Rudolph v. The King

Rudolph v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-11-25
Neutral citation
2024 TCC 148
File numbers
2021-370(IT)G
Judges and Taxing Officers
Dominique Lafleur
Subjects
Income Tax Act
Decision Content
Docket: 2021-370(IT)G
BETWEEN:
GORDON RAYMOND RUDOLPH,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on May 28 to 30, 2024, at Quebec, Quebec; and
Written submissions filed by the parties on June 6 and 13, 2024
Before: The Honourable Justice Dominique Lafleur
Appearances:
Counsel for the Appellant:
Bobby Doyon
Counsel for the Respondent:
Julien Dubé-Sénécal
Noémie Vespignani
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeals made under the Income Tax Act (the “Act”) for the 2007, 2008, 2009 and 2012 taxation years are allowed, with costs to the Appellant, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:
For the 2007 taxation year:
the Appellant did not dispose of any share in the capital of Keltic Petrochemicals Incorporated (“Keltic”), and hence, no amount shall be included in that respect in the calculation of his income under the Act; and
the Appellant is not entitled to any deduction for interest expenses under paragraph 20(1)(c) of the Act.
For the 2008 taxation year:
the Appellant did not realize any taxable capital gain from the disposition of 910,000 Class “A” common shares in the capital of Keltic;
in the calculation of the Appellant’s income under section 9 of the Act, the Appellant shall include an amount of $966,105.26 as profit resulting from the sale of 910,000 Class “A” common shares in the capital of Keltic to Mumsco Holdings Limited on March 4, 2008; and
the Appellant has realized a non-capital loss of $548,600, not a capital loss, resulting from the expiration of various options to buy shares in the capital of Keltic.
For the 2009 taxation year: the claim for non-capital losses carryforward from other years has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.
For the 2012 taxation year: the claim for non-capital losses carryforward has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.
The parties shall have 30 days from the date of this Judgment to agree on costs. If the parties do not come to an agreement on costs, they shall file written submissions, not exceeding 10 pages, on or before December 20, 2024. If the parties do not advise the Court that they have reached an agreement and no submissions are received by this date, then one set of costs shall be awarded to the Appellant in accordance with Tariff B.
Signed at Montreal, Quebec, this 25th day of November 2024.
“Dominique Lafleur”
Lafleur J.
Citation: 2024 TCC 148
Date: 20241125
Docket: 2021-370(IT)G
BETWEEN:
GORDON RAYMOND RUDOLPH,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Lafleur J.
I. OVERVIEW
[1] Gordon Raymond Rudolph (the “Appellant” or “Mr. Rudolph”) is appealing to this Court from reassessments made by the Minister of National Revenue (the “Minister”) under the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.), as amended) (the “Act”) for the 2007, 2008, 2009 and 2012 taxation years.
[2] According to the Minister, Mr. Rudolph’s profit from the sale of 910,000 Class “A” common shares (in these reasons, the Class “A” common shares are simply referred to as “shares”) in the capital of Keltic Petrochemicals Incorporated (“Keltic”) to Mumsco Holdings Limited (“Mumsco”) is in the nature of capital and not income. In that respect, the Minister is of the view that Mr. Rudolph sold 660,000 shares in the capital of Keltic to Mumsco on September 4, 2007 for $1,320,000, and 250,000 shares on March 3, 2008 for $500,000. Mr. Rudolph thus realized a capital gain of $990,000 in September 2007 and a capital gain of $253,975 in March 2008, the taxable portion of which must be included in the calculation of his income for the 2007 and 2008 taxation years respectively. At the hearing, the Respondent conceded that the capital gain resulting from the sale of shares on March 3, 2008 is $250,000, as the auditor from the Canada Revenue Agency (the “CRA”) did not take into account the appropriate average adjusted cost base of the shares in his calculations.
[3] Furthermore, according to the Minister, in 2008, Mr. Rudolph’s loss of $548,600 resulting from the expiration of options to buy shares in the capital of Keltic is also in the nature of capital.
[4] Finally, in 2007, the Minister disallowed a deduction of $70,549 claimed by Mr. Rudolph as interest expenses under paragraph 20(1)(c) of the Act, as the Minister is of the view that Mr. Rudolph did not pay interest totalling $70,549 on borrowed money used for the purpose of earning income from a business or property. At the hearing, the Respondent also objected to the Appellant’s testimony on the uses of money borrowed for purposes of interest deductibility in accordance with section 98 of the Tax Court of Canada Rules (General Procedure) (the “Rules”).
