Citation: 2005TCC563
Date: 20050909
Docket: 2003‑2253(IT)G
BETWEEN:
MICHEL BROWN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] On his income tax return for the
1999 taxation year, the Appellant indicated an allowable business
investment loss of $112,194 resulting from a business investment loss
("BIL") of $149,592. The claimed deduction was disallowed in an
initial assessment dated September 25, 2000. In addition, in a
reassessment dated March 7, 2002, a capital loss of $178,412 was
recognized. Reconciling the above amounts is not at issue. The only issue is to
determine whether the Appellant sustained a BIL of $149,592 in 1999.
[2] In the years from
1996 to 1999, the Appellant advanced funds to Sapa International Inc.
("Sapa"); the advances totalled approximately $180,000. Sapa’s fiscal
year was from June 1 to May 31; it apparently ceased its operations
on May 31, 1999. In addition, I would like to point out that
paragraph 5 of the Notice of Appeal indicates that [translation] "the Corporation
ceased its operations in early 1999."
[3] According to the
Respondent, the Appellant's debt for Sapa became uncollectible on
May 31, 1999, and the Appellant could therefore avail himself of the
provisions of subsection 50(1) of the Income Tax Act (the
"Act") for 1999.
[4] To determine that
the loss the Appellant sustained is a BIL, it is necessary to prove that the
conditions set out in paragraph 39(1)(c) of the Act have
been met and, more specifically, that Sapa can be deemed to have been a
"small business corporation" according to the definition of this
expression that is found in subsection 248(1) of the Act. The
relevant portion of this definition reads as follows:
"small business corporation",
at any particular time, means, subject to subsection 110.6(15), a
particular corporation that is a Canadian‑controlled private corporation
all or substantially all of the fair market value of the assets of which at
that time is attributable to assets that are
(a) used principally in an active business carried on
primarily in Canada by the particular corporation or by a
corporation related to it,
(b) . . .
(c) . . .
including, for the purpose of paragraph
39(1)(c), a corporation that was at any time in the 12 months preceding
that time a small business corporation, . . .
[5] The expression
"active business" is also defined in subsection 248(1) of
the Act, as follows:
"active
business", in relation to any business carried on by a taxpayer resident
in Canada, means any business carried on by the
taxpayer other than a specified investment business or a personal services
business.
[6] In addition, the
definition of the term "business", which is also found in
subsection 248(1), reads as follows:
"business"
includes a profession, calling, trade, manufacture or undertaking of any kind
whatever and, except for the purposes of paragraph 18(2)(c), section
54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or
concern in the nature of trade but does not include an office or employment.
[7] Paragraph 11
of the Reply to the Notice of Appeal ("Reply") indicates
that confirmation of the reassessment was based on the following assumptions of
fact:
[translation]
(a) On
June 1, 1995, Sapa International Inc. (the
"Corporation") was incorporated;
(b) The
Corporation's principal activity was to be the bottling of maple sap;
(c) Between
1996 and 1999, the Appellant advanced $179,255 to the Corporation;
(d) Most of the
expenses were capitalized in the "start‑up costs" item;
(e) The Corporation
had no assets or equipment for bottling production;
(f) No water was
bottled;
(g) The Corporation
never began operating any business; and
(h) At all relevant
times, the Corporation's assets were not used principally in an active
business.
[8] At the hearing,
Counsel for the Respondent adopted a more tentative position than the one
expressed in the Reply, in that she recognized that Sapa had started operating
a business. However, she argued that no objective evidence was adduced to prove
that Sapa had carried on any business whatsoever subsequent to May 1997.
In addition, she argued that one could not claim that Sapa's assets, mainly
consisting of capitalized "start‑up costs" could be deemed to
be assets that were used principally in an active business.
Summary of the evidence
[9] The Appellant, as
well as André Boudreau, an objections officer with the Canada Customs
and Revenue Agency ("CCRA") testified.
[10] The Appellant is a
dentist. During his testimony, he explained that because he had a weight
problem, he was looking for a natural beverage that was healthy and low in fat.
He noticed that the products on the market contained a lot of sugar,
preservatives and chemicals and that it was during a discussion with a client
that they came up with the idea to try bottling maple sap.
[11] This idea, to create
and market a new beverage, led to Sapa's incorporation as a business in 1995.
