Bosa Bros. Construction Ltd. v. Minister of National Revenue, (1995) 106 F.T.R. 30 (TD)

• Judge: Nadon, J.
• Court: Federal Court (Canada)
• Case Date: May 16, 1995
• Jurisdiction: Canada (Federal)
• Citations: (1995), 106 F.T.R. 30 (TD)

Bosa Bros. Constr. Ltd. v. MNR (1995), 106 F.T.R. 30 (TD)

MLB headnote and full text

Bosa Bros. Construction Ltd. (plaintiff) v. Her Majesty the Queen (defendant)

(T-3403-90; T-3404-90; T-3405-90)

Indexed As: Bosa Bros. Construction Ltd. v. Minister of National Revenue

Federal Court of Canada

Trial Division

Nadon, J.

December 22, 1995.

Summary:

Bosa Bros. Construction appealed certain reassessments made by the Minister of National Revenue for the taxation years 1984, 1987 and 1988. The appeals involved issues respecting, inter alia, capital gains or losses, bad debts and noncapital losses.

The Federal Court of Canada, Trial Division, dealt with the appeals accordingly.

Income Tax - Topic 1057

Income from a business or property - Income from business - What constitutes a sale of inventory - [See all Income Tax - Topic 1742 ].

Income Tax - Topic 1139

Income from a business or property - Deductions - General - Bad debts - In 1978, Bosa Bros. U.S. (Bosa U.S.) was incorporated in Washington to pursue property development opportunities in the United States - Bosa U.S. was a wholly owned subsidiary of Bosa Bros. Construction, a property development business (Bosa) - Bosa U.S. was operated and administered from Bosa's head offices in British Columbia - From 1979 to 1987 Bosa advanced approximately $1,640,875 to Bosa U.S., interest free - Bosa also guaranteed a mortgage for Bosa U.S., which included personal guarantees of certain Bosa directors - In 1987, Bosa U.S., which had never shown a profit, sold all of its rental property - As a result, Bosa wrote off all of its advances to Bosa U.S. as a bad debt (Income Tax Act, s. 20(1)(p)(ii)) - The Federal Court of Canada, Trial Division, disallowed the deduction stating, inter alia, that the advances were not loans under s. 20(1)(p)(ii) because it was not part of Bosa's ordinary business to lend money - See paragraphs 57 to 76.

Income Tax - Topic 1139

Income from a business or property - Deductions - General - Bad debts - The Federal Court of Canada, Trial Division, stated that there were "two ways under which a taxpayer may be entitled a deduction for bad debts under s. 20 of the [Income Tax Act]: if the amount had previously been included in income, or the taxpayer is a lender in the regular course of its business" - See paragraph 60.

Income Tax - Topic 1153

Income from a business or property - Deductions - Noncapital losses - What constitutes noncapital losses - [See first Income Tax - Topic 4223 ].

Income Tax - Topic 1303

Income from a business or property - Deductions not allowed - Respecting capital outlays or losses - Bosa Bros. Construction Ltd. was contractually obliged to repurchase limited partnership units in certain buildings that it had previously sold - Bosa claimed deductions for these repurchases arguing that they were "ordinary expenses of a developer that may be deducted against income" - The Minister of National Revenue held that the deductions were not allowed because they were deductions against capital pursuant to the Income Tax Act, s. 42, and accordingly, they were not allowable deductions on income account pursuant to the operation of s. 18(1)(b) - The Federal Court of Canada, Trial Division, affirmed the Minister's decision - See paragraphs 77 to 90.

Income Tax - Topic 1706

Capital gains and losses - Disposition subject to warranty - [See Income Tax - Topic 1303 ].

Income Tax - Topic 1706

Capital gains and losses - Disposition subject to warranty - The Federal Court of Canada, Trial Division, discussed the scope of s. 42 of the Income Tax Act stating that it provided, inter alia, that "where a taxpayer receives proceeds of disposition of property and part of the proceeds is received as consideration for any warranty, covenant or other conditional or contingent obligation incurred by the taxpayer in respect of the disposition, the amount so received must be included in the proceeds of disposition of the property. However, the amount is included in proceeds of disposition only for the purpose of computing the capital gain or loss. For other purposes, the amount is not included in proceeds of disposition" - See paragraphs 77 to 90.