[5] According to the Appellant, the profit of $966,105.26 resulting from the sale of 910,000 shares in the capital of Keltic to Mumsco is in the nature of income and not capital. Further, because Mr. Rudolph disposed of 910,000 shares in the capital of Keltic to Mumsco on March 4, 2008 and had not sold any shares in the capital of Keltic to Mumsco at any time in 2007, the profit resulting from the sale should be recognized in the 2008 taxation year only and not partly in 2007 and partly in 2008 as determined by the Minister.
[6] Furthermore, for the 2008 taxation year, the Appellant is of the view that the loss of $548,600 resulting from the expiration of options to buy shares in the capital of Keltic is also of an income nature and not capital.
[7] Finally, at the hearing, Mr. Rudolph conceded that he had incurred interest expenses totalling $52,858.73 and not $70,549 as he claimed originally; hence, Mr. Rudolph is of the view that he is entitled to a deduction for interest expenses totalling $52,858.73 in the calculation of his income for the 2007 taxation year.
[8] For the 2009 and 2012 taxation years, the Minister disallowed the carryforward of non-capital losses from other years claimed by Mr. Rudolph as follows:
(i)For the 2009 taxation year, the non-capital losses carryforward of $123,161 from 2007 was disallowed because, according to the Minister, the non-capital losses balance of other years was nil (Exhibit A‑1, Appellant’s Book of Documents, tab 1, notice of reassessment dated August 24, 2011); and
(ii)For the 2012 taxation year, the non-capital losses carryforward of $40,000 was disallowed because, according to the Minister, the non-capital losses balance of other years was nil (Exhibit A‑3, notice of assessment dated August 6, 2013).
[9] At the hearing, Mr. Rudolph testified, as did David Hennigar and Brett Olsen. Nicole Meisner, the CRA’s appeal officer who reviewed the Appellant’s tax matters, testified for the Respondent.
[10] In these reasons, all references to statutory provisions are references to the Act, unless otherwise indicated.
II. ISSUES
[11] The parties acknowledge that this appeal raises the following issues for the 2007 and 2008 taxation years:
(i)When did Mr. Rudolph dispose of 910,000 shares in the capital of Keltic to Mumsco, and what is the quantum and nature of the profit resulting from the sale of the shares?
(ii)If Mr. Rudolph realized a capital gain on the sale to Mumsco of the shares in the capital of Keltic, is he entitled to the capital gain deduction under section 110.6 and to a deferral of part of the gain under section 44.1?
(iii)Did Mr. Rudolph realize a loss on capital account or on income account totalling $548,600 on the expiration of his options to buy shares in the capital of Keltic in 2008?
(iv)Is Mr. Rudolph entitled to a deduction in the calculation of his income in an amount of $52,858.73 under paragraph 20(1)(c) as interest paid or payable in 2007 on money borrowed for the purpose of earning income from a business or property, and should the Court admit Mr. Rudolph’s testimony in accordance with section 98 of the Rules?
[12] For the 2009 and 2012 taxation years, the issues are whether non-capital losses from other years could be carried forward to these years, which will depend on my findings on the nature of the losses resulting from the expiration of stock options (under issue (iii) above).
III. CONCLUSION
[13] In accordance with these reasons, the appeals for the 2007, 2008, 2009 and 2012 taxation years are allowed, with costs to the Appellant, and the reassessments are referred back to the Minister for reconsideration and reassessment on the following basis:
(i)For the 2007 taxation year:
the Appellant did not dispose of any shares in the capital of Keltic, and hence, no amount shall be included in that respect in the calculation of his income under the Act; and
the Appellant is not entitled to any deduction for interest expenses under paragraph 20(1)(c).
(ii)For the 2008 taxation year:
the Appellant did not realize any taxable capital gain from the disposition of 910,000 shares in the capital of Keltic;
in the calculation of the Appellant’s income under section 9, the Appellant shall include an amount of $966,105.26 as profit resulting from the sale of 910,000 shares in the capital of Keltic to Mumsco on March 4, 2008; and
the Appellant realized a non-capital loss of $548,600, not a capital loss, resulting from the expiration of various options to buy shares in the capital of Keltic.
(iii)For the 2009 taxation year: the claim for the non-capital losses carryforward from 2007 has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.
(iv)For the 2012 taxation year: the claim for the non-capital losses carryforward has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.
[14] The parties shall have 30 days from the date of this Judgment to agree on costs. If the parties do not come to an agreement on costs, they shall file written submissions, not exceeding 10 pages, on or before December 20, 2024. If the parties do not advise the Court that they have reached an agreement and no submissions are received by this date, then one set of costs shall be awarded to the Appellant in accordance with Tariff B.
