Date: 20000913
Docket: 1999-1982-IT-G
BETWEEN:
R.A. HEWITT & SONS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at London, Ontario on September 7, 2000. Robert Hewitt ("Mr. Hewitt"), president and controlling shareholder of the Appellant, was the only witness.
[2] The following statements in the Notice of Appeal were admitted in the Respondent's amended Reply:
1. The Appellant is a corporation incorporated under the laws of the Province of Ontario. At all material times its directors were Robert A. Hewitt and Yvonne M. Hewitt, its officers were as follows:
President - Robert A. Hewitt
Secretary-Treasurer - Yvonne M. Hewitt
and Robert A. Hewitt was its controlling shareholder.
2. Robert A. Hewitt is, and at all material time was, resident in Canada.
3. The Appellant is, and at all material times was, resident in Canada.
4. R.A. Hewitt and Sons (Bahamas) Limited (the "Subsidiary") was incorporated in the Commonwealth of the Bahamas on or about the second day of January, 1990.
5. At all relevant times, the Subsidiary carried on the business of farming in the Bahamas. ...
6. At all relevant times, the Subsidiary had three directors, Robert A. Hewitt, his wife, Yvonne J.M. Hewitt and their son David R. Hewitt.
7. Yvonne J.M. Hewitt and David R. Hewitt were both at all relevant times resident in Canada..
...
9. The Appellant financed the operations of the Subsidiary by means of loans made pursuant to an agreement made between the Appellant and the Subsidiary on or about November 13, 1992. Although the agreement calls for the payment of interest, none was paid.
...
11. ... At all relevant times, the Subsidiary had 5,000 issued shares of which (A) 3,000 were registered in the name of Abaco Grower Limited ("Abaco") which is a corporation incorporated under the laws of the Commonwealth of the Bahamas and (B) 2,000 were registered in the name of the Appellant.
...
13. Because 60% of its issued shares were registered in the name of Abaco, the Subsidiary took the position when dealing with the Bahamian government that it was beneficially owned as to a minimum of 60% by persons of Bahamian nationality. ...
14. The Minister has assessed the Appellant for its 1994, 1995 and 1996 on the basis that the Appellant loaned monies to a non-resident person which was not a "subsidiary controlled corporation" (as defined in the Income Tax Act) of the Appellant without receiving interest at a reasonable rate. Consequently the Minister has included interest at the prescribed rate in the Appellant's income for the relevant taxation years pursuant to Section 17(1) of the Income Tax Act.
"Subsidiary controlled corporation" is defined in subsection 248(1) of the Income Tax Act as:
'subsidiary controlled corporation' means a corporation more than 50% of the issued share capital of which (having full voting rights under all circumstances) belongs to the corporation to which it is subsidiary;
[3] Paragraphs 6 to 13 inclusive of the Amended Reply to the Notice of Appeal read:
6. The Minister of National Revenue (the "Minister") reassessed the Appellant for the 1994, 1995 and 1996 taxation years pursuant to s. 17(1) of the Income Tax Act (the "Act") to include in its income deemed interest in the amounts of $31,639, $48,449 and $40,447 respectively.
7. In reassessing the Appellant for the 1994 to 1996 taxation years, the Minister assumed the following facts:
(a) The Appellant is a corporation resident in Canada.
(b) R.A. Hewitt & Sons (Bahamas) Limited (the "Subsidiary") is incorporated in the Bahamas, and is a non-resident person.
(c) By written agreement dated 13 November 1992 (the "Agreement"), the Appellant agreed to lend money to the Subsidiary at an annual interest rate of 5 percent.
(d) Pursuant to the Agreement, the Appellant lent money (the "Loan") to the Subsidiary.
(e) The Loan remained outstanding for one year or longer, without any interest on the Loan being included in computing the Appellant's income.
(f) The amount of the Loan outstanding at the end of the 1993, 1994, 1995 and 1996 taxation years is $406,602, $615,582, $634,746 and $669,224 respectively.
(g) Interest on the Loan at the prescribed rate, computed for the Appellant's 1994, 1995 and 1996 taxation years, is $31,639, $48,449 and $40,447 respectively.
(h) No tax has been paid on the Loan under Part XIII of the Act.
(i) The Subsidiary is not a corporation more than 50 percent of the issued share capital of which (having full voting rights under all circumstances) belongs to the Appellant.
(j) Of the issued share capital of the Subsidiary, 40 percent belongs to the Appellant.
(k) Of the issued share capital of the Subsidiary, 60 percent belongs to Bahamian nationals.
