Date: 19980206
Docket: 96-1435-IT-G
BETWEEN:
PAUL HUNEAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
LAMARRE, J.T.C.C.
[1] The appellant is appealing two assessments made by the
Minister of National Revenue ("the Minister") under the
Income Tax Act ("the Act") for the 1990 and 1991
taxation years. In submitting his amended tax return for 1990 the
appellant claimed inter alia a business expense of $10,000
which was disallowed by the Minister. The appellant maintained
that this was salary expense incurred in the course of carrying
on his profession as a notary.
[2] Secondly, the appellant claimed a business investment loss
in his tax return for 1991 under s. 39(1)(c) of the
Act, on an alleged loss of $26,000, which was also disallowed by
the Minister. The latter considered that the appellant had not
made a loan to a small business corporation but to an individual.
Consequently, in the Minister's submission, if there was a
disposition of the debt it could not result in a business
investment loss. The Minister further alleged that since the loan
in question bore no interest, it was not made for the purpose of
gaining or producing income and so the loss sustained on
disposition of the debt was deemed to be nil under
s. 40(2)(g)(ii) of the Act.
[3] The appellant contended that the loan was made to a small
business corporation for the purpose of gaining or producing
income.
[4] In assessing the appellant the Minister relied on the
following facts:
[TRANSLATION]
(a) on or about October 18, 1993 the Minister issued a
notice of reassessment for the 1990 taxation year in which he
disallowed a deduction of $10,000 by the appellant from his
professional income, claimed as salary expenses paid for the
purpose of gaining or producing business income;
(b) although he was requested by the Minister several times to
document the $10,000 of salary expenses for the 1990 taxation
year, the appellant was unable to produce any form of receipt or
cheque as evidence of such expenses;
(c) the appellant knowingly, or in circumstances amounting to
gross negligence in the carrying out of a duty imposed by the
Income Tax Act ("the Act"), made or participated
in, assented or acquiesced in the making of a false statement or
omission in his tax return for the 1990 taxation year, such that
the tax payable on the basis of the information provided in the
appellant's return was less than the amount that was payable
under the Act;
(d) the Minister accordingly imposed a penalty on the
appellant on the excess tax payable by him which was not paid as
a result of the false statement or omission, pursuant to
s. 163(2) of the Act, for the 1990 taxation year;
(e) on or about October 18, 1993 the Minister also issued
a notice of reassessment for the 1991 taxation year in which he
disallowed the deduction which the appellant had claimed as a
deductible business investment loss on an alleged loss of
$26,000;
(f) on or about December 7, 1989 the appellant lent the
sum of $26,000 to Jean-Rhéal Gauthier in return
for a promissory note;
(g) the appellant did not make this loan to a corporation,[1] but to an
individual;
(h) accordingly, the disposition of this loan by the appellant
cannot be a disposition of a debt owed by a small business
corporation;
(i) the appellant made this loan without interest;
(j) the appellant did not make this loan for the purpose of
gaining or producing income;
(k) the loss sustained by the appellant on disposition of this
loan is accordingly deemed to be nil within the meaning of the
Act.
[5] At the start of the hearing counsel for the respondent
mentioned that she consented to judgment regarding the penalty
imposed on the appellant under s. 163(2) of the Act for the
1990 taxation year.
[6] I also heard the testimony of
Jean-Rhéal Gauthier (sole shareholder in Les
Constructions Janré Ltée ("Janré
Ltée")), Claude Hachey (who acted as bookkeeper
for the appellant's employees from 1983 to 1991) and the
appellant himself.
[7] The appellant explained regarding the $10,000 salary
expense that he has been a notary since 1980 and that since 1981
he has occupied space in the offices of another notary,
Charles Rioux. He pays him rental which includes the use of
all necessary equipment. At the start of his practice the
appellant had no employees. His employees were subsequently paid
through Mr. Rioux's payroll. It was not until
June 1991 that the appellant obtained his own employer
number and began having his own payroll (in a sworn statement
prior to the hearing, Exhibit I-4, the appellant spoke
of June 1990). Accordingly, from 1983 to 1991 the appellant
apparently repaid Mr. Rioux the gross salary paid to his
employees.
[8] It was not until 1990 (in the statement filed as
Exhibit I-4 the appellant spoke of July 1990,
though at the hearing he mentioned towards the end of 1990 or
early 1991) that the notary Rioux realized that his bookkeeper
Mr. Hachey had not claimed from the appellant all the money
paid by Mr. Rioux with respect to the appellant's
employees. These unclaimed amounts corresponded to the part paid
by the employer for unemployment insurance, the Quebec Pension
Plan, wage loss insurance and health insurance. Mr. Rioux
apparently estimated the amount owed by the appellant in 1990 for
the money paid in this way from 1983 to 1989 at about $10,000.