IV. CONTEXT
A. Origins of Keltic
[15] Keltic was a private company incorporated on March 20, 2000 under the laws of the province of Alberta by Brett E. Olsen, a corporate lawyer practising in Calgary. Back in 2000, Mr. Olsen was approached by W. Kevin Dunn, one of his clients, with the idea of developing a major world-class petrochemical plant in Goldboro, Nova Scotia. At that time, the proposed project was for a fully integrated petrochemical complex associated with a liquefied natural gas component and a cogeneration plant (the “Keltic Project”). It looked promising to Mr. Olsen. The project was designed to utilize the liquids from natural gas and process them to yield plastic (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 26–61).
[16] Mr. Dunn and Mr. Olsen were the original shareholders of Keltic. Mr. Dunn was the president and Mr. Olsen the vice-president and corporate secretary. Mr. Dunn, who passed away in 2013, was the driving force behind Keltic, and his primary role was to raise capital to finance the Keltic Project.
[17] For about the first two years after Keltic’s incorporation, Mr. Dunn and Mr. Olsen evaluated the feasibility of the project. According to the results of a feasibility study, the feedstock to carry out the project was insufficient. Hence, Mr. Dunn and Mr. Olsen looked into the possibility of importing liquefied natural gas into Nova Scotia. As indicated by Mr. Olsen, since the project was not only a chemical processing facility but also a liquefied natural gas receiving terminal, they needed to integrate the liquefied natural gas receiving facility into the chemical processing plant. This resulted in the Keltic Project being much more expensive than originally anticipated. According to Mr. Olsen, the costs to implement the Keltic Project were evaluated in billions of dollars. Hence, in order to continue with the project, Mr. Dunn had to raise more funds. He was successful, but at that stage, no one knew whether the project would ultimately succeed.
B. Mr. Rudolph, his involvement with Keltic and the end of the Keltic Project
[18] During all the taxation years under review, Mr. Rudolph ran a successful practice as a full-time dentist under the name “Dr. Gordie Rudolph Dentistry”.
[19] In 1984, Mr. Rudolph graduated with a degree in technical engineering from the Technical University of Nova Scotia. Upon graduation, he secured employment with Michelin Tires (Canada) Ltd. in Bridgewater, Nova Scotia, and purchased a triplex. He occupied one unit with his wife and two daughters and rented out the other two units.
[20] In 1986, Mr. Rudolph enrolled in a Doctor of Dental Surgery program at Dalhousie University in Halifax. While in dental school, he started a taxi business to cover the costs of his studies and to support his family.
[21] In 1989, Mr. Rudolph purchased an established dental practice in Dartmouth, Nova Scotia. In 1991, he built the Sheet Harbour Professional Centre and established the Sheet Harbour Dental Centre, which serviced a rural community east of Halifax. Mr. Rudolph purchased several other properties throughout the 1990s in order to build a townhouse-style condominium development.
[22] In the early 2000s, Mr. Rudolph was the proponent for a 385-megawatt natural gas-fired power-generating facility in Bedford, Nova Scotia (the “Bedford Project”), which he registered for environmental assessment in 2003.
[23] In 2003, Mr. Rudolph started trading in currency futures. He was also a sponsor for a hotel development in downtown Halifax, called the “Downtown Hotel”.
[24] In the course of 2003, Mr. Dunn contacted Mr. Rudolph after seeing him in the media coverage of the Bedford Project. Their initial discussion centred on the potential relocation of the power-generating facility from Bedford to Goldboro, where the Keltic Project was to be located, in order to be part of the Keltic Project, and the possibility of Mr. Rudolph getting involved in the Keltic Project.
[25] In 2004, Mr. Dunn and Mr. Rudolph came to an agreement that led Mr. Rudolph to purchase the rights to obtain 75% equity interest in the cogeneration part of the integrated facility. From February 2004 to February 2005, in accordance with the agreement concluded with Mr. Dunn, Mr. Rudolph purchased 800,000 shares in the capital of Keltic for $400,000 (at a price of $0.50 per share). Mr. Rudolph purchased additional shares in the capital of Keltic over the following years, up to 2008.
[26] In 2004, Mr. Rudolph also became a director of Keltic. Mr. Rudolph was not an employee of Keltic, but in 2004, he received $20,000 for his consulting services in chemical engineering.
[27] In 2005, Mr. Rudolph began to purchase options to buy shares in the capital of Keltic.
[28] In December 2005, Keltic and Petroplus International B.V. (“Petroplus”) executed a Memorandum of Understanding to develop a plant with a liquefied natural gas regasification receiving terminal and storage facility. Upon signing the Memorandum of Understanding, Keltic received a payment of US$350,000. The negotiation continued into 2005 for the sale by Keltic of the liquefied natural gas component of the integrated project.
