October 07, 2011

Bosa Bros. Construction Ltd. (Plaintiff) v. Her Majesty the Queen (Defendant)

96 DTC 6193
Federal Court-Trial Division
December 22, 1995

(Court File Nos. T-3403-90, T-3404-90 and T-3405-90.)

Income or capital gain — Profit on disposition by corporate developer (the taxpayer) of two apartment complexes — Whether secondary intention — Whether court entitled to deal with issues raised in nil assessment when such issues pertinent to assessments for other taxation years under appeal — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 9(1), 39(1) and 169(1) — Non-capital losses — Taxpayer acquiring all of the shares of T Inc., and winding it up — Whether taxpayer entitled to include T Inc.’s non-capital losses in its own non-capital loss calculations — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 13(21)(b), 20(1)(a), 54(b) and 85(5.1) — Income Tax Regulations, ss. 1102(1)(b) — Deductions — Bad debts — Unrepaid advances made by taxpayer to its U.S. subsidiary — Whether advances deductible on income account, on capital account, or not at all — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 20(1)(p) and 40(2)(g) — Deductions — Repurchase costs — Taxpayer contractually obliged to repurchase condominium units in buildings previously sold by it — Whether costs of such repurchases to be treated as fully deductible, or as capital in nature — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 9(1), 18(1)(a), 18(1)(b) and 42.

(1) The corporate taxpayer was engaged in the business of real estate development and property management. In reassessing the taxpayer for its 1986 taxation year, the Minister recharacterized as income the proceeds of sale of one of its apartment complexes (“Talbot Place”). This resulted in a nil assessment for that year, but it also reduced the amount of non-capital losses available for carryforward. In reassessing the taxpayer for its 1984, 1987 and 1988 taxation years, the Minister also added to its income gains realized by it on the sale of three properties, one of which was Boundaryview Place. (2) In 1984 the taxpayer acquired all of the shares of T Ltd. (which had been a wholly owned subsidiary of D Ltd.). The taxpayer then caused T Ltd. to wind up, including in its own non-capital losses available for its own 1985 and subsequent taxation years those of T Ltd. The Minister disallowed this. (3) The taxpayer sought to deduct, either as non-capital losses under subparagraph 20(1)(p)(ii) of the Act, or as capital losses under subparagraph 40(2)(g)(ii) of the Act, unrecovered interest-free advances which it had made to its U.S. subsidiary from April, 1979 to April, 1987. Such deductions were disallowed by the Minister in respect of the taxpayer’s 1987 taxation year. (4) Over the course of several different taxation years the taxpayer had been contractually obliged to repurchase condominium units in buildings which it had previously sold. In computing its income for 1987 and 1988 the taxpayer claimed as a deduction for those years certain costs incurred by it in respect of such purchases. These were disallowed by the Minister. The taxpayer appealed to the Tax Court of Canada in respect of all four issues.

Held: The taxpayer’s appeal was allowed in part. (1) On a preliminary point, although the taxpayer’s 1986 taxation year (which was not under appeal) involved a nil assessment, the Talbot Place issue had been properly appealed, since it affected the amount of non-capital losses available for carryforward into the taxpayer’s 1987 and 1988 taxation years which were before the court on the appeal. On the merits, although the taxpayer may well have intended to operate Talbot Place as an income-producing asset upon its acquisition, the fact that it could not afford the property and did not want it, pointed to a secondary intention. That, coupled with the short period of time during which the property was held, meant that the taxpayer’s gain therefrom was income. The Minister was ordered to reassess accordingly. The situation with Boundaryview Place was different. The taxpayer had located its head office in the front portion thereof, and had clearly intended to retain it as a producer of rental income. It was sold only to provide working capital for other revenue-producing properties, and the fact that title thereto had been stratified was not an indication of a secondary intention to sell, in light of the prevailing practices in the industry. The profit from such sale, therefore, was capital and the Minister was ordered to reassess accordingly. (2) T Ltd.’s non-capital losses had resulted from its writing down to fair market value an apartment property which it had acquired from its parent D Ltd. in 1984. The cost of the building component of that property, however, had been determined by T Ltd. in accordance with the provisions of subsection 85(5.1) of the Act, which applies only to depreciable property. The Minister, however, had contended that subsection 85(5.1) did not apply to the disposition by D Ltd. to T Ltd. of the property since D Ltd. had treated the property as inventory rather than depreciable capital property. There was evidence, however, that D Ltd. had, on a balance of probabilities, treated the property as depreciable, having claimed capital cost allowance in respect thereof which had not been disallowed by the Minister. As a result of its acquisition of T Ltd.’s shares from D Ltd., therefore, the taxpayer was entitled to take advantage of the provisions of subsection 85(5.1) and the Minister was ordered to reassess accordingly. (3) The advances made by the taxpayer to its U.S. subsidiary were not loans within the meaning of subparagraph 20(1)(p)(ii) of the Act, since lending money was not part of the taxpayer’s ordinary business. In addition, the advances had not been made for the purpose of acquiring a product or ensuring a source of supply. They were simply to cover losses incurred by the taxpayer’s subsidiary, and to protect its guarantors. Accordingly, there were not deductible, either as an expense or as a capital loss. The Minister’s reassessment was affirmed accordingly. (4) A guarantee fee paid by the taxpayer in respect of certain of the condominium unit repurchases constituted a capital loss under section 42 of the Act as both the taxpayer and the MInister had agreed. The Minister was correct, however, in taking the position that the taxpayer had failed to meet the onus of proving that the repurchased units constituted inventory. The unit repurchase costs associated therewith, therefore, were on capital account, falling within the operation of section 42 of the Act. The Minister was ordered to reassess accordingly.