(l) On 24 February 1993, Robert Hewitt and Yvonne Hewitt, as directors of the Subsidiary, signed a Declaration of Ownership stating: "We declare that the above named Company is beneficially owned to a minimum of 60% by persons of Bahamian nationality."
(m) On 2 March 1995, Robert Hewitt and Yvonne Hewitt, as directors of the Subsidiary, signed a Declaration of Ownership stating: "We declare that the above named Company is beneficially owned to a minimum of 60% by persons of Bahamian nationality."
(n) On 20 February 1996, Robert Hewitt and David Hewitt, as directors of the Subsidiary, signed a Declaration of Ownership stating: "We declare that the above named Company is beneficially owned to a minimum of 60% by persons of Bahamian nationality."
(o) The "above named Company" in the Declarations referred to on paragraphs 7(1) to 7(n) is R.A. Hewitt & Sons (Bahamas) Limited, certificate number 37,263.
(p) The Declarations referred to in paragraphs 7(1) to 7(n) were sent to the Bahamian government, and were intended to be acted upon.
7.1 The reassessment for the 1994 taxation year is a nil assessment with the result that there is no tax liability for that year.
B ISSUES TO BE DECIDED
8. Is the Appellant deemed to have received interest at the prescribed rate pursuant to s. 17(1) of the Act as a result of its loan to a non-resident person?
9. In the alternative, should interest receivable at the rate of 5 percent be included in computing the Appellant's income in accordance with s. 12(1)(c) of the Act?
9.1 Whether the Appellant has a valid appeal for the 1994 taxation year.
C. STATUTORY PROVISIONS, GROUNDS RELIED
UPON AND RELIEF SOUGHT
10. He relies upon sections 12(1)(c), 17, 169, 171, and 248(1) of the Act, as amended for the 1994, 1995 and 1996 taxation years.
11. He submits that the Subsidiary is a non-resident corporation, more than 50 percent of which belongs to Bahamian nationals.
12. He submits that the Subsidiary is not a subsidiary controlled corporation of the Appellant, and that the Appellant is deemed to have received interest at the prescribed rate pursuant to s. 17(1) of the Act as a result of its loan to a non-resident person.
13. In the alternative, he submits that the interest receivable at the rate of 5 percent should be included in computing the Appellant's income in accordance with s. 12(1)(c) of the Act.
13.1 He further submits that for the 1994 taxation year the reassessment is a nil assessment and that the appeal for that year is invalid.
[4] Assumptions 7(a), (c), (d), (e), (f), (g), (h), (l), (m), (n), (o) and (p) were not refuted.
[5] R.A. Hewitt & Sons (Bahamas) Limited ("(Bahamas)") was incorporated in the Bahamas on January 2, 1990. Robert Hewitt testified that the initial shareholders and directors were Robert Hewitt, his wife, Yvonne, and his son, David (Exhibit R-1, Tab 13 and Tab 2) – although law office nominees appear to be shareholders of record. On November 13, 1992 the Appellant and (Bahamas) executed a loan agreement in Woodstock, Ontario whereby the Appellant would lend money to (Bahamas) at 5% interest.
[6] Robert Hewitt felt that (Bahamas) was having difficulty developing and operating its farm enterprise in the Bahamas and was advised and understood that it was because it was foreign owned by Canadians. As a result, he caused Abaco Growers Limited ("Abaco") to be incorporated in the Bahamas on February 18, 1993. Its shareholdings were:
|
Edgar Curling |
(Bahamas resident) |
200 shares |
|
Edward Monroe |
(Bahamas resident) |
450 shares |
|
Wayne Monroe |
(Bahamas resident) |
200 shares |
|
Robert Hewitt |
(Canadian resident) |
150 shares |
|
TOTAL ISSUED |
1,000 shares |
All of the share certificates of Messrs. Curling, Monroe and Monroe were immediately endorsed in blank by them and delivered to Robert Hewitt who took them back with him to Woodstock, Ontario within a few days. No agreement of any kind was made or executed respecting this.
[7] On February 24, 1993 (Bahamas) directors met in Woodstock and issued the following shares:
To the Appellant 2,000 shares
To Abaco 3,000 shares
(Exhibit R-1, Tab 3 and Tab 4). At that point, the shares (Bahamas) had previously issued were cancelled.