Income Tax - Topic 1742

Capital gains and losses - Capital gains - Capital receipt v. income - The Federal Court of Canada, Trial Division, stated that it was clear that an assessment of whether gains or losses are on account of income and not on account of capital is a finding of fact - One of the most important factors in the classification of a property as capital or inventory is the taxpayer's primary intention at the time the property was acquired - However, also important is the taxpayer's secondary intention - That is, not only must the thought of a sale at a profit be present at the time of the acquisition of the property, but the prospects of such a sale must have been evidence of an operating motivation to acquire the property - See paragraph 12.

Income Tax - Topic 1742

Capital gains and losses - Capital gains - Capital receipt v. income - The Federal Court of Canada, Trial Division, stated that two of the most important factors in the classification of a property as capital or inventory are a taxpayer's primary and secondary intention at the time the property was acquired - The determination of intention is a question of fact to be determined by reviewing all of the objective indications of intent when the property was acquired - The court must examine all the surrounding circumstances and must decide, on a balance of probabilities, whether the possibility of resale at a profit would have been a motivating consideration that entered in the decision to acquire the property - See paragraphs 12 to 21.

Income Tax - Topic 1742

Capital gains and losses - Capital gains - Capital receipt v. income - The Federal Court of Canada, Trial Division, outlined six main factors that courts should consider in characterizing property on account of capital or property on account of inventory: 1. The taxpayer's primary intention at the time the property was purchased or constructed; 2. The relationship of the impugned transaction to the taxpayer's normal course of business; 3. the number and repetition of similar transactions by the taxpayer; 4. the nature of the property and the length of time for which it was held; 5. The reason for the sale of the asset (e.g., unforseen problems, the receipt of an unsolicited offer to purchase); and 6. the taxpayer's secondary intention regarding the property at the time of its purchase - The court further noted that these six factors should not be given equal weight, but should be borne in mind when assessing the evidence presented - See paragraphs 21 and 22.

Income Tax - Topic 1742

Capital gains and losses - Capital gains - Capital receipt v. income - In 1981, Bosa Bros. Construction agreed to purchase Talbot Place, an apartment complex - However, due to financial constraints, Bosa was unable to complete the purchase - The vendor commenced legal action - In 1985, Bosa settled the action by, inter alia, purchasing Talbot - Because Talbot was in a poor state of repair, Bosa had to expend considerable time and money to improve it - Later that year, Bosa was approached by a group of businessmen who wanted to purchase Talbot - The sale, completed in November, 1985, was for an amount far greater than the purchase price - Bosa reported the sale proceeds as a net capital gain - The Federal Court of Canada, Trial Division, affirmed the Minister of National Revenue's decision that the proceeds were income, where it was clear from the short period of time that Bosa owned the property that Bosa intended to sell it for a profit - See paragraphs 4 to 27.

Income Tax - Topic 1742

Capital gains and losses - Capital gains - Capital receipt v. income - Between 1980 and 1982, Bosa Bros. Construction built Boundaryview Place - In 1983, Bosa sold Boundaryview Place to a limited partnership assembled by Equion Properties because of financial problems - Bosa earned approximately $6 million dollars from the sale - Bosa reported the sale proceeds as a net capital gain - The Minister of National Revenue reassessed Bosa's taxes and held that the proceeds were income - The Federal Court of Canada, Trial Division, allowed Bosa's appeal - Boundaryview Place was Bosa's "crown jewel" - "It was a showcase that the Bosa brothers, who had emigrated from Italy in the late 1950's, were proud to display because it was such a symbol of their success in the construction business" - Bosa only sold the property because of financial difficulties and therefore the proceeds of its sale were properly characterized as capital and not noncapital gains - See paragraphs 27 to 32.

