Ridge Run Developments Inc. v. The Queen

Ridge Run Developments Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2007-04-16
Neutral citation
2007 TCC 68
File numbers
2004-4537(IT)G
Judges and Taxing Officers
Theodore E. Margeson
Subjects
Income Tax Act
Decision Content
Docket: 2004-4537(IT)G
BETWEEN:
RIDGE RUN DEVELOPMENTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on November 30, 2006 at Toronto, Ontario.
Before: The Honourable Justice T. E. Margeson
Appearances:
Counsel for the Appellant :
John A. Gamble, Q.C.
Counsel for the Respondent:
Marie-Thérèse Boris
____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1997 taxation year is dismissed and the assessment of the Minister of National Revenue is confirmed.
The Respondent shall have her costs of this action to be taxed.
Signed at New Glasgow, Nova Scotia, this 16th day of April 2007.
"T. E. Margeson"
Margeson J.
Citation: 2007TCC68
Date: 20070416
Docket: 2004-4537(IT)G
BETWEEN:
RIDGE RUN DEVELOPMENTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1] This is an appeal from a Notice of Reassessment dated October 1, 2004 by which the Minister of National Revenue ("Minister") reassessed the Appellant for the amount of $227,122 with respect to tax, $15,922.55 with respect to a late filing penalty, and interest in the amount of $99,061.83.
[2] The Minister took the position that in calculating its income for the 1997 taxation year, the Appellant misrepresented its total income, by including a non-capital loss carried forward from the 1994 taxation year, in the amount of $611,397. The Minister claimed this misrepresentation was attributable to wilful default, or alternatively, to carelessness or neglect.
[3] The Appellant's position is that the assessment for the 1997 taxation year made as of October 1, 2004 is a nullity and requests that the Court confirm the validity of the Notice of Reassessment of October 23, 2003 with respect to the Appellant's 1997 taxation year.
Evidence
[4] Robert Schwartz ("Mr. Schwartz") is a lawyer currently practicing at the firm of Gardiner Roberts LLP in Toronto. He is a senior partner at that firm. He provided legal advice to the Appellant, Ridge Run Developments Inc. ("Ridge Run") starting in and around the year 1992. Stanley Poulton ("Mr. Poulton"), who was a principal of Ridge Run and certainly an officer of Ridge Run was instrumental in retaining his services. This witness testified that Mr. Poulton, a principal of the Appellant was, along with others, being threatened with a legal action by one Catherine Reynal ("Ms. Catherine Reynal") who was a principal in Oakamp Developments Limited ("Oakamp Developments"). This purported Plaintiff took the position that a principal of the Appellant, namely one Peter Miller ("Mr. Miller"), had misused certain funds that were obtained through financing at the Royal Bank of Canadawhich advances she was responsible for. She wished to be put back in the same position that she was in prior to these funds being misused. It became obvious to the Appellant that it would suffer substantial loss and consequently it wanted to know what its legal position was. Mr. Poulton, on behalf of himself and on behalf of the Appellant, obtained the services of Mr. Schwartz and his firm to provide legal advice to them.
[5] Various negotiations took place between the lawyers representing the individuals and companies above referred to and a number of other companies, who were involved in this matter, which resulted in the execution of an agreement, which has been admitted into evidence in Volume I, Tab 1 of the Appellant's Book of Documents. This agreement is dated February [blank] 1994. At the end of the day, the purpose of the agreement was to obtain the best deal with the least possible damage to the Appellant and Mr. Poulton as it was argued that the company and Mr. Poulton were vicariously liable for all of Mr. Miller's actions. In essence, the Plaintiffs "were going to go after everything that both Miller and Poulton had, which included all the various properties that they owned at the time".
[6] In an attempt to shield some of Ridge Run's interests in certain properties, to avoid huge legal fees that would be associated with litigation and time, effort and distraction, the advice was that it would be better off to have it settled. "It was a balancing act because there was a cost."
[7] Finally, the various parties reached the agreement as earlier referred to.
