[OFFICIAL ENGLISH TRANSLATION]
Date: 20021128
Docket: 1999-3421(IT)G
BETWEEN:
PAUL-AIMÉ JONCAS,
Appellant,
and
Her Majesty The Queen,
Respondent.
Reasons For Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals concern the 1993 to
1995 taxation years.
[2] The point for determination is
whether the appellant incurred an amount of $162,325.71 for the
purpose of gaining or producing income from a business or
property within the meaning of
subparagraph 40(2)(g)(ii) of the Income Tax
Act (the "Act") and is thus entitled to an
allowable business investment loss under
paragraph 38(c) of the Act for the 1993
taxation year.
[3] At the outset of the hearing, the
parties informed the Court that they had reached agreements on a
few points, as follows:
[TRANSLATION]
(a) The amount of
the business investment loss is $162,325.27, and the respondent
admits that the loss has the characteristics required by
paragraph 39(1)(c) of the Act. The remaining
issue therefore is the one regarding the requirement of
subparagraph 40(2)(g)(ii) of the Act, that the
debt or right was acquired for the purpose of gaining or
producing income from a business or property.
(b) For the 1993 and
1994 taxation years, the appellant has admitted that he must add
the respective amounts of $15,488 and $6,421 as income from his
medical profession in computing his income for those years. Those
amounts are those referred to in subparagraph 8(e) of the
amended Reply to the Notice of Appeal (the "Reply").
The respondent has agreed to delete the penalties in respect of
those amounts, which penalties are referred to in
subparagraphs 8(f) and (g) of the Reply.
(c) According to
subparagraphs 8(h) to (k) of the Reply, the Minister of
National Revenue (the "Minister") has added an amount
of $8,657.16 to the appellant's income for the 1995 taxation
year in respect of a benefit relating to the use of a motor
vehicle put at his disposal by 162481 Canada Ltd. The appellant
was the principal shareholder of that corporation. That amount
must be reduced to $2,992.34, according to the respondent,
because the appellant was only in Canada for the last four months
of the year. However, the appellant disputes the inclusion of
that benefit.
(d) The respondent
consents to the write-off of $3,586.19, which was included
in computing the appellant's income in respect of a benefit
relating to the use of a snowmobile and described in
subparagraphs 8(l) to (p) of the Reply.
(e) For the purposes
of the bill of costs, the parties agree that the tariff that
should apply to these appeals is Tariff B.
[4] With respect to the benefit
relating to the use of a motor vehicle, the Minister relied on
the following facts:
[TRANSLATION]
(h) During the 1995
taxation year, the appellant was the principal shareholder of
162481 Canada Ltd.;
(i) During the
entire 1995 taxation year, 162481 Canada Ltd. put a motor vehicle
at the disposal of the appellant and/or a person related to
him;
(j) During the
1995 taxation year, 162481 Canada Ltd. was the lessee of the
motor vehicle put at the appellant's disposal; the monthly
cost of that lease was $721.43;
(k) For the
appellant's 1995 taxation year, the Minister of National
Revenue added the amount of $8,657.16 ($721.43 x 12 months)
to the appellant's income in respect of a benefit relating to
the use of a motor vehicle;
[5] The amended Notice of Appeal
states the following on this subject:
[TRANSLATION]
. . .
13. In addition, the
agents of the respondent have added taxable benefits from the use
of a snowmobile and a motor vehicle to the appellant's income
for the 1995 taxation year.
. . .
18. The appellant further
appeals from the Minister's decision to tax taxable benefits
for the 1995 taxation year regarding the use of a snowmobile and
a motor vehicle because those assets were never used for his
personal purposes during that taxation year.
[6] A tax expert from the accounting
firm of Price Waterhouse Coopers sent a letter dated
September 22, 1998, stating the following
(Exhibit A-15):
[TRANSLATION]
. . .
TAXATION OF A BENEFIT FOR THE USE OF A MOTOR VEHICLE
During the years in issue, Dr. Joncas owned a truck that
was registered in his name until December 1997.
Corporation 162481 Canada Inc. owned a car. When
Dr. Joncas left Blanc-Sablon, he and the corporation
exchanged vehicles without there being a change of owner.