[8] Thereafter, Robert Hewitt annually filed applications by (Bahamas) for a business licence in the Bahamas which showed that (Bahamas) shares were issued at 60% to Abaco (3,000) and 40% to the Appellant (2,000). They were dated:
March 16, 1995 (Exhibit R-1, Tab 9)
February 24, 1993 (Exhibit R-1, Tab 9)
February 20, 1993 (Exhibit R-1, Tab 9)
It was held out by this means that Abaco was a Bahamas controlled corporation and so was (Bahamas). Mr. Hewitt testified that by the autumn of 1993 this was not believed in the Bahamas. Nonetheless he persisted in holding this out. He also filed declarations that a minimum of 60% of (Bahamas) was owned by persons of Bahamian nationality in the Bahamas dated February 20, 1996 (Exhibit R-1, Tab 6), March 2, 1995 (Exhibit R-1, Tab 9). This was also done on February 24, 1993 (Exhibit R-1, Tab 9).
[9] Section 17 of the Income Tax Act reads:
(1) Where a corporation resident in Canada has lent money to a non-resident person and the loan remained outstanding for one year or longer without interest on the loan computed at a reasonable rate having been included in computing the lender's income, the corporation shall be deemed to have received, on the last day of each taxation year during which the loan was outstanding, interest on the loan at the prescribed rate computed for the period in the taxation year during which it was outstanding.
(2) Subsection (1) does not apply if a tax has been paid on the amount of the loan under Part XIII.
(3) Subsection (1) does not apply if the loan was made to a subsidiary controlled corporation and it is established that the money that was lent was used in the subsidiary corporation's business for the purpose of gaining or producing income.
[10] The financial statements which the Appellant filed with its income tax returns which show that the Appellant owned 2,000 dollars worth of shares of (Bahamas) in its fiscal years ending –
October 31, 1994 (Exhibit R-1, Tab 16)
October 31, 1995 (Exhibit R-1, Tab 17)
October 31, 1996 (Exhibit R-1, Tab 18)
October 31, 1996 (Exhibit R-1, Tab 19)
During his testimony, Robert Hewitt took this to mean 2,000 shares.
[11] After this audit began, the corporate lawyer in the Bahamas drew back-dated documents which attempted to change matters. Thus the various corporate records which were not drawn by Robert Hewitt are of doubtful origin and do not verify the facts.
[12] For the Appellant's fiscal years ending October 31, 1994, 1995 and 1996, Robert Hewitt was in possession of blank share certificates of 85% of the shares of Abaco and personally owned the other 15% in his name. Abaco owned 60%, or 3,000 shares, of (Bahamas). Simultaneously, Robert Hewitt was holding out to the Bahamian authorities, orally and in writing, that (Bahamas) was 60% owned by Bahamian nationals. At this time, Robert Hewitt was the operating officer of the Appellant and was holding out in financial statements and income tax returns signed by him and filed with the Government of Canada that the Appellant only owned 2,000 shares of (Bahamas). Robert Hewitt was the proper signing officer of both these corporations for these purposes. Only after this audit began did Robert Hewitt cease these representations.
[13] Robert Hewitt is the only one who knew for whom he was holding the blank share certificates of Abaco. He represented to the Bahamian government that Abaco was a Bahamian national intending that to be acted on. It may have been acted on by the Bahamian government. That is not in evidence one way or the other. But it was never reversed during the years in question. He represented to the Canadian government that the 3,000 shares were not held for the Appellant, intending that it would be acted on, and it was.
[14] Because many corporate documents were drawn fictitiously by a Bahamian lawyer after the audit began, Robert Hewitt was often unable to identify which documents represented the true facts and which did not.
[15] 15% of Abaco's shares were in Robert Hewitt's name and he was a resident of Canada at all times. The remainder was left registered in the names of the nominees arranged for by Robert Hewitt's lawyer in the Bahamas, including that lawyer. There is no evidence that they paid for these shares or received anything for endorsing them in blank and delivering them to Robert Hewitt. Robert Hewitt retained all of Abaco's shares personally in Canada. He never filled in the names of the transferees in the years in question.
[16] In the Court's view Robert Hewitt owned 100% of Abaco during the years in question. Therefore (Bahamas) was not a subsidiary controlled corporation of the Appellant. Rather –
(1) 40% (2,000 shares) of (Bahamas) was owned by the Appellant.
(2) 60% (3,000 shares) of (Bahamas) was owned by Abaco, which was a corporation wholly owned by the Appellant's controlling shareholder, Robert Hewitt, a Canadian resident.
The Court also finds that (Bahamas) was a resident corporation of Canada during the years in question, because -
(1) (Bahamas) directors were Robert, Yvonne and David Hewitt. Robert and Yvonne were always Canadian residents. David stayed in the Bahamas from July, 1993 until May, 1994 (at which time his residence is unknown), but at all other times he lived and worked in Canada.
