Citation: 2006TCC418
Date: 20060721
Docket: 2003-3638(IT)G
BETWEEN:
GARY FIDYK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant,
Gary Fidyk, is appealing the reassessments by the Minister of National Revenue
of his 1998, 1999 and 2001 taxation years. The Minister disallowed the
Appellant's claim of an allowable business investment loss in 2001 which he had
deducted as a non-capital loss in his 1998 and 1999 taxation years. The Appellant
had claimed some $183,000 for amounts he had advanced to Reed Drilling Ltd. and
590201 Saskatchewan Ltd.[1] between 1989 and 1999 and which, as of 2001, remained
unpaid. The basis for the Minister's disallowance was the Appellant's lack of
conclusive evidence of the companies' indebtedness to him. The 2001 reassessment
resulted in a "nil" assessment[2];
with no non-capital losses to carry back, the amounts claimed for 1998 and 1999
were also disallowed.
The
1998 and 1999 Appeals
[2] Reed Drilling
Ltd. and 590201 Saskatchewan Ltd. were started by the Appellant's uncle Dale
Reed. The Appellant began working as a jack-of-all trades in Reed Drilling Ltd.
in 1982; in 1992, he purchased shares in Reed Drilling Ltd. and later, in
590201 Saskatchewan Ltd. On the understanding that he would someday buy-out his
uncle's interest in the companies, the Appellant contributed both time and
money to build up the businesses that would someday be his. By 1999, however,
the Appellant had lost faith that this goal would ever be fulfilled. The
businesses were faltering. Despite his continuing contributions, the Appellant
was not advancing his position; meanwhile, control of the companies remained
the exclusive domain of the increasingly unforthcoming Mr. Reed.
[3] In March 1999,
things came to a head and the Appellant ceased to be employed with the
companies. In 2001, he brought an oppressive shareholder application under the Business
Corporations Act (Saskatchewan) against Mr. Reed to recover his interest in
the businesses[3]. The matter was ultimately settled. Pursuant to the
settlement agreement dated July 18, 2001[4],
the Appellant received $70,000 in "full satisfaction of all share and
shareholder loan interests held in Reed Drilling and 590201 Sk Ltd." He transferred all of
his shares in the companies to Mr. Reed.
[4] The issue in
this appeal is what amounts, if any, the Appellant advanced to the companies
for business purposes. In my view, the answer lies somewhere between the
approximately $34,000 (for Reed Drilling Ltd.) and $14,000 (for 590201
Saskatchewan Ltd.) accepted by the Minister, and the $183,000 claimed by the
Appellant. Given the factual nature of this determination, the credibility of
the witnesses is of primary importance.
[5] I found the
Appellant and his accountant, Mr. Bulmer, well-informed, straight-forward in
the presentation of their evidence and entirely credible.
[6] The Crown called
Mr. Bradley, the appeals officer who handled the Appellant's objection to the
Minister's reassessments and Mr. Reed, the Appellant's uncle and guiding force
behind Reed Drilling Ltd. and 590201 Saskatchewan Ltd. The weak link was Mr.
Reed. Not only was he the source of the scant and reluctantly furnished records
relied upon by Mr. Bradley and the auditor[6], but his testimony showcased the sort of bullying and
obstructive temperament that undoubtedly drove the Appellant, notwithstanding
his significant investment in the companies, to cease his involvement. Mr. Reed
tended to edit his testimony to show himself in his best light; I have no
reason to think he took any different approach to corporate records keeping. I
was further troubled by the fact that some of the financial records he withheld
from the Appellant and which were "unavailable" during the audit,
were suddenly
located at his residence. Thus, except to the extent that it corroborated the
Appellant's evidence of his uncle's treatment of him while in his employ, Mr.
Reed's evidence was not at all convincing.
[7] In making his
assessment, the Minister assumed that the Appellant's shareholder loan balance
in Reed Drilling Ltd. stood at $34,916; in 590201 Saskatchewan Ltd., at
$14,488[8]. It was further assumed that the Appellant owed Reed
Drilling Ltd. $13,787. These figures had as their source the companies' balance
sheets which contained no information explaining what was included in these
figures; as Mr. Bradley explained on redirect "… all [the accountant]
would really have used is the general ledger printouts for each year and that
she did not have any working papers further analyzing the shareholders loan
account"[9]. Nor were any source documents made available to the
auditor in respect of the $34,916[10].
