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Citation: 2004TCC37
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Date: 20040109
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Docket: 2001-3472(IT)G
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BETWEEN:
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KEVIN BARRIE,
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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
Rip, J.
[1] Kevin Barrie has appealed income
tax assessments for 1997, 1998 and 1999 which denied him his
claim in each year for an allowable business investment loss
("ABIL") within the meaning of subsection 38(c)
of the Income Tax Act[1]("Act"). Mr. Barrie acted
without benefit of counsel.
The Sound
[2] Mr. Barrie loaned funds
aggregating $13,600 to 1171615 Ontario Inc. ("117
Inc.") during 1996 and 1997. At trial he submitted eight
documents, each entitled "Investment Agreement", which
purported to evidence these loans. In each document 117 Inc.
agrees to pay a principal amount
"plus 10% ..." by a certain date. The eight
purported loans were made in cash, according to Mr. Barrie.
The following table describes dates the documents were
executed,
the borrowed amounts, amounts of repayment and the dates the
aggregate amounts of the loan and interest were payable:
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Date of Agreement
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Amount Advanced
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Amount of Repayment
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Date Payable
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January 4, 1996
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$1000
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$1100
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December 1, 1996
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March 8, 1996
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$1900
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$2090
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December 1, 1996
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March 28, 1996
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$1600
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$1760
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December 1, 1996
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April 29, 1996
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$3000
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$3300
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December 1, 1996
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June 7, 1996
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$3000
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$3300
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December 1, 1996
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September 23, 1996
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$ 500
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$ 550
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April 1, 1997
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October 26, 1996
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$1000
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$1100
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April 1, 1997
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April 1, 1997
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$1600
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$1760
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April 1, 1997
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[3] All of the shares of 117 Inc.
were owned by Paul Pauzé, who was the sole director and
officer of the Corporation. 117 Inc. was incorporated on
April 1, 1996, according to a Certificate of Status
produced at trial.
[4] Mr. Barrie was introduced to Mr.
Pauzé by the latter's brother. At one time, Mr.
Pauzé operated a bar and in 1996 he caused 117 Inc. to
apply for a liquor licence in expectation of operating another
bar to be known as "The Sound". 117 Inc. was
incurring expenses in renovating the bar and for legal fees.
Mr. Barrie agreed to advance amounts to 117 Inc. as the bar
was renovated. The Liquor Licence Board of Ontario's hearing
of Mr. Pauzé's application for a licence was heard on
or about November 1, 1996 and the application was
denied. Although the bar never operated as such, there was one
time when it was used for a special occasion function with a
special liquor licence.
[5] By letter dated June 2, 1997, Mr.
Barrie wrote 117 Inc., care of Paul Pauzé,
complaining that he was to have been repaid his loan by then and
acknowledging that 117 Inc. had "problems with the
LLBO". He asked for payment by July 1, 1997. 117 Inc.,
by letter dated June 22, 1997, signed by Mr. Pauzé,
advised Mr. Barrie that:
... To date, I have not been successful and have run out of
resources for continuing my fight with [the Liquor Licence Board
of Ontario]. The Corporation known as 1171615 Ontario Ltd., is
therefore going out of business.[2]
I am truly sorry for any inconvenience that this may cause
you.
[6] On October 10, 2001, Mr.
Pauzé, apparently on behalf of 117 Inc., wrote Mr. Barrie
confirming a recent telephone call that repayment date in the
Investment dated April 1, 1997 "is in April 1, 1998 and
further confirms the amount to be repaid at $1760.00".
[7] Mr. Barrie, in his 1997 income tax
return, claimed a business investment loss of the money he
advanced to 117 Inc.
[8] In cross-examination Mr.
Barrie stated that he "believed" he signed each
Investment Agreement with 117 Inc. on the date indicated on each
Agreement. For example, he would "have to say
'yeah'" if asked if he signed the
Investment Agreement of January 4, 1996 on January 4.
[9] The loans to 117 Inc. were not
guaranteed by Mr. Pauzé. Mr. Barrie said that his remedy
for non-payment would be to seize the assets of 117 Inc.