[8] Mr. Schwartz said:
By agreeing to the terms of this settlement, Ridge Run was seeing properties sold at a time it didn't really want to sell, when there was no reason for it to sell. That was a large disadvantage. They were effectively giving away any interest in Huntsville and Stouffville, and I believe there was equity.
[9] The agreement further provided that $18,000 per month was to accrue to Ms. Catherine Reynal or to Oakamp Developments over the term of the agreement. To the extent that that money was available from the properties, it was coming out of the other parties' interests, as well as the legal fees of Aird and Berlis and various other fees.
As Mr. Schwartz put it:
Ridge Run, Greystoke and Stan Poulton were paying a price for this settlement, but we thought it was better than the alternative. Otherwise, we would not have been a party.
[10] This agreement started out as a draft in 1992 but it was ultimately concluded in 1994. There was no deal until this was signed.
[11] Mr. Schwartz said:
I think at the end of the day the notion was: There is a quid pro quo for our throwing everything into the pot, so to speak, and agreeing now to sell assets that we would not otherwise be inclined to sell. At the end of the day everything is going to pay down Royal Bank and indirectly be deemed to be repaying those various book entries.
[12] Mr. Schwartz agreed that there was no analysis done to prove that any of the loans, including the loan to Hill Top Plaza Co-tenancy ("Hill Top") was actually in the amount that was reflected. There was no analysis of the debts that were alleged to be owing by Ridge Run to Termai Investments Limited ("Termai"). At the end of the day, the parties agreed that at that point any loan would be deemed to have been repaid.
[13] He agreed that at no time did anyone ever do a detailed calculation or analysis to determine how much money was applied toward each loan. To the extent that any money went to the Royal Bank of Canada, the book entries indicated that that was the amount that was owing on these loans.
[14] The idea was that this was a final agreement and that all parties would release each other. The agreement required that the parties execute Releases and they were executed in accordance with the agreement. To the extent that there was something in the main agreement that one of the parties had not implemented, the Release would have been subject to it.
[15] He agreed that Ridge Run may have given up some rights to receive an amount of money by signing the Release. As indicated by this witness in cross-examination when the Release was executed, as far as the Appellant was concerned, the matter was ended. Everything to do with the dispute, Ms. Catherine Reynal, the problems with Mr. Miller and his companies was done and finalized.
[16] Stanley Poulton was a land developer, not an accountant. He was familiar with the amount as disclosed in the Appellant's 1994 tax return. He confirmed the Appellant's tax return for the year 1994 as found in Volume 1 at Tab 2 of Exhibit A-1. He confirmed the figures contained in the Statement of Income and Expenses for Hill Top for the year 1994 for the loss on the Dinnerex loan receivable of $176,169; the gain on the forgiveness of Hill Top Loan by Termai of $1,716,442 and that this was the same figure shown on the Hill Top Plaza Co-tenancy Schedule of Co-Tenants' Income Tax Information For The Year Ended April 30, 1994. This showed a write-off of the loan for $1,716,442. This return had been completed by Mr. Miller.
[17] Mr. Poulton explained the type of business that he was in and it was obvious from his evidence that he was experienced, astute and honest in this type of business. In essence he was describing what the Appellant did, as it was obvious that the Appellant did exactly what he did as he was the principal in all of the Appellant's actions.
[18] He indicated that he never took a partner but he did enter into joint ventures. The Appellant had a 100% interest in the Burlingtondevelopment but that was reduced to 50% when Mr. Poulton's lawyer came forward and put the funds into the development. This interest was reduced to 25% to him and his lawyer when 50% was transferred to Fred Fillo ("Mr. Fillo") who turned out to control the company, Oakamp Developments. This company was a supplier of money. The development was called Patriot Fairview Shopping Centre ("Patriot Fairview").
[19] Mr. Fillo did not want to be active so he appointed Mr. Miller as the acting President and Chief Executive Officer. Mr. Poulton considered him to be the "whole company" in all the decisions with respect to Oakamp Developments. The Dinnerex mortgage was to be split between the two companies. He did not know what was to happen to the mortgage under the Settlement Agreement. The tenancy statements, attached to the income tax return for the Appellant for 1994 were prepared by Mr. Miller. The Appellant's interest in the Burlingtonproject was reduced to 12 ½% and then through a sale to Oakamp Developments it became 9.01%.