While conceding that "[this figure] wasn't verified", Mr. Bradley
went on to explain that "…the risk was viewed to be low that the number
was incorrect because it was created by an accountant and reviewed externally
by an accountant each year."[11]
[8] Counsel for the
Respondent argued, quite correctly, that the taxpayer has the onus of proving
on a balance of probabilities that the Minister erred in making his assessment[12]. She argued that on the evidence presented, the
Appellant had failed to establish the allowable business investment loss
claimed. What the taxpayer must do to meet this onus, however, was discussed by
Chief Justice Bowman in the recent case of Benjamin v. The Queen[13]:
...
[6]
Whatever may be the policy of the CRA to require documentation to support an
expense, a payment or a deduction, it is not the policy of this court, unless
the taxing statute specifically requires it (as for example, in the case of
charitable donations). If a taxpayer in court can demonstrate through credible
oral testimony that a payment was made or an expense incurred, the court must
make a finding based on that evidence and give effect to it. The court cannot
avoid its responsibility to base its conclusions on the evidence adduced by
saying in effect "It doesn't matter how credible your testimony is, if you
don't have a piece of paper you must necessarily lose."
[7]
The cases referred to by the respondent do not support the proposition advanced
by the respondent. They say merely that if an appellant lacks documentary
evidence he or she has a more difficult task in meeting the onus of proof. If
the appellant has made out a prima facie case by credible oral testimony
and it is unrefuted, the appellant should win. The cases in which an appellant
has lost were ones in which both paper and credibility were lacking.
[8]
In Bullas v. R., [2002] 3 C.T.C. 467, Evans J.A. speaking for the
Federal Court of Appeal in dismissing an appeal from the judgment of Brulé, J.
said:
... As the
Judge indicated to when dismissing Mr. Bullas' appeal, a taxpayer is obliged by
law to keep records to support claimed deductions and puts himself in a very
difficult position if he fails to do so. Nonetheless, the Tax Court may accept
other evidence in place of documentary records. However, it is for the Tax
Court Judge, as the trier of fact, to consider the totality of the evidence and
to assess its credibility in determining whether the taxpayer has demonstrated
that the Minister was in error in disallowing the claimed deductions.
[9] In the present
case, notwithstanding the roadblocks put in his path by his uncle, prior to
filing his 2001 income tax return, the Appellant spent several months searching
his personal records for documentation pertaining to the companies. Everything
he found was duly handed over to Mr. Bulmer for his use in the preparation of
the Appellant's 2001 income tax return. Such a stickler is Mr. Bulmer that
on his advice, the Appellant chose not to include certain amounts for which he
could not obtain source documents. When the audit was launched, the Appellant
and Mr. Bulmer responded promptly to the auditor's request for substantiation
of his claims. The auditor was informed of their requests for additional
information made to the companies' accountant and their limited success in this
endeavour. He was referred to Mr. Reed who, to put it politely, declined to
assist him in his efforts. In spite of all this, the auditor and ultimately,
the appeals officer rejected the Appellant's claims on the basis of the
shareholder loan balances shown in the companies' balance sheets. In his
report, the auditor wrote that "[t]he probable reason for the discrepancy
between the total investment information provided by Mr. Fidyk, and the Shareholder
Loan account balances is that Mr. Fidyk did not indicate any withdrawals
from his shareholder loan account"[14].
Yet on cross‑examination, Mr. Bradley, the appeals officer, had this to
say with regard to the basis of the auditor's statement:
Q Now,
what evidence was presented to you by Mr. Fidyk or the accountant for the
company or anyone to suggest that Mr. Fidyk ever took a withdrawal out?
A I
was not presented with any evidence of that nature.
Q If
that's the case, then why didn't you accept that what Mr. Fidyk told you was
the truth based upon what Mr. Connery found? Don't you see that if you accept
that statement and you had no evidence of withdrawals, you have to sort of
accept what Mr. Fidyk said, don't you?
A If
there was a withdrawal by Mr. Fidyk from his shareholders loan account, that
would lower the amount owing to him by the company.
Q Yes.
A So
that would lower what is owed to him by the company.
Q But
absent any evidence of a withdrawal, how could you conclude that that was the
reason for the discrepancy between the 34,000 and the 183,016?
A I
saw no evidence that there was or was not a withdrawal, so I can't make any
assumptions on that.
Q But
somebody must have made those assumptions, right?
A We
saw no evidence of the withdrawal so – of any withdrawals.
This
is consistent with Mr. Reed's evidence on cross-examination that:
Q Well,
tell me this: If that statement is accurate, what are the withdrawals that we –
that we haven't been told about? You tell me what the withdrawals are that account
for the discrepancy.
A All
the withdrawals –- now, what are we talking about, numbered company or Reed
Drilling?
Q Well,
either one.