[29] On March 14, 2006, Keltic executed a Purchase and Sale Agreement with Maple LNG Ltd. (which was part of the Petroplus group of companies) and 4Gas B.V. for the sale of the liquefied natural gas component of the integrated project (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 86‑120). The purchase price (which included the amount of US$350,000 already paid by Petroplus) would be paid to Keltic as follows: (i) US$1.9M upon closing; (ii) US$2M, plus the amount payable to the municipality of the district of Guysborough, upon the transfer of the exclusive rights on the land situated in Goldboro; (iii) US$2M upon receiving the environmental approvals for the construction of the facility; (iv) US$10M upon the final investment decision; and (v) US$9.75M within 10 days of the arrival and unloading of the first commercial liquefied natural gas cargo.
[30] Around mid-2006, LyondellBasell Industries, a publicly traded company, expressed its interest in becoming Keltic’s strategic partner in its project (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 62). According to Mr. Rudolph, LyondellBasell Industries was the largest producer of polypropylene in the world and made annual sales of close to US$60M.
[31] In order to implement its project, Keltic still required significant capital. As circumstances began to align in a favourable manner, Mr. Rudolph initiated a significant investment in Keltic and started to buy shares and stock options in the capital of Keltic more aggressively.
[32] In July 2007, Keltic was just about to receive federal environmental approval and “things were looking very, very positive” according to Mr. Rudolph. However, around that same time, another director of Keltic, John Chisholm, informed Mr. Rudolph that the board of directors of Keltic would be taking a different direction with the Keltic Project. Specifically, the directors of Keltic were seeking to replace Mr. Rudolph as a director, along with two other directors, with businesspeople from Calgary at Keltic’s upcoming meeting to be held in September 2007.
[33] Mr. Rudolph, who wanted to continue with the Keltic Project, met with David Hennigar (a shareholder of Mumsco) on Labour Day weekend in 2007 and reached an agreement with him, which I will describe below. After that, Mr. Rudolph was successful in retaining his directorship in Keltic. He was also elected chair of the board. Various share transfers in the capital of Keltic and exercises of stock options in Keltic took place between September 2007 and March 2008.
[34] In 2008, Keltic formally announced its strategic partnership with LyondellBasell Industries (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 62), after having received the federal environmental permit in February 2008.
[35] In March 2008, the effects of the worldwide financial crisis were becoming evident for Keltic, as LyondellBasell Industries started to encounter difficulties in managing its debt. Further, the price of natural gas was falling. Mr. Rudolph stated that “things were getting a little shaky” and he was getting a “little concerned”. Nevertheless, he proceeded to make a few additional transactions in the capital of Keltic, which I will also address below.
[36] In January 2009, LyondellBasell Industries was placed under bankruptcy protection.
[37] Due to the worldwide financial crisis that started in 2007, Keltic received only US$1.9M upon closing and US$2M upon receiving the environmental approvals for the construction of the facility; Keltic was notified in 2010 that the purchasers, Maple LNG Ltd. and 4Gas B.V., were not going ahead with the purchase as planned, resulting in a significant financial loss for Keltic. Keltic, which required funds from these purchasers to maintain its operational viability, ceased operations, and the Keltic Project was abandoned. All employees were terminated, and Mr. Dunn’s salary was paid up to March 31, 2010. Minimal funds were left in Keltic to cover outstanding bills.
V. ANALYSIS
A. When did Mr. Rudolph dispose of 910,000 shares in the capital of Keltic to Mumsco, and what is the quantum and nature of the profit resulting from the sale of the shares?
(1) Conclusion
[38] For the following reasons, the Court finds that the disposition by Mr. Rudolph of 910,000 shares in the capital of Keltic to Mumsco took place on March 4, 2008, as indicated in Keltic’s corporate ledgers, and not partly in 2007 and partly in 2008 as determined by the Minister.
[39] Further, for the following reasons, the Court finds that Mr. Rudolph’s profit resulting from the sale of these shares to Mumsco is $966,105.26 and is on income account, since Mr. Rudolph was engaged in an adventure or concern in the nature of trade. Accordingly, an amount of $966,105.26 shall be included in the calculation of Mr. Rudolph’s income for the 2008 taxation year under section 9.
[40] Because of the Court’s findings on the nature of the profit realized by Mr. Rudolph upon the disposition of 910,000 shares in the capital of Keltic, Mr. Rudolph is not entitled to a capital gain deduction under section 110.6 or to a deferral of part of the gain under section 44.1.
(2) Evidence adduced at the hearing
[41] The Court must first determine the effective dates and review the various transactions entered into by Mr. Rudolph in respect of shares and stock options in the capital of Keltic.