[12] In his opinion, the
idea of bottling maple sap, as such, was short‑term. First, maple sap
would not keep for more than 24 hours. After 48 hours, it became
milky and started to ferment. Although the product's stability could be ensured
using a special filtering process developed by an engineer the Appellant had
met, problems associated with the supply and storage of this maple sap quickly
led to a change in direction.
[13] Instead of using
maple sap, they decided to use low‑mineral spring water and grade AA
maple syrup to sweeten the product. By adding citric acid, grape juice and
fruit concentrates to this base, six different flavours of the beverage
were created: grapefruit, strawberry, cherry, cranberry, raspberry and coffee‑raspberry.
Two sample batches were bottled first. Then Sapa bottled the product using
subcontractors: 200 bottles (300 mL) for each flavour. The Appellant
admitted that they were samples; however, he said that they could be marketed,
because they met all of the standards. As we will see later, these activities
took place in 1996. Although some of the bottles were given away, none of them
were ever sold. The bottles were stored in the basement of the Appellant's
clinic and then eventually discarded.
[14] Although the new
product was created through the collaboration of several stakeholders,
particularly Cintech AA Inc. (Food Technology
Innovation Centre), the Appellant also discussed the many steps that were
taken to launch the Sapa business, to find suppliers and to market and
distribute the product.
[15] Having no experience
in the field, the Appellant claims he followed all of the steps in a business
plan submitted by Division Externe Inc. (see Exhibit I‑1,
tab 8), in addition to taking other steps on his own. As such, the
Appellant introduced Sapa's products at two international food shows held
in Montréal. He also met with a potential distributor in Los Angeles. The latter was
particularly interested in the coffee‑raspberry‑flavoured drink;
however, the required financial terms were such that no agreement was made.
[16] Efforts were also
made to obtain a supply of spring water from Aliments Lexus
Foods, Inc. However, the Appellant explained that the wells to which this
company had access presented a risk of contamination and the tests that were
conducted showed that the water was of poor quality.
[17] The Appellant
explained that he had found very high‑quality spring water in the Les
Cèdres area. The source belonged to an individual named Frank. A written
agreement was drafted whereby the Appellant (or Sapa) would hold 25% of
the land and Frank would receive a percentage of the product sales. In
addition, the Appellant considered the possibility of bottling and marketing
spring water. In the end, the agreement was never signed. According to the
Appellant, Frank was required to register his source prior to the moratorium
passed by the Government of Quebec,
which he failed to do, in spite of the pressure that was exerted on him. Thus,
it was no longer possible to use the source as of December 18, 1997;
it was therefore impossible to obtain water from this source before the
moratorium ended. Although the Appellant claimed to have had plans to develop
this source, such as building a bottling centre and a warehouse, these plans
could not be undertaken due to the moratorium. According to the Appellant, the
moratorium came about at a very bad time and, in some respects, it caused him
to lose "momentum".
[18] The Appellant
claimed that at the end of the moratorium he attempted to approach other
companies to obtain water or to enter into an agreement for the manufacturing
of the beverages. The first of these companies was located in the
Eastern Townships and possessed very high‑quality water that it
already marketed in small quantities, was not interested in expanding and in
making further investments.
[19] A second company,
Bio‑Pur, located on the South Shore of Montréal, required Sapa
to become a half‑owned subsidiary. In the case of a dispute, this company
wanted to ensure that it had priority in decisions, which the Appellant was not
willing to concede, due to the vulnerable position in which he would be placed.
[20] The Appellant also
contacted a company in Ontario called Bessie. However, this company required that a
minimum of 18,000 litres be bottled, which posed a major problem in terms
of storage and preservation, given the sales, or rather the lack of sales, of
the beverages that had already been manufactured. The Appellant claimed that he
approached this company shortly before Sapa officially ceased its operations.
[21] The Appellant did
not find a water supplier. In addition, although he claimed that he had made
efforts to find market outlets and to "start over," these efforts did
not produce any results. Realizing that the business required too much energy
and involved too high a cost, the Appellant decided, after discussing the
matter with his accountant, to end the business.
[22] In his testimony,
the Appellant did not provide specific dates regarding the various steps taken
to restart Sapa during and subsequent to the moratorium, claiming that he could
not really remember the dates. He claimed that for some of the efforts that
were made, particularly with the company located in the Eastern Townships,
no invoices were submitted to Sapa for his travel expenses.