Dr. Joncas continued to pay for the registration and
insurance of his truck, and the corporation did the same with
respect to its car. Dr. Joncas therefore received the use of
the car in exchange for the use of his truck by the corporation.
Consequently, he received no benefit through that
transaction.
. . .
[7] At paragraph 18, the amended
Notice of Appeal reads as follows on the subject:
[TRANSLATION]
18. The appellant further
appeals from the Minister's decision to tax taxable benefits
for the 1995 taxation year regarding the use of a snowmobile and
a motor vehicle because those assets were never used for his
personal purposes during that taxation year.
[8] The appellant stated in his
testimony that the car had not been leased as was stated in the
Reply. The car was the property of the corporation, and the
corporation had let him use it in Québec because he had
allowed the corporation to use his truck in Blanc-Sablon.
That is not what was stated in the amended Notice of Appeal. In a
letter dated January 15, 1999, the appellant gave the
following explanation to an appeals officer
(Exhibit A-16):
[TRANSLATION]
. . .
(b) Taxable benefit
for the use of a motor vehicle provided by 162481 Canada Inc.
I admit that that vehicle had been put at my disposal for
personal and business purposes for four months of 1995 (i.e.,
from September to December of that year). During that period, the
vehicle was used for business for the various companies related
to 162481 Canada Inc. The business and personal use portions for
that period were approximately 40 percent for business and
60 percent for personal use.
Under the agreement I had with 162481 Canada Inc., in exchange
for my personal use of their vehicle, I lent them my vehicle, a
four-wheel-drive Ford F150 truck. They used my Ford truck for
strictly business purposes during all of 1995 (i.e.,
12 months).
Therefore, for four months I had access to the use of a vehicle
provided by 162481 Canada Inc. for personal (60 percent) and
business (40 percent) purposes, and, in exchange, 162481
Canada Inc. used my personal vehicle, which was in
Blanc-Sablon, for business purposes (100 percent) for
12 months.
For that exchange, in which I am at a financial loss, I have been
assessed a taxable benefit of $8,567.
Whereas there was an exchange of vehicles; whereas 162481 Canada
Inc. received a financial advantage from that exchange; and
whereas I gained nothing financially from that exchange-it was
quite the opposite-I ask that this assessment be vacated.
. . .
[9] A motor vehicle insurance policy
(Exhibit A-14) was filed as evidence of ownership of
the truck in 1995 and of the appellant's use of it for the
corporation's business purposes. It states that the effective
period of the insurance policy was from March 18, 1996, to
March 18, 1997, that the vehicle was to be used for pleasure
driving, excluding round trips to work, and that the appellant
was the principal driver.
Business Investment Loss
[10] The facts on which the Minister relied
in disallowing this loss as an allowable business investment loss
are described in subparagraphs 8(q) to (aa) of the
Reply:
[TRANSLATION]
(q) For his 1993
taxation year, the appellant claimed a business investment loss
of $222,325.77, which he purports to have paid to the Lower North
Shore Transportation Integrated Cooperative (hereinafter the
"Cooperative"); the appellant thus claimed an amount of
$166,744 (75 percent of $222,325.77) as an allowable
business investment loss;
(r) The Cooperative
was founded on March 26, 1990;
(s) The only
document that was provided to the Minister of National Revenue is
a financial statement of the Cooperative for the period from
April 1 to November 30, 1990;
(t) At
November 30, 1990, the 272 members of the Cooperative
holding 8,645 shares had invested $86,450;
(u) The appellant
provided no documents showing that he in fact lent the
Cooperative the amount of $222,325.77;
(v) The appellant
provided no documents showing the Cooperative's
activities;
(w) The Cooperative did
not carry on a business;
(x) The appellant
provided no documents on the basis of which it could be concluded
that the Cooperative had ceased its activities;
(y) The appellant
provided no documents on the basis of which it could be concluded
that the Cooperative had assigned its property;
(z) The appellant
provided no documents showing that he had a debt of $222,325.77
that had become unrecoverable.
[11] The amended Notice of Appeal states the
following on this subject at paragraphs 3 to 10:
[TRANSLATION]
3. The
appellant is a doctor, a member of the Corporation
professionnelle des médecins du Québec, and also
carries on various commercial undertakings, some of which are
involved in passenger air transportation.