The table summarizing these amounts, filed in evidence as
Exhibit A-4, showed a total paid in this connection
from 1983 to 1989 of $9,574.02.
[9] As the appellant acknowledged that he owed Mr. Rioux
this amount, he claimed it as a salary expense for 1990 forthwith
instead of amending his tax returns for 1983 to 1989. However,
the appellant admitted that he has not to date repaid
Mr. Rioux.
[10] According to the appellant's testimony there was no
formal agreement for repayment, except that from time to time
Mr. Rioux would ask him about repayment of the amount.
Mr. Hachey was not aware of the repayment terms and
Mr. Rioux was not present to give his version of the
facts.
[11] Mr. Hachey explained in testimony that he had
mistakenly failed to claim these amounts from the appellant and
that as soon as Mr. Rioux told him of it he prepared the
summary table (Exhibit A-4) to show exactly what
amounts were owed, based on the payrolls for each year.
[12] Concerning the loss of $26,000, this was apparently an
amount loaned to Jean-Rhéal Gauthier on
December 7, 1989. According to the promissory note signed by
Mr. Gauthier (Exhibit I-1), he undertook to repay the
sum of $26,000 loaned him by the appellant without interest
within two weeks, that is, on December 21, 1989. On the back
of this promissory note was written [TRANSLATION] "Loan
Const. Janré Ltée and J.R. Gauthier".
[13] Mr. Gauthier testified that his business was
experiencing serious financial problems at the time. A petition
for the appointment of an interim receiver of the property of
Janré Ltée pursuant to the Bankruptcy and
Insolvency Act was made before the Superior Court, Hull
District, by four creditors of Janré Ltée on
November 29, 1989 (Exhibit A-1). It was alleged
in that petition that Janré Ltée was
four months late in its mortgage payments, totalling over
$170,000. The co-petitioners were creditors of amounts
totalling some $65,000.
[14] Mr. Gauthier avoided the bankruptcy of Janré
Ltée by finding the money needed to arrive at a
composition with his creditors. Accordingly, he approached the
appellant, with whom he had been doing business for a long time.
Janré Ltée was a construction business and the
appellant prepared notarial contracts relating to the sale of
land and newly built houses. Mr. Gauthier mentioned that
Janré Ltée might build between 200 and
300 houses a year. This client represented over
50 percent of the appellant's turnover.
[15] That is why when Mr. Gauthier asked the appellant to
advance him the sum of $26,000, the appellant agreed as he hoped
to preserve this business which was his largest source of income.
The appellant explained that he put a two-week deadline on
it because it corresponded to the date on which the Federal
Business Development Bank ("FBDB") was to make mortgage
advances to Janré Ltée on a shopping centre in
Hull, which in fact was the company's last project. The
shopping centre was not rented as expected and the FBDB refused
to make the advances in question.
[16] Mr. Gauthier explained that the FBDB subsequently retook
possession of the shopping centre and held a judicial sale from
which it collected the proceeds of the sale. That was the point
at which Janré Ltée ceased operating its business.
The appellant said this judicial sale took place some time in
late 1990 or early 1991. Mr. Gauthier did not give the date
of the judicial sale.
[17] Furthermore, the appellant submitted in evidence a copy
of a cheque (Exhibit A-2) which he drew on his trust
account on December 7, 1989 in the amount of $48,738.39,
payable to Bélec, Letellier In Trust, the lawyers acting
for Janré Ltée at that time.
[18] The appellant also filed a copy of two cheques
(Exhibit A-3) drawn on the account of Bélec,
Letellier, dated December 11, 1989, one in the amount of
$8,500 and the other of $45,450.77, payable to
Paul Fréchette, who was acting for the
co-petitioners in the petition to appoint an interim
receiver. According to Mr. Gauthier these two cheques were
used to repay the creditors mentioned in the petition so as to
avoid bankruptcy.
[19] The appellant also submitted in evidence two copies
of documents from the Bank of Nova Scotia
(Exhibits A-7 and A-8) showing that he had paid
$28,738.39 into his trust account on December 12, 1989.
Mr. Gauthier apparently also deposited $20,000 from his
personal account into the appellant's trust account on
December 7, 1989. The total of these two amounts, that is,
$48,738.39, represented the amount of the cheque paid to
Bélec, Letellier on December 7, 1989
(Exhibit A-2).
[20] In support of these various amounts the appellant
maintained that he made a loan to Janré Ltée, and
not Mr. Gauthier personally, in order to enable the company
to continue generating income.
[21] In cross-examination the appellant admitted that he had
not claimed this loss at the time he filed his tax return for
1991 (the appellant's fiscal year for his professional income
ends on July 31). He explained that at that time he was not
expecting that he would be unable to recover the amount of his
debt. He said it was around 1992 or 1993 that he realized
Mr. Gauthier would be unable to pay. In re-examination
he candidly admitted that he did not know that Janré
Ltée was so much in debt at the time of the petition to
appoint an interim receiver, and that it was shortly before the
date of the hearing in this Court that he had learned of the
content of the petition.