[23] Exhibit I‑1,
submitted on cross‑examination of the Appellant, contains documents,
invoices and statements of account from various firms and companies, relating
to a number of the steps taken by Sapa, which the Appellant submitted in
support of his claim. Thus, tab 5 of Exhibit I‑1 includes an
application for funding within the context of the Business Start‑Up
Investment Program (Paillé Plan). According to the Appellant, a
$45,000 loan was obtained through this program. Tab 6 contains
invoices from Analex Inc. According to the Appellant, these invoices are
for the initial tests conducted on the maple sap. Tab 7 contains an
invoice from the Copral company (professional food advisors); it relates to
Canadian and American nutrition labels for two products. Tab 8 contains
statements of account from Division Externe Inc.—communications
relating to business start‑up, principally for the preparation of a
business plan, for surveys, for seeking strategic alliances and suppliers, and
for the graphic design of the labels. Tab 9 contains a series of invoices
from Cintech AA Inc. (Food Technology Innovation Centre)
for analyses, professional and technical assistance, the use of a laboratory
and a pilot plant to bottle 200 bottles of each of the above‑mentioned
flavours. Tab 10 contains an invoice from the IntelPro company, for
research relating to the potential use of the trademarks
"Cool Sap" and "Walk On Water." According to
the Appellant, the name "Cool Sap" was already being used;
however, Sapa registered the trademark "Walk On Water"
in 1996, and then sold it in 1997 for a sum of $3,000. Tab 11
contains invoices from Aliments Lexus Foods Inc. relating to the
purchase of bottles, caps and fruit concentrates used to manufacture and bottle
beverages in the six fruit flavours mentioned previously. Tab 12
contains invoices from three law firms relating to the preparation of
certain "corporate documents," the filing of the trademark
"Walk On Water" in Canada and in the United States and the preparation of
other agreements, including a confidentiality agreement.
[24] It is important to
note that all of the documents, invoices and statements of account, without
exception, that were adduced in evidence and included in tabs 5 to 12
of Exhibit I‑1 and that were briefly described above and provided by
the Appellant, in support of his claimed BIL in 1999, are dated in 1995,
1996 or 1997. In 1997, no date is later than May 31.
[25] Tab 13 of
Exhibit I‑1, prepared by the Appellant's accountant, is a statement
of all of Sapa's expenses as at May 31, 1996, described as
"start‑up costs." The total of $172,878 is for the fiscal year
ending on May 31, 1996, and is capitalized and recorded on Sapa's
balance sheet as "start‑up costs" (Exhibit I‑1,
tab 1, financial statements, page 3). For the fiscal year ending on
May 31, 1997, the financial statements indicate that these same costs
increased to $185,508 (Exhibit I‑1, tab 2, financial
statements, page 3). For the fiscal year ending on May 31, 1998,
these costs did not increase (Exhibit A‑1, tab 5, financial
statements as at May 31, 1998, page 3). Sapa did not file a tax
return or financial statements for the fiscal year ending on
May 31, 1999.
[26] The Appellant
explained that Sapa never had any employees and had never sold the fruit
beverages that it had manufactured. However, he never specified when the
beverages for the 1,200 bottles (200 for each of the
six flavours) had been manufactured and bottled. Based on the invoices for
the purchase of the bottles, caps and fruit concentrates from
Aliments Lexus Foods Inc. (Exhibit I‑1, tab 11) and
those from Cintech AA Inc. (Food Technology
Innovation Centre), which bottled the beverages (Exhibit I‑1,
tab 9), it is reasonable to conclude that these operations occurred during
the 1996 calendar year. According to the Appellant, some of the bottles
were given out to spark peoples' interest and the remainder were stored in the
basement of his dental clinic. They were discarded a year or
two later.
[27] The financial
statements for the fiscal year ending on May 31, 1996 indicate no
income (Exhibit I‑1, tab 1, financial statements, page 2).
The financial statements for the fiscal year ending on May 31, 1997
indicate income of $3,000 (Exhibit I‑1, tab 2, financial
statements, page 2). According to the Appellant, Sapa needed money.
Therefore, in exchange for $3,000, he decided to sell the trademark
"Walk On Water," which Sapa had registered in 1996.
The financial statements for the fiscal year ending on May 31, 1998
indicate no income (Exhibit A-1, tab 5, financial statements for the
fiscal year ending on May 31, 1998, page 2).