[20] The Patriot Fairviewshopping centre project dealt with the Royal Bank of Canadaat 20 King Street. This witness was not consulted at anytime with respect to the borrowings that Patriot Fairview may have made with respect to the Royal Bank of Canada. Further, he had no knowledge of the banking arrangements with the Royal Bank of Canada with respect to the Appellant's 9.01%. He was referred to the balance sheet for Patriot Fairview dated June 30, 1994 and he said that the largest liability was a loan to the Bank of Nova Scotia for $2,910,860. When asked about the Settlement Agreement found in Exhibit A-1 at Tab 1 he said that he signed it because the lawyers believed that this was the only way that Ms. Catherine Reynal was going to get any money back and it did not seem to matter to them whether "my company got shredded. We lost a considerable amount of money on this agreement."
[21] Apart from contacting Mr. Schwartz with respect to his legal position he relied upon the advice of his accountant, Harold Grabowski ("Mr. Grabowski"). Mr. Grabowski attended at Mr. Schwartz' office with him and he was asked to go through the agreement and let this witness know what his thoughts were as a chartered accountant. However, he did not provide Mr. Poulton with any documents or on the issue as to whether or not the agreement should be executed. He could not remember having received any other specific documents, including working papers other than the agreement found in Volume I, Tab 1. He received this from Mr. Schwartz' office. He identified his signature on the agreement on his own behalf and on behalf of the Appellant. He also identified other signatures contained in the agreement. Further, he identified his signature on the Mutual Release Agreement dated June 29, 1994. The document was signed in Aird and Berlis' office on the 29th of June and he remembered signing it. He believed that his accountant had a copy of it but was not sure that anyone else did. He gave it to John Gamble and that would have been some time after 1994.
[22] In cross-examination the witness indicated that once the commercial developments were built, Ridge Run would keep them and earn revenue from them and, if the time was right, would sell them. In the course of dealing with companies and the development business over a number of years he had a chartered accountant by the name of Mr. Grabowski and two other chartered accountants. The returns for him and his companies would have been done by these accountants. They also prepared financial statements. He never looked at them because he simply did not understand them. Things would be put in front of him and he would sign them.
[23] He admitted signing the 1994 and 1997 tax returns for the Appellant. He was the sole shareholder and President of the Appellant. He did not identify any other employees of the Appellant and it was obvious that he did what had to be done for the Appellant in terms of the land development. If he needed others he would go out and hire them for that particular time.
[24] With respect to the Appellant's accounts, he had fired his accountant and Mr. Miller recommended that he take the Appellant's accounts down to Arthur Andersen & Co. SC ("Arthur Andersen"). They were there for two years. They sent them back to his office and said that they were so muddled and so confusing that it was not the kind of work that they did.
[25] He was asked about the accounting for the Huntsville Co-tenancy Ltd. ("Huntsville Co-tenancy") and he said that it was his understanding that Mr. Miller did the statements and that if there was a tax situation he would pass them along to Arthur Andersen. They in turn would go back to Mr. Grabowski from Mr. Miller and not from Arthur Andersen. He agreed that Mr. Andersen would have taken the financial statements for 1994 and reviewed them and made some revisions. He was not aware of whether or not Arthur Andersen reviewed or had input into any other of the co-tenancy agreements except Huntsville Co-tenancy.
[26] He was referred to the Hill Top Plaza Co-tenancy Statement of Income and Expenses found at Tab 2 of Exhibit A-1 and the figure of $1,716,442 shown as a gain on forgiveness of HTP loan - Termai. He could not say whether or not he was aware of this amount in 1994 when he signed the income tax return. He vaguely remembered that Mr. Grabowski would give all of the "stuff" to him and say "sign here" and that is what he did. He did not ask any questions about it. He never received an accounting of the results of all of the transactions that were referred to in the agreement. He did not take any action to receive such an accounting. He did not think it would make any difference.