Income Tax - Topic 1784

Capital gains and losses - Capital losses - What constitutes a capital loss - In 1978, Bosa Bros. U.S. (Bosa U.S.) was incorporated in Washington to pursue property development opportunities in the United States - Bosa U.S. was a wholly owned subsidiary of Bosa Bros. Construction, a property development business (Bosa) - Bosa U.S. was operated and administered from Bosa's head offices in British Columbia - From 1979 to 1987 Bosa advanced approximately $1,640,875 to Bosa U.S., interest free - Bosa also guaranteed a mortgage for Bosa U.S., which included personal guarantees of certain Bosa directors - In 1987, Bosa U.S., which had never shown a profit, sold all of its rental property - As a result, Bosa wrote off all of its advances to Bosa U.S. (Income Tax Act, s. 40(2)(g)(ii)) - The Federal Court of Canada, Trial Division, disallowed Bosa's deduction stating that the advances were not losses on the disposition of property under s. 40(2)(g), because Bosa was simply covering losses incurred by its subsidiary and trying to protect its guarantors - See paragraphs 57 to 76.

Income Tax - Topic 1784

Capital gains and losses - Capital losses - What constitutes a capital loss - The Federal Court of Canada, Trial Division, stated that s. 40 of the Income Tax Act "sets out the rules for determining the gain or loss on the disposition of any property. Under s. 40(2)(g), a debt which is uncollectible may only be deducted as a capital outlay where the debt was incurred to earn revenue. The section is very clear on the exception to the general principle that a loss on a debt is not deductible. For the purpose of s. 40(2)(g)(ii), a taxpayer is deemed to have disposed of a debt owing to him at the end of a taxation year in which the debt is established by the taxpayer to have become uncollectible" - See paragraph 72.

Income Tax - Topic 1823

Capital gains and losses - Capital gains - Land - Capital gains v. ordinary income - [See all Income Tax - Topic 1742 ].

Income Tax - Topic 4223

Corporations and shareholders - Transfers of property - Transfers of depreciable property - In 1984, Bosa Bros. Construction acquired all of the shares of Topaz, a wholly owned subsidiary of Darwai Investment Corp. - The cost of the building component of the apartment property owned by Topaz was determined by Topaz in accordance with the Income Tax Act, s. 85(5.1) - Topaz wrote down the property to its fair market value and reported a noncapital loss - Bosa then caused Topaz to wind up - Bosa included the losses to Topaz in its noncapital losses available for the 1985 and subsequent taxation years - The Federal Court of Canada, Trial Division, allowed the deduction where it determined that Darwai had claimed capital depreciation (i.e., taken a capital cost allowance) on the Topaz property - Accordingly, Bosa had the right to do the same under the Act, s. 85(5.1) - See paragraphs 34 to 56.

Income Tax - Topic 4223

Corporations and shareholders - Transfers of property - Transfers of depreciable property - The Federal Court of Canada, Trial Division, stated that s. 85(5.1) of the Income Tax Act "denies or reduces a terminal loss which would otherwise result from the disposition of depreciable property or a specified class by a person or partnership in specified control situations. There are two conditions for the application of s. 85(5.1). First the transfer must occur in certain specified control situations and second, a valuation test must be met" - See paragraph 34.

Income Tax - Topic 7843

Returns, assessments, payment and appeals - Assessments - Presumption of validity - Burden of proof - The Federal Court of Canada, Trial Division, stated that it was "trite law that any tax assessment (or reassessment) is binding on its face, subject to the taxpayer's right to challenge that assessment. The burden of proof in such a case is on the taxpayer to show that the assessment is wrong" - The court further noted, however, the Crown has a concurrent burden to "play fair" - This may result in a shift in the burden of proof in certain circumstances - See paragraphs 42 to 56.

Income Tax - Topic 7955

Returns, assessments, payment and appeals - Appeals to tax review board or Tax Court - Appeal from a nil assessment - [See Income Tax - Topic 8004 ].