[28] In its financial
statements for the fiscal year ending on May 31, 1998, Sapa's latest
products, assets on the balance sheet are described as follows:
[translation]
|
ASSETS
|
|
|
|
|
|
CURRENT
|
|
|
Cash
|
$40
|
|
Accounts Receivable
|
3,418
|
|
Income tax
|
856
|
|
Amounts receivable
|
17,915
|
|
|
22,229
|
|
OTHER
|
|
|
|
|
|
Incorporation expenses, amortized cost
|
1,269
|
|
Start‑up costs
|
185,508
|
|
|
186,777
|
|
|
$209,006
|
|
|
|
|
The Appellant provided no
explanation concerning the items included in Sapa's assets, aside from the
"start‑up costs." It is even more difficult to understand what
these items represent, since it is known that Sapa never sold anything at all,
except for its trademark "Walk On Water," which it sold for
$3,000 in 1997, and it never reported any other income.
[29] André Boudreau
is an objections officer with the CCRA. In his testimony concerning the BIL
that the Appellant claimed, he first stated the position that was adopted at
the audit stage and then he stated his own personal position that he adopted
following the Appellant's objection. Tab 3 of Exhibit A‑1
contains a report that he wrote outlining these positions. With regard to the
position taken at the audit stage, the following appears on pages one
and two:
[translation]
According to the documents that the
taxpayer provided, he proved that a business existed; however, he did not prove
that it was an active business. Consequently, it does not fall within the
definition of "small business corporation"(SBC) as defined in
subsection 248(1). As a result, the loss does not qualify as a business
investment loss. However, due to the fact that his debt was incurred for the
purpose of earning income, the client can claim a capital loss in the year in
which the debt became uncollectible.
Throughout SAPA's entire period of
activity, from June 1995 to May 1999, the Corporation only reported a
gross income of $3,000, the source of which is unknown. All of the costs that
SAPA incurred were recorded in the "start‑up costs" account.
There are no assets or equipment for bottling production. The business
conducted market studies, research and laboratory tests to determine a product
to be sold on the market. Due to the fact that the product was not profitable
on the market following these and other studies, the Corporation ceased its
operations in May 1999. The taxpayer did not provide proof regarding
purchases of the raw materials necessary to produce the products for the
purpose of selling them. Analysis of the item "start‑up costs"
indicates that the invoices are primarily from:
• Division Externe
for expenses totalling $92,779 between October 1, 1995 and
May 30, 1996, relating to fees for the market surveys, business plan
and other research;
• Cintech AA
for expenses totalling $19,139 between October 1, 1995 and
December 19, 1996, relating to the use of laboratories and the
assistance of a technician to conduct product research and tests;
• Legal fees paid
primarily to two firms. Fees were first paid for the preparation and
filing of trademarks between February 26, 1996 and
May 29, 1997 ($6,811). The second set of fees was for drafting the
confidentiality contract and for the transfer of shares ($1,372);
• Other
expenses relating to purchasing the sample products and laboratory analysis
($2,485), developing the nutritional text ($1,208) and purchasing bottles, caps
and essence concentrate ($2,751).
None of these expenses have anything to
do with the actual operation of a corporation. In addition, these expenses do
not create assets regarding product production. According to the definition of
SBC, 90% of the assets must be used principally in an active business. Based on
the documents reviewed, the Corporation has no such assets. Consequently, the
Corporation is not a SBC and the taxpayer's loss on the debt does not qualify
as a business investment loss under paragraph 39(1)(c).
. . .
The position of the audit is that the
Corporation did not begin operating an active business, or at least that it did
not constitute a Corporation operating a small business, because all or
substantially all of the fair market value of the assets were not attributable
to assets used principally in an active business, as required by the definition
of "small business corporation" in subsection 248(1), which
reads as follows:
. . .
[30] With regard to his
own opinion on the matter, Mr. Boudreau writes the following on
pages three and four of his report:
[translation]
In our opinion, all the steps taken, such
as the surveys, business plan, market study and laboratory tests, were merely
intended to bring together the basic elements of the structure of a new
business, which was never actually put in place. The Corporation did not begin
any activity giving rise to business income. The purpose of all its activities
was to establish the structure of the business itself, which ultimately never
saw the light of day. No water was bottled. The Corporation never developed a
distribution network.
. . .