[27] He admitted that without an accounting he did not have any idea of how much of the Termai loan was forgiven at the end of the day. He did say that he did not think they owed them anything. He did say that when his accountant, Mr. Grabowski got the information about the $1.716 million gain on forgiveness of the HTP loan - Termai he thought it was ridiculous. As far as he was concerned there was no forgiveness of debt. This was repeated to him by Gordon Williamson ("Mr. Williamson") three months ago but Mr. Williamson was not going to be testifying.
[28] Mr. Gabrowski did say that the Appellant was going to have to pay tax on this amount even though he did not get it. Mr. Grabowski was at Mr. Schwartz' office and he asked them both to go through the agreement and tell him what the damages were going to be. After two days he was not told anything of what the cost would be to the company which was the extent of his involvement except that he came to Mr. Gamble's office with him on two occasions. He was in the office of Aird and Berlis when he signed the Mutual Release. Mr. Schwartz was there and the other lawyers and parties were there. He did not get a copy of any of these documents for some time after that. Mr. Schwartz had them and he later provided them to him. He did not know whether he gave a copy of the Release to Mr. Grabowski.
[29] Fidelia Louie ("Ms. Louie") testified that she was an appeals officer with Canada Revenue Agency ("CRA"). She has held that position for thirteen years. Prior to that she was an auditor with Revenue Canada and before that she was a staff accountant at Ernst & Young. She possessed the CGA designation. She has held that designation for about twenty years.
[30] She was the officer of CRA who raised the assessment that is currently under appeal. After the Notice of Objection was received she contacted the Appellant's solicitor. At a meeting he explained how the loan from Termai to Hill Top came about. She obtained the auditor's file with respect to the Appellant for the 1997 taxation year. She perused the working papers and the auditor's report. She also referred to the principal file that was referred to in the auditor's report.
[31] A principal file is created when an auditor reviews a taxpayer company and as a result of this review she also reviews other related companies. The principal file contains most of the documentation or paperwork. In this case, that was the Oakamp Developments file. When she met with the Appellant's solicitor she told him that she had obtained the agreement referenced in this case. This was located in the Oakamp Developments file. At that point in time she had not seen the Mutual Release that had been executed. For the taxation year 1997 the auditor on the file had denied a non-capital loss carry forward applied against taxable income. The auditor took the position that there was a forgiven loan in 1994. She adjusted the non-capital loss carry forward balance and, as a result, the balance available for application for the taxation year 1997 was reduced.
[32] The auditor was applying the provisions of section 80 of the Income Tax Act ("Act") and in doing so relied upon the financial statements. These statements are found in Exhibit A-1 at Tab 2, being the last four pages of that tab referable to the taxation year 1994 for Hill Top.
[33] In the Statement of Income and Expenses, there is a line item called GAIN ON FORGIVENESS OF HTP LOAN - TERMAI, $1,716,442. That gain was reassessed by the auditor to reduce the non-capital loss balance of 1994. In the financial statements the Appellant had reported the gain on the forgiveness, for $1.7 million. However, for income tax purposes, it was taken out on schedule T2S(1), one of the income adjustment schedules and consequently was never reported. The T2S(1) is a reconciliation of accounting income to taxable income. On the T2S(1) form, the Appellant had deducted the gain on the forgiveness of debt which was recognized for accounting purposes. In effect, the gain was not declared. The Appellant had not applied the forgiveness that appears in the financial statements to any non-capital losses in 1994 or any other year.
[34] She produced the Agreement at Tab 1 for the Appellant's counsel and he went away with it to a second meeting. There were further communications between the witness and the Appellant's counsel including telephone conversations over a considerable period of time from 2002 to September 2003. The issue that was being looked at was whether or not the loan was forgiven. She concluded that in order for the debt to be discharged the creditor had to take some action in forgiving the liability. However, the only statement that indicated that there was a forgiveness was how it was filed in the tax return of Hill Top, that is referred to at Tab 2 in the Income Statement. The Appellant's counsel did not produce any evidence from Termai saying that the loan was forgiven. Based on that information she believed that it was not sufficient for the auditor to rely on just the financial statements to assess the forgiveness.
