Citation: 2008TCC204
Date: 20080521
Docket: 2005-1828(IT)G
BETWEEN:
GESTION RAYNALD LAVOIE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
In an amended income
tax return that it filed with respect to its 2003 taxation year, the Appellant
claimed a $52,000 non-capital loss. The Minister of National Revenue
("the Minister"), by notice of reassessment dated January 7,
2005, disallowed the claimed loss, and, upon an objection filed by the
Appellant, confirmed the reassessment dated January 7, 2005, in relation to the
2003 taxation year.
[2]
The parties raised
several issues at the hearing of this matter. The Respondent questions whether
the debt alleged by the Appellant really existed, and, if it did exist, the
amount of that debt. The Appellant wonders whether it is entitled to use the
non‑capital losses that it incurred in prior years during the years 2000,
2001, 2002 and 2003, and whether it properly did not write off work in progress
on the production of a television series prior to its 1997 fiscal period.
[3]
Other issues were
raised as well — specifically,
whether the Court, as part of the instant appeal, has jurisdiction to determine
the precise moment at which the non‑capital loss was realized, whether it
was appropriate under the circumstances to include the project in the
Appellant's subsidiary's inventory, and, if so, what value should be ascribed
to this inventory property in the accounting for the years in issue.
[4]
The Appellant is a
company duly incorporated under Quebec's Companies Act by articles of
incorporation issued on September 8, 1986. Since January 1988, its sole
shareholder has been Raynald Lavoie.
[5]
2841-0777 Québec Inc. ("the
subsidiary") was duly incorporated on October 16, 1990 under Part
1A of the Companies Act (Quebec) and was a wholly‑owned subsidiary
of the Appellant until its dissolution on November 2, 1999. On
October 31, 1997, the subsidiary went into liquidation, and all its
assets were distributed to its sole shareholder, the Appellant. The Appellant's
fiscal periods end on October 31 each year, and those of its subsidiary
ended on the last day of February each year, except for the last period,
which ended on October 31, 1997. The subsidiary was operating as
"Groupe Contact" or "Groupe de communication Contact".
[6]
The subsidiary's
activities began in 1991. It was a marketing and communications company. Raynald
Lavoie looked after the administrative aspects of management and injected
funds. The first contracts were in graphic design. This was followed by
contracts with Parks Canada for signage and other work, and, finally, by the
contract in issue.
[7]
According to Mr. Lavoie,
it was common practice for Parks Canada to receive work orders after work was
done. The actual mandate, then, was given before the work order was issued.
Jean Bernier, the subsidiary's director of operations, confirmed that this was
how things were done. In fact, he was the one who headed the marketing and
communications field work for the subsidiary. The subsidiary got several
contracts from Parks Canada, and Mr. Bernier had become friends with Jean‑Paul Desjardins,
the marketing director of the Environment Canada Parks Service
("the Parks Service"). The projects started before the contracts
were signed, because the contracts had to go through Supply and Services
Canada. Mr. Bernier said that he relied on Mr. Desjardins, whom he
described as a man of his word, and that a handshake was sufficient to start a
project. He met with Mr. Desjardins two or three times a week.
He emphasized that it was commonplace for work to be finished before a
contract was received.
[8]
The project in issue
began in early 1991. It was a television series that was initially to be called
Jardinier du monde but was later re-titled Curieux de nature. According
to Mr. Lavoie, the impetus for the series, and the investment therein, was a
letter dated March 13, 1991, in which Jean-Paul Desjardins confirmed
to the subsidiary's Jean Bernier that the Parks Service would be going ahead
with the series, to be produced by Parks Canada with partial funding from the private
sector. Mr. Desjardins added that, even though the broadcaster had not yet
been decided upon, the research and pre-scripting stage needed to begin; the
costs associated with that stage were to be defrayed in the course of the following
fiscal year (1991-92). Mr. Desjardins ended the letter by stating:
[TRANSLATION] "Let the great adventure begin."
[9]
The subsidiary invested
in scripting, and a draft script (tab 28 of Exhibit A‑1) was
submitted to the Parks Service. In the wake of this, the Parks Service
notified the subsidiary that there was no money in the short term, but it made
employees and other resources, such as equipment and guides from various parks,
available to the subsidiary. On June 6, 1991, Société de radio-télévision
du Québec (Radio‑Québec) confirmed to the Parks Service that it would
provide nearly $200,000 for the project, and, in a letter to the broadcaster dated
June 19, 1991, the Parks Service confirmed its own $200,000
financial commitment to the project. The next day,
June 20, 1991, the Parks Service promised that it would repay Radio‑Québec
the $100,000 that it had advanced to the subsidiary if the project did not go ahead
within the coming months.