The Corporation's principal activities
took place in 1996 and 1997. However, even at that time, no sufficient
organizational structure was established to enable the Corporation to commence
activities relating to the operation itself, such as looking for suppliers,
developing markets and bottling the water. The Corporation never began to
actively operate its business, which was to consist of the marketing of bottled
maple sap water.
[31] According to
Mr. Boudreau, his report was submitted to the Appellant's accountant, who
was given the opportunity to make additional submissions. The accountant did
not feel that it was appropriate to do so and asked Mr. Boudreau to close
the file, preferring to appeal to the Court.
[32] In his testimony,
Mr. Boudreau stated that, according to the invoices submitted by the
Appellant, it was not apparent that a supplier had been sought. With regard to
the invoices for the purchase of various concentrates, he claimed it was his
understanding that it was a matter of trying "different varieties",
"different flavours". With regard to bottling, Mr. Boudreau felt
that it was a matter of minimum quantities.
[33] In light of the
Appellant's testimony concerning the bottling of the six different
flavours of beverages, Mr. Boudreau claimed that he still considered them
to be samples and that, in reality, the invoices that had been submitted to him
indicated that Sapa's operations had been carried out in 1995, in 1996 and
in early 1997 and that the beverages were bottled in 1996.
Mr. Boudreau stated that his report made no reference to the moratorium
that the Appellant discussed in his testimony, because this issue had not been
raised in the audit report or in the submissions.
[34] Mr. Boudreau
also stated that he had reviewed Sapa's financial statements. For the fiscal
year ending on May 31, 1996, expenses totalling $172,878 are recorded
on the balance sheet as start‑up costs (Exhibit I‑1,
tab 1, financial statements as at May 31, 1996, page 3).
Upon reviewing the reconciliation sheet that the Appellant's accountant
submitted entitled [translation] "start‑up
costs," he was able to note that this represented all of the expenses for
which invoices had been submitted (Exhibit I‑1, tab 13). In the
financial statements as at May 31, 1997, the balance sheet indicates
that the start‑up costs increased to $185,508 (Exhibit I‑1,
tab 2, financial statements as at May 31, 1997, page 3).
Mr. Boudreau also noted that no income was reported in 1998 and that the
start‑up costs remained the same for the fiscal year ending on
May 31, 1998 (Exhibit A‑1, tab 5). With regard to
1999, he confirmed that no tax return had been filed.
[35] In short,
Mr. Boudreau stated that the principal asset submitted in the financial
statements was the start‑up costs and that there was nothing to indicate
that the business was active, as required by the Act.
Position of the
Appellant
[36] Counsel for the
Appellant maintains that Sapa actively carried on a business by seeking expertise,
by having studies done, by seeking raw materials and by creating a product that
was introduced at two food shows. Although the business began with maple
sap, there was a subsequent change in order to make juice using spring water.
However, according to Counsel, due to the moratorium imposed by the
Government of Quebec from December 1997 to January 1999 on
the marketing of spring water, Sapa's operations were interrupted, because the
owner of the source that was to supply the water could henceforth no longer
develop it. However, Counsel for the Appellant states that in spite of all of
this, the Appellant continued to seek other water suppliers and even went to Los Angeles to meet with an
individual who could have distributed his product.
[37] Counsel for the
Appellant also emphasizes that the audit stage focused on the start of
operations relating to the bottling of maple sap; however, she argues that the
Appellant's testimony shows that after the studies were conducted, he decided
to manufacture juice using spring water. In fact, 200 bottles were
produced for each of the six different flavours, for a total of
1,200 bottles. Counsel emphasizes that although this quantity was not
sufficient for commercial distribution, it was sufficient to introduce the product
and to obtain orders. In addition, she notes the purchases made to produce the
beverages, which were bottled by subcontractors. In her opinion, this was a
normal way in which to proceed and it was not necessary for Sapa to purchase
its own plant to bottle its products.
[38] Counsel for the
Appellant argues that the Appellant's efforts to find other water suppliers
must be taken into consideration and that it cannot be said that the operations
ceased on the date of the last invoice. She claims that the business did not
necessarily cease operations because it had not paid for the studies that were
conducted or for the professional services received.
[39] Counsel for the
Appellant believes that Sapa was an active business within the definition of
this expression in subsection 125(7) of the Act, in
that it was definitely "an adventure or concern in the nature of
trade", because the Appellant had invested and lost nearly $180,000 in the
Corporation. As such, she argues that Sapa must be deemed to be a "small
business corporation" according to the definition of this expression in
subsection 248(1) of the Act.