A The
withdrawals on Reed Drilling on the credit card was taken off by salaries. If
it wasn't taken off the salary, it was taken off shareholders loan. As far as
numbered company, I don't know any withdrawals.
Q Mr.
Reed, are you able to point to a single item of withdrawal by Mr. Fidyk
from either of these companies other than his salary and his expense
reimbursement?
A Yes
Q Tell
me what it is.
A Fishing
trips, a boat tarp, travel.
Q Is
that it?
A Some
of it. I'd have to go back through the books. It goes back a lot of years.
Q Do
you have any documents that you can produce to say that these were withdrawals
taken on his shareholders loan, anything you can produce right now?
A No,
I don't.
[10] The net effect of
the department's treatment of the Appellant was to put him in the unusual
situation of being penalized for making every effort to provide records that
he, as a shareholder and employee, could not reasonably be expected to prepare
and to which, he was denied access by the very person responsible for compiling
them. The standard of records-keeping imposed on a taxpayer under the Act
is adequacy; in these circumstances, the Appellant has more than satisfied that
requirement. On the basis of the documentation he was able to produce, and his
and Mr. Bulmer's testimony, I am satisfied that the Appellant has successfully
proven that he made loans for business purposes to Reed Drilling Ltd. and
590201 Saskatchewan Ltd.
[11] The specific
amounts claimed by the Appellant in his 2001 income tax return are set out in
paragraph 16(l) of the Reply to the Notice of Appeal:
|
Date
|
Amount
|
Source per Appellant
|
|
|
|
|
|
June 1989
|
$
25,000
|
CIBC
|
|
February 1990
|
$
33,000
|
CIBC
|
|
Dec. 1991 – Dec. 1992
|
$
6,101
|
Personal funds
|
|
August 1992
|
$32,000
|
Royal Bank
|
|
August 1992
|
$
7,000
|
Personal funds
|
|
March 1994
|
$25,000
|
Personal funds
|
|
November 1994
|
$20,992
|
Credit Union
|
|
October 1995
|
$30,000
|
Scotia Bank
|
|
June 1999
|
$
3,923
|
Royal Bank
|
|
Total:
|
$
183,016
|
|
[12] At the hearing, counsel
for the Respondent conceded the $3,923 claimed by the Appellant for the Royal
Bank loan in June 1999. The Respondent also conceded the Appellant's claim for
legal fees of $14,094 in 2001. The $32,000 and $7,000 loans in 1992 were for
the acquisition of the Appellant's shares in Reed Drilling Ltd.
[13] Of the remaining
amounts set out above, I find that the companies' were indebted to the Appellant
in 2001 in the following amounts:
1. $15,000 of the $25,000 CIBC
loan, June 1989: the Appellant personally borrowed $25,000[17] and advanced this amount to 590201 Saskatchewan
Ltd. to permit that company to purchase shares in an Alberta oil company known
as "Pioneer Inc. of Alberta". Following the disposition of some or
all of those shares, in March 1994 590201 Saskatchewan Ltd. paid $35,000
to the Appellant, $25,000 of which was immediately advanced to Mr. Reed
personally to advance to Reed Drilling Ltd.[18]. There is no evidence to show that the remaining
$10,000 was not retained by the Appellant personally; thus, that amount must be
offset against the $25,000 advanced by the Appellant in 1989, leaving an unpaid
balance of $15,000;
2. the full amount of $25,000
advanced from the Appellant's personal funds, March 1994: I am satisfied
that the $25,000 advanced to Reed Drilling Ltd. through Mr. Reed was not repaid
to the Appellant;
3. the full amount of $6,101
advanced from the Appellant's personal funds, December 1991 to December 1992:
the Appellant advanced this amount as sundry cash advances, as required, to
590201 Saskatchewan Ltd.[19] and these amounts were not repaid;
4. the full amount of $30,000
borrowed from Scotia Bank, October 1995: the Appellant personally took out a
loan, co-signed by his wife, for this amount to shore up the unsatisfactory
loan ratios of Reed Drilling Ltd. and it was not repaid.
[14] As for the two
remaining amounts of $33,000 (February 1990) and $20,992 (November 1994), I
find the following:
1. in respect of the $33,000 amount claimed,
there is insufficient evidence to establish that the Appellant personally
borrowed the $33,000 to enable 590201 Saskatchewan Ltd. to purchase the shop
used in the business. I do, however, accept his evidence that he personally put
$5,000 into that company for repairs and revamping of the shop and this amount
was not repaid. Although counsel for the Respondent argued that the Appellant
should not be entitled to claim this amount at this stage of the proceedings, I
am of the view that justice is better served in this case by following the
approach taken in Benjamin[20].