4. In
addition, during the 1993 taxation year, the appellant was a
member of a cooperative having the corporate name "Lower
North Shore Integrated Transportation Cooperative"
(hereinafter the "Cooperative").
5. The
Cooperative offered certain administrative services
(accounting, bookkeeping, etc.) and operated a transportation
business and owned a helicopter for that purpose.
6. The
appellant was involved in the management of the
Cooperativefor a number of years as chairman of the board
of directors.
7. The
appellant left the board of directors of the Cooperative
in view of the potential conflict of interest between his
professional activities as a physician and the operation of the
Cooperative's business.
8. Given the
financial difficulties facing the Cooperative, the
appellant made advances to the Corporative totalling $222,325.00,
bearing interest, to enable it, among other things,
to replenish the working capital of the business and to repay the
amounts owed to the financial institution that had financed the
helicopter purchase.
9. The
Cooperative ceased operating its business in 1993 and the
amounts advanced by the appellant then became a bad debt for
him.
10. In his return of
income for the 1993 taxation year, the appellant subsequently
claimed "a business investment loss" in respect of that
amount of $222,325.00.
[12] One must recall the admissions that the
parties made and that were referred to at the start of these
reasons, that is, that the debt is in the amount of $162,325.27
and that it has the characteristics required by
paragraph 39(1)(c) of the Act. The only
remaining issue is whether the debt was incurred for the purposes
of gaining or producing income from a property or business within
the meaning of subparagraph 40(2)(g)(ii) of the
Act.
[13] Upon hearing the evidence, I find that
the amended Notice of Appeal correctly stated the facts.
[14] James Fequet was the first
witness. Mr. Fequet has been a chartered accountant since
1990. He worked at the accounting firm of Samson et Bélair
from 1986 to 1990. In 1990, he returned to St-Augustin,
where he is originally from.
[15] The articles of incorporation of the
Lower North Shore Integrated Transportation Cooperative (the
"Cooperative") were filed as Exhibit A-1.
The Cooperative's project began to be developed in 1989. The
Cooperative was incorporated on March 26, 1990, and its
purpose was:
[TRANSLATION]
- To operate a
business in order to provide its members with goods and/or
services in the field of maritime, land and air
transportation;
- To hold and use
every transportation permit necessary in order to achieve the
purposes of the business;
- To acquire, lease
or manage any apparatus, equipment or immovable necessary to the
operation of the business; and
- To promote the
economic, social and cooperative training of its members in order
to promote the economic development of the Lower North Shore.
[16] The appellant's name is the first
indicated on the list of the 12 founders (natural persons).
The names that follow are those of four merchants, a garage
operator, a garage manager, the director of the Caisse populaire,
a day labourer, an information officer, a plumber and a middle
manager. The list of corporate members includes a number of
corporations of which the appellant was the principal
shareholder.
[17] Exhibit A-1 also includes
the report of the organizational meeting held on May 20,
1990. The appellant is named as chairman and James Fequet as
secretary. There were 10 other directors, a number of whom were
on the list of the founders.
[18] Mr. Fequet was the director
general of the Cooperative until September 25, 1992. He
remained secretary of the board of directors until 1995. He and
two other persons were the employees of the Cooperative.
[19] Exhibit A-2 is the Master
Plan of the Lower North Shore Integrated Transportation
Cooperative dated October 1991. That document states that the
Cooperative's head office is in St-Augustin and that
there is a branch office of the Cooperative on leased premises in
Blanc-Sablon. The objectives of the Cooperative were,
briefly stated, to operate a business in order to provide its
members with goods and/or services in the field of maritime, land
and air transportation and to promote the economic interests of
the region by promoting the economic interests of its
members.
[20] That same document states that there
were 177 members and four auxiliary members. Some
102 persons had begun to pay their membership dues of $550.
At the time, the Cooperative appeared to have had six employees
in addition to Mr. Fequet.
[21] The Cooperative also offered
bookkeeping, financial statement preparation and business
consultation services. The Cooperative offered the services of
Mr. Fequet and two assistant accountants for that
purpose.
[22] The same report
(Exhibit A-2) states that a Bell 206 BII
helicopter was bought for $500,000. The purchase was financed by
the Laurentian Bank, and the helicopter was operated by
Trans-Côte Inc., a corporation of which the appellant
was the principal shareholder.