[40] In support of her
arguments, Counsel for the Appellant referred to the decisions rendered in Boulanger v. Canada,
[2002] T.C.J. No. 344 (Q.L.), 2002 DTC 2016 (T.C.C.), M.P. Drilling Ltd.
v. Canada (M.N.R.), [1976] F.C.J. No. 12 (Q.L.),
76 DTC 6028 (F.C.A.), Samson et Frères Ltée v. Canada,
[1995] T.C.J. No. 1385 (Q.L.), 96 DTC 1559 (T.C.C.), Poulin
v. Canada, [1996] F.C.J. No. 960 (Q.L.), 96 DTC 6477
(F.C.A.), Selig v. M.N.R., 55 DTC 46 (T.A.B.) and Harquail v.
Canada, [2001] F.C.J. No. 1616 (Q.L.), 2001 FCA 320.
Position of the
Respondent
[41] Counsel for the
Respondent recognizes that a business was started, that the Appellant took
steps and that some of Sapa's activities might have enabled the Corporation to
qualify its business as an active business; however, she emphasizes that the
issue in this case is essentially to determine whether Sapa operated a small
business in the 12 months preceding May 31, 1999, the time at
which the Appellant's debt became uncollectible.
[42] Counsel for the
Respondent emphasizes that the documentary evidence consisting of the invoices
submitted does not prove that Sapa carried on any kind of business whatsoever or
took any steps subsequent to May 1997, in spite of the Appellant's
testimony. Furthermore, in her opinion, this testimony was rather vague
regarding the true nature of the steps that were taken after the moratorium, in
respect of which the Appellant was unable to provide specific dates.
[43] According to Counsel
for the Respondent, a certain number of indications, including the fact that
Sapa did not file a tax return for his 1999 year, confirm the absence of
operations. In addition, in her opinion, the Corporation's assets as at
May 31, 1998 were the same as they were on May 31, 1997. At
this point, I must emphasize that in reality the total of the assets differs
slightly from the previous year; however, the start‑up costs are the same
amount, that is, $185,508.
[44] With regard to these
start‑up costs, which constitute the principal asset if they are compared
with the amounts, which she considers to be very minimal, recorded in the
"cash," "incorporation expenses," "accounts
receivable" and "amounts receivable" items, Counsel for the
Respondent argues that it cannot logically be claimed that these assets are
used principally in an active business, in such a way as to comply with the
condition set out in the definition of the expression "small business corporation"
in subsection 248(1) of the Act.
[45] Furthermore, with
regard to these start‑up costs, Counsel for the Respondent emphasizes
that it can be noted in the reconciliation that the Corporation's accountant
treated the costs of various steps and studies and of various business plans,
as well as the purchase of bottles, caps and fruit essences as "start‑up
costs."
[46] Counsel for the
Respondent calls into question the importance of the moratorium in terms of
curbing Sapa's operations and emphasizes that this factor was never raised
before, not even in the questionnaire that the accountant had to complete in
support of the BIL (Exhibit I‑1, tab 14). This document cites [translation] "non‑profitability"
as the reason for which the Corporation ceased its operations. Counsel adds
that she finds it somewhat difficult to understand how the Appellant could have
attempted to establish a business by relying on a non‑regulatory source
to supply water.
[47] In addition, she
notes that Sapa never had any employees and that the majority of the
1,200 bottles of beverages that were produced were stored in the basement
of the Appellant's dental clinic and that they eventually had to be discarded.
[48] In conclusion,
Counsel for the Respondent argued that the facts show that Sapa did not operate
an active business in the 12 months preceding May 31, 1999.
Analysis
[49] In his testimony,
the Appellant placed a great deal of emphasis on the commencement of the
moratorium to explain Sapa's small amount of activity after 1997. Furthermore,
in this respect, he raised the fact that he could not be supplied by the water
source he had found and that seeking a water supplier became problematic. I
find that this fact was raised for the first time at the hearing of this appeal
and that [translation] "non‑profitability"
was the only reason noted for ceasing operations in the questionnaire completed
by the Appellant's and Corporation's accountant in support of the BIL
(Exhibit I‑1, tab 14). However, it is important to recognize that
none of the beverages that were already bottled in 1996 were ever sold.