[35] Discussions took place about a settlement and making other adjustments, such as disallowing a non-capital loss application in 1997 and reassessing the forgiven amount in 2000 when the loan was statute-barred for collection under the Statute of Limitations Act. She made the adjustment and concluded from the settlement agreement that there was a forgiveness of debt.
[36] She reversed the auditor, allowed the non-capital loss to be applied to 1997 and added to income in 2000, the forgiven amount. Based upon these discussions she determined that there was no loan forgiven in 1994. Consequently, she removed the forgiven amount that the auditor used to reduce the non-capital loss balance carry forward. By making that adjustment, there would be a non-capital loss available for application in 1997 and so she allowed that.
[37] The statute of limitations kicked in since it was six years after the last payment in 2000. In that year the creditor was barred from collecting any debt from the taxpayer. That is when it was considered that the loan was forgiven. At that point in time there was no more loss available to be reduced. Under subsection 80(13) of the Act the forgiven amount was to be included in income.
[38] At the time that she issued the reassessments for the December 1997 taxation year, it would have been barred in the event that there was no objection. She issued a reassessment in the absence of a signed waiver as she believed it was the right thing to do.
[39] At the time that the reassessment was issued in 2000 the witness had not seen the Mutual Release. No document was received to support this. She did not receive any documents indicating that there was no forgiveness of debt. Further, representations were made with respect to other payments being made to Ms. Catherine Reynal. Ms. Louie asked for a waiver to be signed so that she could make the adjustment. If she had seen the Mutual Release prior to issuing this reassessment for 1997 and the reassessment for 2000, she would not have issued those reassessments because this would have supported the Respondent's position that the loan was discharged in 1994.
[40] It was her position that the forgiveness of the loan in 2000 by virtue of expiry of the limitation period would be inconsistent with the financial statements of Hill Top that were filed for 1994. In the financial statements the forgiveness of the loan was recognized in 1994 and they were talking about 2000. Further, the Mutual Release would be consistent with the financial statements filed for Ridge Run and Hill Top that were filed with the 1994 return because the Mutual Release was executed in June of 1994 and the statement was for the taxation year of 1994.
[41] Following the reassessments for 1997 and 2000 a further Notice of Objection was received. It was noted in the Notice of Objection that the loan was actually forgiven in 1994 and that the Appellant had documents to show that. This was a Notice of Objection for the taxation year 2000. Further conversations took place with the Appellant's solicitor and the Minister subsequently received the Mutual Release in question. There was no Notice of Objection filed for 1997. This reassessment gave Ridge Run more non-capital losses.
[42] As a result of receiving the Mutual Release, the witness concluded that the liability that was being looked at was released in 1994 and the loan was forgiven. She looked at the year 1997 and there was no objection filed. It was statute-barred. The Mutual Release was signed in 1994 and the taxpayer should have recorded a forgiveness in 1994 and it was not done. She believed that there was a misrepresentation in filing the 1994 return.
[43] As a result of that misrepresentation, 1997 was incorrectly filed because the taxpayer utilized a non-capital loss balance which had been reduced to nothing. The taxable income for 1997 was being misrepresented.
[44] Further, the witness concluded that the failure to produce the Mutual Release indicated that evidence was withheld which withholding led her to believe that there was no forgiveness in 1994 on the previous assessment.
[45] Ultimately, based upon this information, the witness reinstated the auditor's assessment. She accepted the forgiveness as happening in 1994 and applied subsection 80(3) of the Act, reducing the non-capital loss carry forward balance by the forgiven amount. In doing that, the non-capital loss carry forward balance was reduced. As a result, there was no non-capital loss available for application for 1997. Her position was that it was to the taxpayer's benefit not to present the Mutual Release because she was prepared already to reassess, allowing the non-capital loss application and reducing the taxable income for 1997.
[46] In cross-examination the witness admitted that on the basis of discussions with counsel for the Appellant that, as the amount of $261,000 had been paid as a result of the Settlement Agreement, she allowed the deduction.
