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Citation: 2004TCC215
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Date: 20040326
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Docket: 2003-1806(IT)G
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BETWEEN:
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RANDALL H. SHOEMAN,
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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
Beaubier, J.
[1] This appeal pursuant to the
General Procedure was heard at Regina, Saskatchewan on March 11
and 12, 2004, together with the appeal of Randall's father,
Harry, on common evidence by consent of the parties. Randall,
Harry Shoeman and Randall's brother, Russell Shoeman,
testified for the Appellant.
[2] Paragraphs 17 to 31 of the Reply
to Randall's Notice of Appeal outline the matters in dispute.
They read:
17. In computing his
income for 2000 the Appellant reported the following amounts
(amounts rounded):
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interest income
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52.
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capital gains
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638.
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RRSP income
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19,168.
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other income
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1.
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net business income
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(32,469.)
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net commission income
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19,816.
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taxable income
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7,206.
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18. The Minister of
National Revenue (the "Minister") initially assessed
the Appellant as filed for 2000. The Notice of Assessment was
dated May 3, 2001.
19. The Minister
reassessed the Appellant for 2000 and disallowed the net business
loss the Appellant had claimed. The Notice of Reassessment was
dated May 30, 2002.
20. The Appellant objected
to the Notice of Reassessment by a Notice of Objection received
June 26, 2002.
21. By a Notice of
Reassessment dated February 19, 2003, the Minister allowed the
objection in part and reassessed the Appellant to allow an
allowable business investment loss of $15,670.24.
22. The Minister initially
assessed the Appellant for 2001 by a Notice of Assessment dated
May 9, 2002. The Appellant did not file an objection to this
assessment.
23. In so assessing the
Appellant, the Minister made the following assumptions of
fact:
(a) at all material
times the Appellant was a commissioned salesperson;
(b) the Appellant
claimed a net business loss of $32,469.97 on his 2000 income tax
return;
(c) the net business
loss the Appellant claimed on his 2000 income tax return was
calculated as follows:
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income
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0.00
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expenses
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insurance
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24.00
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interest
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1,616.79
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office expenses
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5,915.68
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supplies
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559.51
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legal, etc.
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80.00
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travel
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2,092.48
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telephone, utilities
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1,663.42
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Ken Newman, book printing
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20,518.09
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subtotal
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32,469.97
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net business income*
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(32,469.97)
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(d) Ken Newman, who
is also known as Kenneth Eugene Newman, loaned money to
Russell's Company;
(e) the
Appellant's father, Harry Shoeman, not the Appellant,
guaranteed the loan Ken Newman made to Russell's Company;
(f) the
$20,518.09 the Appellant included when calculating the net
business loss he claimed on his 2000 income tax return was not
paid by the Appellant;
(g) the expenses the
Appellant claimed when calculating the net business loss he
claimed on his 2000 income tax return related to a business
carried on by Russell, rather than a business carried on by the
Appellant;
(h) Russell is the
Appellant's brother;
(i) Russell
wrote a book entitled "The Nature of Golf";
(j) the first
production run of Russell's Book began in 1995;
(k) in 1999 a
limited printing run of 5,000 copies of Russell's Book was
done;
(l) in order
to market his book Russell incorporated 610807 Saskatchewan
Ltd.;
(m) at all material times
Russell was the sole direction of 610807 Saskatchewan Ltd.;
(n) at all material
times Russell owned 100% of the issue and outstanding shares of
610807 Saskatchewan Ltd.;
(o) Russell's Company
was incorporated on or about March 29, 1995;
(p) neither Russell
not Russell's Company generated any income from Russell's
Book;