Therefore, it is difficult to accept that the main problem the Appellant faced
had to do with obtaining spring water of an acceptable quality. The Appellant
referred to the meeting held with a potential distributor in Los Angeles, likely in
1996 or 1997, and to introducing the bottled beverages at two food
shows in Montréal. I have no doubt that he took other steps relating to
marketing. However, the total absence of any result observed in 1996
and 1997 probably contributed greatly to the subsequent cessation of any
significant activity. In addition, the fact that Sapa sold its only trademark
for its beverages, "Walk On Water," during the taxation
year ending on May 31, 1997, is definitely a major indication of the
cessation of any active operation of the business.
[50] The fact that there
were no employees and the fact that no income was earned in spite of the
Appellant's efforts are not in and of themselves indicative of a situation in
which no active business was carried on (refer to Harquail, supra,
at paragraphs 62 to 64). I am willing to acknowledge that the
business plan, studies, laboratory tests and efforts made to obtain raw
materials, as well as to market and distribute the bottled beverages, are
activities that fall within the framework of an active business. The difficulty
lies in determining when the business ceased to be active. As I indicated
previously, paragraph 5 of the Notice of Appeal indicates that
this occurred in early 1999. The questionnaire completed by the Appellant's
accountant indicates May 31, 1999 (Exhibit I‑1, tab 14).
The Appellant testified that he had taken some steps after the moratorium;
however, he was unable to specify the time frames. In addition, Sapa did not
file a tax return or produce financial statements for the period from
June 1, 1998 to May 31, 1999. Furthermore, the "start‑up
costs" remained the same for the fiscal year ending on
May 31, 1998 and the one ending on May 31, 1997. In this
context, it is difficult to conclude that Sapa continued to be an active
business in 1998 or in 1999.
[51] In addition, Counsel
for the Respondent argues that the condition relating to the market value of
the assets used in an active business has not been met. I note that the
definition of "small business corporation" in subsection 248(1) of
the Act imposes the condition that "all or substantially all of the
fair market value of the assets of which at that time is attributable to assets
that are used principally in an active business carried on . . . by
the particular corporation." The end of the definition specifies that for
the purpose of paragraph 39(1)(c), a corporation shall be
deemed to be a small business corporation if it was a small business corporation
at any time in the 12 months preceding that time.
[52] In light of the
evidence presented, I believe that there is insufficient evidence to determine
that this condition has indeed been met. First, the asset composition is not
known for the 12 months of Sapa's fiscal year, from June 1, 1998
to May 31, 1999. For the fiscal year of June 1, 1997 to
May 31, 1998, it is known that the largest asset, as presented on the
balance sheet, consists of capitalized start‑up costs totalling $185,508,
the same amount as for the previous year. Since these start‑up costs were
incurred during the 1996 and 1997 fiscal years, capitalized and placed on
the asset side of the balance sheet by accounting policy, one can certainly
question whether such an asset could continue to be deemed to have been
"used" in an active business, even though there is no doubt that the
costs so capitalized were capitalized for the benefit of the Corporation.
Finally, as I pointed out previously, it is impossible to determine what the other
assets represent, such as accounts receivable and amounts to be received, as
the Corporation never sold anything except for its trademark
"Walk On Water," which was sold for $3,000 in 1997.
[53] Counsel for the
Appellant did not directly address the condition relating to the market value
of the assets that must be used in the active business. This issue cannot
simply be completely pushed aside or ignored without any attempt to prove that
it has been met, because the evidence brought by the Respondent tends to demonstrate
the contrary. However, even if one could consider that all of the fair market
value of Sapa's assets was attributable to assets that are used principally in
its business, it still would have been necessary to first establish that Sapa
continued to be an active business at the relevant time, that is, on
May 31, 1999, or at any time in the 12 months preceding this
date, of which I am not satisfied.
[54] In conclusion, I
believe that Sapa did not meet the requirements to be deemed a small business
corporation for the purpose of applying paragraph 39(1)(c) of the Act.
Therefore, the Appellant cannot claim a BIL for the 1999 taxation year.
[55] As a consequence of
the foregoing, the appeal is dismissed, with costs awarded to the Respondent.
Signed at Ottawa, Canada, this 9th day of
September 2005.
"P. R. Dussault"
Translation certified true
on this 9th day of January 2006.
Sharlene Cooper, Translator
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