Date: 19981105
Docket: 97-3827(IT)I
BETWEEN:
G. LEE MacMILLAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sarchuk, J.T.C.C.
[1] This is an appeal
by G. Lee MacMillan (the Appellant) from an assessment of tax
with respect to his 1991 taxation year. The events which
ultimately led to this assessment began on August 9, 1990 when
the Appellant incorporated a company under the name and style of
898673 Ontario Inc. (the Company). It operated a taxi service
during all or parts of 1991 using its own vehicle and others
registered in the name of the Appellant.
[2] When the
Appellant filed his 1990 income tax return he claimed business
income as the sole proprietor of a taxi service. The Minister of
National Revenue (Minister) assessed his return as filed. The
Appellant did not file his 1991 income tax return until 1996. In
it he claimed a $16,132.45 loss from a sole proprietorship
carrying on a taxi business under the name of the Company, as
well as reporting income from the Company (the requisite T4
supplementary was filed with his return). The Minister assessed
the Appellant's return as filed on July 2, 1996 and on
September 3, 1996, reassessed the same year for an unknown issue
that is not in dispute in the present appeal. The Minister
further reassessed the Appellant's 1991 taxation year on June
12, 1997 and disallowed the aforesaid business losses on the
basis that the Appellant was not carrying on business in 1991 and
was not entitled to deduct the losses incurred by the Company in
computing his personal taxable income for that taxation year.
Accordingly, the Minister assessed federal income tax of $273.90,
charged accrued interest of $184.97 and levied a late filing
penalty of $46.56.
[3] In so reassessing
the Appellant's tax, the Minister made the following
assumptions of fact:
(a)
...
(b)
during the 1991 taxation year, the Appellant was a shareholder
and employee of 898673 Ontario Inc. (the
"Corporation");
(c)
the Corporation was incorporated on August 9, 1990;
(d)
the business activities conducted or services carried on by the
Corporation were owing (sic) and operating taxis (the
"Business")
(e)
in computing income for the 1991 taxation year, the Appellant
deducted $16,132.45 as business losses with respect to the
Business;
(f) the losses
referred to in subparagraph (e) above were losses incurred by the
Corporation for the 1991 taxation year;
(g)
the Appellant was not carrying on a business during the 1991
taxation year; ...
[4] The
Appellant's primary position is that although he incorporated
the Company, it never carried on business and that at all times,
the taxi business was being conducted by him in a sole
proprietorship. He said no organizational meeting of directors
was held, no directors were ever appointed, no records containing
minutes of meetings and/or resolutions were maintained and no
shares were issued or allocated.[1]
[5] In his Notice of
Appeal, the Appellant contended that the Minister erred in
disallowing his business losses for a number of reasons, inter
alia:
(a)
the company did not have operational taxis until September
1991;
(b)
the Appellant had three vehicles that he used as taxis during
1991;
(c)
the business expenses claimed by him in calculating the business
loss included capital cost allowance and loan interest incurred
on his personally owned vehicles;
(d)
the Minister was barred or estopped from determining that the
taxi business was operated by the company and not by the
Appellant because, ignoring the later assessments, the Minister
had accepted the Appellant's 1990 and 1992 returns as
initially filed;
(e)
the Minister failed to discharge his duty to act fairly;
[6] The issue is
whether the Appellant was engaged in a business in taxation year
1991 or whether the business loss was that of the Company in
which instance, the losses claimed by the Appellant were properly
disallowed by the Minister.
[7] The Appellant
contends that although the Company operated as a taxi service
supplier during the relevant period of time, it was his business,
carried on as a sole proprietorship, and conducted under the
Company name.
[8] The evidence
fails to support the Appellant's proposition. He testified
that the taxi business commenced in the middle of 1990 at or
about the same point of time that the Company was incorporated
and the Appellant transferred one of the vehicles he owned to it.