(q) neither Russell
not Russell's Company sold any copies of Russell's
Book;
(r) Russell's
Company did not file any income tax returns;
(s) Russell's
Company filed for bankruptcy on December 20, 2001;
(t) on or
about July 1, 1999, the Appellant entered into an agreement with
Russell's Company (the "Agreement");
(u) pursuant to the
terms of the Agreement the Appellant was to pay the business
related expenses of Russell's Company;
(v) the Agreement
did not include repayment terms for any amounts that the
Appellant paid pursuant to the Agreement;
(w) the Agreement did not
specify that interest was payable on any amounts that the
Appellant paid pursuant to the Agreement;
(x) the Appellant
earned no income from the Agreement;
(y) all other
financing agreements Russell's Company entered into included
repayment terms and interest of 10% per annum;
(z) the Appellant
and Russell's Company were not dealing with each other at
arm's length;
(aa) the Appellant did not
advertise or promote a company;
(bb) the Appellant's only
"client" was Russell's Company;
(cc) the Appellant took no steps
to create a client base;
(dd) the activities specified in
the Agreement were not undertaken in pursuit or profit or in a
commercial manner;
(ee) other than being a
commissioned salesperson, the Appellant was not involved in a
business;
(ff) the Appellant
paid some of Russell's Company's expenses;
(gg) the Appellant was an
investor in Russell's Company, not a financing company;
(hh) any amounts the Appellant
paid to or on behalf of Russell or Russell's Company were not
paid for the purpose of gaining or producing income from a
business or property;
(ii) any amounts the
Appellant advanced to or on behalf of Russell or Russell's
Company were paid to assist a family member who was in financial
difficulties;
(jj) the Appellant
did not intend to carry on the activities specified in the
Agreement for profit;
(kk) by an agreement dated
August 16, 1999 and a subsequent agreement dated February 26,
2001, the Appellant guaranteed the repayment of the amount that
Wayne Leibel and Robert Pyne loaned to Russell's Company.
(ll) other than
Wayne Leibel and Robert Pyne, none of the creditors of
Russell's Company could take any actions against the
Appellant to ensure that they were paid.
(mm) the Appellant made the following 4
payments, which totalled $33,000.00, to Wayne Leibel and Robert
Pyne in 2000:
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paid to Rob Pyne September 19, 2000
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25,000.00
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paid to Wayne Leibel September 28, 2000
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3,000
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paid to Wayne Leibel November 3, 2000
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3,500.00
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paid to Rob Pyne November 3, 2000
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1,500.00
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subtotal
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33,000.00
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(nn) other than the amounts
referred to in the previous subparagraph the Appellant did not
pay any amount under the personal guarantee referred to in
subparagraph 23(kk) during 2000;
(oo) the Appellant did not incur
a business investment loss in excess of $33,000 in 2000; and
(pp) the Appellant did not incur
an allowable business investment loss in excess of $15,670.24 in
2000, calculated as follows:
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paid to Wayne Leibel September 28, 2000
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3,000
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paid to Wayne Leibel November 3, 2000
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3,500.00
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paid to Rob Pyne November 3, 2000
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1,500.00
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subtotal
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33,000.00
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less capital gain previously claimed
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8,541.00
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business investment loss
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24,459.00
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allowable business investment loss
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15,670.24
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B.
ISSUES TO BE DECIDED
24. The issues to be
decided in this appeal are:
(a) whether the
Appellant was involved is in a business in 2000, other than being
a commissioned salesperson; and if so, the net business income or
loss from that business in 2000; and
(b) whether the
Appellant is entitled to deduct an allowable business investment
loss in excess of the amount allowed by the Minister in 2000.
C. STATORY
PROVISIONS, GROUND RELIED ON AND RELIEF SOUGHT
25. He relies on sections
3, 38, 111, 165 and 169, subsection 18(1), 39(9), 39(12), 50(1),
125(7), 152(8) and 248(1) and paragraphs 39(1)(c) and 40(2)(g) of
the Income Tax Act (the "Act") R.S.C.
1985, c. 1 (5th Supp.) as amended for the 2000 taxation year.
26. In response to
subparagraphs 3(o) and 9(b) and paragraphs 5 and 8 of the Notice
of Appeal, it is submitted that as the Appellant did not file a
Notice of Objection to the assessment that was issued for the
2001 taxation year, he cannot, pursuant to subsection 169(1) of
the act, appeal the assessment for the 2001 taxation year to the
Tax Court of Canada and the Court cannot, therefore, grant the
relief that is sought in subparagraph 9(b) of the Notice of
Appeal.