Mr. Barrie said he had "no use for lawyers". He
made no effort to collect the money advanced to 117 Inc.; he was
not going to throw out more money by going to a lawyer. (This was
Mr. Barrie's reaction to the loans to the other corporations
as well.) He stated that Mr. Pauzé had another partner
with 117 Inc. "who continued the business so I didn't
bother".
[10] Mr. Barrie had no idea whether or not
Mr. Pauzé invested in 117 Inc. In advancing funds to 117
Inc., Mr. Barrie relied solely on Mr. Pauzé's word. He
"got to know" Mr. Pauzé, later in "1998
maybe".
[11] As far as interest on the loans are
concerned, Mr. Barrie said that he was to be paid "ten per
cent on an annual basis". As I understood Mr. Barrie's
evidence, whether the loan was outstanding six months or twelve
months, he believes he was entitled to interest equal to ten per
cent of the principal amount of each advance.
[12] Mr. Pauzé testified as a witness
for the appellant. He stated that 117 Inc. used the money
borrowed from Mr. Barrie to make renovations and alterations to
the bar and to acquire the building in which the proposed bar was
to be located.
[13] According to Mr. Pauzé, he
approached Mr. Barrie to invest in 117 Inc. He declared that
all the Investment Agreements were signed at different times,
that is, at the time of each advance. He told Mr. Barrie that if
he obtained a liquor licence, 117 Inc. would repay the loans
before their due dates for repayment. Mr. Pauzé would meet
with Mr. Barrie at "each of our residences or at the
bank" and the Agreements "would have been drawn up when
we met" and signed. On each occasion it appears Mr.
Pauzé's wife was present since she witnessed the
signatures on each of the Investment Agreements. Mr. Pauzé
was not sure how the money was advanced, by cash, cheque or bank
draft.
[14] Mr. Pauzé replied that Mr.
Barrie was not the only unsuccessful investor in 117 Inc. A
Mr. Frank Lee lost $200,000 on the transaction, "some of
it" in 117 Inc.
[15] The interest rate, Mr. Pauzé
recollected, was "what I could afford ... I was trying to
get the business off the ground". In his view, the interest
was 10 per cent per year "but", he said
he "was paying ten per cent for all the money at the end of
the year even if [it were] less than a year".
[16] Mr. Pauzé said he could not
explain the fact that some of the Investment Agreements were
signed and dated before the date of the incorporation of
117 Inc. Neither could Mr. Barrie volunteer an
explanation.
Ultimate Golf Accessories
[17] In 1997 Mr. Pauzé again
solicited funds from Mr. Barrie through 1282788 Ontario Ltd.
("128 Ltd."). 128 Ltd. was incorporated on
February 23, 1998. Mr. Pauzé, again, was the
sole shareholder, director and officer of the corporation. 128
Ltd. was developing a golf accessory to be marketed across
Canada. The corporation registered itself to carry on business as
"Ultimate Golf Accessories". The accessory was a
beverage holder that could always stay vertical, preventing any
spillage of the beverage. Mr. Pauzé, Mr. Barrie said,
arranged for a company in Barrie, Ontario to develop the
holder but there was a problem in development, the mould was
faulty, and eventually the Barrie company went out of business.
The beverage holder was never marketed.
[18] Mr. Barrie, a golfer at the time, liked
the idea of the beverage holder and by an Investment Agreement
dated February 24, 1998 agreed to advance to 128 Ltd.
$10,000 with interest at nine per cent. According to
the Investment Agreement the "return on investments will be
paid quarterly commencing September 1998". According to Mr.
Barrie, this meant he would receive nine per cent of the amount
of his loan every quarter, that is 36 per cent interest
each year. Mr. Barrie produced a copy of a Bank of
Nova Scotia "Certification Request" indicating an
amount of $10,000 was paid to 128 Ltd. on
February 24, 1998.
