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Citation: 2004TCC669
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Date: 20041005
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Docket: 2003-350(IT)I
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BETWEEN:
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ALAIN LEGER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Lamarre, J.
[1] These are appeals under the
informal procedure against assessments made by the Minister of
National Revenue ("Minister") under the Income Tax
Act ("Act") for the appellant's 1992,
1993, 1994, 1995 and 1997 taxation years. In computing his income
for the 1994 taxation year, the appellant claimed a business
investment loss of $262,678 under paragraph 39(1)(c) of
the Act. In reassessing the appellant for that year, the
Minister disallowed $69,879 of the total business investment loss
claimed and likewise disallowed that part of the loss that was
carried either back or forward to the 1992, 1993, 1995 and 1997
taxation years pursuant to paragraph 111(1)(a) and
subsection 111(8) of the Act. The allowable business
investment loss that was carried forward to 1995 and that was
disallowed by the Minister amounts to $30,736. Counsel for the
appellant indicated in Court that the appellant has elected,
pursuant to section 18.13 of the Tax Court of Canada Act,
to limit the appeal to a loss amount of $24,000 for that year, as
he wished to have all his appeals heard under the informal
procedure.
[2] In reassessing the appellant, the
Minister relied upon the following assumptions of fact that are
found in paragraph 7 of the Reply to the Notice of Appeal
("Reply"):
(a) the Appellant
claimed a business investment loss of $69,879 (plus $192,799
allowed by the Minister) in respect to a debt owed by the
Corporation [520205 Ontario Inc.] to him;
(b) the Appellant
was a shareholder of the Corporation;
(c) the Corporation
filed for bankruptcy on May 30, 1994;
(d) the Corporation
did not file any financial statements for the year ended February
28, 1994;
(e) except the
business loss allowed, the Corporation had no additional debt
with the Appellant on February 28, 1993 or May 30, 1994; and
(f) for the
period of March 1, 1993 to May 30, 1994, no books or records were
provided to the Minister to support the business investment
loss.
Issue
[3] The issue as stated in paragraph 8
of the respondent's Reply is whether 520205 Ontario Inc.
("corporation") owed a debt to the appellant on May 30,
1994, the date of the corporation's bankruptcy. The
respondent's sole argument in her Reply is that the appellant
did not incur a business investment loss of $69,879 in his 1994
taxation year since there was no additional debt of that amount
owed to the appellant by the corporation under paragraph
39(1)(c) of the Act either on
February 28, 1993 (the corporation's year end) or
on May 30, 1994 (date of the corporation's
bankruptcy). The appellant claims not only that the corporation
owed him a debt for money lent to it by him or paid by him on its
behalf during the corporation's 1994 fiscal year, but also
that the additional amount due that should be allowed as a
business investment loss is not $69,879 but $85,069.
[4] A schedule of the amounts now
claimed was prepared by the appellant's accountant, Robert
Ogle, a partner in the accounting firm Welch & Co., and filed
as Exhibit A-1, which is reproduced below:
ALAIN LEGER
ALLOWABLE BUSINESS INVESTMENT LOSS
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Opening balance of shareholders account Feb. 28/93
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$ 30,300
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Advances to company:
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April/93
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$ 5,000
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April/93
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35,000
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April/93
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15,000
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May /93
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15,000
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June /93
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15,000
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85,000
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Legal and financing costs
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6,566
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Expenses paid personally by Alain Leger
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1,601
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Funds paid personally re: net pays:
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June /93
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7,483
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Sept /93
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8,265
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Feb /94
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5,398
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21,146
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Drawings
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(20,000)
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Clear out A/R
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(365)
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Correct wages
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(5,129)
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Withdrawals - 5 x 750
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(3,750)
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Revised allowable business loss
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$115,369
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[5] The business investment loss of
$85,069 now claimed is the difference between the "Revised
allowable business loss" of $115,369 and the "Opening
balance of shareholders account Feb. 28/93", namely,
$30,300, as per Exhibit A-1. Although the Minister has
accepted the opening balance of the shareholder's account as
at February 28, 1993 ($30,300), the respondent does not agree
that the additional amounts added to that account in Exhibit A-1
constitute a debt owed by the corporation to the appellant.
