Citation: 2009 TCC 102
Date: 20090424
Dockets: 2007-4901(IT)I
2007-4902(IT)I
BETWEEN:
ADELA PINA GILBERT,
PIERRE GILBERT,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
These
are two appeals relating to the 1999 taxation year. The parties agreed to
proceed on common evidence in their respective dockets, that is, 2007-4901(IT)I
and 2007-4902(IT)I.
[2]
In
both matters, the issue to be decided is the same, namely, whether the Minister
of National Revenue (the Minister) was justified in denying the
Appellants a business investment loss.
[3]
Besides the main issue,
two sub-issues were raised, namely, whether limitation is a sufficient and
valid reason to vacate the assessment; in fact, the Appellants submit that the
assessments are void, considering that they were made after the three-year
period. Lastly, the Appellants submit that if the assessments were to be confirmed,
the interest that was added should be cancelled.
[4]
As for the Respondent, she
submits that, should the Appellants discharge the burden of proof as to the
merits of the business investment loss,
the appeal should be dismissed, considering that the losses claimed must be
offset by the fact that they benefited from sizeable advances from the
corporation in favour of which they made the disbursements that gave rise to
the losses claimed.
[5]
The evidence consisted
of the testimony of the Appellant, Pierre Gilbert, whose testimony essentially
relied on the exhibit books filed as Exhibits A‑1 and A‑2. For her
part, the Respondent also filed exhibit books adduced as Exhibits I‑1 and
I‑2.
[6]
With the help of his
exhibit book, the Appellant explained the background and history of Sécovac
Inc. Incorporated in May 1996, he and his wife have been the sole shareholders
and directors since the very beginning.
[7]
He indicated that Sécovac
Inc. experienced rapid success and that the order book was generally full: he
stated that the company’s activities involved the design, manufacturing by
subcontractors, and sale of kilns for the softwood lumber industry.
[8]
He stated that the financial
situation deteriorated very quickly following the Canada vs. U.S.A. dispute
involving softwood lumber exported to the United States, as lumber export to the
United States was heavily impacted by the imposition of new
taxes by the Americans.
[9]
Softwood lumber producers
were therefore forced to bear significant additional costs to the point where
they slowed down their forestry activities; many questioned if not terminated
their investment project, all of which, in the Appellants’ words, had direct
and significant consequences on the financial viability of Sécovac Inc.
[10]
The sequence of events
is described very clearly in the Notice of Appeal of the Appellant, Adela Pina
Gilbert, at paragraphs 4(a) to (e) et seq. as well as paragraphs 5, 6, 7, 8, 9
and 10, which read as follows:
[TRANSLATION]
4. After experiencing significant success,
the taxpayer’s company experienced difficulties owing to the crisis in Canada’s softwood lumber industry following
the special import taxes imposed by the United States in this sector in early 2000. Sécovac Inc. made an assignment in
bankruptcy or became bankrupt on March 31, 2001, under the following circumstances:
(a) Sécovac Inc., as an insolvent person, filed
a notice of intention to make a proposal under section 50.4(1) of the Bankruptcy
and Insolvency Act (“BIA”) on March 30, 2001, and Samson Bélair Deloitte
& Touche agreed to act as trustee (Exhibits P-1 and P-2).
(b) The Corporation filed a proposal with the licensed
trustee under the BIA on May 3, 2001 (Exhibit P-3). The sole
creditors who had voting rights on the proposal were the Ministère du Revenu du
Québec and Canada Customs and Revenue Agency.
(c) The proposal was the subject of favourable
recommendations by the trustee Samson Bélair Deloitte & Touche on May 15,
2001 (Exhibit P-4).
(d) The proposal was voted against by the
creditors at a meeting that started on May 17, 2001, and ended on May 31, 2001,
and the Corporation was deemed thereupon to have made an assignment or bankrupt
on that day, following the vote of the creditors against it (Exhibit P-5).
The fiscal year of Sécovac Inc. ended October 31.
(e) The Appellant also refers to the Reasons
for Judgment of the Tax Court of Canada rendered by the Honourable Justice
Louise Lamarre Proulx on October 17, 2005 (Exhibit P-6), and more particularly
to paragraphs [3], [4], [6], [7] and [8].
5.
In early March 2001, prior to filing the notice
of intention to make a proposal with the trustee, the Appellant paid debts owed by Sécovac Inc. to its regular
suppliers or “preferred creditors” out of her personal joint account. The
Appellant submitted as evidence the bank statement from her personal bank
account which shows the transactions made as well a copy of each cheque dated
March 9, 2001, with the name of each creditor for a total payment of
$68,772 (Exhibit P-7).