[23] The report also refers to a contract
for the supply of services by the Cooperative to Essor
Helicopters Inc. at the Chevery Airport in 1990; the purchase and
renovation of a building in St-Augustin for the
Cooperative's head office; the construction of a helicopter
hangar at Chevery Airport; the installation of the aircraft fuel
tank; the management of a scallop farm project for the consortium
P.A.S. Enr.; the purchase of office equipment; the purchase and
resale of a barge and the participation in various files of the
departments of Transport and Health and Social Services.
[24] The report (Exhibit A-2)
refers to a $1,013,000 financing agreement with various banks.
That agreement reads in part as follows:
K. Start-up
Financing Agreement with the Federation of Caisses
Populaires.
During September 1991 an agreement was reached between the
cooperative, Laurentian Bank of Canada, Federation of Caisse
Populaire, Caisse Populaire de Lourdes de Blanc Sablon, Caisse
Populaire de La Tabatière, Caisse Populaire de Tête
à la Baleine and the Société de
Développement Industriel (SDI) on a financing deal for the
cooperative of $1,013,000 as follows:
Institution
Participation
Laurentian Bank of
Canada
$ 493,000 capital lease
Caisse Populaire de Blanc
Sablon
*150,000 loan
50,000 credit margin
Caisse Populaire de La
Tabatière
*150,000 loan
Caisse Populaire de Tête à la
Baleine
*85,000 loan
Cooperative
members
85,000 common share
issue
$1,013,000
The funds from this financing project were used to help finance
the achievements mentioned in A to J, plus the cooperative's
start-up costs and working capital.
*$190,000 of these loans are guaranteed by the SDI.
[25] The first and last financial statements
prepared by an outside auditor are dated November 30, 1990,
and were filed as Exhibit A-3. On page 8, in the
chapter entitled "Long Term Debt", an amount of $3,000
is indicated respecting a "Note payable from a director,
without interest nor terms of repayment".
Exhibits A-4 and A-5 are draft financial
statements prepared by Mr. Fequet.
[26] Exhibit A-6 is a document
written by hand by the appellant and addressed to the two senior
directors and to Mr. Fequet. The appellant had ceased to be
chairman in 1991, but he had remained an active advisor to the
Cooperative. That document is a summary of a meeting held on
February 19, 1992. The appellant reviewed the decisions that
had been taken and gave additional instructions for the
management of the Cooperative's business. The last page of
the document is addressed in particular to James [Fequet]. It
states very clearly that the amounts lent by the appellant bear
interest at the same rate as the rate granted to the Cooperative
by the Laurentian Bank.
[27] Exhibit A-7 is a list of
advances the appellant made to the Cooperative. That list was
apparently typed by Revenue Canada officers. Mr. Fequet said
he had typed the list by hand. It states the date and amounts of
the cheques written by the appellant to make the instalments
payable on the helicopter. The amounts lent were spread over the
period from November 19, 1990, to May 25, 1993.
Exhibit A-8 is the minutes of a directors' meeting
dated March 14, 1992. There were now four directors. The
appellant was present but not as a director. The appellant
granted the Cooperative a $20,000 loan at 10 percent
interest. That amount appears in Exhibit A-7. There
were two amounts of $10,000 each.
[28] Mr. Fequet admitted that the
Cooperative had wanted to acquire Trans-Côte Inc., a
corporation of which the appellant was the principal shareholder.
Exhibit I-3, a letter from Mr. Fequet to an
official of the Centre de santé de la Basse
Côte-Nord, states that the Cooperative had acquired
Trans-Côte Inc. but explained that, for some reason,
the agreement had never been completed.
[29] The appellant testified. He is a
physician and a native of Blanc-Sablon. He and his family
own a number of businesses there. Before studying medicine, he
had studied engineering.
[30] The appellant stated that another
Quebec region had managed to establish an integrated
transportation cooperative on a profitable basis and that this
was the hope of the members for both their own economic purposes
and those of their region. He had made loans to the Cooperative
to enable it to start up and get through its growth period.
[31] As Exhibit A-10, the
appellant filed a financial lease agreement entered into between
the Laurentian Bank and the Cooperative concerning the
acquisition of a helicopter for $450,000. That document is dated
April 24, 1991. The appellant had signed it as president of
the Cooperative. Exhibit A-11 is a demand note dated
April 24, 1991, issued by the Cooperative to the bank.