[42] Without any credible and reliable evidence to the contrary adduced by the Respondent at the hearing, and for the following reasons, the Court finds that the transactions recorded in Keltic’s minute book, including the various dates entered in Keltic’s corporate ledgers, are an accurate reflection of the actual transactions and their effective dates.
[43] I find Mr. Olsen’s testimony reliable and credible. Mr. Olsen was in charge of the minute book: he was responsible for receiving subscription forms, issuing shares, updating corporate records and minute books, and completing and filing annual returns. All corporate records were kept at the address of Mr. Olsen’s law firm.
[44] Regarding Mr. Rudolph’s initial subscription to the capital of Keltic, Mr. Olsen said he would make the necessary entries in the corporate ledgers after receiving confirmation from Mr. Dunn or the office manager in Nova Scotia that Mr. Rudolph had made the required payments. There was no letter of subscription or other document, other than a two‑page document giving Mr. Rudolph an option to participate in the cogeneration facility. This document was not adduced in evidence.
[45] Furthermore, Mr. Olsen testified that he was not aware of any written documentation evidencing any investment made by the shareholders in the capital of Keltic, other than the relevant entries in the corporate ledgers and the share certificates issued to the respective shareholders.
[46] In addition to investing in shares in the capital of Keltic, Mr. Rudolph also subscribed to various options to buy shares in the capital of Keltic over the years.
[47] According to Mr. Olsen, there were three stock option plans in Keltic:
(i)Stock Option Plan 1: available only to Mr. Dunn and himself;
(ii)Stock Option Plan 2: available to officers, directors and suppliers to buy shares at $0.50 per share; and
(iii)Stock Option Plan 3: available to two directors, namely Mr. Rudolph and Mr. Smith, to buy shares at $3 per share.
[48] The cost of each option was $0.10.
(a) Corporate ledgers
[49] From 2004 to 2008, the corporate ledgers indicate that Mr. Rudolph engaged in 34 transactions in respect of shares and options to acquire shares in the capital of Keltic. During that period, Mr. Rudolph bought 2,394,000 shares and sold 910,000 shares. In addition, Mr. Rudolph purchased 7,950,000 options: 7,716,000 options expired from 2007 to 2008, and he exercised 234,000 options (Exhibit R‑1, Respondent’s Book of Documents, tab 10, and Exhibit A‑1, Appellant’s Book of Documents, tab 7). These transactions are detailed below:
Date
Transaction
1
February 28, 2004
Purchase of 40,000 shares
2
March 30, 2004
Purchase of 40,000 shares
3
April 30, 2004
Purchase of 40,000 shares
4
May 31, 2004
Purchase of 40,000 shares
5
June 30, 2004
Purchase of 40,000 shares
6
July 31, 2004
Purchase of 40,000 shares
7
August 31, 2004
Purchase of 40,000 shares
8
September 30, 2004
Purchase of 60,000 shares
9
October 31, 2004
Purchase of 60,000 shares
10
November 30, 2004
Purchase of 40,000 shares
11
December 31, 2004
Purchase of 40,000 shares
12
February 28, 2005
Purchase of 320,000 shares
13
March 20, 2005
Purchase of 250,000 options
14
May 6, 2005
Purchase of 250,000 options
15
May 20, 2005
Purchase of 250,000 options
16
September 9, 2005
Purchase of 1,000,000 options
17
September 23, 2005
Purchase of 1,000,000 options
18
December 24, 2005
Purchase of 1,200,000 options
19
February 8, 2006
Purchase of 1,000,000 options
20
March 22, 2006
Purchase of 250,000 options
21
April 7, 2006
Purchase of 250,000 options
22
May 5, 2006
Purchase of 250,000 options
23
June 19, 2006
Purchase of 500,000 options
24
July 5, 2006
Purchase of 150,000 options
25
August 4, 2006
Purchase of 600,000 options
26
September 8, 2006
Purchase of 600,000 options
27
September 8, 2006
Purchase of 390,000 options
28
September 8, 2006
Purchase of 10,000 options
29
September 4, 2007
Purchase of 1,055,000 shares
30
September 7, 2007
Purchase of 220,000 shares (option exercised)
31
March 3, 2008
Purchase of 14,000 shares (option exercised)
32
March 4, 2008
Purchase of 290,000 shares
33
March 4, 2008
Purchase of 15,000 shares
34
March 4, 2008
Sale of 910,000 shares
(b) Labour Day weekend, 2007
[50] The Court accepts the version of events presented by Mr. Rudolph at the hearing in respect of his numerous meetings with Mr. Hennigar during the 2007 Labour Day weekend, and more particularly, in respect of the objectives sought by Mr. Rudolph, that is, to maintain his directorship and continue with the Keltic Project. Mr. Hennigar’s testimony confirmed Mr. Rudolph’s version of events. The Respondent has not adduced any evidence to the contrary.