[47] This amount was deducted from the amount of the outstanding indebtedness. Before she knew there was a Mutual Release, it was determined that the loan was forgiven in 2000. If the payment was made in 1997 the amount forgiven would be the loan itself minus whatever was paid against it. The difference would be the amount forgiven in 2000. That was prior to Ms. Louie's knowledge of the Mutual Release.
[48] The witness would not agree with counsel for the Appellant that the reason that she deducted $261,790 from an amount otherwise added to the assessment by her was the provisions of subparagraph (v) on page 41 of the Settlement Agreement. She said that the deduction was made when she did not have this clause in mind. Whatever evidence she did have showed that the taxpayer paid that amount. The taxpayer pays that amount and in her mind the taxpayer is entitled to the deduction, so the deduction was allowed. She was not really referring to the Settlement Agreement. In relation to Patriot Fairview it was shown that they paid an amount of $261,000, so she allowed the deduction.
[49] The witness was asked what this representation was made in the 1994 taxation return. She said that in filing the 1994 tax return and based on the Mutual Release that was presented to her later on, the liability was discharged in 1994. The taxpayer did not include that forgiveness in the 1994 taxation year. According to subsection 80(3) of the Act the forgiveness has to be used to reduced the non-capital loss carry forward balance which is on the T2S(4). On the fourth page after the T2S(1) schedule there is "Continuity of Losses Carried Forward". The taxpayer misrepresented the non-capital loss carry forward balance by not reducing the balance by the amount of the forgiven debt. She agreed that the purpose for the T2S(1) was to reconcile net income for tax purposes from accounting purposes.
[50] She was referred to four pages of the return for 1994 being the T2S(1), the T2S(4), the T2S(1) supporting schedule and the last two pages of the return. She was asked whether, as a result of looking at all four of those pages, was there any concealment taking into account reporting for tax purposes and the difference between reporting for tax purposes and reporting for accounting purposes. The answer was that now that they were aware that there was a Mutual Release signed in 1994, the T2S(4) was obviously incorrect because the taxpayer failed to reduce the non-capital loss balance by that forgiveness amount. That is a misrepresentation because the taxpayer is knowingly not reducing the balance.
[51] It was then suggested to the witness that it was possible that an accountant that was not an employee of CRA might conclude that these amounts were in fact not to be included in computing taxable income. Her response was that as a professional accountant they should note all these sections of the Act and how they should be applied.
[52] She further admitted that in the last four or five pages the Appellant disclosed the nature of the matter which is now before the Court as to its tax treatment as forgiveness of the Hill Top loan by Termai in its financial statements attached to the return. Further, she said that the amount was disclosed that there was a gain but it did not disclose the debt that is supposed to be used to offset the loss balances. If I looked at it as an assessor, there was a gain in the financial statements but it was not included in income. As an assessor she would say that there was a forgiveness. The forgiveness should have been used to offset the loss carry forward and it should have been shown on the T2S(4) and it was not. She admitted that when the assessment was made in September 1998, this was an incorrect assessment.
[53] In redirect, the witness was referred to a document at Tab 4 called "Settlement of Co-tenancy receivable from Oakamp". The applicable reference was with respect to Ridge Run's contribution of $261,790 towards settlement of the Oakamp Developments receivable in proportion to Ridge Run's interest in the co-tenancy. She received the document from the principal file in the Oakamp Developments' tax return. From a loan forgiveness point of view, if a loan was forgiven in 1994 this payment would not have any effect on it because the payment was made in 1997. If the loan was forgiven subsequent to 1997, this amount would reduce the loan amount. It would be used to offset the loan. It was taken as something that had been paid in 1997.
[54] Ultimately she said that the she allowed the adjustment just for settlement purposes since the taxpayer paid it out. It was a payment in connection with earning income. Since it was to the benefit of the taxpayer she did not really question it.
[55] At the conclusion of the evidence, it was concluded that Tab 16 had not been proved and consequently it was not to be considered as one of the exhibits.
Argument on Behalf of the Appellant
[56] Counsel reminded the Court that this appeal is with respect to the 1997 taxation year even though much evidence was given with respect to the 1994 taxation year. With regards to the 1994 taxation year, the only real evidence was with respect to the Notices of Assessment which are referred to under Tabs 3, 5, 6, 7 and 10 of Volume 1, Exhibit A-1.
