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Citation: 2005TCC397
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Date: 20050707
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Docket: 2002-1996(IT)G
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BETWEEN:
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STEFAN BORYS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowman, C.J.
[1] These appeals are from assessments for the 1995, 1996, 1997, 1998, 1999 and 2000 taxation years. The central issue is whether the appellant is entitled to deduct an allowable business investment loss ("ABIL"). The amount originally claimed was $500,000 and it was claimed in 1995. The appellant has now limited the amount claimed as a business investment loss ("BIL") to $480,000. There is also an issue with respect to interest claimed in the years in question.
[2] The appellant is an insurance broker. His evidence is that on July 27, 1987 he borrowed $100,000 on a second mortgage on his property at 337 Roncesvalles Avenue, which he loaned to Zenon Developments Limited ("Zenon").
[3] On May 10, 1989 he borrowed $500,000 from Community Trust of which $250,000 was loaned to Zenon. In December 1989 the appellant borrowed $130,000 and loaned the proceeds to Zenon.
[4] On December 19, 1989, Zenon signed a Promissory Note in favour of the appellant in the amount of $500,000 with interest in the amount of 15% calculated semi-annually, not in advance. The money loaned to Zenon was used in its business of designing and developing residential and commercial properties.
[5] In 1993 the principal of Zenon, Mr. Zenon Greszta died. It is alleged that at some point after that Zenon ceased carrying on business although the precise date of this event has not been established.
[6] In the Notice of Appeal the appellant states that he claimed a business investment loss ("BIL") of $500,000 in 1997. The respondent admits that the appellant claimed a BIL of $500,000 but states that the claim was made in 1995. The appellant's returns of income were not put in evidence. Accordingly, it was impossible to determine from the returns the year in which the claim was made but I accept that the claim was made in 1995.
[7] At all events the ABIL was disallowed. Also, the appellant claimed interest and carrying charges as follows:
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1995
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$30,534
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1996
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$34,739
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1997
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$32,718
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1998
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$30,661
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1999
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$30,369
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2000
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$29,941
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These amounts were claimed as deductions by the appellant and disallowed by the Minister.
[8] The assumptions upon which the reassessments were made were the following:
11. In so reassessing the Appellant, the Minister made, inter alia, the following assumptions:
a) the Appellant borrowed funds from a financial institution and advanced part of the funds to Zenon Greszta;
b) Zenon Greszta was the principal and sole shareholder of Zenon Developments Ltd ("Zenon");
(c) Zenon was insolvent as of the end of the 1991;
(d) the Appellant did not have a debt that became a bad debt, pursuant to subsection 50(1) of the Income Tax Act (the "Act");
(e) the Appellant did not have a capital loss;
(f) Zenon was not carrying on active business at all material times;
(g) Zenon was not a Canadian Controlled Private Corporation ("CCPC") at all material times; and,
(h) the Appellant and Zenon, were not dealing at arm's length at all material times.
[9] It is, I believe, useful to repeat what Justice L'Heureux-Dubé of the Supreme Court of Canada said about assumptions in Hickman Motors Limited v. The Queen, 97 DTC 5363 at 5376:
K. Onus of Proof
As I have noted, the appellant adduced clear, uncontradicted evidence, while the respondent did not adduce any evidence whatsoever. In my view, the law on that point is well settled, and the respondent failed to discharge its burden of proof for the following reasons.
It is trite law that in taxation the standard of proof is the civil balance of probabilities: Dobieco v. M.N.R., [1966] S.C.R. 95, and that within balance of probabilities, there can be varying degrees of proof required in order to discharge the onus, depending on the subject matter: Continental Insurance v. Dalton Cartage, [1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 DTC, 1102 (T.C.C.) at p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge Estates v. M.N.R., 59 DTC 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to "demolish" the Minister's assumptions in the assessment (Johnston v. M.N.R., [1948] S.C.R. 486; Kennedy v. M.N.R., 73 DTC 5359 (F.C.A.), at p. 5361). The initial burden is only to "demolish" the exact assumptions made by the Minister but no more: First Fund Genesis v. The Queen, 90 DTC 6337 (F.C.T.D.), at p. 6340.