Even without considering the $5,000 cancelled cheque[21] produced at the hearing, I accept the Appellant's
testimony that he paid this amount in the manner stated and that it was never
repaid; and
2. in respect of the $20,992, I accept the
Appellant's evidence that because of the fiscal woes of Reed Drilling Ltd., a
decision was made to finance the purchase of the 1993 Chev 4X4 in the
Appellant's name. While I am satisfied that the Appellant personally paid the
$5,000 down payment and this amount was not repaid to him, there is
insufficient evidence that he paid the remaining balance of $13,917[22]. The Appellant was not able to refute the Minister's
assumption that the monthly payments of approximately $440 were reimbursed to
the Appellant. Accordingly, Reed Drilling Ltd. was indebted to the Appellant
for $5,000 in respect of the 1993 Chev 4X4.
[15] One further matter
is the Minister's inclusion in the calculation of the Appellant's non‑capital
loss of $13,787, assumed by the Minister to be an amount owed by the Appellant to
Reed Drilling Ltd. I accept the submission of counsel for the Appellant that
this amount was not properly offset against the amounts owed by Reed Drilling Ltd.
to the Appellant. This debt, if it existed[23], was satisfied in full by the terms of the settlement
agreement of July 18, 2001. Accordingly, this amount ought not to have been deducted
from the amounts owed to the Appellant by the companies.
[16] For all of these
reasons, I am satisfied that as of 2001, Reed Drilling Ltd. and 590201
Saskatchewan Ltd. were indebted to the Appellant in the amounts determined
above.
The
2001 Appeal
[17] I accept the Crown's submission that because the reassessment of the 2001 taxation year
resulted in a "nil" assessment, no appeal may be made in respect of
that year. Counsel for the Respondent submitted that if the Appellant were to
be successful on his appeal of the 1998 and 1999 appeals, his recourse (in the
event the Minister does not undertake a reassessment as a result of this
Judgment) is to seek a loss determination from the Minister under subsection
152(1.1) of the Act. She referred the Court to Aallcann Wood
Suppliers Inc. v. Canada[24] in which Bowman, T.C.J. (as he then was) reviewed the
workings of this provision:
One
preliminary procedural or possibly jurisdictional point should be disposed of
at the outset. Originally the appellant asked that this court make a
determination of its loss for 1988 as the size of that loss affected its
taxable income for 1985, 1986 and 1987. The respondent took the position that
in the appeals for 1985, 1986 and 1987 the appellant could not challenge the
Minister's computation of the loss for 1988 because the appellant had not
requested a determination of loss for 1988.
The
appellant acceded to this position and requested a loss determination for 1988
under subsection 152(1.1) of the Income Tax Act. A determination was
made by the Minister, an objection was filed, the determination was confirmed
and an appeal was brought to this court from the loss determination for 1988.
The
Minister's position in the original reply to the notice of appeal that the
Minister's ascertainment of a loss for a particular taxation year is immutable
unless a loss determination is made under subsection 152(1.1) is, however,
wrong. It is true that this court cannot make a formal loss determination under
subsection 152(1.1). That is the Minister's function. If such a loss
determination is made it is valid and binding unless challenged by way of
objection or appeal and, if it is sustained on appeal, it stands. The purpose
of subsection 152(1.1) is to permit a taxpayer to have its loss for a year
determined definitively and, if necessary, to have the Minister's determination
reviewed by the court. One of the reasons for the enactment of subsection
152(1.1) was that no appeal lies from a nil assessment. In the absence of a
binding loss determination under subsection 152(1.1), 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.
[18] Accordingly, the
appeal from the reassessment made under the Income Tax Act for the 2001
taxation year is quashed. The appeals from the reassessments made under the Income
Tax Act for the 1998 and 1999 taxation years are allowed, with costs, and the
reassessments are referred back to the Minister for reconsideration and
reassessment on the basis that:
1. the Appellant incurred legal
fees of $14,094 in the 2001 taxation year for the purpose of disposing of his
interest in Reed Drilling Ltd. and 590201 Saskatchewan Ltd. and they are
deductible under subparagraph 40(1)(b)(i) of the Act;
2. in 2001, Reed Drilling Ltd. and
590201 Saskatchewan Ltd. were indebted to the Appellant in the amount of
$90,024 for advances he made to the companies;
3. as of July 18, 2001, the
Appellant was not indebted in any amount to Reed Drilling Ltd. or 590201
Saskatchewan Ltd.
Signed at Sudbury, Ontario, this 21st day of July,
2006.
"G. Sheridan"
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