Exhibit A-12, dated April 29, 1991, also concerns
the acquisition of the helicopter. Exhibit A-13 is a
surety dated April 24 that was signed by the appellant for
the bank concerning the helicopter acquisition.
[32] The appellant admitted that most of the
loans to the Cooperative had been made to help it make the
financial lease payments on the helicopter acquired by the
Cooperative for the purposes of establishing integrated
transportation.
[33] Harold Bouchard testified for the
respondent. He had calculated the benefit as being in respect of
a leased vehicle. Corporation 162481 Canada Inc. from which he
had obtained the computerized statement of advances to the
appellant, which he filed as Exhibit I-5, did not
explain the true nature of the payments.
[34] He also filed the various requests for
information sent to the appellant, requests that apparently went
unanswered for a long period of time. The last of the requests is
dated January 15, 1997 (Exhibit I-6). One request
had been made to Mr. Fequet on October 17, 1996
(Exhibit I-7). However, on February 28, 1997,
there is a letter of that date from the appellant to
Mr. Fequet, which was filed as Exhibit I-8. That
letter requested financial statements and other documents from
the Cooperative substantiating the business investment loss and
the notice of bankruptcy.
Arguments
[35] Counsel for the appellant argued that
the amounts of money lent to the Cooperative were
interest-bearing. Furthermore, the purpose of those loans was to
enable the Cooperative to retain ownership of the helicopter, as
a result of which the appellant's various businesses, which
were members of the Cooperative, were able to earn business
income.
[36] Counsel referred to the Cooperatives
Act, R.S.Q., c. C-67.2, as amended on July 1,
1999, and argued that the rebates provided for by that act were a
source of income.
[37] Counsel for the respondent suggested
that the appellant's purpose in his investment in the
Cooperative was to sell the shares he had held in a corporation
called Trans-Côte Inc., not to benefit the businesses
of which the appellant was a shareholder.
[38] Counsel stated that payment of interest
on the loans was not enforceable. No document clearly states that
the Cooperative undertook to pay interest on the loans.
Furthermore, the rebates to the members of the Cooperative did
not constitute income. She noted, however, that the purpose of
the Cooperative was to provide services to its members at lower
cost, but she argued that the relationship between loans and
income must be more immediate.
[39] With respect to rebates, she referred
to the Cooperatives Act, supra, in particular to
subsection 4(5) and to the relevant portion of
section 143 concerning operating surplus or surplus
earnings:
4. The
rules of cooperative action are as follows:
. . .
(5) the surplus
earnings or operating surplus must be allocated to the reserve or
to rebates to members in proportion to the business carried on
between each of them and the cooperative, or to other accessory
purposes determined by law;
. . .
CHAPTER XX
OPERATING SURPLUS OR SURPLUS EARNINGS
143. . . .
Rebates.
The rebates are allotted to the members and to the auxiliary
members, if any, in proportion to the business done by each of
them, during that fiscal year, with the cooperative.
. . .
[40] Counsel referred to an article by
Professor Roger Durand, Les traits juridiques
distinctifs de la coopérative et de la compagnie au
Québec, (1987) 17 R.D.U.S. 415, at
page 476:
[TRANSLATION]
. . . The allotment of rebates to members of a
cooperative adheres to an exclusive rule; rebates are allotted to
members in proportion to the business done by each of them with
the cooperative, as stipulated by the Commission on Cooperative
Principles of the International Cooperative Alliance and as
codified in the Quebec legislation. That rule is based on the
very nature of the operating surpluses of a cooperative, which,
it should be recalled, constitute all overpayments made by
members for the goods and services purchased from their
cooperative and not profits. . . .
Conclusion
[41] I shall begin by including in the
appellant's income a benefit in respect of the personal use
of a car, which is the property of a corporation of which he is
the principal shareholder. Apart from the appellant's
statements that he allowed that corporation to use a truck of
which he was the owner and that this constituted an exchange and
not a benefit, there is no written evidence to that effect. The
only document filed was the appellant's proof of insurance on
a truck but that was insurance for a year subsequent to the one
in question, and the use stated was pleasure driving. There is no
corporate document. The Notice of Appeal does not state the exact
facts. Accordingly, the evidence is insufficient to have the
taxed benefit written off.