[10]
The funds from Radio‑Québec
enabled Raynald Lavoie to authorize shooting to begin, and the shooting took
place from June 21 to September 1, 1991.
On December 11, 1991, the subsidiary signed a broadcasting and exploitation
rights pre-purchase contract with Radio‑Québec for the project. The
contract acknowledged its $100,000 investment of June 21, 1991, and
its commitment to invest an additional $100,000 in two instalments of $50,000
each. The financial structure of the project, set out in Appendix B of the
contract, states a total of $700,395, including Radio‑Québec's
contribution. According to a letter dated February 19, 1992, Radio‑Québec
clearly still wanted to broadcast the 13-episode series.
[11]
On October
20, 1992, Parks Canada, through Laurent Tremblay, its associate director general
for the Quebec region, sent a letter to Jean Bernier underlining the
efforts that the subsidiary had devoted to the project and informing Mr.
Bernier that, in response to his call for partners, and in a spirit of
partnership, Jean-Paul Desjardins would be supporting his efforts to
secure financing and would offer his cooperation.
[12]
On February 3, 1993,
Raynald Lavoie wrote to Jean-Paul Desjardins of the Parks Service to tell him
that the subsidiary still had not received a contract number based on which an
invoice could be issued. He therefore notified him that his letter dated
March 13, 1991, would be considered a contract, and, in that regard,
he enclosed an invoice for $53,470, plus tax, covering professional fees,
research and pre‑scripting. The reply was swift. In a letter dated
February 9, 1993, Laurent Tremblay set out the facts and the
circumstances, noting that no contract had been signed, that no instructions
for work had been issued, and that, ultimately, Parks Canada would merely
be a partner, along with the other sponsors, subject to the availability of the
funds applied for.
[13]
According to Mr. Bernier,
and based on Exhibit A-3, the project budget was $727,981. A total of $444,360
was actually paid. Although the budget is dated October 30, 2002, the
figures are from an earlier pre-budget proposal. In addition, the contract
provided for a 15% profit margin, so that the actual expense for the subsidiary
was approximately $377,400, less Radio‑Québec's contribution, for a total
of $277,400.
[14]
Mr. Bernier left
his job with the subsidiary in the spring of 1993. In 1994 and 1995, he
continued his efforts to sell the project to Parks Canada. He screened excerpts,
and met with Suzanne Hogan, a Parks Canada marketing consultant from 1990 through
1995, though Ms. Hogan was absent from July 18, 1994, to August 24, 1995.
Ms. Hogan recalls seeing a project script and remembers having contacts with Mr. Bernier.
Mr. Bernier's efforts with Parks Canada were unsuccessful, because it was
clear that it did not have the budget for the project.
[15]
As for Mr. Lavoie,
he also took steps to find out why Parks Canada had changed its mind. He
tried to retain the services of a Montreal lawyer, but the lawyer asked him for
a rather substantial retainer, which he did not provide. Mr. Lavoie also
met with his MP and a government minister in order to move things forward, but
he was unsuccessful. He says that he does not have the resources to sue.
[16]
Laurent Tremblay and
Jean-Paul Desjardins also testified. They stressed that private-sector partners
were crucial for the project. Mr. Desjardins testified that even though
Parks Canada made a $200,000 financial commitment to Radio‑Québec in its
letter of June 19, 1991, the commitment was subject to finding such partners.
He discussed Parks Canada's efforts to find sponsors in a letter to Mr. Bernier
dated October 20, 1992.
[17]
As for Mr. Tremblay,
he stressed that the project was proposed to Parks Canada by the
subsidiary, and he repeated that private-sector partners were a must for
the project. His interpretation of the letter of March 13, 1991, is
that it merely expressed Parks Canada's intent to be involved, and did not constitute a work
request or a contract.
[18]
In the subsidiary's financials
for the period ended February 29, 1992, the assets column includes the
asset class [TRANSLATION] "work in progress" (WIP). According to
Mr. Lavoie, its value, $260,000, represents the subsidiary's total expenditures
on the project. The amount is entered under this item because he was still
hoping to recover it. Following discussions with his accountant, the amount
continued to be characterized in this manner until February 1997, at which
point, given the financial situation of the subsidiary (which had been
inactive since 1995) and Mr. Lavoie's physical exhaustion, he decided to
abandon his efforts to recover the project expenditures.