27. It is submitted that
Russell, not Russell's Company, wrote the book entitled
"The Nature of Golf". It is, therefore, submitted that
any expenses incurred to write the book were Russell's
expenses, not the Appellant's or Russell's Company's
expenses.
28. Furthermore, it is
submitted that as the Appellant's brother owned 100% of the
shares and was the only director of 610807 Saskatchewan Ltd., the
Appellant and Russell's Company were not dealing at arm's
length.
29. Moreover, it is
submitted that the Agreement did not contain any repayment terms
or any interest for any amounts that the Appellant paid pursuant
to the Agreement, while all of the other financing agreements
Russell's Company entered into contained such terms.
30. In addition, it is
submitted that the Appellant's only "client" was
Russell's Company and that the Appellant did not take any
steps, such as advertising, to create a client base.
31. Additionally, it is
submitted that any amount the Appellant paid to either Russell or
Russell's Company was paid to assist Russell when he was in
financial difficulty, which is entirely personal and not a
commercial endeavour. Furthermore, it is submitted that the
Appellant did not receive any revenue from either Russell or
Russell's Company with respect to any amounts he paid
pursuant to the Agreement. It is, therefore, submitted that the
Appellant had no source of income from the amounts he advanced to
Russell or Russell's Company and that the Appellant is not
entitled to deduct any business losses when computing his income
under section 3 of the Act.
[3] At the outset, Respondent's
counsel pointed out the particulars contained in paragraph 26 of
the Reply and it was ruled that the Court would not hear evidence
relating to the objection for the Appellant's 2001 year since
there have been no further proceedings respecting it.
[4] Assumptions 23(b), (c), (d), (e),
(h), (i), (l), (m), (n), (o), (r), (s), (t), (u), (v), (w), (x),
(y), (z), (aa), (bb), (cc), (ff), (kk), (ll) and (mm) were not
refuted by the evidence.
[5] Respecting the remaining
assumptions in paragraph 23, by subparagraph number, the Court
finds:
(a) The appellant was also a
"business consultant" during the material times as he
testified. However, there is no evidence that he did anything in
this field except that he worked for a trucking business in an
unspecified capacity to about the end of 1999, did some work
pursuant to the contracts in question and helped invest his
father, Harry Shoemaker's money. (All of Harry's alleged
"investments" in this period appear to have been the
money in question in his appeal.)
(f, mm and nn) Randall never paid Ken Newman any money for
anything. Randall did repay some money to Pyne and Leibel in 2000
on account of loans they made to Russell. He filed evidence of
this consisting of $38,000 in cheques dated in 2000 (Exhibit
A-30, Tab A). This was pursuant to his guarantee dated August 16,
1999, described in assumption (kk) (Exhibit A-16). It should be
noted that the first of these cheques was for $25,000 to Rob Pyne
on September 19, 2000 and refers to two items -
"Lifesaver (Cherry) NOG Loan". The $5,000 not described
in assumption (mm) is shown as a photocopy of a cheque dated
October 11, 2000 to Rob Pyne.
(g) See (gg) and (hh).
(j and k). The only "production" of Russell's
book was a printing of 5,000 copies in November, 1999.
(l and r) Deserve substantial additional comment. Russell
testified that 610807 Saskatchewan Ltd. ("610") was
incorporated for tax reasons. The only tax returns 610 filed were
GST returns for Input Tax Credits (Exhibit A-11) commencing
effective April, 1995. The only other corporate documents it
executed were corporate annual returns. Any other documents
executed in 610's name are in exhibit, according to
Russell's testimony. However, early in 1996, 610 did open a
corporate bank account at the Sherwood Credit Union in Regina.
Despite this, much of the money that Randall and Harry allege to
have advanced to 610 was paid to Russell or to various creditors
who were dealing with or billing Russell or, in the case of
telephone bills and credit cards, Randall or Harry.