Income Tax - Topic 8004

Returns, assessments, payment and appeals - Appeals to courts - Federal court - Jurisdiction - Nil assessment - The Federal Court of Canada, Trial Division, stated that while it was a well established rule that there can be no appeal from a "nil" assessment, "an appeal does lie to the Minister's assessment in other taxation years where there is tax payable. The matter may be dealt with on the merits in other taxation years where it is relevant in determining the taxes for those years" - See paragraphs 4 to 11.

Cases Noticed:

Bowater Mersey Paper Ltd. v. Minister of National Revenue (1987), 78 N.R. 233; 87 D.T.C. 5382 (F.C.A.), refd to. [para. 6].

Okalta Oils Ltd. v. Minister of National Revenue (1955), 55 D.T.C. 1176 (S.C.C.), refd to. [para. 6].

Consumers' Gas Co. v. Minister of National Revenue (1986), 72 N.R. 206; 87 D.T.C. 5008 (F.C.A.), refd to. [para. 7].

Consoltex Inc. v. Minister of National Revenue (1991), 92 D.T.C. 1567 (Tax C.C.), refd to. [para. 8].

Day & Ross Inc v. Canada (1976), 76 D.T.C. 6433 (F.C.T.D.), refd to. [para. 9].

Forest Lane Holdings Ltd. v. Minister of National Revenue (1986), 87 D.T.C. 1 (Tax C.C.), refd to. [para. 10].

Villa Capri Apartments Ltd. v. Minister of National Revenue (1970), 70 D.T.C. 6307 (Ex. Ct.), refd to. [para. 12].

Schillaci v. Minister of National Revenue (1992), 92 D.T.C. 1648 (Tax C.C.), refd to. [para. 12].

Irrigation Industries Ltd. v. Minister of National Revenue (1962), 62 D.T.C. 1131 (S.C.C.), refd to. [para. 12].

Cragg v. Minister of National Revenue (1951), 52 D.T.C. 1004 (Ex. Ct.), refd to. [para. 12].

Sini v. Minister of National Revenue (1988), 88 D.T.C. 1450 (Tax C.C.), refd to. [para. 13].

Hébert v. Minister of National Revenue (1986), 7 F.T.R. 248; 86 D.T.C. 6543 (T.D.), refd to. [para. 13].

Cantor v. Minister of National Revenue (1984), 85 D.T.C. 79 (Tax C.C.), refd to. [para. 13].

Marsted Holdings Ltd. v. Minister of National Revenue (1986), 2 F.T.R. 68; 86 D.T.C. 6200 (T.D.), refd to. [para. 14].

Crystal Glass Canada Ltd. v. Canada (1989), 89 D.T.C. 5143 (F.C.A.), refd to. [para. 15].

Racine v. Minister of National Revenue (1965), 65 D.T.C. 5098 (Ex. Ct.), refd to. [para. 15].

Reicher v. Minister of National Revenue (1975), 12 N.R. 31; 76 D.T.C. 6001 (F.C.A.), refd to. [para. 16].

Regal Heights Ltd. v. Minister of National Revenue, [1960] S.C.R. 902, refd to. [para. 16].

Canada v. Stanfold Investment Corp. (1973), 74 D.T.C. 6035 (F.C.T.D.), refd to. [para. 16].

Snell Farms Ltd. v. Minister of National Revenue (1990), 39 F.T.R. 119; 90 D.T.C. 6693 (T.D.), refd to. [para. 16].

Farmer Construction Ltd. v. Canada (1984), 84 D.T.C. 6331 (F.C.T.D.), refd to. [para. 17].

Rudolph (W.) Construction Ltd. v. Canada (1984), 84 D.T.C. 6454 (F.C.T.D.), refd to. [para. 19].

145101 Canada Ltd. v. Minister of National Revenue (1989), 89 D.T.C. 644 (Tax C.C.), refd to. [para. 20].

Slater v. Minister of National Revenue (1965), 66 D.T.C. 5047 (Ex. Ct.), refd to. [para. 20].

Diamond Developments Ltd. v. Minister of National Revenue (1984), 84 D.T.C. 1811 (Tax C.C.), refd to. [para. 21].