[19]
According to the
accountant responsible for preparing the subsidiary's financial statements, the
project remained on the books as WIP because of discussions with
Mr. Lavoie, who said that the amount might later be converted into real
dollars. This explains why it was only in 1997 that the decision was made to
sacrifice the amount and take it off the books upon issuing the subsidiary's
closing financial statements as at October 31, 1997. According to the
accountant, the subsidiary now had to be liquidated because its raison d’être
had ceased to exist. This did not happen earlier because the subsidiary
was thought to have an asset (namely WIP) that had value.
[20]
The accountant says
that, in a notice to readers, an accountant must ascertain whether the numbers
are truthful, and that one must ensure that everything makes sense.
In the subsidiary's financial profit and loss statement for the period
ended February 29, 1996, the accountant took care to note, under
[TRANSLATION] "Contingency", that the valuation of the WIP had not
changed, and he explained the position of the subsidiary's management.
References to contingencies in a financial statement denote an uncertain
situation. In the instant case, in order to valuate the WIP as nil, one would
need to show that the amount was unlikely to be realized. Section 3290,
paragraph 6(2) of the CICA Handbook explains the conditions that must be
met in order for a contingency to be entered in financial statements.
[21]
The accountant was
questioned as to why the WIP was not written off earlier. In response, he
explained that a write-off has repercussions on the financial situation of the
subsidiary, and that if his only consideration had been the tax consequences of
the write-off, he would have done it much earlier. In 1997, he felt that
the limit had been reached, and that all was lost for the subsidiary from a
financial standpoint. Thus, the subsidiary was liquidated on
October 31, 1997.
[22]
Éric Beauséjour is an
appeals officer with the Canada Revenue Agency. He was the person who
changed the year of the loss from 1997 to 1993 on behalf of the Respondent. In
his submission, the letter from Parks Canada to the subsidiary, dated
February 9, 1993, clearly states that there was no contract and that
Parks Canada did not owe the subsidiary anything. When he received the
file in 2002, he asked the subsidiary to provide him with documents showing
what measures it had taken to recover the loss, and he was not given any such
documents. He says that the CRA prefers to see documents rather than believe
taxpayers. He therefore maintained his decision that the loss should have
been claimed at the close of the fiscal period that ended on
February 28, 1993. In fact, the notice of confirmation dated
May 19, 2005, reflects this.
[23]
It is interesting to
note that the notice of confirmation refers to a non‑capital loss of
$347,014, whereas the amount in the financial statements is $260,000.
[24]
On another note, the
evidence suggests that, on March 29, 2004, the Appellant, through its
accounting firm, made a loss determination request in connection with its
taxation year ended October 31, 1997. Having been told that the
request had not been received, the Appellant faxed it on
October 24, 2004. However, the evidence does not disclose
that the Agency issued a notice of determination. Although the Appellant, in
its written submissions, alleged that a notice of determination was issued prior
to the reassessment, I believe that the evidence does not support such an
allegation, and I dare say that if the Appellant had not been satisfied with
the determinations set out in such a notice, it would have filed an appeal from
it in this Court.
[25]
Since I have found that
the Minister did not issue a notice of determination prior to the issuance of
the reassessment that gave rise to the instant appeal, I will first address the
question of whether this Court has jurisdiction to determine the precise moment
at which the non-capital loss was incurred.
[26]
The Tax Court of Canada's
jurisdiction over these questions has been the subject of decisions in which it
has been held that the Court has jurisdiction to consider all constituent
elements of an assessment under appeal. In Horvath v. The Queen,
1999 CarswellNat 7, No. 97-373(IT)I, January 7, 1999, Judge
Bell of this Court held that the non-capital losses realized in 1991 and 1992,
and carried forward to 1994, were constituent elements of the assessment made
in respect of the latter year. Judge Bell relied on the principles set out in Aallcann
Wood Suppliers v. The Queen, 94 D.T.C. 1475, and Samson & Frères Ltée
v. The Queen, 97 DTC 642. In Aalcann, Judge Bowman
(as he then was) made the following remarks concerning this Court's
jurisdiction with respect to this question:
. . . it is open to a taxpayer to challenge the
Minister's calculation of a loss for a particular year in an appeal for another
year where the amount of the taxpayer's taxable income is affected by the size
of the loss that is available for carry-forward under section 111. In
challenging the assessment for a year in which tax is payable on the basis that
the Minister has incorrectly ascertained the amount of a loss for a prior or
subsequent year that is available for deduction under section 111 in the computation
of the taxpayer's taxable income for the year under appeal, the taxpayer is
requesting the court to do precisely what the appeal procedures of the Income Tax Act
contemplate: to determine the correctness of an assessment of tax by
reviewing the correctness of one or more of the constituent elements thereof,
in this case the size of a loss available from another year. This does not
involve the court's making a determination of loss under subsection 152(1.1) or
entertaining an appeal from a nil assessment. It involves merely the
determination of the correctness of the assessment for the year before it.