(p and q) There were sales of Russell's Book. Some were
sold in the United States for cash and none of that income was
reported or recorded. Some were sold in Canada and Russell listed
these in Exhibit A-33. In all, to date, the estimate is of a sale
of about 1,300 or 1400 copies at $50 per copy. This appears to be
the wholesale price. The book (Exhibit A-1) records a retail
price of $100 per copy.
(t, u, v, w, x) Randall's July 1, 1999 Agreement (Exhibit
A-17) with 610 was for a consideration of $5.00 per copy sold
after the first 5,000 copies are sold. Randall testified that
before that he had an oral agreement with Russell for $1.00 per
copy sold which A-17 replaced. A-17 contained no time limit.
Paragraph 1. specified Randall's future services and
financial commitment. It reads:
1.
Engagement
Company hereby engaged Consultant, and Consultant accepts
engagement, to provide to Company the following services:
1) Advise the Company on business related matters such as
accounting, legal, financing, administrative, marketing,
technology, and others.
2) Pay business related expenses of the Company including
costs of accounting, legal, financing, administrative, marketing,
technology, and others.
(dd and ee) Despite Russell's testimony of sales in Canada
(A-33) and the United States, 5,000 were not sold and Randall has
received nothing. Respondent's counsel suggested to Harry and
Russell that, by July 1, 1999, the book was a financial disaster
and that this was completely known by July 1, 1999 when, on
Russell's testimony, only 700 books had been sold. All the
Shoemakers denied this. In particular, they felt that Randall
"coming on board" would provide the necessary marketing
impetus. Randall did assist in financing, administering and
marketing. Respecting marketing, Randall and Russell met with
representatives of a proposed marketing advisor and charitable
sponsor in Orlando, Florida in late January, 2001; but any
possible transaction fell through when a contract could not be
agreed on.
(gg and hh) Based on Exhibit A-17, Randall was not an investor
in 610. Exhibit A-17 was a venture by Russell to make $5.00 per
copy sold as stated therein and the amounts that he paid and the
time he expended were for that purpose. He was a co-venturer with
610. Respondent's counsel argued properly that this was a
venture to help out Randall's brother and father and that was
the basis of the deal - personal affection. However, judging by
Randall's appearance, he was in his late 30's or early
40's by 1999, he had business experience, and even though all
three men lived at 23 Cowburn Crescent, Regina, Randall had his
own personal responsibilities and he decided, independent of his
father and his similarly mature brother, to enter into the
contract of July 1, 1999. He limited his contracted time and the
term of the contract to an average of ten hours per week from
July 1, 1999 to December 31, 2001. Nonetheless, the $5.00 per
copy would continue for the full run of the book, which they
expected would amount to or exceed 100,000 copies.
(ii, jj, kk, ll, mm, nn) It was on the basis of Exhibit A-17
that Randall signed the guarantees of August 16, 1999 and
February 26, 2001 guaranteeing Leibel and Pyne. The Court accepts
Exhibit A-30, Tab A, that this amounted to $38,000 in 2000 (and
not the $20,518.09 described as paid to Ken Newman in assumption
23(c)). Exhibit A-17 indicates that the remaining expenses
claimed in assumption 23(c) also constitute business expenses
incurred as an adventure in the nature of trade. In the
Court's view it is pursuant to and as a natural consequence
of Exhibit A-17 that Randall guaranteed Pyne and Leibel in
Exhibits A-16 and A-18 when they agreed to lend 610 the overdue
money due from Russell and 610 to Newman for his loan and
interest incurred for printing and, in addition, for the costs
necessary for distribution. This money would fund the
distribution steps necessary for the book to succeed and pay off
Newman.
(oo and pp) For these reasons, the Court finds that the
business expenses described herein under the previous reference
(ii, jj, kk, ll, mm, nn) constitute business expenses and a
business loss to Randall from an adventure in the nature of trade
in the year 2000.
[6] The appeal is allowed and this
matter is referred to the Minister of National Revenue for
reconsideration and reassessment pursuant thereto. The Appellant
is awarded his party and party costs.
Signed at Vancouver, British Columbia, this 26th day of March,
2004.
Beaubier, J.
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