6.
Since the proposal was refused by the creditors,
the Corporations made an assignment or became bankrupt on May 31, 2001. The
amounts advanced by the Appellant for the benefit of Sécovac Inc. were not
reimbursed to her. Hence the loss claim by the Appellant.
7.
The debts were deemed bad by the Appellant on
March 31, 2001, that is, the date on which the Corporation made an assignment
or became bankrupt.
8.
The Appellant and her husband therefore equally divided
the total amount paid to the regular suppliers between the two of them, which
came to $34,386 each. The Appellant therefore claimed the losses in her 2001 individual
tax return which represented half of the debts she paid out of her personal
joint account to the regular suppliers or “preferred creditors” of Sécovac
Inc. She paid the debts thinking there was a chance that the proposal would
be accepted.
9.
Seeing as in 2001 the Appellant did not have sufficient income to absorb
the loss, the latter was carried backward to 1999, as losses of this nature can
be carried back up to three years. The Appellant and her husband therefore equally divided the total amount paid to the regular suppliers
between the two of them, which came to $34,386 each. This is why in 2001
each of the Appellants claimed a business investment loss of $17,193, which
they carried backward to 1999. The loss claimed was 50% of the total amount paid
to the creditors.
10.
Therefore, in 2001, the Appellant claimed a business investment loss of
$17,193, which she carried backward to 1999.
[11]
The Appellant, who is very
articulate, provided a clear and consistent presentation of all the facts, the
majority of which were substantiated by the relevant documentary evidence. The evidence
pertaining to the details of the losses claimed clearly surprised the
Respondent.
[12]
What is surprising
is that during the audit, despite numerous and specific attempts to obtain supporting
documentation and certain information pertaining to the losses claimed, the
Respondent always failed. The Appellants suggested at the time that such
documentation and information was established arbitrarily. However, the descriptive
evidence of the amounts paid, which is unassailably precise, was clearly
available.
[13]
Some of the allegations in the
Reply to the Notice of Appeal illustrates very clearly the reason for the
surprise:
[TRANSLATION]
6. . . .
(i) the Appellant has yet to provide the MNR with
the information necessary to verify and validate the debt for which the loss
claim was made; and
. . .
12. This statement does not contain any
information to verify the business investment for which the loss claim was made.
. . .
16. On June 2, 2004, the MNR asked the Appellant
to complete a questionnaire in order to obtain information to verify and
validate the alleged business investment for which the loss claim was made.
17. The Appellant never completed the
questionnaire.
18. On June 11, 2004, the
Appellant and her husband state to the MNR’s representative, in the presence of
their lawyer at the time, that
(a)
they cannot explain the source of the amount invested in the
business
for which the loss claim was made;
(b) they
cannot provide any document demonstrating that they did
in
fact invest the amount for which the loss claim was
made; and
(c) they
arbitrarily determined the amount of the business
investment loss claimed.
[14]
On
the face of the documentary evidence submitted by the parties, it appears
obvious that the demise of Sécovac Inc. was quickly and very easily accepted. The
softwood lumber trade dispute between the United States and Canada was certainly one
explanation or even a legitimate excuse; surprisingly, it appears that the
bankruptcy essentially impoverished both the federal government and the Quebec government.
[15]
As
for the business investment loss, it is also obvious that the lack of
co-operation and the systematic refusal to provide the information that was
indeed available, clear and unequivocal was merely an attempt to buy time until
certain evidence was diluted.
[16]
However,
the losses claimed essentially arise from the payment of indebtedness to the
creditors of Sécovac Inc. by the Appellants: in other words, the Appellants
decided to pay certain debts of the Corporation of which they were the
shareholders some time before the bankruptcy, debts which clearly would have
been extinguished by the bankruptcy.
[17]
For
a loss to be admissible, it must meet the requirements set out in paragraphs 38(e)
and 39(1)(c) and subsections 50(1) and 127(7) of the Income Tax Act (the
Act).
[18]
The testimony
and documentary evidence is clear. The facts are also clear and precise.
[19]
First, I will discuss
the statute barred argument. Can the
assessments be vacated on the ground that they are statute-barred?