[22] The appellant said that it was when Revenue Canada
undertook an audit of his tax returns that he realized he had a
bad debt. However, he did not know when this audit took
place.
[23] On June 1, 1994 Mr. Gauthier signed a document
(Exhibit I-2) by which he acknowledged that he was
indebted to the appellant under a promissory note dated
December 7, 1989 and that this loan had been made
[TRANSLATION] "for the purposes of [his] company". In
the same document he indicated that [TRANSLATION] "the
company [Janré Ltée] . . . has not
repaid the said loan".
Analysis
[24] The appellant has the burden of showing on a balance of
probabilities that the subject assessments are incorrect.
[25] On the $10,000 expense which the appellant claimed as an
expense incurred in the course of his professional occupation, I
consider that he did not succeed in showing that he was entitled
to such an expense. To begin with, on the evidence I agree that
this amount is attributable to money paid by Mr. Rioux in
connection with salaries paid to employees. However, I draw a
negative conclusion from the absence of any testimony by
Mr. Rioux. I would recall here the comments contained in
The Law of Evidence in Civil Cases, by Sopinka and
Lederman, which were cited by Judge Sarchuk of this Court in
Enns v. M.N.R., 87 DTC 208, at 210:
In The Law of Evidence in Civil Cases, by Sopinka and
Lederman, the authors comment on the effect of failure to call a
witness and I quote:
In Blatch v. Archer, (1774), 1 Cowp. 63, at
p. 65, Lord Mansfield stated:
"It is certainly a maxim that all evidence is to be
weighed according to the proof which it was in the power of one
side to have produced, and in the power of the other to have
contradicted. "
The application of this maxim has led to a well-recognized
rule that the failure of a party or a witness to give evidence,
which it was in the power of the party or witness to give and by
which the facts might have been elucidated, justifies the court
in drawing the inference that the evidence of the party or
witness would have been unfavourable to the party to whom the
failure was attributed.
In the case of a plaintiff who has the evidentiary burden
of establishing an issue, the effect of such an inference may be
that the evidence led will be insufficient to discharge the
burden.(Lévesque et al. v. Comeau et al.
[1970] S.C.R. 1010, (1971), 16 D.L.R. (3d) 425)
(emphasis added)
[26] The appellant was very vague about the agreement he had
concluded with Mr. Rioux for repayment of the money
allegedly advanced by the latter. There was nothing to show the
Court that Mr. Rioux had not himself already claimed in his
operating expenses the amount he was now claiming from the
appellant. The latter did not repay this money and submitted no
evidence to show he intended to repay it. It is not enough to say
that he admitted owing this amount, without providing much
corroboration for his testimony. Mr. Hachey did acknowledge
that he had failed to claim this amount from the appellant, but
he was unable to throw any further light on the agreement made
between Mr. Rioux and the appellant. I therefore conclude
that the appellant provided insufficient evidence to show on a
balance of probabilities that he had himself incurred an expense
of $10,000 in order to gain or produce income from his
profession.
[27] For the appellant to be entitled to the business
investment loss in the amount of $26,000 he has to meet the
conditions set out in s. 39(1)(c) of the Act, which
reads in part as follows:
39: Meaning of capital gain and capital loss.
(1) For the purposes of this Act,
. . .
(c) a taxpayer's business investment loss for a
taxation year from the disposition of any property is the amount,
if any, by which the taxpayer's capital loss for the year
from a disposition after 1977
(i) to which subsection 50(1) applies, or
(ii) to a person with whom the taxpayer was dealing at
arm's length
of any property that is
(iii) a share of the capital stock of a small business
corporation, or
(iv) a debt owing to the taxpayer by a
Canadian-controlled private corporation (other than, where the
taxpayer is a corporation, a debt owing to it by a corporation
with which it does not deal at arm's length) that is
(A) a small business corporation . . .
[28] Section 50(1) reads in part as follows, for the year
in question:
50: Debts established to be bad debts and shares of
bankrupt corporation.
(1) For the purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a
taxation year (other than a debt owing to him in respect of the
disposition of personal-use property) is established by him to
have become a bad debt in the year, or . . .
. . .
the taxpayer shall be deemed to have disposed of the debt or
the share, as the case may be, at the end of the year and to have
reacquired it immediately thereafter at a cost equal to nil.