[27]
In Samson et Frères
Ltée., Judge Dussault clearly showed that, in determining whether an
assessment is valid, this Court may look at each constituent element of that
assessment. The relevant excerpt reads:
As the Minister was entitled to make a reassessment in
respect of that year, it seems clear that he could assess every relevant
element for the purposes of computing the tax for the year, including the
amount of a non-capital loss in respect of which a taxpayer claimed a
carry-back in order to reduce his taxable income. To the extent that there was
no request by the taxpayer for determination of the loss under subsection
152(1.1) of the Act and that, therefore, no determination was made that would
be binding on the Minister and the taxpayer under subsection 152(1.3) of
the Act, it is clear that, for the purposes of the assessment in respect
of a taxation year, the Minister may determine the amount of the non-capital
loss that a taxpayer is entitled to deduct for the purposes of computing his
taxable income. Similarly, in his appeal from such an assessment, the taxpayer
may dispute the amount thus assessed, even if the year in which the loss was
incurred is time-barred and may have been the subject of a 'nil' assessment.
[28]
In my opinion, then,
the initial moment at which the loss was realized becomes a constituent element
of the instant dispute because it dictates both the expiry of the loss and the actual
amount of the loss, there being nothing in the nature of a determination
by the Minister that is binding on the parties. Thus, it is this Court's duty
to verify the accuracy of this constituent element of the assessment in order
to ensure that it is valid, even though the year in which the losses were
incurred is otherwise time‑barred.
[29]
Before analysing these
issues, we must clarify the circumstances of the case at bar and the confusion
regarding the method that needed to be used in order to account for the
expenses, and, ultimately, the revenue, associated with the television series
project. This must include, among other things, certain clarifications
regarding the term "work in progress". A distinction must be drawn
between the accounting definition of WIP and the tax definition of WIP. From an
accounting standpoint, the project was still in progress when it was
abandoned. From the perspective of the financial standing of the subsidiary, it
was important to continue to characterize the amount in this manner, and not to
write it off, because it was an asset. From a tax standpoint, the term
"work in progress" is generally used for work done by certain
professionals. Such professionals can elect to exclude their year-end WIP in
computing their income for a taxation year, so that it will not be part of
their inventory. But they are nonetheless entitled to deduct the expenses
associated with the work, even though no income therefrom will be taxable until
the client is billed. This tax treatment is provided for in subsection 10(4)
of the Income Tax Act ("the Act"). As for
other unfinished work, it is normally part of inventory, in accordance
with section 10 of the Act.
[30]
We must also determine whether
the unfinished work in the case at bar can constitute an inventory asset.
Subsection 248(1) of the Act provides the following very broad definition
of inventory:
"inventory" means a description of property the cost or
value of which is relevant in computing a taxpayer's income from a business for
a taxation year or would have been so relevant if the income from the business
had not been computed in accordance with the cash method and, with respect to a
farming business, includes all of the livestock held in the course of carrying
on the business;
[31]
Thus, an inventory
consists of property. Is the television series project truly property? The term
"property" is also defined in subsection 248(1) of the Act:
"property"
means property of any kind whatever whether real or personal or corporeal or
incorporeal and, without restricting the generality of the foregoing, includes
(a) a right of any kind whatever, a share or a
chose in action;
(b) unless a contrary intention is evident, money;
(c) a timber resource property; and
(d) the work in progress of a business that is a
profession.
[32]
In my opinion, even
though the project was not completed, the fact remains that some work was done,
and thus it can be concluded that the project constitutes property. The
production of a 13-episode television series, including scripting and shooting,
is incorporeal personal property that undoubtedly gives the producer
intellectual property rights. In my opinion, the television series project constituted
property, and the fact that it was unfinished does not alter the situation in
any way. The Act does not say that the property in a taxpayer's inventory has
to be finished product.