It is also a fact that at least two other vehicles registered in
his name were used in the taxi business.[2] The conclusion that the Company was
carrying on the taxi business is also supported by the fact that
the Company kept the daily records for the business, paid all of
the operating expenses with respect thereto, and maintained a
bank account for that purpose. In addition to attending to the
day-to-day expenses, it paid for the insurance, the taxi stand
rent and the cost of the taxi plate leases. Furthermore, the
Appellant's testimony as well as his representations to
Revenue Canada at various times, demonstrates that he considered
the entire business as a single entity and a single source of
income for the purposes of sections 3 and 9 of the Income Tax
Act. Nothing in his testimony supports a proposition that the
vehicles which were registered in his name and were used by the
Company in the taxi business were leased or rented by the
Appellant to the Company or were the subject of some other form
of financial arrangement between them.
[9] On the evidence
before me, I am unable to conclude that in taxation year 1991 the
taxi business was carried on by the Appellant as a sole
proprietorship. Accordingly, the Minister's assessment that
the income from the business was that of the Company was
correct.
[10] In the alternative,
the Appellant says that if the taxi business was being carried on
by the Company, then he should be able to deduct in the
computation of his income an allowable business investment loss
(ABIL) in taxation year 1991. Although his testimony was at times
difficult to follow, it appears that the ABIL the Appellant
claims is composed of two items.
[11] The first component
arises out of the fact that no bank would lend the Company
sufficient money to purchase equipment and that in or about June
1990, he personally borrowed the amount of $16,000 from Municipal
Trust for the purpose of acquiring a 1986 Mercury and a 1985
Pontiac. These vehicles remained registered in his name but were
at all times utilized in the taxi business. He says that he made
payments of principal and interest of $386.95 per month and that
by his calculation, the amount of $2,500.50 should be treated as
an interest expense of the Company. Since he has never been
reimbursed for this expenditure, this amount, if I understood him
properly, should be included in his ABIL in taxation year
1991.
[12] The second component
is what he claims to be a bad debt in the amount of $5,252.60. In
his Answer to the Minister's Reply, he described this amount
as part of the sum advanced by him to "the then proposed
corporate taxpayer for the purpose of earning income pursuant to
subparagraph 40(2)(g)(ii) of the Act. From his
testimony, it became apparent that the advance he referred to
represented the cost (or part thereof) of the acquisition in 1990
of the 1984 Pontiac Parisienne. This vehicle was transferred to
the Company, registered in its name and was used in its taxi
business. According to the Appellant, the Company was unable to
pay for the vehicle and ultimately, in his words "was sold
by the corporation" at some point of time in 1992.
[13] With respect to both
aspects of his claim, the Appellant relied on the decision of
Rouleau J. in Charles A. Brown v. Her Majesty the Queen.[3] This
case he argued supported the proposition that where a shareholder
loaned money to a company for the purpose of allowing the company
to pay interest to the Bank, such a loan was made for the purpose
of earning income.
[14] The Minister's
position with respect to the ABIL is that the Company was not
dissolved until 1994 and that if such a loss actually occurred
(i.e. amounts that the Appellant paid on behalf of the company
represented advances or loans made for the purpose of earning
income) then such loss would be created upon receivership and/or
dissolution and would be available in his 1994 tax year (and
which might then be carried forward and/or backward). On the
evidence, this point seems to be well taken. The Appellant
himself testified that the taxi business was wound down in 1992
and in fact, ceased operating as such that year. Since it is
fairly clear from the evidence that the taxi business was being
carried on throughout 1991 by the Company and since there is no
other evidence that an allowable business loss actually occurred
in the Appellant's 1991 taxation year, he cannot succeed on
this issue.
[15] As counsel for the
Minister observed, in order to properly make such a claim, it
would be necessary for the Appellant to seek to amend the
Company's T2 return for the year in which the loss was
crystallized before adjustments of any kind might be considered
to his personal returns with respect to any ABIL which might have
been sustained by the Appellant. This Court has no jurisdiction
to deal with this matter since the only tax year before it is
1991. The resolution of this issue rests properly with the
Appellant and the Minister of National Revenue.
[16] The appeal is
dismissed.
Signed at Ottawa, Canada, this 5th day of
November, 1998.
J.T.C.C.
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