[19] By letter dated December 27, 1998,
Mr. Pauzé informed Mr. Barrie that 128 Ltd. "has
ceased operating ... the company will not be able to meet
it's [sic] financial obligations ... We are truly
sorry for any inconvenience this may cause you." Based on
this letter and conversations with Mr. Pauzé, Mr. Barrie
concluded he would not receive any repayment. He stated that the
company was "belly up". However, 128 Ltd. still
exists.
[20] Mr. Barrie acknowledged that he
"didn't do much research" into 128 Ltd. He simply
liked the product and thought it would be successful.
[21] Mr. Barrie claimed an ABIL in his 1998
income tax return with respect to his investment in 128 Ltd. He
said that he never received any money back from 117 Inc. or
from Mr. Pauzé personally.
[22] Mr. Pauzé disagreed with Mr.
Barrie concerning the amount of interest; as far as he is
concerned the rate was nine per cent per year, or
2 1/4 per cent per quarter, not 36 per cent
per year.
Georgian Bay Publishing
[23] According to Mr. Barrie, Mr.
Pauzé had written a book on
"Credit Repair", that is, how one may repair or
re-establish one's personal credit rating. However, he had no
"distribution deal". Mr. Barrie testified that
Mr. Pauzé showed him a copy of the book before 1999
as part of his effort to have Mr. Barrie lend 1348903 Ontario
Inc. ("134 Inc.") money to be used to increase the
number of books already printed and to assist in Mr.
Pauzé's "follow up" book. Mr. Barrie
produced the purported copy of the book at trial which, he said,
Mr. Pauzé gave him at the time.[3] When he advanced the funds, Mr.
Barrie did not know how many books had already been published or
if they had been sent to the stores. He did believe that a
Canadian Tire franchisee had been sent books for sale.
[24] Mr. Pauzé incorporated 134 Inc.
on April 7, 1999. Mr. Barrie claims he advanced $77,000 to
134 Inc. According to an Investment Agreement dated
April 20, 1999, Mr. Barrie advanced to 134 Inc. the sum of
$40,000; "[t]he rate of interest for this investment is
fixed at 9.5%" and the "return on Investments will be
paid quarterly, commencing September 1999". On or about
June 19, 1999, according to another Investment
Agreement of that date, he advanced to 134 Inc. a further $37,000
and "the rate of interest for this investment is fixed at 10
per cent". Also, "returns on Investments"
were as in the previous agreement. Mr. Barrie testified that in
his view he would receive 10 per cent of $40,000 and
$37,000, respectively, each quarter or 40 per cent
interest on each loan annually. Mr. Pauzé did not agree
with this interpretation.
[25] Produced at trial was a copy of a Bank
of Nova Scotia receipt stub indicating $40,000 was drawn from Mr.
Barrie's account in favour of 134 Inc. on
April 21, 1999, a copy of the corresponding bank draft,
as well as Mr. Barrie's bank account pass book at the
Bank of Nova Scotia reflecting the purchase of the draft in the
amount of $40,000. A cheque drawn on Mr. Barrie's account at
the Bank of Montreal, dated June 17, 1999 in the amount of
$37,000 and payable to "G.B.P." was also produced at
trial.
[26] By letter dated July 17, 1999
Mr. Pauzé informed Mr. Barrie that:
... due to lack of sales, the first distribution of funds will
not take place in September of 1999 as originally
anticipated.
At this point in time, it appears as though a distribution may
not be likely until some time in early 2000. I apologize for any
inconvenience this may cause.
The head of Mr. Pauzé's letter bore the following
description: "GBP, Georgian Bay Publishing, a Division of
1348903 Ontario Inc."
[27] Mr. Barrie, on discovery, stated he
"had no idea" if any proceeds may have been generated
from the sale of the book. He "did not know where the money
went" nor was he aware of 134 Inc.'s assets. He did not
know if 134 Inc. may have invested in GBP Inc.
