Madaline v. MNR, 91 DTC 1451, [1991] 2 CTC 2658 (TCC)

Hamlyn, T.CJ.: —This is an appeal with respect to an assessment of income tax for the appellant's 1987 taxation year.

In computing his income for the 1987 taxation year the appellant reported an allowable business investment loss in the amount of $2,452.42.

By letter dated September 6, 1988, the appellant requested that the respondent adjust his 1987 income tax return to increase the allowable business investment loss to $23,864.92.

By notice of assessment dated October 26, 1988, the respondent disallowed the allowable business investment loss of $23,864.92.

The assessment was confirmed by notice of confirmation dated February 13, 1990.

The appellant's appeal before this Court is based on the submission that the appellant had an allowable business investment loss. The appellant wishes to deduct a portion of the purported allowable business investment loss in the computation of his income for the 1987 taxation year.

The respondent submits he did not allow an allowable business investment loss in that the appellant has not shown that he incurred any business investment loss in his 1987 taxation year.

Facts

In 1987, Odilio Nadalin claimed a business investment loss in relation to a small business corporation known as Nadalin Contract Floor and Wall Covering Ltd. This corporation secured a bank loan from the National Bank of Canada on July 14, 1981. This same small business corporation went into bankruptcy on January 15, 1982.

Nadalin Contract Floor and Wall Covering Ltd. was owned by the appellant's son and the alleged loss was as a result of a personal guarantee signed by the appellant and given to the National Bank of Canada to secure a liability of Nadalin Contract Floor and Wall Covering Ltd. in the sum of $100,000.

When the bank sought to collect the outstanding sum from the appellant, the appellant transferred his assets to his wife to frustrate the bank's collection process. Eventually after some litigation the bank received its indebtedness through the appellant's wife. The appellant maintained the receipt of funds by the bank was really his funds and not his wife’s funds.

The appellant gave several reasons for signing the guarantee.

In 1977, the appellant and his older brother closed their own business premises and moved what remained of their activities to the appellant's son's business premises. The businesses were similar. The son charged no rent and the appellant and his brother carried on their activities in a reduced and limited fashion.

In 1981, the bank insisted that the father give a personal guarantee to secure a bank loan to the son's company so it could carry on business. The appellant stated he still wanted a place to carry on his limited business activities, wanted to ensure his own future possible employment with his son's company, and to a lessor degree he wished to help his son simply because of his affection for his son.

The appellant further stated that although there was nothing in writing and nothing specific was agreed upon between himself and his son, there was an understanding. The details of this alleged understanding were not precisely delineated.

The issue in this appeal is whether the sum expended by the appellant, as a result of honouring a guarantee, albeit indirectly, in respect of a bank loan made to Nadalin Contract Floor and Wall Covering Ltd., is deductible as an allowable business investment loss for the purpose of computing his income for the 1987 taxation year; did the appellant acquire the debt for the purpose of gaining or producing income from business or property?

Allowable Business Investment Loss

Scheme of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”)

Given a business investment purpose in certain circumstances a business investment loss is the loss resulting from a disposition of shares or debt of a small business corporation (paragraph 39(1)(c)).

Where a taxpayer establishes that an amount owing to him on account of a disposition of capital property has become uncollectible, he is deemed to have disposed of the debt (subsection 50(1)).

An allowable business investment loss is a certain prescribed portion of the loss resulting from the disposition of the shares or debt of a small business corporation (paragraph 38(c)).

In the case of an allowable business investment loss a taxpayer is entitled to deduct prescribed amounts from any source of income (paragraph 3(d)).

Jurisprudence

Debts that become bad debts in order to be deductible must have a business purpose, i.e., to gain or produce income from a business or property. Subparagraph 40(2)(g)(ii) provides that a capital loss from a disposition, whether actual or deemed, of a debt is deemed to be nil unless the debt was acquired for the purpose of gaining or producing income from a business or property. O'Blenes v. M.N.R., [1990] 1 C.T.C. 2171; 90 D.T.C. 1068.

Where the motivation in guaranteeing a company's loan is simply to help a family member and is not for the purpose of gaining or producing income, the taxpayer will not be entitled to treat sums paid under the guarantee as an allowable business investment loss. Casselman v. M.N.R., [1983] C.T.C. 2584; 83 D.T.C. 522.

Analysis

From the evidence, it is apparent the appellant paid the guarantee indirectly through his wife. It is further clear the appellant signed the guarantee to allow his son's company to carry on business. The appellant thought that any recourse against him on the guarantee was simply to be the last recourse and that all other avenues of collection would be exhausted before he would be called upon to honour the guarantee. Although there were several alleged motivating factors, the evidence before the Court, in large part, supports the theory of a father trying to help his son.

The lack of precise terms or documentation as to preconditions or conditions agreed to, prior to, or at the signing of the guarantee, is also a significant omission in relation to the appellant's appeal. Moreover, the historical fact of no rent charged or a hope of future possible employment does not lead to the conclusion there was a business investment purpose in the guarantee being signed by the appellant.

Decision

The appeal is dismissed.

Appeal dismissed.