[42] Now let us turn to the allowable
business investment loss. I will begin with the first point
raised by the respondent-that the appellant lent money to the
Cooperative so that it could acquire Trans-Côte Inc.,
a corporation of which the appellant was the principal
shareholder. It is impossible for me to assess the weight and
significance I should attach to that statement. That is a point
that should have been alleged because evidence is required in
order for it to be understood. In fact, no allegation was made on
that point and accordingly no evidence was brought to explain or
rebut it. I therefore set it aside.
[43] As to the binding force, or lack
thereof, of the agreement on interest, I find that the evidence
showed that, if the Cooperative had been able to repay the loans,
it would have done so with interest.
[44] In my opinion, however, the evidence
showed that the appellant's primary purpose in lending the
amounts in question to the Cooperative was to enable the
Cooperative to have the necessary operating funds and to retain
ownership of the helicopter.
[45] It was as a member of the Cooperative
that the appellant lent it the amounts in question. A member of a
cooperative is not a shareholder. Section 51 of the
Act provides that, to be a member of a cooperative, a
person or a partnership must have an interest as a user of the
cooperative's services.
[46] The meaning that should be given to
subparagraph 40(2)(g)(ii) of the Act is
explained in the decision of the Federal Court of Appeal in
Byram v. Canada, [1999] F.C.J. No. 92 (Q.L.). At
issue in that case was a capital loss from an interest-free loan
granted to a corporation by a lender who was a shareholder. The
Court found that the loan had been granted for the purpose of
earning income from dividends.
[47] The passages that I find most
informative in helping to determine whether a debt was incurred
for the purpose of gaining or producing income from a property or
business are quoted:
11 It is not
disputed that the Respondent issued interest-free loans to USCO
for the purpose of earning income in the form of dividends from
the company. The Appellant, the Crown admits that, in a broad
sense, the disputed loan was a device for financing the
operations of USCO and that the expected return from the loan is
through dividend income.
. . .
14 In contrast,
subparagraph 40(2)(g)(ii) of the Act provides that any
capital loss from the disposition 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. The relevant
portions of this section read as follows:
40(2)(g) a taxpayer's loss, if any, from the
disposition of property, to the extent that it is
. . .
(ii) a loss from the disposition of a debt or
other right to receive an amount, unless the debt or right, as
the case may be, was acquired for the purpose of gaining or
producing income from a business or property (other than exempt
income) or as consideration for the disposition of capital
property to a person with whom the taxpayer was dealing at
arm's length, . . . is nil.
15 Unlike
paragraph 20(1)(c) this section only requires a single stage
inquiry, namely what was the purpose for acquiring the debt.
. . .
16 The language of
section 40 is clear. The issue is not the use of the debt,
but rather the purpose for which it was acquired. While
subparagraph 40(2)(g)(ii) requires a linkage between the
taxpayer (i.e. the lender) and the income, there is no need for
the income to flow directly to the taxpayer from the loan.
17 Such an approach
is also consistent with commercial reality. Frequently,
shareholders make such loans on an interest-free basis
anticipating dividends to flow from the activities financed by
the loan. To adopt the position of the Minister would require
that this Court ignore this reality. It would also be contrary to
the comments of the Supreme Court of Canada in Stubart Industries
Ltd. v. The Queen. Commercial reality is to be
considered by the Courts in interpreting tax provisions like
subparagraph 40(2)(g)(ii) so long as it is consistent with
the text and purpose of the provision.
18 The ultimate
purpose of a parent company or a significant shareholder
providing a loan to a corporation is, without question, to
facilitate the performance of that corporation thereby increasing
the potential dividends issued by the company. This purpose is
clearly within the scope of both the text and the purpose of
subparagraph 40(2)(g)(ii), a section which is directed
towards preventing taxpayers from deducting losses that are not
incurred for the purpose of earning income from a business or
property.
19 There is a
growing body of jurisprudence that considers current corporate
reality as being sufficient to demonstrate that the expectation
of dividend income justifies a capital loss deduction under
subparagraph 40(2)(g)(ii). As articulated above, this
approach is consistent with current corporate realities and the
purpose of subparagraph 40(2)(g)(ii).