[28] Mr. Pauzé explained that he
incorporated two corporations, one, Georgian Bay
Publications Inc., to handle advertising and to distribute the
book and a second, 134 Inc., to write the book, get it published
and to own the rights to the books. He stated that, in fact, 134
Inc. manufactured the book and initiated negotiations for
distribution of the book. He testified that Mr. Barrie did not
invest in GBP Inc. Shortly after the investment, 134 Inc. was no
longer in business, Mr. Pauzé testified. In fact, 134 Inc.
was dissolved on December 30, 1999 because
Mr. Pauzé had failed to pay the incorporation fees.
The book became an asset of "a new company", GBP Inc.
"which was a shell and not doing anything", according
to Mr. Pauzé.
[29] Except for Mr. Pauzé's
evidence that the rights to the book were transferred to GBP
Inc., there is no evidence as to how 134 Inc.'s assets,
whatever they were, were distributed. There is no evidence Mr.
Barrie questioned the transfer of the book rights. Mr. Barrie did
not expect any payment of his loans to 134 Inc. and claimed a
business investment loss of $77,000 in filing his 1999 income tax
return.
[30] The book was originally published in
1999, according to Mr. Pauzé. Copies of the book were sent
for distribution but there were no sales. Mr. Pauzé
insisted the book was not available at the time Mr. Barrie
advanced money to 134 Inc. It was only during the editing
process that he asked Mr. Barrie to invest. He said he probably
finished writing the book in late 1998 or early 1999 and then
sent it out for editing. The copy of the book Mr. Barrie produced
indicated the book was copyright in 1999. Mr. Pauzé said
no book had been printed at the time Mr. Barrie made his initial
or second loan.
General
[31] Mr. Barrie testified that he was
partially influenced in making his loans to the three companies
by Mr. Pauzé's representations that the Canada Customs
and Revenue Agency ("CCRA") had informed the latter
that a company would qualify as a Canadian controlled private
corporation and be eligible for a business investment loss if it
carried on a business. Mr. Pauzé stated that he
"preached" this to various investors. The availability
to obtain a benefit of an allowable business investment loss was
a major influence in Mr. Barrie deciding to lend money to Mr.
Pauzé's corporation.
[32] There are no financial records of the
three corporations. It appears no income tax returns were filed
by any of 117 Inc., 128 Ltd. and 134 Inc. This, coupled with
testimony that I can charitably describe as confusing and
incomplete, leads to some difficulty in assessing, for example,
whether any of the corporations qualified as a small business
corporation or carried on an active business within the meaning
of subsections 248(1) and 125(7) respectively, of the
Act.
[33] I question whether 117 Inc. was the
beneficiary of the loans purportedly made to it. First of all,
the first three loans were made before 117 Inc. was
incorporated and neither Mr. Barrie nor Mr. Pauzé could
explain how that could be. This colours the other five loans, in
particular the last loan, which was both made and due on April 1,
1997. The letter of October 10, 2001 from Mr. Pauzé
to Mr. Barrie correcting the due date to April 1, 1998 does not
impress me; it was written long after the fact and after the
reassessments for 1997 was issued. I am not impressed with the
testimony of either Mr. Barrie or Mr. Pauzé with respect
to these loans. I would not be surprised if all of the Investment
Agreements were prepared, signed and witnessed at the same time.
Mrs. Pauzé, who witnessed the agreements, did not
testify.
[34] As far as the loan to 128 Ltd. is
concerned, there is evidence that money was advanced from Mr.
Barrie to that corporation. It appears that Mr. Barrie had his
bank certify a cheque on February 24, 1998 for $10,000
payable to 128 Ltd. In the usual course of events, the $10,000
would become an asset of 128 Ltd. This was eight months after
another of Mr. Pauzé's corporations, 117 Inc.,
purported to default on alleged loans of $13,600. Why Mr. Barrie
would agree to again advance money to Mr. Pauzé
without security, after being burned months earlier, remains
unanswered, but is not particularly relevant. What I do find
strange is that Mr. Barrie expected an annual return of
36 per cent on this investment.
