Good Luck Construction Company Limited
(Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Gibson J.—Toronto, May 4;
Ottawa, June 15, 1972.
Income tax—Profit-sharing agreement between two com
panies on separate projects—Whether a joint venture.
The El-Al Construction Co. and the Good Luck Construc
tion Co., both controlled by the same persons, were engaged
in separate construction projects. In April 1960, when it
was known that the El-Al Co. would suffer a loss on its
project, the two companies entered into an agreement to
share the profits and losses on the two projects. The El-Al
Co. did suffer a loss on its project and the Good Luck Co.
made a profit on its project of which $153,788 was allocat
ed to the El-Al Co. pursuant to the agreement.
Held, the Good Luck Co. was assessable to income tax on
the $153,788 so allocated to the El-Al Co. The El-Al Co.
did not actually take part in any way in the construction of
the project in which the Good Luck Co. earned its profit
and therefore did not earn any of such profit as a partici
pant in a joint venture.
INCOME tax appeal.
W. D. Goodman, Q.C. and F. E. Cappell for
appellant.
Gerald Rip for respondent.
GIBSON J.—The appellant, Good Luck Con
struction Company Limited, is a construction
company, one of a group of companies jointly
owned by the Edelstein and Fischtein families.
Among other projects, the appellant engaged in
limited dividend housing projects under the
National Housing Act.
(In limited dividend projects the government,
through Central Mortgage and Housing Corpo
ration, makes available loans of a very high
percentage of total cost, repayable over long
terms with interest at less than commercial
rates. Such projects must be owned by a com
pany which is specifically incorporated as a
limited dividend housing corporation and it may
not pay dividends in excess of 5% per annum
on invested capital.)
Messrs. Fischtein and Edelstein, through
their companies, had been involved in construc
tion for some time. The project, however,
known as the Landscape Court (Landscape
Court Apartments Limited) project on Keele
Street in North York, Ontario, was their first
limited dividend housing project. Messrs. Edel-
stein and Fischtein incorporated Landscape
Court Apartments Limited as a limited dividend
housing corporation to own this project and
El-Al Construction Limited, one of their con
struction companies, undertook construction of
the project in accordance with plans already
approved.
The completed Landscape Court project
resulted in a loss for El-Al Construction Com
pany Limited. Attempts were made to remedy
this situation by requesting readjustments of the
approved contract price and requesting a larger
mortgage loan. These requests were turned
down. At the time the relevant C.M.H.C.
employees in declining to approve a larger
mortgage loan, according to the evidence, are
alleged to have given some verbal encourage
ment to Messrs. Fischtein and Edelstein to the
effect that probably C.M.H.C. would approve
another limited dividend housing project on
which, if matters turned out well, they could
make a profit.
After this, a new project known as Sylvan
Court Apartments was undertaken by these
people on lands in Scarborough, Ontario,
immediately adjoining another apartment pro
ject which was just being completed for a com
pany called Edelstein Apartments Limited.
Sylvan Court Apartments Limited was incor
porated as a limited dividend housing corpora
tion and the project proceeded in the same way
as the Landscape Court project.
El-Al Construction Limited was not the con
struction company for this second limited divi
dend project. Instead, another construction
company was the builder, namely, the appellant,
Good Luck Construction Company Limited,
also a Fischtein-Edelstein company, which had
been incorporated a number of years earlier.
And, the Sylvan Court project was approved by
C.M.H.C., with Sylvan Court as the owner and
Good Luck as the builder.
A substantial profit was made on this second
project.
Messrs. Fischtein and Edelstein relied very
heavily on bank financing. While they operated
through quite a number of companies, there
were cross-guarantees given in respect of bank
loans. Therefore, Good Luck was liable to the
bank in respect of any bank loans made to
El-Al. Good Luck acted as the financial clearing
house for the group of companies because it
had available cash. It had advanced substantial
amounts—almost $200,000—to El-Al during
the course of the Landscape Court project. It
was stated that these were intended only as
interim loans, to be repaid when the Landscape
Court project was completed. However, when
Landscape Court project had resulted in a large
loss, the evidence was that a method was
sought by which Good Luck could be repaid.
With this in mind, apparently, Good Luck and
El-Al entered into an agreement in April, 1960
whereby they agreed to share the profits and
losses on the two projects. At the time this
agreement was entered into, it was already clear
that the Landscape Court project would result
in a loss, although the amount of the loss had
not yet been determined. Apparently, so the
evidence was, it was the intention in entering
this agreement that if a profit could be made
and shared between the two companies, El-Al
could recoup some of its loss on the Landscape
Court project, enabling it to repay Good Luck.