This initial onus of "demolishing" the Minister's exact assumptions is met where the appellant makes out at least a prima facie case: Kamin v. M.N.R., 93 DTC 62 (T.C.C.); Goodwyn v. M.N.R., 82 DTC 1679 (T.R.B.). In the case at bar, the appellant adduced evidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, the appellant "demolished" the following assumptions as follows: (a) the assumption of "two businesses", by adducing clear evidence of only one business; (b) the assumption of "no income", by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence "demolishes" the Minister's assumptions: see for example MacIsaac v. M.N.R., 74 DTC 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87 DTC 652 (T.C.C.). As stated above, all of the appellant's evidence in the case at bar remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions of "two businesses" and "no income" have been "demolished" by the appellant.
Where the Minister's assumptions have been "demolished" by the appellant, "the onus shifts to the Minister to rebut the prima facie case" made out by the appellant and to prove the assumptions: Maglib Development Corp. v. The Queen, 87 DTC 5012 (F.C.T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are "two businesses" and "no income".
Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac, supra, where the Federal Court of Appeal set aside the judgment of the Trial Division, on the grounds that (at pp. 6381-2) the "evidence was not challenged or contradicted and no objection of any kind was taken thereto". See also Waxstein v. M.N.R., 80 DTC 1348 (T.R.B.); Roselawn Investments Ltd. v. M.N.R., 80 DTC 1271 (T.R.B.). Refer also to Zink v. M.N.R., supra, at p. 653, where, even if the evidence contained "gaps in logic, chronology and substance", the taxpayer's appeal was allowed as the Minster failed to present any evidence as to the source of income. I note that, in the case at bar, the evidence contains no such "gaps". Therefore, in the case at bar, since the Minister adduced no evidence whatsoever, and no question of credibility was ever raised by anyone, the appellant is entitled to succeed.
In the present case, without any evidence, both the Trial Division and the Court of Appeal purported to transform the Minister's unsubstantiated and unproven assumptions into "factual findings", thus making errors of law on the onus of proof. My colleague Iacobucci, J. defers to these so-called "concurrent findings" of the courts below, but, while I fully agree in general with the principle of deference, in this case two wrongs cannot make a right. Even with "concurrent findings", unchallenged and uncontradicted evidence positively rebuts the Minister's assumptions: MacIsaac, supra. As Rip, T.C.J., stated in Gelber v. M.N.R., 91 DTC 1030, at p. 1033, "[the Minister] is not the arbiter of what is right or wrong in tax law". As Brulé, T.C.J., stated in Kamin, supra, at p. 64:
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the Minister should be able to rebut such [prima facie] evidence and bring forth some foundation for his assumptions.
...
The Minister does not have a carte blanche in terms of setting out any assumption which suits his convenience. On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption.
[Emphasis added.]
In my view, the above statement is apposite in the present case: the respondent, on being challenged by evidence in chief, failed to present anything more concrete than simple assumptions and failed to bring forth any foundation. The respondent chose not to rebut any of the appellant's evidence. Accordingly, the respondent failed to discharge her onus of proof.
[10] I think that the assumptions, as pleaded, except for (b), have been demolished.
(a) It is true the funds were initially advanced to the principal of Zenon, Mr. Zenon Greszta, ("Greszta"), but he was merely a conduit. The intention throughout was that the funds would go to Zenon and be used in its business, as indeed they were. They were passed on to Zenon which recognized them as its indebtedness. Indeed it signed a promissory note to this effect.
(b) This assumption is correct.
(c) The evidence does not support this assumption. The financial statements of Zenon for 1991 indicate substantial property as well as indebtedness but I do not think it can be said that by the end of 1991 Zenon was insolvent. At all events it cannot be said that the debt of Mr. Borys was bad in 1991.
(d) This type of pleading is ambiguous. It is difficult to know whether the respondent is saying that the appellant did not have a debt at all or that if he had a debt it did not become bad. Where assumptions (or for that matter any other assertion in a pleading) are pleaded in an ambiguous way, I think the benefit of any doubt arising from the ambiguity should be resolved in favour of the other party. At all events, whatever the statement may mean, it is clear that the appellant did have a debt and that the debt became bad. I note that the respondent does not put in issue the year in which the debt became bad. Having put forward as an assumption that the appellant did not have a debt at all, or, as an alternative reading of this portmanteau assumption, that if it did have a debt it did not become bad, I do not think it would be appropriate for the Crown to state as an alternative (and inconsistent) assumption that the debt became bad in a particular year. In any event it has not done so, either by way of assumption or as a separate assertion.