[20]
The Appellants submitted
that the limitation period was reached and that the assessments should be
vacated on that basis. Subsection 152(3.1), subparagraph 152(4)b)(i) and
paragraph 152(6)(c) of the Act read as follows:
152(3.1) Definition of “normal
reassessment period” -- For the purposes of
subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal reassessment
period for a taxpayer in respect of a taxation year is
(a) where at the end of the year the taxpayer is a mutual fund
trust or a corporation other than a Canadian-controlled private corporation,
the period that ends 4 years after the earlier of the day of mailing of a
notice of an original assessment under this Part in respect of the taxpayer for
the year and the day of mailing of an original notification that no tax is
payable by the taxpayer for the year; and
(b) in any other case, the period that ends 3 years
after the earlier of the day of mailing of a notice of an original assessment
under this Part in respect of the taxpayer for the year and the day of mailing
of an original notification that no tax is payable by the taxpayer for the year.
152(4) . . .
(b) the assessment, reassessment or additional
assessment is made before the day that is 3 years after the end of the normal
reassessment period for the taxpayer in respect of the year and
(i) is required pursuant to
subsection 152(6) or would be so required if the taxpayer had claimed an amount
by filing the prescribed form referred to in that subsection on or before the
day referred to therein,
. . .
152(6) Reassessment
where certain deductions claimed [carrybacks] -- Where a taxpayer has filed for a
particular taxation year the return of income required by section 150 and an
amount is subsequently claimed by the taxpayer or on the taxpayer’s behalf for
the year as
. . .
(c) a deduction under section 118.1 in respect of a
gift made in a subsequent taxation year or under section 111 in respect of a
loss for a subsequent taxation year.
[21]
Thus, based on
these provisions, there is no doubt that the assessments are in no way affected
by the limitation provisions. In fact, the Appellants were assessed on July 4, 2000,
and submitted a request for loss on April 8, 2002, for the 1999 taxation
year. Following an audit in 2004, assessments were issued on June 21, 2004, and
confirmed on September 28, 2004, in Mrs. Gilbert’s case and on November
13, 2007, in Mr. Gilbert’s case.
[22]
Subsection
165(3) of the Act allows the Minister to reconsider an assessment that is under
objection. This subsection allows him, following the reconsideration, to vary
the assessment under objection by a reassessment. It is very clear that
subsection 165(5) of the Act allows the Minister to do so without having to
take into account the limitations provided for in subsection 152(4) of the Act.
[23]
In the case at
bar, the matter does not involve an assessment issued after the taxpayer
objected to it, but rather an assessment made following a decision by the Appellants
to file a request for loss carryback. It is subsection 152(6) of the Act which
allows the Minister to make such an assessment despite the fact that the normal
reassessment period as set out in subsection 152(4) of the Act may be
prescribed.
[24]
Subsections
165(3) and (5) provide as follows:
165(3) Duties of Minister – On receipt of a notice of
objection under this section, the Minister shall, with all due dispatch,
reconsider the assessment and vacate, confirm or vary the assessment or
reassess, and shall thereupon notify the taxpayer in writing of the Minister’s
action.
(5) Validity of reassessment
– The limitations imposed under subsections 152(4) and
152(4.01) do not apply to a reassessment made under subsection 165(3).
[25]
The
documentary evidence validated by circumstantial evidence arising out of the
trustee’s questioning and the creditor’s attitude is that Sécovac Inc. was in
fact a creditor of the Appellants for a substantial amount, with the amount advanced
to the directors being in the hundreds of thousands of dollars.
[26]
The
Respondent submits that the Appellants did not suffer any business investment
loss as at the time they were debtors to Sécovac Inc. on behalf of which and
for the benefit of whom they
made the disbursements that gave rise to the losses claimed.
[27]
The
Respondent submits that the business investment losses claimed by the Appellants
are extinguished by virtue of legal compensation for the advances paid to the
shareholders.
[28]
Before
answering this question, I believe it is pertinent to first answer the question
as to whether the losses were truly business investment losses.
[29]
Did
the Appellants discharge the burden of proof required to be entitled to those
losses?
[30]
The
documentary evidence concerning the names of the persons who received the
payment, the amounts paid and the dates on which they were paid is decisive,
which makes it difficult to understand the reason for the Appellants’
stubbornness in not disclosing these details when requests for information were
made to them.
[31]
This
aspect is as clear and unequivocal as the evidence regarding the reason for the
payment of certain specific debts of Sécovac Inc. is deficient, especially in
explaining why and how this payment had a direct or indirect chance, however
slight, of generating any income or profit.
[32]
Sécovac
Inc. saw exceptional growth over a short period of time. It incurred a
significant tax liability to which other current debts are added, albeit more
marginal ones considering the company’s
activities.