[35] As far as the loan to 134 Inc. is
concerned, I have no idea if 134 Inc. used the money or if the
money was applied to the benefit of GBP Inc. The evidence
suggests that GBP Inc., not 134 Inc., may have carried on an
active business and had some expectations to earn income from an
active business. I have no evidence that the $77,000 loaned to
134 Inc. by Mr. Barrie was an asset of 134 Inc. or used in
its business. I doubt Mr. Pauzé's recollection of how
the money was applied.
[36] Respondent's counsel argued that
none of the loans, if made, to 117 Inc., 128 Ltd. and 134
Inc. was established by Mr. Barrie to have become a bad debt in
the year he claimed the loss on the particular loan nor was Mr.
Barrie deemed to have disposed of any of the debts in accordance
with subsection 50(1) of the Act. He referred to
Flexi-Coil Ltd. v. The Queen[4]. In
Flexi-Coil, the Federal Court of Appeal agreed
with the trial judge's conclusions that amounts claimed by
Flexi-Coil as bad debts were too high as the amounts it
determined to be bad debts did not fulfil the criteria for bad
debts in all cases. The uncollectable bad debts were as
determined by the Minister. The Minister's position at trial
was that Flexi-Coil could not claim deductions for certain
portions of bad debts because it had not established that the
disallowed portions had become uncollectable.
[37] In the appeals at bar, it is quite
clear that Mr. Barrie relied solely on Mr. Pauzé. He
appears to have relied on Mr. Pauzé's letter of July
1, 1997 that the corporation was "going out of
business", although the corporation's partner in the
business continued to operate the business. He did not inquire
what assets the corporation may have had or how the assets, if
any, were distributed. I agree that Mr. Barrie did not reasonably
determine, if at all, that the debts to 117 Inc. had become
uncollectable in 1997. Not one of the factors summarized by
Rothstein, J.A. in Rich v.Canada[5], was seriously considered
by Mr. Barrie.
[38] Mr. Barrie did no more to determine
whether the debts from 128 Ltd. and 134 Inc. had become bad in
1998 and 1999, respectively, than he did in determining whether
the debts to 117 Inc. were bad. He relied strictly on the letters
of December 27, 1998 and July 17, 1999 from Mr. Pauzé and
concluded the debts from 128 Ltd. and 134 Inc, respectively,
became bad in 1998 and 1999 respectively. The letter of December
27, 1998 informed Mr. Barrie that 128 Ltd. "will not be able
to meet it's [sic] financial obligations" but he
did not query what its obligations, other than to him, were and
whether there were any assets available for the creditors to
share, among other investigations. The letter of July 17,
1999 was not hopeless: Mr. Pauzé advised him that a
"distribution may not be likely until some time in
2000". Clearly, this is not the establishment of a bad debt
in 1999 and there is no evidence of further information received
by Mr. Barrie later in 1999 to indicate any debt became bad
in that year.
[39] Mr. Barrie, it appears to me, was
anxious to establish the debts as bad as soon as possible so as
to claim an ABIL in as early a taxation year as possible. The
losses were all written off within a year of their creation and
they were made without regard to the financial condition of the
borrowers. Even after a purported or initial loss to 117 Inc.,
Mr. Barrie made a loan to one and then, after another loss, to
another corporation wholly owned by Mr. Pauzé without any
security or investigation of the lenders' financial
wherewithal. He did not make the determinations that the debts
were bad in a reasonable and in a pragmatic business-like
manner. With respect to loans to 128 Ltd. and 134 Inc., I doubt
whether he considered the realistic chances of earning interest
on the loans. Indeed, for what it is worth, the whole episode of
loans to Mr. Pauzé's corporations were not made in a
reasonable and in a business-like manner.
[40] Even if all the loans Mr. Barrie claims
he had to the three corporations were valid loans, I cannot
conclude one way or the other whether any of 117 Inc., 128
Ltd. and 134 Inc. could qualify as a small business corporation;
I do not know if substantially all of the fair market value of
any corporation's assets were used principally in an active
business carried on primarily in Canada by the particular
corporation or by a corporation related to it.
[41] The appeals are dismissed, with costs,
if demanded.
Signed at Ottawa, Canada, this 9th day of January,
2004.
Rip, J.
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