Ross v. Minister of National Revenue (1973), 73 D.T.C. 5060 (F.C.T.D.), refd to. [para. 21].

Anderson Logging Co. v. Canada, [1924] C.T.C. 198 (S.C.C.), refd to. [para. 43].

First Fund Genesis Corp. v. Minister of National Revenue (1990), 34 F.T.R. 313; 90 D.T.C. 6337 (T.D.), refd to. [para. 44].

Daybo Rentals v. Canada, [1994] E.T.C. 51 (Tax C.C.), refd to. [para. 48].

152633 Canada Inc. v. Minister of National Revenue, [1993] G.S.T.C. 17 (C.I.T.T.), refd to. [para. 49].

Sako Auto Leasing v. Minister of National Revenue - see 152633 Canada Inc. v. Minister of National Revenue.

Wang Canada Ltd. v. Minister of National Revenue (1991), 91 D.T.C. 1279 (Tax C.C.), refd to. [para. 50].

Canada v. Jones (F.H.) Tobacco Sales Co. (1973), 73 D.T.C. 5577 (F.C.T.D.), refd to. [para. 61].

MacDonald (D.J.) Sales Ltd. v. Minister of National Revenue (1956), 56 D.T.C. 481 (I.T.A.B.), refd to. [para. 61].

Panda Realty Ltd. v. Minister of National Revenue (1986), 86 D.T.C. 1266 (Tax C.C.), refd to. [para. 61].

Pepper v. Minister of National Revenue (1992), 92 D.T.C. 1909 (Tax C.C.), refd to. [para. 61].

Heap & Partners (Nfld.) Ltd. v. Minister of National Revenue (1966), 66 D.T.C. 772 (T.A.B.), refd to. [para. 61].

Berman (L.) & Co. v. Minister of National Revenue (1961), 61 D.T.C. 1150 (Ex. Ct.), refd to. [para. 61].

Stewart & Morrison Ltd. v. Minister of National Revenue (1972), 72 D.T.C. 6049 (S.C.C.), refd to. [para. 64].

Discovery Research Systems Ltd. v. Canada (1994), 94 D.T.C. 1510 (Tax C.C.), refd to. [para. 65].

Morflot Freightliners Ltd. v. Minister of National Revenue (1989), 27 F.T.R. 162; 89 D.T.C. 5182 (T.D.), refd to. [para. 68].

Business Art Inc. v. Minister of National Revenue (1986), 86 D.T.C. 1842 (Tax C.C.), refd to. [para. 73].

Strauss v. Minister of National Revenue (1960), 60 D.T.C. 1060 (Ex. Ct.), refd to. [para. 90].

Jager Homes Ltd. v. Minister of National Revenue (1988), 82 N.R. 196; 88 D.T.C. 6119 (F.C.A.), refd to. [para. 90].

Statutes Noticed:

Income Tax Act, Interpretation Bulletin, IT-330R, para. 8, para. 9 [para. 84].

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 13(21)(b) [para. 38]; sect. 18(1)(a), sect. 18(1)(b) [para. 81]; sect. 20(1)(a) [para. 39]; sect. 20(1)(p) [para. 60]; sect. 40(2)(g)(ii) [para. 59]; sect. 42 [para. 83]; sect. 85(5.1) [para. 34].

Income Tax Regulations (Can.), C.R.C. 1977, c. 945, para. 1102(1)(b) [para. 40].

Interpretation Bulletin - see Income Tax Act.

Counsel:

Craig C. Sturrock and Steve Cook, for the plaintiff;

Brent Paris and Andrea Goodey, for the defendant.

Solicitors of Record:

Thorsteinssons, Vancouver, British Columbia, for the plaintiff;

George Thomson, Deputy Attorney General of Canada, Ottawa, Ontario, for the defendant.

These appeals were heard on May 16, 1995, at Vancouver, British Columbia, before Nadon, J., of the Federal Court of Canada, Trial Division, who delivered the following decision on December 22, 1995.