. . .
21 It is equally
clear that the anticipation of dividend income cannot be too
remote. It is trite law that sections 3 and 4 of the Act, in
conjunction with the rules set out in subdivisions (a)
through (d) of division B, establish that the income of a
taxpayer is to be determined on a source by source basis.
Furthermore, the availability of certain deductions under the
Act, including subparagraph 40(2)(g)(ii), require that some
regard be given to the source of income that is relevant to the
deduction. Accordingly, a deduction cannot be so far removed from
its corresponding income stream as to render its connection to
the anticipated income tenuous at best. This does not preclude a
deduction for a capital loss incurred by a taxpayer on an
interest-free loan given to a related corporation where it had a
legitimate expectation of receiving income through increased
dividends resulting from the infusion of capital.
23
. . . The determination of whether there is
sufficient connection between the taxpayer and the income earning
potential of the debtor will be decided on a case by case basis
depending on the particular circumstances involved.
[48] According to that decision, the lender
taxpayer need not derive income directly from the loan because
taxpayers sometimes grant interest-free loans, expecting that the
activities financed by those loans will produce income.
Commercial realities must be taken into account. The question as
to whether there is a sufficient connection between the debt and
the taxpayer's income is decided on a case-by-case basis on
the facts of each case.
[49] In this instance, the nature of
cooperatives must be considered. I refer on this point to the
article by Jean-Pierre DesRosiers, supra, at
page 39:5:
[TRANSLATION]
The cooperative is a unique form of partnership originating in
the spirit of economic development and mutual aid. This mode of
operation has managed to meet market needs such that it is now an
important part of our economy and has evolved in various forms.
Among the features that distinguish the cooperative from other
entities is the fact that its customers are its owners and that
it therefore acts, above all, in their best interests.
. . .
A cooperative is a partnership of members who have common
economic and social needs and who, with a view to satisfying
those needs, join forces to operate a business in accordance with
certain rules of action specific to the cooperative movement,
including the following: . . .
[50] As to the nature of rebates, it seems
established that they do not constitute a sharing of profits, but
rather a remittance of the costs of services rendered by the
Cooperative to its members. I refer on this point to a passage
from an article in the appellant's book of authorities by
Jean-Pierre DesRosiers, CA M. Fisc., entitled La
fiscalité des coopératives et de leurs membres,
APFF Congrès 1995, at page 39:14:
[TRANSLATION]
. . . A cooperative does not realize a profit
or loss, but rather an operating surplus or surplus earnings, or
a deficit. . . . Deficits are charged against the
reserve, whereas operating surpluses or surplus earnings are
allotted as rebates or paid into the reserve in accordance with
the members' decision at the annual meeting.
2.5.1 - Rebate Payments
A rebate is a remittance of the overpayment made by members or an
adjustment of prices of the goods and services delivered or
rendered to the cooperative. Rebates may not be paid from other
sources of income such as investments. It is expected that
rebates may vary with the nature or quality of the goods and
services transacted.
[51] In the appellant's case, the
monetary reward for his investment will not be potential dividend
income, as in Byram, supra, but a reduction in the
cost of services required by his businesses in the course of
their affairs. It seems to me that the relationship is just as
close as in the case of a shareholder who lends to his
corporation.
[52] The purposes for which the appellant
made the loans were business purposes. The loans were not made
for philanthropic or family purposes. His purpose in making the
loans to the Cooperative was to facilitate and promote the
commercial activities of his businesses and thus to increase his
own income. I therefore conclude that the debt was acquired by
the appellant for the purpose of earning income from his
businesses within the meaning of
subparagraph 40(2)(g)(ii) of the Act.
[53] The appeal is allowed on the following
basis: (a) the appellant is entitled to deduct the amount of
$162,325.27 in respect of allowable business investment losses;
(b) as admitted at the start of the hearing, the appellant
shall include in his income for 1993 and 1994 the respective
amounts of $15,488 and $6,421 and the penalties assessed in
respect of those amounts shall be deleted; (c) the benefit
in respect of the personal use of an automobile in the amount of
$2,992.34 shall be included in computing the appellant's
income, but the benefit in respect of the use of a snowmobile is
cancelled.
Signed at Ottawa, Canada, this 28th day of November
2002.
J.T.C.C.
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