The Sylvan Court project was commenced in
the spring in 1960 and resulted in a substantial
profit. In accordance with the agreement of
April, 1960, the costs were finally audited and
approved by C.M.H.C. and the construction
profit on the Sylvan Court project was deter
mined. An accounting was then made between
the two companies but not in accordance with
the profit and loss sharing agreement.
Pursuant to this accounting, Good Luck
excluded from its income for the 1964 taxation
year the sum of $153,788.35, being the portion
of the profit on the Sylvan Court project which
was allocated to El-Al, (purportedly pursuant to
the agreement Exhibit 8, but, as stated, in fact,
not). The Minister re-assessed the appellant
Good Luck on the basis that this was part of its
income.
This is the appeal from such re-assessment.
Exhibit 8 filed at this trial is the said agree
ment whereby, according to its terms, the appel
lant Good Luck Construction Company Limited
and El-Al Construction Limited as a joint ven
ture or in partnership or, in any event, jointly,
acquired the property and built the limited divi
dend project on Morningside Avenue in the
Borough of Scarborough, Ontario, known as
Sylvan Court, which limited dividend project
was incorporated as Sylvan Court Apartments
Limited. This same agreement also provided
that the parties in like manner complete the
construction of the limited dividend project by
the name of Landscape Court which latter was
incorporated under the name of Landscape
Court Apartments Limited.
This agreement (Exhibit 8) was dated April,
1960 and paragraph 4 is the relevant operative
clause which reads as follows:
4. The profits and/or losses of the afore-mentioned
projects are to be determined and apportioned pursuant to
their auditors' statements within 18 months after the com
pletion of the two projects.
When the agreement, Exhibit 8, was entered
into, as stated, the parties knew that the Land
scape Court project was going to result in a
loss. At that time also, the cumulative losses of
El-Al Construction Limited were in the order of
$177,000. At the time also, as stated, it was
hoped that a profit would be made on the
Sylvan Court project.
The issue for decision is whether or not on
the evidence the correct conclusion to reach is
that the income earned from the Sylvan Court
project was earned exclusively by the appellant,
or whether at least $153,788.35 of it was
earned by El-Al Construction Limited.
If the appellant and El-Al Construction Limit
ed actually undertook, carried on, and com
pleted the Sylvan Court project pursuant to the
agreement, Exhibit 8, jointly as a joint venture
or partnership venture, or otherwise jointly,
then for tax purposes, the income arising out of
such activities would belong jointly to them.
The evidence disclosed that all contracts for
the Sylvan Court project were in the name of
the appellant; that all banking arrangements
(other than reciprocal guarantees) were made
by the appellant; that all formal dealings with
C.M.H.C. were done by and in the name of the
appellant; that all the income as a result of the
carrying on and completing the Sylvan Court
project was declared initially as income of the
appellant in its income tax returns and only
subsequently by way of amended return was
declared, to the extent of $153,788.35, to be the
income of El-Al Construction Limited; and that
all the other indicia related solely to the appel
lant being the person who undertook, carried on
and completed the Sylvan Court project.
Any one of the indicia proved in evidence
may not necessarily be proof in respect to the
issue to be decided in this case, but the fact is
that none proved that El-Al Construction Limit
ed actually did take part in any way in the
undertaking, carrying on or completion of the
Sylvan Court project.
While it may have been prudent and proper to
execute the agreement, Exhibit 8, so as to
attempt to arrange the affairs of these two
companies with a view to enabling El-Al Con
struction Limited to take advantage of the loss
carry-over provisions of section 27(1)(e) of the
Income Tax Act, it was imperative, before such
a result would obtain, that the appellant and
El-Al Construction Limited otherwise really
arrange their affairs so that both companies
jointly undertook, carried on and completed the
project.
Such was not done.
The agreement, Exhibit 8, was ignored after
execution. There was no evidence adduced
from which it could be inferred that this agree
ment actually governed and controlled the
undertaking, carrying on or completion of the
Sylvan Court project in any way. On the con
trary, the whole of the evidence from which any
inference can be drawn established that the
appellant alone undertook, carried on and com
pleted the business of the Sylvan Court project.
The appeal is therefore dismissed with costs.
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