(2) The corporate seal and the minute book of (Bahamas) were in Woodstock, Ontario. There is no evidence of a share registry outside of the minute book.
(3) Almost all directors meetings occurred in Woodstock. One may have occurred in the Bahamas in 1996 and another in 1993 may not have occurred there in Mr. Hewitt's opinion because the minutes were drawn long after that on a made-up basis by the Bahamian lawyer, when the audit was in progress.
(4) Licences and other filings were drawn up by Mr. Hewitt in Woodstock, Ontario.
(5) (Bahamas') corporate decisions were done by Robert and Yvonne Hewitt at their residence in Woodstock, Ontario.
(6) Decision by (Bahamas) to purchase large capital items were made in Woodstock and orders were placed from there. The corporate returns and filings were made from Woodstock by Robert Hewitt.
(7) The Corporate solicitor was in Nassau. But Robert Hewitt drew up whatever financial statements were necessary and after about the first year none were necessary, so none were made or kept.
(8) (Bahamas) had a bank account in the Bahamas but major purchases were ordered and signed for from Woodstock, and the cheques for their purchase were signed and delivered from Woodstock. Occasionally (Bahamas) had employees (a foreman and some field hands) in the Bahamas and there is no evidence respecting their cheques.
(9) (Bahamas) operated an unsuccessful farm in the Bahamas which Robert Hewitt and Yvonne Hewitt managed respecting all major decisions including kinds of crops, changes of crops, exporting, capital purchases and government dealings in the Bahamas.
Thus (Bahamas) real business was carried on at Woodstock and its central management and control abided at Woodstock, Ontario. The Court finds that this was in the hands and minds of Robert and Yvonne Hewitt.
[17] Paragraph 12(1)(c) of the Income Tax Act reads:
12(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:
...
(c) any amount received or receivable by the taxpayer in the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's profit) as, on account or in lieu of payment of, or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer's income for a preceding taxation year;
[18] The agreement between the Appellant and (Bahamas) referred to in assumption (c) was executed by the parties at Woodstock (Exhibit R-1, Tab 8). It was drawn by Robert Hewitt and refers to the Appellant as "SONS CANADA" and (Bahamas) as "SONS BAHAMAS". The body of the agreement reads:
SONS CANADA will advance funds, in either Canadian or United States currency, to SONS BAHAMAS, either by direct payment by cheque or cash, or by payment to suppliers of SONS BAHAMAS for materials, supplies, equipment and expenses acquired, and said funds at the time of disposition shall be deemed to have been loaned to SONS BAHAMAS, AND SONS BAHAMAS shall pay interest on said loan at the rate of 5% per annum, calculated yearly on the balance from time to time outstanding.
SONS BAHAMAS will acknowledge the total amount payable to SONS CANADA annually, at each fiscal year end of SONS BAHAMAS, being on October 31, by the issuing to SONS CANADA a demand note for all indebtedness which accrued in the said fiscal year to Sons Canada under the agreement.
During the life of the agreement SONS BAHAMAS will not pledge, mortgage or hypothecate any of its real assets without the prior written consent of SONS CANADA.
It was on this basis that the loans from the Appellant occurred.
[19] The Appellant never declared or determined that the loans were doubtful or bad during the years in question or the audit itself. However, it argued that during the Court proceedings. Crown counsel pointed out in response that each year during the years in appeal the Appellant advanced more money. That is true. Moreover, (Bahamas) initial plan was to grow citrus trees which it seeded in 1993 with a three or four year development plan to the fruit stage which it carried out. There was an interim squash crop planted in 1993-4 which was "a disaster". But buildings were built and irrigation was installed and trees were placed in the fields in 1994. In 1995 some papaya was harvested and sold, but the focus remained on citrus through the October 31, 1996 year end. A prospective partner was recruited in June, 1996 who stayed until July of 1997 with the prospect of a potato farm development. A hurricane in 1999 resulted in the citrus project being abandoned.
[20] Thus, there were modest setbacks in the farm operation, but until the end of fiscal 1996 there was no reason to consider (Bahamas) anything but a long term investment which was progressing slowly. Therefore, the Appellant's loan was not bad or doubtful during the years in question.
[21] For these reasons, the Court finds that the Appellant should have included interest receivable at the rate of 5% from its loans to (Bahamas) in computing its income for 1994, 1995 and 1996 pursuant to paragraph 12(1)(c) of the Income Tax Act. This matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
[22] The Respondent is awarded party and party costs.
Signed at Ottawa, Canada this 13th day of September 2000.
"D.W. Beaubier"
J.T.C.C.