[57] It is only the Notice of Reassessment of October 23, 2003 which is subsisting and the Notice of Reassessment of October 1, 2004 is a nullity. The agreement which is found in Exhibit A-1, Volume 1 at Tab 1 is of the greatest significance. The entire agreement was designed to put into Oakamp Developments' and Ms. Catherine Reynal's hands the funds that would put them in the position that was equivalent to the position that they were in before the funds of Oakamp Developments were used for the joint venture or co-tenancy arrangements established by Mr. Miller with Mr. Poulton. The proceeds of those funds had the effect at the same time of reducing the amount of Termai receivables, one of which was the very loan that is an issue in this appeal, that is a loan by Termai to Hill Top in which Ridge Run was a 50% participant.
[58] Counsel referred to pages 29 and 30 of the Settlement Agreement. In effect, Oakamp Developments was paid even though Ridge Run did not owe it anything but Ridge Run owed Termai and Termai owed Oakamp Developments. This loan was to be paid.
[59] At the end of the day, when everything was done, if money was still owing, it would be paid or, if too much money had been paid, it would be recovered.
[60] The initial issue is to determine the forgiven amount. The Minister has employed the provisions of subparagraph 80(3)(a)(ii) of the Act in making this assessment. This subparagraph was amended prior to the period in issue here, and prior to that, the subparagraph did not contain any provision defining what the forgiven amounts were although it did provide for the inclusion in income of forgiven amounts. As a result or consequence of the application of the Settlement Agreement and the Mutual Release, for which provisions were made in the Settlement Agreement and executed on June 20, 1994, that amount is nil.
[61] The effect of this agreement and the Mutual Release was that the parties gave up a number of rights by virtue of the agreement and the Release and there was no forgiveness.
[62] These various rights were not illusory rights put there for cosmetic purposes. According to the evidence given by Mr. Schwartz, Mr. Poulton had done nothing that would make him the subject matter of litigation. Mr. Poulton had a cause of action against Termai and Mr. Miller because Mr. Miller was supposed to provide the financing. That meant financing that could be used, not financing that would result in actions that would call all the money back at an inappropriate time as would appear to be the results of these actions. The contract made provision for management fees to be forgiven that were otherwise payable. It was uncertain what these amounts might have been at any time but to set out the revenue test dollar for dollar would have been a mathematical impossibility.
[63] There was no accounting kept because there were no dates fixed for the disposition of assets. If you interpret subsection 80(3) of the Act as it existed in 1994, the first challenge is to determine the forgiven amount in the definition in that subsection. Given the nature of the transaction in 1994 and the provision of the Settlement Agreement, according to the evidence of Mr. Schwartz, that forgiven amount, because of set off, was zero.
[64] Mr. Schwartz concluded in his evidence that at the end of the day, as a result of the agreement, all of the indebtedness of Ridge Run and Oakamp Developments was considered as paid in full. That is what the agreement was intended to do. In the final agreement, all of the parties were going to release each other.
[65] In the alternative, if there was any forgiven amount, if it could be any amount at all, it is the amount that existed in 1994 and at no other time. The Mutual Release is dated June 29, 1994. The fiscal period of the Appellant ends in September. Therefore, at any time means "at the time of the 1994 taxation year of the Appellant, and no other time". The repetition of the words "at that time" three times in that paragraph must mean something. It is submitted that it means that the losses carried forward up to the year 1994 are to be deducted as a consequence of the addition to income of whatever the forgiven amount was.
[66] Clause (ii) of that provision says that the amount so applied does not, because of this subsection, reduce the debtor's non-capital loss for the preceding taxation year. The argument is that in 1994 it is appropriate for the Minister to add to the income of the taxpayer any forgiven amount of a commercial obligation to reduce the amount of losses carried forward from prior taxation years, but that is the only year in which that can be done. You cannot do it to effect a subsequent taxation year, and that is exactly what has happened here. The Minister is carrying this reduction of an assumed forgiven amount against non-capital losses in 1994 and prior years and applying them in 1997. This is not possible under the section.