[33]
At
the same time, it appears that Sécovac Inc. pumped its surpluses or available
funds to the Appellants, sole shareholders
and directors, personally. [Here I will open a parenthesis to say that it is unclear to
me why the tax file pertaining to the assessments arising out of the advances
paid to the shareholders was not attached to this file, especially since the
Respondent argues compensation].
[34]
Certainly,
the degree of probative force of perceptions, intentions or insinuations is less
convincing than evidence consisting of facts and documents which cannot be
ignored. However, in
the case at bar, the dates, facts and numbers established by the documentary
evidence support a finding that is in harmony with the weaker dimension of the
evidence.
[35]
In fact, the Appellants
disbursed the amounts that gave rise to
the losses claimed on
an essentially voluntary basis without duress or coercion, at least based on
the evidence made available by the Appellants, on whom the burden of proof rested.
[36]
Why did the Appellants
choose to pay the creditors of Sécovac Inc.? I should state, at the outset,
that the evidence did not explain nor justify why they did so. It is very
surprising how such reasonable persons could have displayed such generosity especially
since the following is stated in their Notice of Appeal:
[TRANSLATION]
9. Seeing as in
2001 the Appellant did not have sufficient income to absorb the loss, the
latter was carried backward to 1999, as losses of this nature can be carried
back up to three years. The Appellant and her husband therefore equally divided the total amount paid to the regular suppliers
between the two of them, which came to $34,386 each. This is why in 2001
each of the Appellants claimed a business investment loss of $17,193, which
they carried backward to 1999. The loss claimed was 50% of the total amount paid
to the creditors.
9. Seeing as in
2001 the Appellant did not have sufficient income to absorb the loss, the
latter was carried backward to 1999, as losses of this nature can be carried
back up to three years. The Appellant and his wife therefore equally
divided the total amount paid to the regular suppliers between the two of them,
which came to $34,386 each. This is why in 2001 each of the Appellants
claimed a business investment loss of $17,193, which they carried backward to 1999.
The loss claimed was 50% of the total amount paid to the creditors.
[37]
Although
the answer is not essential to dispose of the appeal, I believe, in light of
the overall evidence, context and circumstances, that the Appellants did so to
prevent the payment from being taxed preferentially to the detriment of the creditors,
likely to trigger collection action, which would explain the reason for the Appellants’
stubbornness in failing to comply with requests for information during the review
of their tax file.
[38]
It
was evident from the moment the Appellants decided to reimburse the creditors
of Sécovac Inc. without being legally required to do so that the bankruptcy
would make it impossible to recover the amounts paid out, on the one hand, and
that, on the other, nothing would be gained by it; in other words, it was
obvious from the start that those amounts would be lost definitively with no
possibility of return other than possibly obtaining a certain tax benefit.
[39]
I
would also venture to say that the Appellants may have sought to maintain a good
rapport with one or more companies with which they could potentially rebuild a
business relationship. There is no evidence upon which to base such a theory and had that theory
been confirmed, it would not be pertinent.
[40]
The Appellants freely
elected to disburse $34,386 each to pay creditors of Sécovac Inc., of
which they were the sole
shareholders and directors, without
duress or coercion and without hope of any profit or income. Such a payment can
and is to be characterized as a payment of convenience with a purpose and
objectives that have absolutely nothing to do with the conditions required to
be deemed a business investment loss.
[41]
I would like to
note that the content of subparagraph 40(2)(g)(ii) of the Act is different
from that provided for in paragraph 2(1)(c) of the Act where there needs
to be a direct link between the money borrowed and expected income. In that
regard, subparagraph 40(2)(g)(ii) of the Act reads as follows:
40(2) Notwithstanding
subsection 40(1),
. . .
(g) a
taxpayer’s loss, if any, from the disposition of a 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
by the taxpayer 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.
[42]
The Appellants are
seeking the cancellation of interest if the validity of the assessments is
confirmed.
[43]
On
the issue of interest, under subsection 220(3.1) of the Act, only the Minister
can waive the interest due on an assessment. The waiving of interest is essentially
discretionary and granted to the Minister and not this Court. Once such a
request has been made and a decision is taken by the Minister, the Court’s only
jurisdiction is to verify whether the decision was rendered in accordance with
the requirements of the Act.
[44]
Jurisdiction over such a review of a
decision of the Minister is vested exclusively in the Federal Court and not the
Tax Court of Canada.
[45]
For all
these reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 24th
day of April 2009.
“Alain Tardif”
Translation
certified true
on this 15th day
of May 2009.
Daniela Possamai,
Translator
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