[51] As mentioned above, in July 2007, Mr. Rudolph was advised that the board of directors of Keltic wanted to replace him as a director of the company. However, Mr. Rudolph did not want to be replaced as a director of Keltic and he wanted to continue with the Keltic Project, as planned.
[52] Mr. Rudolph testified that, in order to maintain his directorship, he needed to secure more funds to buy additional shares to vote in his favour at the upcoming annual meeting of Keltic’s shareholders. Therefore, with these objectives in mind, Mr. Rudolph contacted a very good friend of his, Mr. Hattie, CEO and President of Annapolis Group Inc. in Nova Scotia, who introduced him to Mr. Hennigar, a shareholder of Mumsco. Mr. Hennigar is a businessman from Nova Scotia with more than 60 years of experience in investment. During the 2007 Labour Day weekend, Mr. Rudolph met with Mr. Hennigar on several occasions.
[53] Mr. Hennigar, through Mumsco, agreed to loan him enough funds so Mr. Rudolph could exercise stock options to prevent the change of control of Keltic at the next annual upcoming meeting and be able to maintain his directorship. Mr. Hennigar testified that Mumsco advanced an amount of $1,320,000 to Mr. Rudolph in September 2007. Other sums were advanced in March 2008. Mr. Rudolph did not reimburse the sums that Mumsco advanced to him with actual cash but with the transfer to Mumsco of 910,000 shares in the capital of Keltic, at $2 per share, on March 4, 2008.
[54] According to the testimony of both Mr. Rudolph and Mr. Hennigar, the agreement they reached in September 2007 was that Mumsco would pay $2 per share, for a total of $1,820,000 for 910,000 shares in the capital of Keltic.
[55] Because Mr. Rudolph came highly recommended by Mr. Hattie to Mr. Hennigar, no written agreement was executed between them. Both Mr. Hennigar’s and Mr. Rudolph’s testimonies confirmed that there was no documentation evidencing their agreement.
[56] Mr. Hennigar, being one of five directors (and shareholders) of Mumsco, wrote a memorandum to his siblings (the other shareholders and directors) in September 2007, recommending the purchase of shares in the capital of Keltic. Mr. Hennigar testified that he was confident that an investment in Keltic would be a good investment, and if so, there would be a substantial return.
[57] In addition, Mr. Rudolph testified that he wanted Mr. Hennigar to become the chair of the board of directors of Keltic. However, Mr. Hennigar declined, but stated that he would support Mr. Rudolph as a chair of the board and would accept a directorship. Indeed, the evidence shows that, later in 2008, Mr. Hennigar became a director of Keltic.
[58] On September 4, 2007, Mumsco transferred $1,320,000 to Mr. Rudolph via wire transfer (Exhibit A‑1, Appellant’s Book of Documents, tab 15, at 231). Furthermore, on March 3, 2008, Mumsco transferred an additional amount of $500,000 to Mr. Rudolph (Exhibit A‑1, Appellant’s Book of Documents, tab 15, at 235). The total funds transferred by Mumsco to Mr. Rudolph in 2007 and 2008 amounted to $1,820,000. There is no dispute between the parties regarding the effective dates of these fund transfers.
(c) Transactions in the capital of Keltic following the meetings between Mr. Rudolph and Mr. Hennigar in September 2007
(i) Between Mr. Rudolph and Mr. Dunn on September 4, 2007
[59] On Labour Day Monday, 2007 (September 3, 2007), Mr. Rudolph met with Mr. Dunn in order to negotiate an agreement, as Mr. Rudolph knew that Mr. Dunn held some options to buy shares in Keltic (at $0.50 each) that were about to expire. Further, Keltic needed more capital to pursue its project.
[60] Mr. Dunn and Mr. Rudolph promptly entered into an agreement whereby Mr. Rudolph would provide between $1.5M and $2M to Keltic in exchange for shares in the capital of Keltic.
[61] Mr. Dunn and Mr. Rudolph agreed that Mr. Rudolph would receive newly issued shares in the capital of Keltic at a reduced price. They agreed that Mr. Dunn would exercise options to buy 1,105,000 shares, following which Mr. Dunn would transfer 1,055,000 shares to Mr. Rudolph; the total consideration to be paid by Mr. Rudolph amounted to $663,500, of which Mr. Dunn would receive $151,000 and Keltic would receive $512,500. Mr. Rudolph issued two cheques: one cheque payable to Mr. Dunn for $151,000 and one cheque payable to Keltic for $512,500.