[33]
It must be recalled
that this type of project was normally carried out by the subsidiary of the
Appellant, which operated a communications business. It seems reasonable to me
that the inventory of this type of business would include these types of
projects, which are in the course of production.
[34]
This being said, we
must, as counsel for the Appellant has suggested, valuate the inventory. For the purpose of computing its income from a
business that is not an adventure or concern in the nature of trade, a taxpayer
must use the method set out in subsection 10(1) of the Act to valuate the
property described in its inventory. The property must be stated at the
lesser of cost or fair market value. Subsections 10(4) and 10(6) do not
apply, and the Appellant cannot avail itself of them.
[35]
Thus, under the
circumstances, it is difficult for the Appellant to state a project in the
midst of production at fair market value. The project's development spanned several
subsequent fiscal periods, so it is difficult to obtain a market value that faithfully
reflects the reality at each different stage of production. In the instant
case, it is more realistic to state an inventory value equal to the
expenditures made for the purpose of completing the project.
[36]
Under the
circumstances, I believe that the amount truly incurred by the Appellant's
subsidiary in 1991, 1992 and 1993 to produce the 13 episodes is $260,000. That
is the amount that I consider fair under the circumstances, and it is the
amount that the Respondent accepted at the time of the assessment, as shown, in fact,
by her position in paragraph 38 of the Amended Reply to the Notice of
Appeal, where she submits that the Appellant's subsidiary's $260,000 loss was
sustained no later than its fiscal year ended February 28, 1993. Moreover,
in the notice of confirmation issued by the Minister on May 19, 2005,
the loss was valuated at $347,014.
[37]
Consequently, there was
indeed a $260,000 claim. At what moment was the loss realized on that claim? As
we have seen, on February 9, 1993, the Appellant received a letter from Laurent
Tremblay, informing it that no contract had been signed, that no work order had
been issued, and that Parks Canada was merely one partner among several,
subject to the availability of funds. The Appellant's 1993 fiscal period
ended on February 28, and, according to the appeals officer, the Appellant
should have stated the loss on its 1993 balance sheet.
[38]
In my opinion, the
appeals officer's conclusion that the letter from Parks Canada clearly
states that there was no contract, and that the Appellant was therefore not a
creditor of a debt, reflects a defeatist and much too
categorical attitude. It would amount to saying that, immediately upon receiving
the letter stating that there was a potential problem with Parks Canada's
financial involvement, the Appellant should have thrown in the towel, forgotten
about the project, and taken its losses on the spot. Given the circumstances of
the instant case, I do not believe that it would have been wise or even
prudent to think that such a claim could be written off without making some
efforts to collect on it, and in fact the Appellant made such efforts in
subsequent years.
[39]
At the same time, one
would have had to be very optimistic to believe that the project could keep its
$260,000 market value until 1997, before the decision to abandon the television
series. Thus, perhaps the loss should not have been completely written off in
1993 or 1997.
[40]
In view of this
situation, it would have been logical, in my view, for the subsidiary to state
a reduction of the permanent value of the project over more than one fiscal
period. Thus, the market value of the property described in the inventory
would have been reduced in 1993 upon receiving the letter from Laurent
Tremblay. The fact that the subsidiary was continuing to make efforts to
keep the project on track shows that it was still worth something. Thus, it
would also be logical to conclude that the property's market value decreased
over the subsequent fiscal years each time the efforts were unsuccessful, up
until 1997, when the project was abandoned.
[41]
Such logic offers a
solution to the problem, albeit a purely arbitrary one, under which the
project's market value is reduced by 20% for each of the five fiscal periods in
issue. The following table shows how this works out.
|
Year
|
Amount of loss
|
Year that
loss expires
|
|
|
|
|
|
1993
|
$52,000
|
2000
|
|
1994
|
$52,000
|
2001
|
|
1995
|
$52,000
|
2002
|
|
1996
|
$52,000
|
2003
|
|
1997
|
$52,000
|
2004
|
|
Total
|
$260,000
|
|
[42]
In my opinion, this
approach is much more faithful to reality than claiming that the total value of
the inventory should have been written off in 1993 or 1997. The market
value of the property underwent a significant reduction, but that reduction
results from the circumstances as a whole, not one single event.
[43]
Consequently, the
Appellant was entitled to carry forward a $52,000 loss to its 2003 taxation
year. The appeal is allowed, with costs.
Signed at Ottawa, Canada, this 21st day of May 2008.
"François Angers"
Translation
certified true
on this 21st day
of October 2008.
Brian McCordick,
Translator
Email this Content