[29] Disregarding for the moment the question of the existence
of a capital loss within the meaning of
s. 40(2)(g)(ii) of the Act, the appellant first had
to show that the loan was made to Janré Ltée and
not to Jean-Rhéal Gauthier personally. A
priori the promissory note (Exhibit I-1) and debt
acknowledgment (Exhibit I-2) established that the
appellant made a loan to Mr. Gauthier personally. All the
appellant's evidence sought to show that this loan was made
to offset part of the debts of Janré Ltée.[2] That may be so, but it
is not enough to show that the loan was not made to
Mr. Gauthier personally. As Janré Ltée was on
the point of bankruptcy it is highly likely that the appellant
and Mr. Gauthier deliberately agreed to make a loan to
Mr. Gauthier directly so the latter could control where the
money went. If the loan had been made to the company directly, in
view of the fact that there was already a petition pending to
appoint an interim receiver, Mr. Gauthier would have lost
control of it.
[30] Further, in tax matters form takes on some importance. In
this connection I would refer to the Federal Court of Appeal
judgment in The Queen v. Friedberg, 92 DTC 6031,
at 6032; [1991] F.C.J. No. 1255, at 5 and 6 (Q.L.)
(C.A.):
In tax law, form matters. A mere subjective intention, here as
elsewhere in the tax field, is not by itself sufficient to alter
the characterization of a transaction for tax purposes. If a
taxpayer arranges his affairs in certain formal ways, enormous
tax advantages can be obtained, even though the main reason for
these arrangements may be to save tax (see The Queen v.
Irving Oil 91 DTC 5106, per Mahoney, J.A.).
If a taxpayer fails to take the correct formal steps, however,
the tax may have to be paid. If this were not so, Revenue Canada
and the courts would be engaged in endless exercises to determine
the true intentions behind certain transactions. Taxpayers and
the Crown would seek to restructure dealings after the fact so as
to take advantage of the tax law or to make taxpayers pay tax
that they might otherwise not have to pay. While evidence of
intention may be used by the Courts on occasion to clarify
dealings, it is rarely determinative. In sum, evidence of
subjective intention cannot be used to "correct"
documents which clearly point in a particular direction.
[31] Further, even if I were persuaded that the appellant
loaned $26,000 to Janré Ltée, I am not persuaded
that the debt became a bad debt during 1991. The appellant
himself candidly admitted that he had not claimed this loss at
the time he made up his 1991 tax return because at that time he
did not think it would never be paid. He became certain of this
at the time of the audit by Revenue Canada. However, he did not
know when the audit took place.
[32] Counsel for the appellant tried to use the petition to
appoint an interim receiver (Exhibit A-1) to show that
the appellant could have known as early as 1989 that Janré
Ltée might find it hard to repay the loan. On the one
hand, if that were so it would seem that the appellant would not
have lent such a sum of money. On the other, the appellant
admitted that it was not until shortly before the date of the
hearing in this Court that he had learned of the content of the
petition.
[33] Counsel for the appellant also relied on the fact that
the latter would no longer have expected to be repaid his debt
once the FBDB retook possession of the shopping centre belonging
to Janré Ltée. Once again, the evidence before the
Court is insufficient to support a conclusion as to the time when
this event occurred or the time when Janré Ltée
ceased operating its business. Only the appellant testified on
this point and his memory of dates was somewhat deficient (if we
consider, for example, the discrepancy between his testimony and
the earlier statement, Exhibit I-4, regarding the
first amount of $10,000 at issue).
[34] Further, it was in 1994 that the appellant had
Mr. Gauthier sign a debt acknowledgment, and the assessments
were issued on October 18, 1993. This suggests that it was
probably not prior to 1992 or 1993, as he mentioned at one point
in his testimony, that the appellant realized that his debt had
really become bad.
[35] There will be a “créance
irrécouvrable” (uncollectable debt)[3] in a taxation year if the
appellant can prove that using his business judgment he
considered during that year that he could not collect on the debt
(see Picadilly Hotels Ltd. v. The Queen, 78 DTC
6445, [1978] F.C.J. No. 803 (Q.L.) (Trial Div.);
Greensteel Industries Ltd. v. M.N.R., 75 DTC 63
(T.R.B.)). I consider here that the appellant has not shown on a
balance of probabilities that he believed his debt to be
uncollectable during 1991. Consequently, the appellant has not
proven that there was a deemed disposition in 1991 of a debt owed
to him by a private small business corporation within the meaning
of s. 50(1) of the Act.
[36] In view of the foregoing conclusion, therefore, I do not
have to rule on the question of a capital loss that might be nil
under s. 40(2)(g)(ii) of the Act.
[37] Consequently, the appeal for the 1990 taxation year is
allowed and the assessment referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that the Minister now agrees to cancel the penalty imposed
under s. 163(2) of the Act. In all other respects the appeal
from the assessment for that year is dismissed. The appeal for
the 1991 taxation year is dismissed.
Signed at Ottawa, Canada, this 6th day of
February 1998.
"Lucie Lamarre"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 5th day of June
1998.
Benoît Charron, Revisor
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