[67] Clause (ii) of this provision has not been subject to judicial interpretation. The Minister can assess a forgiven amount at that time, for that year, when the amount is forgiven, and at no other time and in that process is entitled to apply that forgiven amount in reducing the prior year's non-capital losses. But, if he does not assess for the year at that time when the amount is forgiven, he is barred from doing what customarily would follow, and that is reducing it in a subsequent taxation year. He has one chance, and that is to do it in the year in which the amount is forgiven because in subsequent years that amount of the loss carried forward is reintroduced into the scheme of things and can be deducted in computing the income of the taxpayer.
[68] When the clause says, "reduce the debtor's non-capital loss for the preceding taxation year", that means all years prior to 1994.
[69] Thirdly, counsel argued that the assessment before Court for the year 1997 is statute-barred. The Minister issued a Notice of Reassessment on October 23, 2003 as a result of a Notice of Objection. This was in spite of the fact he indicated to the accountant that she would not issue the reassessment until she received a waiver. She did not receive a signed waiver. This was the last arrow in the Respondent's quiver. The Minister could not issue another Notice of Reassessment for the same taxation year. The Minister could not issue further reassessments for the same year because of the Notice of Objection being filed. The Minister is subject to the provisions of the Act, subsection 152(4).
[70] No other provisions of the Act which allow reassessments apply here since the taxpayer never requested a reassessment for loss carry back or for any other purpose.
[71] In order for the Minister to make a further reassessment under the provisions of subsection 152(4) of the Act, there must be a misrepresentation. Evidence was given as to what this misrepresentation was for the year 1997. There was evidence about 1994 and it might be reasonable under normal circumstances to assume that somehow this had an effect upon 1997 but there was no evidence about it. Without some evidence of any kind with respect to 1997, the Court cannot find a misrepresentation. At the most what the Respondent says is, "We are reassessing you because you disclosed that you had forgiveness of debt on your financial statements." This is not a misrepresentation. It is an incorrect statement because it was not a forgiveness but a payment. Nevertheless, it is the Respondent who is relying upon these words.
[72] Counsel referred to the T2S(1) form which was a form provided by the Respondent for the purpose of disclosing the change or reconciliation of financial statements for accounting purposes and tax purposes. There is a variety of alterations that accountants make changing from accounting to tax purposes under the Act. The reason for relying on subsection 152(4) of the Act would have to be that this was a misrepresentation. If it is, it is a misrepresentation that it is attributable not to wilful default -- it cannot be wilful default. It is shown right there on the statements and the figures balance. The amounts are disclosed. It is not neglect. To neglect it would be a mistake because the forms require professional accountants who prepare these documents to set these matters out. The returns are prepared by the accountant.
[73] Here, these statements were prepared properly. If there was any misrepresentation, it was a misrepresentation of the interpretation of the law. That kind of misrepresentation is not included within the definition of what permits the Minister to reassess beyond the normal reassessment period of three years. Under subsection 152(4) of the Act, the cases make it clear, that in the absence of a misrepresentation attributable to neglect or carelessness or wilful default, there can be no other additions to income or reassessment itself. This did not take place here.
Argument on behalf of Respondent
[74] Counsel agreed that the end result of the agreement was that, at the end of the day, everything was going to be over. The Appellant admitted that he executed a Mutual Release on June 29, 1994. This Release included the obligations in question, those related to Hill Top. Mr. Poulton was given a copy of this Mutual Release, although he does not know when it was, and he gave it to some person or persons, including his accountant. The important point is that the Appellant clearly knew about the Mutual Release and clearly understood it as a result of the discussions with Mr. Schwartz as his professional advisor, and had it in his possession.
[75] It is the Respondent's position that upon the execution of this Release a commercial debt owing by Ridge Run was forgiven. The amount of that forgiveness was not less than the amounts that appear in Volume I, Tab 2 in the Income Statement for Hill Top at the second page in the back of the tab. The inference is clear that these financial statements would have been presented to Arthur Andersen. Counsel asked the question, "What happens when a loan is forgiven?" From an accounting p