[62] Keltic’s ledger (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 105) indicates that Mr. Dunn exercised his options on September 4, 2007 and received 1,105,000 shares in the capital of Keltic (400,000 shares at $0.40 each and 705,000 shares at $0.50 each) and on the same day, Mr. Dunn transferred 1,055,000 shares to Mr. Rudolph (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 108; Exhibit A‑1, Appellant’s Book of Documents, tab 7, at 135).
[63] According to Mr. Olsen, that was a favourable arrangement for Mr. Rudolph, because otherwise he would have had to pay $3 per share in accordance with his stock options if he exercised them.
[64] Mr. Olsen testified that Mr. Dunn informed him of the arrangement whereby he would exercise his options but the payment would be made directly by Mr. Rudolph to Keltic. Further, as indicated by Mr. Olsen, the system he had put in place for Keltic prevented him from transferring stock options. For his convenience, he recorded the transactions as an exercise of options with the issuance of shares and a subsequent transfer of shares.
[65] Moreover, at that time, with Mr. Dunn’s approval, Mr. Rudolph became chair of the board of directors of Keltic.
(ii) Exercise of options by Mr. Rudolph on September 7, 2007
[66] On September 7, 2007, Mr. Rudolph exercised 220,000 options to buy 220,000 shares in the capital of Keltic for $660,000 (at a price of $3 per share) (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 105; Exhibit A‑1, Appellant’s Book of Documents, tab 7, at 135).
(iii) Exercise of options by Mr. Rudolph on March 3, 2008
[67] On March 3, 2008, Mr. Rudolph exercised 14,000 options to purchase 14,000 additional shares in Keltic for $42,000 (at a price of $3 per share) (Exhibits A‑1, Appellant’s Book of Documents, tab 7, at 135 and R‑1, Respondent’s Book of Documents, tab 10, at 108).
(iv) Transactions between Mr. Rudolph and Mr. Olsen and between Mr. Rudolph and Mr. Dunn on March 4, 2008
[68] In February 2008, Mr. Rudolph contacted Mr. Olsen about his options, which were about to expire. They came to an agreement whereby Mr. Rudolph would provide $435,000 to Mr. Olsen to enable him to exercise options to buy 870,000 shares and, subsequently, Mr. Olsen would transfer 290,000 shares to Mr. Rudolph in repayment of that loan.
[69] On February 29, 2008, Mr. Olsen exercised his options to buy 15,000 shares in the capital of Keltic at $0.50 per share. On March 3, 2008, Mr. Olsen exercised his options to buy 855,000 shares in the capital of Keltic at $0.50 per share (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 108; Exhibit A‑1, Appellant’s Book of Documents, tab 7, at 135 and tab 15 at 237 and 239: a cheque by Mr. Rudolph for $7,500 issued to Keltic dated February 29, 2008 re: Brett Olsen loan/options; a cheque by Mr. Rudolph for $427,500 issued to Keltic dated February 29, 2008 re: Brett’s 855,000 shares at 0.50). Then, on March 4, 2008, Mr. Olsen transferred 290,000 shares to Mr. Rudolph.
[70] A similar arrangement was entered into with Mr. Dunn. On March 4, 2008, Mr. Dunn transferred 15,000 shares in the capital of Keltic to Mr. Rudolph, who paid $22,500 directly to Keltic in order for Mr. Dunn to exercise his options. Mr. Dunn exercised his options to acquire 45,000 shares in the capital of Keltic on February 29, 2008 at $0.50 per share (Exhibits R‑1, Respondent’s Book of Documents, tab 10, at 108 and A‑1, Appellant’s Book of Documents, tab 7, at 135).
[71] As indicated above, Mr. Olsen testified that no documentation between Mr. Rudolph and himself or between Mr. Rudolph and Mr. Dunn was prepared to give effect to these transactions. Mr. Olsen entered the transactions in the minute book of Keltic as exercises of options by Mr. Dunn and himself, with issuances of shares to both of them, followed by a transfer of shares to Mr. Rudolph.
(v) Transaction between Mr. Rudolph and Mumsco on March 4, 2008
[72] On March 4, 2008, Mr. Rudolph transferred 910,000 shares in the capital of Keltic to Mumsco.
(3) Timing of the sale by Mr. Rudolph to Mumsco of 910,000 shares in the capital of Keltic
(a) Parties’ positions
[73] According to the Respondent, the disposition of 910,000 shares in the capital of Keltic by Mr. Rudolph to Mumsco took place on the days Mr. Rudolph received funds from Mumsco: on September 4, 2007, Mr. Rudolph sold 660,000 shares because he received $1,320,000 from Mumsco, and on March 3, 2008, he sold 250,000 shares because he received $500,000 from Mumsco.
