCC566 COURT FILE NO.: 2004-2307(IT)G and 2004-2300(IT)G STYLE OF CAUSE: Kevin Weaver et al v. The Queen PLACE OF HEARING: Victoria, British Columbia DATE OF HEARING: October 4 and 5, 2006 REASONS FOR JUDGMENT BY: The Honourable Justice D.W. Beaubier DATE OF JUDGMENT: October 31, 2006 APPEARANCES: Counsel for the Appellant: D. Laurence Armstrong Counsel for the Respondent: Gavin Laird COUNSEL OF RECORD: For the Appellant: Name: D. Laurence Armstrong Firm: Armstrong Nikolich Victoria, British Columbia For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada