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Citation: 2004TCC321
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Date: 20040505
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Docket: 2003-1829(IT)I
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BETWEEN:
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ALINE RONDEAU,
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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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[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] In
her income tax return for the 2000 taxation year, the Appellant claimed a
non-capital loss of $28,381. By a notice of
reassessment dated January 28, 2002, the Minister of National Revenue
(the "Minister") disallowed the deduction of $28,381 claimed for this
loss. It seems that this loss arose from a gross loss of $79,200 during the
1999 taxation year. After an objection, the Minister made a reassessment,
granting the Appellant a gross business investment loss of $30,288 for the 1999
taxation year. As a result of this reassessment, no non-capital loss was available
to carry forward to subsequent years.
[2] To
establish the reassessment of January 28, 2002,
the Minister relied on the following assumptions of fact:
[translation]
(a) The
gross business investment loss of $79,200 relates to loans made by the
Appellant to the "Les Vêtements Rewind Inc." corporation (hereinafter
the "Corporation"): the two shareholders were the Appellant's
sons;
(b) At all relevant
times, the Appellant was not a shareholder of the Corporation nor did she hold
any shares of its capital stock;
(c) The Corporation
began on April 28, 1994, and went bankrupt on
March 5, 1999;
(d) According to the
information obtained from the Inspector General of Financial Institutions, the
Corporation was written off on May 5, 2000;
(e) The Corporation's
financial year ended on February 28 of each year;
(f) According to the
Appellant, she had lent her sons money to help their business, and not to
receive income or goods from the business;
(g) Between 1995 and
1997, the Appellant wrote several cheques payable to the Corporation for
amounts totalling $79,200 (see Appendix);
(h) The Appellant
submitted original documentation in support of these loans;
(i) The Appellant
submitted contracts for three loans, one for $10,000
(August 28, 1995), one for $20,000 (May 15, 1996) and
another for $30,000 (May 30, 1996), bearing interest at an annual
rate of 3.5%, with a note that the Corporation would repay the Appellant for
these loans as soon as it obtained a loan from a financial institution;
(j) These loans were
made by the Appellant to the Corporation without consideration or with
inadequate consideration;
(k) On
August 28, 1995, the Appellant prepared a cheque for $10,000 payable
to the Corporation, but the Corporation's financial statements dated February 28, 1996,
do not mention any external loans;
(l) The Appellant
prepared a cheque for $20,000 dated May 15, 1996, and another for
$30,000 dated May 30, 1996, but the Corporation's financial
statements as at February 28, 1997, mention an amount of $18,200 as
an "external advance";
(m) Between the months
of November 1997 and February 1998, the Appellant wrote several
cheques to the Corporation, totalling $19,200 (no contract, loan on
demand, no mention of an interest rate) but the Corporation's financial
statements as at February 28, 1998, mention an amount of
$25,949 as an "external advance";
(n) On
May 7, 1997, the Appellant obtained a loan of $56,250 from the
National Bank of Canada but there is no mention of the purpose of the loan
recorded on the demand note;
(o) The last cheque
issued by the Appellant was dated February 3, 1998, and no cheques
were issued after that date;
(p) However,
according to the financial statements produced by the Corporation with respect
to the financial year ending February 28, 1998, the amounts due to
the shareholders were $22,057 and the "external advances" had reached
$25,949;
(q) The Appellant's
name appears on the list of the Corporation's creditors prepared by the
Trustee, and according to this list, the amount due to the Appellant is
$30,288.59;
(r) The Appellant
disposed of her debt to an individual with whom she did not have an
arm's-length relationship;
(s) The Appellant did not establish,
for the year at issue, that the said debt was a bad debt under subsection 50(1)
of the Income Tax Act, and did not make this selection in her previous
income tax returns.
[3] Therefore
the issue here is whether the Appellant is entitled to claim a
non-capital loss of $28,381 on her income tax
return for the 2000 taxation year. In order for me to draw this
conclusion, the Appellant must convince me that:
(1) "Les Vêtements Rewind Inc." (the "Corporation") owed the
Appellant $79,200;
(2) The debt was contracted in order to
earn business income under subparagraph 40(2)(g)(ii) of the Income
Tax Act (the "Act");
(3) The Corporation was an eligible
corporation operating a small business;
(4) The debt became unrecoverable in 2000.
[4] The
Respondent has not questioned the fact that the Corporation was an eligible
corporation operating a small business. The Respondent has also admitted that
the Appellant made the choice required under subsection 50(1) of the Act. On the other hand, the Respondent
maintains that the Corporation did not owe $79,200 to the Appellant since the
debt was repaid to the Appellant in full or in part and, if this was not the
case, the debt was not unrecoverable in 2000.
Finally, the Respondent asserted that the amounts loaned by the Appellant were
not for the purpose of earning business income.
[5] There
is no doubt that, if there is a debt, it became unrecoverable in 2000 since the
corporation owing the debt to the Appellant became bankrupt on
May 5, 1999. Since bankruptcy extinguished the Corporation's debt to
the Appellant, it is appropriate to state that the debt was unrecoverable in
2000. As a result, the questions at issue are: (1) Did the Corporation
owe the Appellant a debt of $79,000? (2) Did the Appellant lend the total
amount of $79,200 in order to earn business income?
[6] As
I will explain below, the Appellant has proven that she loaned the Corporation
$79,200. On the other hand, the following analysis of the loan contracts and
the Appellant's behaviour with respect to these loans leads me to conclude that
these amounts were not loaned for the purpose of earning business income.
[7] The
legal provisions relevant to this dispute are subsection 50(1), paragraph 39(1)(c) and subparagraph 40(2)(g)(ii)
of the Act. The provisions read as follows:
50(1) For the purposes of
this subdivision, where
(a) a debt owing to a
taxpayer at the end of a taxation year (other than a debt owing to the taxpayer
in respect of the disposition of personal use property) is established by the
taxpayer to have become a bad debt in the year, or
(b) a share (other than a
share received by a taxpayer as consideration in respect of the disposition of
personal-use property) of the capital stock of a corporation is owned by the
taxpayer at the end of a taxation year and
(i) the corporation has during the
year become a bankrupt (within the meaning of subsection 128(3)),
(ii) the corporation is a
corporation referred to in section 6 of the Winding-up Act that is
insolvent (within the meaning of that Act) and in respect of which a winding-up
order under that Act has been made in the year, or
(iii) at the end of the year,
(A) the corporation is insolvent,
(B) neither the
corporation nor a corporation controlled by it carries on business,
(C) the fair market
value of the share is nil, and
(D) it is reasonable
to expect that the corporation will be dissolved or wound up and will not
commence to carry on business
and the taxpayer elects in the taxpayer's
return of income for the year to have this subsection apply in respect of the
debt or the share, as the case may be, the taxpayer shall be deemed to have
disposed of the debt or the share, as the case may be, at the end of the year
for proceeds equal to nil and to have reacquired it immediately after the end
of the year at a cost equal to nil.
39(1) . . .
(c) a taxpayer's business
investment loss for a taxation year from the disposition of any property is the
amount, if any, by which the taxpayer's capital loss for the year from a
disposition after 1977
(i) to which
subsection 50(1) applies, or
(ii) to a person with whom
the taxpayer was dealing at arm's length
of any property that is
(iii) a share of the
capital stock of a small business corporation, or
(iv) a debt owing to the
taxpayer by a Canadian-controlled private corporation (other than, where the
taxpayer is a corporation, a debt owing to it by a corporation with which it
does not deal at arm's length) that is
(A) a small business
corporation,
(B) a bankrupt (within the
meaning assigned by subsection 128(3)) that was a small business
corporation at the time it last became a bankrupt, or
(C)
a corporation referred
to in section 6 of the Winding-up Act that was insolvent (within
the meaning of that Act) and was a small business corporation at the time a
winding-up order under that Act was made in respect of the corporation,
exceeds the total of
(v) in the case of a
share referred to in subparagraph 39(1)(c)(iii), the amount, if
any, of the increase after 1977 by virtue of the application of
subsection 85(4) in the adjusted cost base to the taxpayer of the share or
of any share (in this subparagraph referred to as a "replaced share")
for which the share or a replaced share was substituted or exchanged,
(vi) in the case of a share
referred to in subparagraph 39(1)(c)(iii) that was issued before
1972 or a share (in this subparagraph and subparagraph 39(1)(c)(vii)
referred to as a "substituted share") that was substituted or
exchanged for such a share or for a substituted share, the total of all amounts
each of which is an amount received after 1971 and before or on the disposition
of the share or an amount receivable at the time of such a disposition by
(A) the taxpayer,
(B) where the taxpayer is
an individual, the taxpayer's spouse, or
(C) a trust of which the
taxpayer or the taxpayer's spouse was a beneficiary
(vii)
in the case of a share
to which subparagraph 39(1)(c)(vi) applies and where the taxpayer
is a trust referred to in paragraph 104(4)(a), the total of all
amounts each of which is an amount received after 1971 or receivable at the
time of the disposition by the settlor (within the meaning assigned by
subsection 108(1)) or by the settlor's spouse as a taxable dividend on the
share or on any other share in respect of which it is a substituted share, and
(viii) the amount
determined in respect of the taxpayer under subsection 39(9) or 39(10), as
the case may be.
40(2) Notwithstanding
subsection 40(1),
. . .
(g) a taxpayer's loss, if any, from
the disposition of a property, to the extent that it is
. . .
(ii) a loss from the disposition of a debt
or other right to receive an amount, unless the debt or right, as the case may
be, was acquired by the taxpayer for the purpose of gaining or producing income
from a business or property (other than exempt income) or as consideration for
the disposition of capital property to a person with whom the taxpayer was
dealing at arm's length,
. . .
WAS THE
APPELLANT OWED A DEBT OF $79,200?
[8] The
Appellant lent the Corporation several amounts totalling $79,200. The total amount breaks down as follows:
1. August 28, 1995: $10,000 draft – written loan
contract;
2. May 15, 1996: $20,000 draft – written loan
contract;
3. May 30, 1996: $30,000 draft – no written
contract;
4. November 12, 1997: Cheque for $7,000 – no written
contract;
5. December 5, 1997: Cheque for $5,000 – no written contract;
6. December 16, 1997: Cheque for $1,000 – no written
contract;
7. December 21, 1997: Cheque for $1,200 – no
written contract;
8. December 29, 1997: Cheque for $3,000 – no written
contract;
9. February 3, 1998: Cheque for $2,000 – no written
contract.
[9] The
loan contracts for $10,000 and $20,000 respectively were proven by the
submission as evidence of documents attesting to these contracts. These are
private writings that make proof of the juridical act that they set forth.
[10] With respect to the
other loan contracts, although the value of the dispute exceeds $1,500, proof
of these juridical acts can be made through testimony when there is a
commencement of proof. In this case, the Appellant had signed a
draft of $30,000 to the Corporation as well as six cheques in various amounts.
On this draft and on each of the cheques, the note "loan" can be
found. This draft and these cheques therefore constitute material evidence that
serve as a commencement of proof, thereby opening the way for proof by testimony.
[11] In her testimony,
the Appellant affirmed that the amounts loaned to the Corporation without a
written contract were subject to the same conditions as the loans which were
recorded in writing. The Appellant explained that the interest and
capital were due at the same time
and that the loans were conditional upon the Corporation obtaining a loan from
a banking institution.
[12] Given the testimony
of the Appellant and considering that her credibility is not in question, it is
my opinion that the Appellant has proven the existence of unwritten loan
contracts.
[13] The written loan
contracts are not identical, since their wording differs. As a result,
these contracts must be interpreted in order to determine the terms and
conditions of the verbal loan contracts that were reached in accordance with
the same conditions. Since proof by testimony is admissible when interpreting a
written document, the Appellant's testimony is relevant to
the interpretation of the written loan contracts and therefore to the
interpretation of the verbal loan contracts.
Loan contract
dated August 28, 1995
[14] The loan contract
dated August 28, 1995 included the following sentence:
[TRANSLATION]
Les Vêtements Rewind, represented by Marc Améziane,
President, agrees that the $10,000 will bear interest at a rate of 3.5% per
year, until such time as a loan can be obtained from a banking institution.
[15] This first loan contract set an extinctive term with respect to the
interest. The loan bore interest from the moment the money was given (since there is no indication to the contrary) until the time the
Corporation obtained a bank loan. Thus the Corporation's obligation to pay
interest at a rate of 3.5% per year should have been extinguished by expiry of
the term, the granting of a loan by a banking institution.
[16] Despite the Appellant's claim that obtaining a bank loan was a
condition of [her] loan, this condition was a certain, future event for the
parties to the loan contract. As a result, this cannot be a conditional obligation, which
requires that the obligation depend upon a future and uncertain event; rather, this
was an obligation with a term. In this respect, I refer to the words of
professors Pineau and Gaudet regarding the characteristics of a conditional
obligation:
[TRANSLATION]
The event must be uncertain: if it is not, if it must
necessarily occur one day, we would have a term, not a condition. Sometimes
interpretation is difficult when the formulation of the agreement is unclear:
" I agree to pay you such‑and‑such an amount as soon as I
can." It could be claimed that this is a conditional obligation: it is not
certain that I will one day be able to pay you, but it is more likely that this
is an obligation with a term: in the mind of the parties, the day will surely
come when the debtor will be able to pay. Obviously the time is indeterminate,
but it is certain. This is the solution retained in article 1512,
para. 2 C.C.Q.
[17] Professor Pierre‑Gabriel Jobin
and the Honourable Jean‑Louis Baudouin express themselves
similarly:
[translation]
Like a condition, a term is a future event, but unlike
a condition, it is an event that is certain to occur. The term may or
may not be fixed, depending on whether the expiry date is known and determined
when the obligation is incurred. Paying in one year is therefore a fixed or
definite term, whereas paying on someone's death is not, since, although it is
certain that the person will die, the exact date of his or her death remains
undetermined. Under the Civil Code of Lower Canada,
the courts sometimes had trouble distinguishing a term from a condition, since
the former is sometimes stipulated in the same way as the latter. A debtor's
obligation to pay "when he can" or "when he has the means"
is not a conditional obligation dependent on his will, but rather an obligation
with a term so the court is sometimes obliged to intervene in order to
determine whether, on the facts, the term has in fact expired.
[18] In Rosenbloom c.
Québec (sous-ministre du Revenu), [1997] A.Q. no 197
(C.A.Q.), Justice Biron of the Quebec Court of Appeal made a statement
with respect to the difference between a suspensive condition and an obligation
with a term. Justice Biron affirmed:
[TRANSLATION]
In Venne v. Québec (Commission de la protection du territoire
[1989] 1 S.C.R. 880, the Supreme Court had to distinguish between a
conditional, suspensive obligation and an obligation with a term.
The facts in this case may be summarized very briefly as follows:
On May 14, 1977, respondent bought two subdivided lots
from Winzen, a commercial corporation specializing in the purchase and sale of
real estate for residential development, and signed a standard sale
contract. Under this agreement, respondent undertook to pay the purchase price
in 84 monthly instalments. Winzen, for its part, retained ownership of the
two lots and only undertook to transfer the right of ownership thereof after
the monthly payments had been made in full.
Justice Beetz, who made the
decision on behalf of the Court, gives his approval to the opinion of
McCarthy J. of our Court, at page 900, in the following passage:
[TRANSLATION]
In my view, and with respect for the
contrary opinion, there is no question of a conditional obligation here;
accordingly, the retroactivity mentioned in art. 1085 C.C. does not
apply. The "condition" referred to in arts. 1079 et seq. of
the Civil Code is "an event future and uncertain" on which the
existence of an obligation depends. The payment of the price by Venne does
not fall in this category: Venne was obligated to pay the price, just as
the Winzen company was obligated to convey the immoveable property, within a
certain time. The obligations on either side were obligations with a term
(arts. 1089 et seq. C.C.), not conditional obligations. They
existed once the "Contract for Deed" had been signed, even though
their performance was in abeyance. The same is true for the rights
corresponding to the obligations.
In support of his opinion, Justice Beetz
cites the following passages from an article titled "Réflexions d'un
civiliste sur la clause de réserve de propriété", written by Professor
Jacques Ghestin in Recueil Dalloz Sirey, 1981, Chronique‑I, at
pp. 4-5:
However, it was argued that this could not
be a term because the payment of the price is an uncertain event, especially in
commercial relations. The writer of a recent noteworthy study also
stressed the fact that "in credit sales . . . the solvency of
buyers, especially business buyers, is precarious and difficult to estimate".
However, this is used as a basis for saying that it would be
"unprecedented to make the transfer of ownership depend on such an
uncertain event". In actual fact, while it is true that the uncertain
nature of the event considered is definitely the criterion for distinguishing a
condition from a term, its application must still be defined.