[74] Although Ms. Meisner reviewed the minute book showing that the transfer by Mr. Rudolph to Mumsco of 910,000 shares took place on March 4, 2008, she did not believe that Mr. Rudolph sold 910,000 shares on that date. According to the Respondent, dates and transactions indicated in the minute book are not an accurate reflection of the transactions that took place over the years in the capital of Keltic.
[75] Furthermore, the Respondent is of the view that Mr. Rudolph himself recognized that the sale of some shares in the capital of Keltic took place in 2007, as he filed a T1 Adjustment Request form with the CRA indicating a disposition of 800,000 shares in the capital of Keltic for $1,600,000 (Exhibit R‑1, Respondent’s Book of Documents, tab 8).
[76] However, the Appellant is of the view that the evidence shows that the disposition of 910,000 shares in the capital of Keltic by Mr. Rudolph to Mumsco took place on March 4, 2008. Further, the evidence shows that Mr. Rudolph’s accountant made a mistake and created confusion by filing the T1 Adjustment Request form without having in his possession the share certificate and the corporate ledgers of Keltic.
(b) Applicable principles
[77] In accordance with the Act, the income of a taxpayer for a taxation year includes the taxpayer’s income for the year from each business of the taxpayer (paragraph 3(a)). Subsection 9(1) provides that “... a taxpayer’s income for a taxation year from a business ... is the taxpayer’s profit from that business ... for the year”.
[78] However, the Act does not define “profit” and does not provide any specific rules for computing profit. The determination of profit is a question of law and must take into account any applicable provisions of the Act. When determining profit, a taxpayer must adopt a method of computation that is not inconsistent with the Act and established case law principles, that is consistent with well-accepted business principles, and that yields an accurate picture of the income for the year (Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147 at paragraphs 29, 50 and 53).
[79] Further, in Ikea Ltd. v. Canada, [1998] 1 S.C.R. 196 at paragraph 37, the Supreme Court of Canada stated that amounts received or realized by a taxpayer, free of conditions or restrictions upon their use, are taxable in the year realized, subject to any contrary provisions of the Act or other rule of law.
[80] When examining that question, the Court should refer to the definition of the term “disposition” found in subsection 248(1), which reads as follows:
248(1) disposition of any property, except as expressly otherwise provided, includes
(a) any transaction or event entitling a taxpayer to proceeds of disposition of the property,
…
248(1) disposition Constitue notamment une disposition de bien, sauf indication contraire expresse :
a) toute opération ou tout événement donnant droit au contribuable au produit de disposition d’un bien;
…
[81] The disposition of property therefore includes a transaction or event that entitles a taxpayer to the proceeds of disposition of that property.
(c) Analysis
[82] As indicated in the previous section, there are no written agreements between Mr. Rudolph and Mr. Hennigar or Mumsco in respect of the sale of 910,000 shares in the capital of Keltic by Mr. Rudolph to Mumsco.
[83] At trial, the following documents were adduced in evidence to show that the transfer from Mr. Rudolph to Mumsco took place in March 2008, not in September 2007:
(i)Keltic’s securities register–shareholder’s ledger indicating that Mumsco became a shareholder of Keltic on March 4, 2008 and received 910,000 Class “A” shares of Keltic upon the transfer from Mr. Rudolph (Exhibit A‑1, Appellant’s Book of Documents, tab 7);
(ii)Share certificate No. 200 representing 910,000 Class “A” common shares in the capital of Keltic issued to Mumsco, dated March 4, 2008 (Exhibit A‑1, Appellant’s Book of Documents, tab 12);
(iii)Email from Mr. Rudolph to Mr. Olsen dated March 3, 2008 requesting that a transfer of 910,000 shares in the capital of Keltic from him to Mumsco be reflected in the book and that a share certificate be issued to Mumsco reflecting its ownership (Exhibit A‑1, Appellant’s Book of Documents, tab 19).
[84] However, according to the Respondent, because Mr. Rudolph’s bank account statements (Exhibit A‑1, Appellant’s Book of Documents, tab 15, at 231 and 235) showed a deposit of $1,320,000 from Mumsco on September 4, 2007 and a deposit of $500,000 from Mumsco on March 3, 2008, Mr. Rudolph must have disposed of 660,000 shares in the capital of Mumsco on September 4, 2007 and 250,000 shares on March 3, 2008.
[85] Further, the Respondent wants the Court to consider the T1 Adjustment Request form filed with the CRA for the 2007 taxation year, which was never processed by the CRA and which indicates a sale of 800,000 shares in the capital of Keltic for $