Facts
[6] The corporation operated a family
business wholesaling electrical and lighting products under the
name of House of Lighting. In 1986, the appellant purchased 50
per cent of the shares of the corporation from his parents, the
other 50 per cent being purchased by the appellant's brother
Guy Leger. The total sales price was $250,000, of which the
appellant paid half, that is, $125,000 (Exhibit A-2).
[7] The corporation went bankrupt in
May 1994 and, as a result, the appellant claimed a business
investment loss for 1994, part of which was disallowed by the
Canada Customs and Revenue Agency ("CCRA").
[8] Mr. Ogle testified that he
prepared the schedule filed as Exhibit A-1, and referred to
above, in 1999 when he was requested by the CCRA appeals officer,
at the objection stage, to provide explanations concerning the
business investment loss that had previously been disallowed.
[9] Mr. Ogle said that Exhibit A-1 is
based on documentation that he had seen, such as copies of the
appellant's bank deposit book, of the appellant's
cancelled cheques, and of documents regarding loans granted to
the appellant after February 1993. He also mentioned that his
firm prepared the corporation's financial statements for the
year ending February 28, 1994, in August 1995 at the request
of the trustee in bankruptcy (Exhibit A-13). In so doing, his
firm relied on the corporation's ledger and on the
preliminary internally generated balance sheet for the
corporation's 1994 fiscal year that were prepared by the
corporation's internal accountant at the time,
Kevin Muldoon, who stopped working for the corporation after
the bankruptcy. The financial statements were never filed in the
end because the trustee in bankruptcy did not want Mr. Ogle to
finalize them. Mr. Ogle therefore did not review them at that
stage. As a result, the corporation's tax return for the 1994
fiscal year was not filed either. However, Mr. Ogle reviewed
those financial statements at the objection stage. Although he
could not verify the documentation supporting the statements, he
nevertheless found them satisfactory enough as they were based on
information recorded by Mr. Muldoon before the bankruptcy and
later confirmed by the appellant.
[10] Having said that, and the appellant
having centered the issue on the figures set out in Exhibit A-1,
I now intend to reproduce the facts as they were presented to me
in respect of each item claimed by the appellant in
Exhibit A-1.
Advances to the company: $85,000 (Exhibit A-1)
[11] The appellant testified that he
advanced from his personal account to the corporation's
account an initial amount of $5,000 in April 1993, and similarly,
two subsequent amounts of $15,000 in May 1993 and June 1993.
These sums are shown under the heading "Advances to
company" in Exhibit A-1. The advances are evidenced by
copies of deposit slips of the corporation. One of these,
prepared by Kevin Muldoon, shows an amount of $5,000
received from the appellant on April 8, 1993 (Exhibit A-4, 1st
page); two others indicate amounts of $15,000 for May 22, 1993
(Exhibit A-4, 3rd page) and for June 4, 1993 (Exhibit A-4, 4th
page). These advances were made by cheques drawn on the
appellant's account and made to the order of House of
Lighting (see Exhibit A-5, 5th, 6th and 11th pages).
[12] The other items appearing under the
heading "Advances to company" in Exhibit A-1 are an
amount of $35,000 and an amount of $15,000, totalling $50,000,
which were advanced to the corporation in April 1993. The
appellant explained that his brother Maurice Leger, who was not a
partner and was not working for the corporation, agreed to lend
him $50,000 from his two lines of credit. The appellant endorsed
the cheques made to his order by his brother Maurice and
deposited them in the corporation's account on April 20,
1993, as evidenced by a copy of a page from the corporation's
deposit book and of a bank statement filed together as
Exhibit A-15. There was no written loan agreement but
there was a verbal understanding that the appellant would pay
back shortly the principal and also the interest incurred by
Maurice on his lines of credit. The appellant did indeed pay back
the entire loan to his brother, with interest, over a period from
July 28, 1993 to August 11, 1994. This is evidenced by
the cheques made by the appellant to the order of Maurice Leger
(see Exhibit A-5, 4th, 7th, 8th, 9th and 10th pages),
and by the schedule of the interest incurred by
Maurice Leger on the $50,000 borrowed on his line of credit,
which shows the amounts of principal repaid by the appellant over
the above-mentioned period and a final interest payment of
$2,866.99 (Exhibit A-6). It is also confirmed by a
document apparently prepared by the appellant's wife, Jill
Leger, on the basis of the appellant's cheque books and
deposit slips (Exhibit A-11, page 2). The loan transaction is
confirmed as well by a letter of August 5, 1998, signed by
Maurice Leger and addressed to Robert Ogle (Exhibit A-5, 2nd
page). This letter also confirms the testimony of both
Mr. Ogle and the appellant that the proceeds of the loan were
"used in the House of Lighting".
Legal and financing costs: $6,566 (Exhibit A-1)
[13] With respect to this item, the
appellant explained that it represented legal costs and interest
expenses that were incurred by him personally in securing a
mortgage from the trustees of the Gilles Aubé Family
Trust ("Aubés") to provide additional funds to
be invested in the corporation. As a matter of fact, on
May 20, 1993, the appellant's wife, Jill Leger, obtained
a $50,000 mortgage from the Aubés on a lot owned by her
(Part of Lot 8, Registered Plan 271, in the township of Cornwall
and designated as Parts 4 and 6, Reference Plan 52R-4483).
The appellant acted as guarantor with respect to this charge (see
Charge/Mortgage of Land, Exhibit A-5, last page). The charge was
registered in the Abstract Index for Lot 8, Plan 271, township of
Cornwall, on May 21, 1993 (Exhibit R-1).
[14] The appellant explained that the loan
could not be obtained from the Aubés without Canada Trust
first issuing a partial discharge for the lot so as to make
possible the severance of a parcel of land that would be used as
security for the second mortgage to be held by the Aubés.
Canada Trust requested as a condition of the partial discharge a
paydown of $20,000 on its mortgage plus an administration fee of
$150 (Exhibit A-7, 1st page). The appellant also had
to pay in respect of the mortgage transaction legal fees of
$1,531.32, less a credit of $87.55 for GST, to his lawyer
(Exhibit A-7, 3rd page), a brokerage fee of $500 and
legal fees in the amount of $1,134.74 to the law firm acting for
Canada Trust (Exhibit A-7, 2nd page). The appellant explained
that the net proceeds of the mortgage (after deduction of all the
above expenses and the 1993 tax arrears amounting to $1,665.30)
were deposited in the corporation's account. This seems to be
evidenced by the corporation's ledger prepared by the
internal accountant, which shows a credit of $22,483.29 and of
$3,187.55 to the appellant's shareholder's advance
account on June 30, 1993 (Exhibit A-12, 1st page).
[15] The appellant said that his
shareholder's advance account was increased by the amount of
the loan and the cost thereof ($6,566) in the accounting records
of the corporation. The cost of $6,566, which is the only amount
now claimed in respect of that loan, is composed of the $150
discharge fee, the brokerage fee of $500, the legal fees
($1,531.32, less a credit of $87.55, and $1,134.74) and the
interest paid on the Aubés' mortgage in 1993 as
adjusted pursuant to the interest schedule shown on the last page
of Exhibit A-7.
[16] It should be noted that the Abstract
Index (Exhibit R-1) indicates that the partial discharge was
registered by Canada Trust only on June 30, 1993, although the
Aubés' charge had been registered on May 21, 1993.
Although this may look strange, there is a letter from Lending
Administration at Canada Trust dated May 21, 1993, and
addressed to the appellant's then lawyer. The letter
indicates that it is Canada Trust's "understanding that
the funds for the paydown of [the Canada Trust] mortgage
will result from [the appellant] putting on a blanket mortgage
(1st on part 6 and a 2nd on part 4 subordinate to [Canada
Trust's] 1st mortgage" (Exhibit A-7, 1st page). The
Aubés' mortgage was secured by the property consisting
of Parts 4 and 6 on Reference Plan 52R-4483 referred to above, as
shown in the Abstract Index (Exhibit R-1).
[17] It is therefore my understanding that
the discharge fee, the brokerage fee and the legal fees paid by
the appellant and referred to under the heading "Legal and
financing costs" in Exhibit A-1 were in fact paid to obtain
the mortgage loan from the Aubés. Now it is the testimony
of the appellant and his accountant, Mr. Ogle, that the net
proceeds of this loan were invested in the corporation
(as mentioned earlier, this seems to be reflected in the
corporation's ledger filed as Exhibit A-12) with the intent
of eventually earning income through the corporation's
profits. They say the money was used to pay ongoing operating
costs of the corporation.
Expenses paid personally by Alain Leger: $1,601 (Exhibit
A-1)
[18] The appellant explained that these
expenses were incurred by him personally to remove and bring back
an electrical ceiling provided by House of Lighting to a
customer. The corporation did not have the funds available to pay
for this and the cost of it was applied to the appellant's
shareholder's advance account. The appellant testified that
the amount in question was never paid back to him. That amount is
recorded in the corporation's ledger under "Due To
Shareholder (A.L.)" (Exhibit A-12, 3rd page), but the
appellant said he did not have any other record on this
expense.
Funds paid personally re: net pays $21,146 (Exhibit
A-1)
[19] The appellant explained that this item
groups together the salaries due to him and his wife by the
corporation that were redeposited in the corporation's
account, without the cheques being cashed, in order to allow the
corporation to pay ongoing expenses. A list of all the cheques
that were made out to the appellant and his wife during the
period from February 10, 1993, to December 30, 1993, which
represent a total of $34,883 ($28,527 for the appellant and
$6,356 for his wife), is found in Exhibit A-8. The
list also shows the cheques that were redeposited and the amounts
thereof, which total $21,147.63. This list was prepared by Mr.
Ogle at the time he was having discussions with the CCRA's
appeals officer at the objection stage. It differs slightly from
the one prepared by Earle Loftman, the appeals officer, which
includes all of the cheques issued in the period from January
1993 to December 1993 to the appellant and his wife, which amount
to $39,113 (Exhibit R-8). Copies of some of the
cheques listed there were filed as Exhibit A-9. Mr.
Ogle explained that he saw all the cheques when he worked on the
financial statements in 1995. He said that the cheques
redeposited were credited to the appellant's
shareholder's advance account (transcript of the proceedings,
page 180). However, although the appellant's wife, Jill
Leger, declared salary income in her 1993 tax return (Exhibit
A-10), the appellant did not himself declare any salary income
from the corporation in his 1993 tax return (Exhibit A-3).
Mr. Ogle explained that the salary cheques were not declared
by the appellant because he decided instead to reduce his
shareholder's advance account by the amounts of the cheques
issued to him. In other words, the cheques issued by the
corporation were considered by him as a repayment of debt and not
as salary (transcript of proceedings, page 187). So the cheques
were issued and then applied to the reduction of his
shareholder's advance account (transcript of proceedings,
page 183). The amounts shown in the "Drawings"
account by Mr. Muldoon when he entered the cheques prepared
for the two shareholders in the accounting records were
ultimately removed in respect of the appellant and applied
against his shareholder's advance account, reducing it by
$20,000 (see Exhibit A-1, "Drawings", and
Exhibit A-12, 3rd page). The same was done with respect to three
other items -- "Clear out A/R", "Correct
wages" and "Withdrawals - 5 x 750" -
shown in Exhibit A-1. The shareholder's advance account was
reduced by the amounts appearing under those items. This was done
prior to completing the financial statements for February
1994.
[20] However, the monies reinvested by
Jill Leger increased the appellant's shareholder's
advance account because she paid tax on the salary cheques that
were redeposited in the corporation's account. The appellant
and Mr. Ogle explained that instead of her trying to cash
her cheques and giving the money to her husband so that he could
reinvest the money in the corporation, they found it easier and
safer just to endorse Jill Leger's cheques back over to the
corporation, as the bank may not have honoured the cheques had
she attempted to cash them.
[21] Earle Loftman, the appeals officer, and
Sue Murray, the auditor, both of whom worked for the CCRA,
testified that they disallowed the business investment loss at
issue because they did not have in hand at the time the complete
general ledger and the finalized financial statements of the
corporation for its 1994 fiscal year. They both said that a
review had to be done to verify the entries behind the numbers
appearing on the financial statements. This is why they would
have liked to have analyze the corporation's general ledger
to verify the flow of funds in order to ascertain whether the
monies invested by the appellant in the corporation were in fact
owed by the corporation. Indeed, they saw excerpts only from the
general ledger. They could see that the money was invested in the
corporation by the appellant, but they could not verify the
entries in the other accounts. They were of the opinion that
there was a lack of documentation to support the claim of the
appellant that there was a debt owed to him by the corporation.
They could not verify what was done with the money by the
corporation and whether it was repaid to the appellant. They said
that the shareholder's advance account alone does not reflect
all of the activity in a business that is related to the
shareholder's transactions. They need to see what is recorded
in other accounts of the general ledger that are germane to the
shareholder's advance account. That is why they did not allow
the loss; they had not seen the underlying documentation showing
how all the transactions within the corporation had been
recorded.
Analysis
[22] The appellant seeks to deduct from his
income for the 1994 taxation year $85,069 above the amount the
Minister allowed as a business investment loss. It is the
respondent's position that the appellant has not met the
burden of proving that he is entitled to that deduction. It
should be remembered here that the only issue raised by the
respondent in her Reply is whether the corporation was indebted
to the appellant on May 30, 1994. As a matter of fact, it is
clear from the Reply that the Minister did not rely on any other
facts in reassessing the appellant, and the evidence adduced at
trial did not go beyond the indebtedness issue. As a result, the
appellant has the burden of showing on a balance of probabilities
that, on the date of the bankruptcy, the corporation was indebted
to him for the amount claimed.
[23] In her written submissions, counsel for
the respondent argues that the appellant failed to provide
documentation substantiating his claim. She says that the
appellant was required to keep records and books of account for
the corporation. She also says that some of the supporting
documents were prepared by people who were not in court to give
evidence as to the veracity of those documents and as to how they
were prepared. She further states that by failing to file an
income tax return and financial statements for the corporation
the appellant prevented the CCRA from conducting an audit to
accurately assess the amount of the business investment loss. The
respondent also questions the discrepancy between the amount
($69,879) originally claimed by the appellant in his 1994 income
tax return and the new amount ($85,069). In her view, there is no
plausible explanation for that discrepancy. Finally, the
respondent is of the view that the appellant has not proven the
existence of a link between the borrowed funds and the
corporation or that the appellant loaned money to the corporation
with the intention of creating indebtedness.
[24] I agree with counsel for the appellant
that the respondent's submissions are inaccurate when she
says that the appellant prevented the CCRA from conducting an
audit. The evidence revealed that the CCRA was in possession of
quite a few documents at that stage. Although the finalized
financial statements and the complete general ledger of the
corporation were not provided to the auditor nor to the appeals
officer, other documents were provided and these were analyzed by
them. One should not forget that the corporation filed for
bankruptcy in May 1994 and it is not surprising that some
documents were not in the possession of the corporation's
shareholder once a trustee in bankruptcy was appointed.
Mr. Ogle testified that his firm was asked to prepare
financial statements for the year ending February 28, 1994, and
did so in August 1995. At the request of the trustee in
bankruptcy, they were not finalized. Mr. Ogle subsequently
reviewed the financial statements when a notice of objection to
the assessments presently under appeal was filed. It is my
understanding that he relied on the figures in those statements
and on the corporation's ledger, which he had in hand at the
time, in preparing Exhibit A-1 and when discussing the
appellant's claim with the appeals officer.
[25] I also agree with counsel for the
appellant that the documentary evidence filed with the Court
proves on a balance of probabilities that the appellant and the
internal accountant treated the money invested in the corporation
as a loan, as it was accounted for in the appellant's
shareholder's advance account with the corporation before the
bankruptcy in May 1994. The documentary evidence was filed
without objection by the respondent. It is now too late to argue
that the people who prepared those documents should have been in
court to give evidence as to their veracity. I also agree with
the appellant that the issue in the present case is a factual
one: i.e. did the corporation owe the appellant an additional
amount of $85,069 either on February 28, 1994 (the end of its
fiscal period) or on May 30, 1994 (the date on which the
corporation filed for bankruptcy). The fact that originally a
lower amount was claimed should not prevent the appellant from
claiming the actual loss sustained by him. I do not find that
this fact is, as suggested by the respondent, significant enough
to cast doubt on the appellant's and Mr. Ogle's
credibility.
[26] The various amounts claimed to have
been lent or advanced by the appellant to the corporation are
listed in Exhibit A-1, and the appellant testified that he was
never reimbursed or repaid.
[27] I am satisfied that the appellant has
established on a balance of probabilities that he did in fact
advance the amounts at issue to the corporation. Cancelled
cheques, deposit slips, the corporation's deposit book, the
shareholder's advance account ledger, the internal
accountant's preliminary figures, the non-finalized
financial statements, the letter from Maurice Leger, and all
the other documents provided in evidence, combined with the
testimony of the appellant and his accountant, Mr. Ogle, are
satisfactory enough, in my view, to show that the appellant had
the funds to make advances to the corporation, did in fact make
such advances, and treated those advances as loans, loans which,
in the end, were never repaid.
[28] With respect to the legal and financing
costs, the appellant produced both documentary and viva
voce evidence to support the amounts thereof. I am also
satisfied that the appellant paid these expenses on behalf of the
corporation with the intent of being reimbursed when the
corporation was back on its feet financially. The fact that the
Aubés' mortgage was granted on the security of a lot
of which the appellant's wife was the registered owner is not
relevant in my view, as the appellant is claiming the expenses he
himself paid to secure this mortgage on behalf of the
corporation. With respect to the expenses paid personally by the
appellant for the removal of the electrical ceiling belonging to
the corporation, they were recorded by Mr. Muldoon in the
appellant's shareholder's advance account. I am satisfied
that these expenses were incurred by the appellant on behalf of
the corporation and that he intended to be reimbursed by the
corporation.
[29] Finally, concerning the redeposited
cheques, I am also satisfied that the accountant properly
accounted for the amounts in question. The cheques issued to the
appellant were taken into account to reduce the shareholder's
advance account, as the amounts thereof were not included in his
tax return. Indeed, a total of approximately $28,000 was used to
reduce the shareholder's advance account, as shown in Exhibit
A-1; this corresponds to the total amount of all the cheques
issued to the appellant (Exhibit A-8). These amounts were treated
as repayment of a debt. However, the cheques redeposited by Jill
Leger increased the shareholder's advance account. Although
Jill Leger was not a shareholder, it is my understanding, from
the evidence, that she gave back her salary to her husband so
that he could reinvest it in the corporation. I note that the
respondent did not raise any issue with respect to this matter at
trial. Furthermore, the evidence suggests that the appellant and
his wife had joint accounts and commingled their funds. It is
therefore reasonable to conclude that Jill Leger did in fact give
her husband her cheques with the intention that he would loan the
amounts thereof to the corporation.
[30] On the whole of the evidence, I
conclude that the appellant has shown on a balance of
probabilities that the corporation owed him an additional amount
of $85,069 on February 28, 1994, and on May 30, 1994. This was
the sole issue raised in the proceedings. As for the other
conditions required for a loss to qualify as a business
investment loss pursuant to paragraph 39(1)(c) of the
Act[1]-- i.e. the requirement that the debt have been
acquired by the appellant for the purpose of gaining or producing
income from a business or property (subparagraph
40(2)(g)(ii)), that the debt have become bad in the year
1994 (the year giving rise to a deemed disposition for the
purposes of subsection 50(1) for proceeds equal to nil), and that
the business investment loss have been sustained by the appellant
-- the respondent in her pleadings did not challenge the fact
that those conditions were met and she has not convinced me that
they were not. For these reasons, I find that the appellant is
entitled to claim an additional business investment loss of
$85,069.
[31] The appeals are therefore allowed and
the assessments are referred back to the Minister for
reconsideration and reassessment on the basis that the appellant
is entitled to claim an additional business investment loss of
$85,069 for 1994 and to carry that loss back or forward to the
other years at issue pursuant to paragraph 111(1)(a) and
subsection 111(8) of the Act, subject to the appellant
having accepted limiting his allowable business investment loss
claimed to a maximum of $24,000 per taxation year as required by
section 18.13 of the Tax Court of Canada Act.
Signed at Ottawa, Canada, this 5th day of October 2004.
Lamarre, J.
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