[OFFICIAL ENGLISH TRANSLATION]
Date:
20021218
Docket:
2002-488(IT)I
BETWEEN:
STEVEN
MILLER,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif,
J.T.C.C.
[1] This is an appeal
concerning the 1997 taxation year.
[2] The issue is whether, in
computing the Appellant’s income, the Minister of National Revenue (the “Minister”) correctly disallowed a deduction
of $12,145 for a business investment loss for the 1997 taxation year.
[3] In making the reassessment
for the year at issue, the Minister assumed the following facts:
[TRANSLATION]
(a) the appellant
is the spouse of Andrée Jean, who was the sole shareholder of the company “Les
Enfants de Victor & Ann inc.”;
(b) the company
“Les Enfants de Victor & Ann inc.” operated a boutique that sold children’s
clothing;
(c) the company
“ Les Enfants de Victor & Ann inc.” ceased its activities on May 18,
1997, and the company was dissolved on July 17, 1997;
(d) the
liquidation balance sheet for the company “Les Enfants de Victor &
Ann inc.” at May 18, 1997, showed the following liabilities, inter alia:
(i) bank
loan $12,145
(ii) owing
to an individual $11,000
$23,145
(e) for the 1997
taxation year, the appellant claimed a deduction of the gross amount of $23,145
for a business investment loss, which can be broken down as follows:
(i) advance–company
“Les Enfants de Victor
& Ann inc.” $11,000
(ii) suretyship – line of
credit
“Les Enfants de Victor
& Ann inc.” $12,145
$23,145
(f) the claim
for the amount of $12,145 referred to in paragraph (e) is derived from the
following:
(i) a contract
of suretyship dated February 20, 1995, in which the appellant guaranteed a line
of credit up to a maximum of $40,000 by the National Bank of Canada for the
company “ Les Enfants de Victor & Ann inc.”,
(ii) confirmation
on May 29, 1997, by the National Bank of Canada of the receipt of the amount of
$12,145.50 paid by the appellant, a release for which was given for the
endorsement on the line of credit in the name of the company “ Les Enfants
de Victor & Ann inc.”;
(g) the deduction
for the $12,145 loss in the 1997 taxation year was disallowed for the following
reasons:
(i) the
suretyship was not given in order to earn income,
(ii) the
appellant was not a shareholder of the company “ Les Enfants de Victor
& Ann inc.”.
[4] These facts summarize the situation that gave rise to the
assessment. In my view, the text of the contract of suretyship should be
reproduced: (Exhibit A-8)
[TRANSLATION]
CONTRACT OF SURETYSHIP entered into at
Drummondville, in the judicial district of Drummond, province of Quebec, on this
20th day of February 1995.
BETWEEN: LES ENFANTS
DE VICTOR & ANN INC., a corporation duly incorporated according to the Companies
Act of Quebec, having its head office at 205 Lionel Groulx, in the city of
Drummondville, in the judicial district of Drummond, province of Quebec,
represented by Andrée Jean, its president, duly authorized for the purposes
hereof pursuant to a borrowing by-law;
HEREINAFTER
CALLED “THE BORROWER”;
AND: STEVEN
MILLER,
a physician, domiciled and residing at 205 Lionel-Groulx, in the city of
Drummondville, in the judicial district of Drummond, province of Quebec, J2C
6E1
HEREINAFTER
CALLED “THE SURETY”.
---------------------------------------------------------------------------------
The parties declare as
follows:
WHEREAS THE BORROWER has, on February 20,
1995, taken out a line of credit with the National Bank of Canada, a
corporation having its head office in the city of Drummondville, province of
Quebec (hereinafter called “THE LENDER”);
WHEREAS the said authorized
line of credit amounts to $40,000 DOLLARS (hereinafter designated “THE LINE OF
CREDIT”);
WHEREAS THE SURETY has guaranteed the LINE
OF CREDIT to a maximum of $40,000 and in return for proper consideration;
WHEREAS IN ADDITION the parties hereto have
agreed to reduce the terms and conditions of the said suretyship to a writing
under private seal; and
WHEREAS the parties want this
writing to be interpreted as a contract by mutual agreement.
NOW THEREFORE, THE
PARTIES AGREE AS FOLLOWS:
1.00 CONSIDERATION
THE BORROWER
promises to pay THE SURETY, in consideration of his suretyship for the LINE OF
CREDIT or a part thereof, an annual rate of interest equal to ONE HALF OF ONE
PER CENT (0.5 per cent) on the amount of the LINE OF CREDIT guaranteed. The
interest shall be calculated annually and shall be payable on the last day of
January of every year.
2.00 FAILURE OF THE
BORROWER
Where the
failure of THE BORROWER results in an obligation for THE SURETY to make the
payment for THE LINE OF CREDIT on behalf of THE BORROWER, THE SURETY shall be
subrogated to the rights of THE LENDER in order to recover the amounts advanced
to THE BORROWER.
3.00 END OF THE
CONTRACT
This
contract shall end upon the extinction of THE LINE OF CREDIT of THE BORROWER or
the extinction of the obligations of THE SURETY to THE LENDER.
4.00 TRANSMISSION
This
contract is binding on and is enforceable against the Parties and their legal
representatives.
IN WITNESS WHEREOF, THE PARTIES HAVE
SIGNED AT DRUMMONDVILLE, THIS 20TH DAY OF FEBRUARY 1995.
THE BORROWER
(Andrée Jean)
THE SURETY
(Dr. Steven Miller)
[5] The issue of whether there is a relationship between the taxpayer
claiming a business investment loss and the potential earnings of the debtor
company is a question of fact that must be evaluated on a case by case basis.
[6] In the case at bar, the suretyship provided for an essentially
symbolic rate of interest. The appellant’s object and purpose were clearly not
to obtain future profits; it basically amounted to indirect financial support
for the sole purpose of enabling his spouse to start up her small business.
[7] The Honourable Judge Sarchuk of this Court provided a good summary
of the situation in a similar case in Lowery v. M.N.R., [1986] T.C.J.
No. 740 (Q.L.):
[TRANSLATION]
...
The court concludes that the appellant did
not incur the guarantee for the purpose of gaining or producing income from a
business or property. The losses are therefore not deductible. The appellant
did not act with a business purpose. According to the court, it is not sufficient to make a general allegation that
the appellant anticipated some participation in the profits of his son’s
business at some unstated time in the future and on that basis to argue that
some consideration for the guarantee existed. There was no agreement, oral or
written, setting out the terms and conditions of the appellant’s participation
in the future profits of the business. Moreover, when the appellant was called
upon by the bank to pay the debt, none of the normal commercial considerations
were given by the appellant to collecting the debt. The court is of the opinion
that the risk in guaranteeing the debt had its justification only in the fact
of the father/son relationship. For these reasons, the court dismisses the
appeal.
...
[8] In the case at bar, the appellant showed definite interest in the
success of his spouse’s new business. This involved acts and supportive
behaviour in respect of his spouse’s initiative. It in no way involved a
business decision for the purpose of directly receiving income or dividends—at
least in the light of the evidence submitted.
[9] For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 18th day of
December 2002.
J.T.C.C.
Translation certified true
on this 9th day of February
2004.
Sophie Debbané, Revisor
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