(e) The bald assertion that the appellant did not have a capital loss is a legal conclusion. No facts are asserted or assumed that would support the conclusion. The conclusion is in any event wrong. The appellant loaned money to Zenon and the debt became bad. All of the elements required by section 50 to establish a capital loss on the disposition of the debt are present.
(f) The assertion that Zenon was not carrying on an active business "at all material times" is incorrect. The evidence is uncontradicted that it carried on an active business as a designer and developer of commercial and residential properties. The respondent does not specify just what is meant by "at all material times". If the pleading of assumptions is to have the effect of casting an onus on the appellant it should be done with a degree of specificity and precision that will enable the appellant to know the case that has to be met. Zenon was unquestionably a small business corporation, carrying on an active business at least when the money was loaned to it. Whether it had ceased carrying on business when the debts became bad is not in issue and is a question that I need not decide. There is authority to support the view that merely because a company is in a period of inactivity it may still be carrying on business: South Behar Railway Company Limited and I.R.C. [1925] A.C. 476 at 488. While I would be reluctant to decide the point without further argument it seems, at first blush, unreasonable to assume that for a taxpayer to be allowed an ABIL the debtor company must have to be carrying on an active business when the debt went bad. At all events the point was not raised by the respondent in the reply or in argument.
(g) The assertion that Zenon was not a CCPC "at all material times" is equally without foundation. Zenon was controlled at all times by Greszta, a Canadian resident, up until his death. There is no assumption or assertion that the deceased's estate which presumably controlled Zenon, was not resident in Canada.
(h) The final assumption that the appellant and Zenon were not dealing at arm's length has no support whatever in the evidence. It is clear from Mr. Borys' testimony that the loaning of money by him to Zenon was an ordinary business transaction and that there were no blood or marital ties between him and Mr. Greszta and no peculiar business or contractual relations that would make their relationship other than arm's length.
The respondent alleges as well in Part 'C' of the reply that the funds advanced to Greszta were not advanced for the purpose of gaining or producing income from a business or property. This is put forth as an argument, not as a fact, and it has no support in the evidence. For one thing I have found as a fact that the funds were loaned to Zenon, not Greszta. The loans bore interest and were, on the uncontradicted evidence of Mr. Borys, made to earn income.
The question of the year in which the debt went bad was not challenged by the respondent. The original claim was in 1995 but in the Notice of Appeal the appellant states that he can claim it in 1997. A businessman is entitled to a certain degree of judgemental discretion in the recognition of when a debt goes bad. As Jackett P. (as he then was) in Associated Investors of Canada Ltd. v. M.N.R. 67 DTC 5096 at page 5101 said, speaking of the recognition of a loss, "In my view, it must be so taken into account in computing the profit for the business for the year in which the appellant, as a "businessman" recognized that the loss had occurred." This does not mean that a taxpayer has carte blanche to pick any year. There must be an element of common sense and reasonableness but some deference must be paid to the businessman's judgement.
[11] I do not think that it has been established that it was unreasonable to choose 1997 although this point was not raised as an issue by the Crown. It was after all remedies had been exhausted. However, the appellant initially picked 1995. I am therefore faced with the question whether to allow the appeal for 1995 or for 1997 to permit the deduction of the ABIL. Both years are open and before the Court. It would not have been unreasonable to claim the loss in 1995. Nonetheless Interpretation Bulletin IT 159R3 which deals with capital debts that become bad debts, states in paragraph 10: "... Generally, a debt will not be uncollectible at the end of a particular taxation year unless the creditor has exhausted all legal means of collecting it or where the debtor has become insolvent and has no means of paying it". I think either 1995 or 1997 can be justified. The appellant attempted up until 1996 to pursue his lawyer for the loss, but without success. Therefore 1997 would seem to meet the condition in IT 159R3.
[12] The appeal is allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons on the basis that the appellant sustained a business investment loss in the amount of $480,000 in 1997 and that the interest and carrying charges set out above are deductible in the respective taxation years..
Signed at Ottawa, Canada, this 7th day of July 2005.
Bowman, C.J.
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