For there to be a condition
the event must first be objectively uncertain. Accordingly, the death of a
given person may never be a condition, as that is certain, though its date is
uncertain and it is thus an uncertain term. However, such objective uncertainty
is not sufficient, it is also necessary that the parties have not taken the
occurrence of the event as certain.
. . .
In a credit sale, the payment of the price is not
regarded simply as a possibility but as a certainty. The purchaser's
obligation is not conditional, but simply an obligation; and the fact that he
may prove to be insolvent on the date of payment in no way affects this
classification. If it were otherwise all credit sales would give rise
merely to conditional obligations. This would still further aggravate the
misuse of the word, which has been quite properly deplored.
I intend to apply these principles to the facts in this case.
[19] In summary, the loan contract of August 28, 1995, provided that the capital loaned would bear interest until
expiry of the term, which was the acquisition of a loan from a banking
institution.
[20] On the other hand,
this same loan contract did not have any provisions with respect to the
payability of the interest. Interest payments were therefore a pure and simple
obligation subject to immediate payment. The same applies to the payability of the
capital loaned, since the loan contract also did not make any provisions in
this respect. Therefore it was a demand loan, and the Appellant therefore could
have required repayment of the interest and capital at any time. Similarly, the
Corporation could have repaid the amounts due at any time.
Loan contract dated May 15, 1996
[21] The loan contract
dated May 15, 1996 provided as follows:
[TRANSLATION]
2. Repayment.
The Borrower agrees that the said capital
of twenty thousand dollars ($20,000) shall bear interest at a rate of
three and one‑half percent (3.5 %) per year.
2.1 The interest will accrue from the date
the amount mentioned above is paid.
2.2 The Borrower shall be required to repay
the current loan as soon as he obtains a loan from a financial institution.
3. Limit of term.
If the Borrower fails to meet either obligation under
this contract, the Lender may require payment of the debt.
[22] Under this loan contract, the interest began accruing when the $20,000
was paid and continued until the capital was repaid.
[23] Furthermore,
repayment of the amount loaned and consequently the payability of this amount
were suspended until expiry of the term, which occurred upon receipt of a bank
loan. Thus, the amount of $20,000 bore interest
at a rate of 3.5% per year until full repayment of the amount loaned, which sum
would be required when the Corporation obtained a bank loan.
Verbal loan contracts
[24] Determining the
terms and conditions of the verbal loan contracts is difficult because the
Appellant affirmed that they were identical to those of the written loan
contracts. However, the two written loan contracts differ in their respective
wording. In order to establish the conditions of the loans that were not
recorded in writing, I must therefore refer to the Appellant's testimony, to
the written contracts, and to the additional rules of the C.C.Q in order to
determine the conditions of the loans that were not recorded in writing, since:
In interpreting a contract, the nature of the
contract, the circumstances in which it was formed, the interpretation which
has already been given to it by the parties or which it may have received, and
usage, are all taken into account.
[25] The Appellant explained that the interest and capital were payable at
the same time and that the loan was conditional upon the Corporation obtaining
a bank loan. Once again, I repeat my position that the loan was not conditional
upon the Corporation obtaining a loan from a financial institution, but rather
that repayment of the loan was subject to a suspensive term: the granting of a loan
by a banking institution.
[26] I therefore conclude
that the unwritten loan contracts included the following conditions:
- the capital bore interest at a rate of 3.5% per year
beginning with the payment of the amount loaned;
- the interest accrued until the capital was fully
reimbursed;
- the interest was payable at the same time as the
capital;
- the capital became due and payable once a loan was
obtained from a banking institution;
- if a bank loan was not obtained, the capital was due
and payable immediately.
[27] Furthermore, I would add that all the evidence, particularly the
testimony of the Appellant, whose credibility was not in question, leads me to
conclude that the Appellant's loan had never been repaid. The Appellant was
therefore owed a debt of $79,200 by the Corporation.
WERE THE LOANS GRANTED FOR THE PURPOSE OF EARNING A
BUSINESS INCOME?
The loan contracts
[28] The terms and
conditions of these loan contracts lead me to believe that the Appellant did
not make these loans in order to earn business income.
[29] On the one hand, the
loans were made without any guarantee to the Appellant. On the other hand, the
interest rate provided (3.5%)
was relatively low, considering that the legal interest rate was 5%. Finally, with
respect to the loan contract dated August 28, 1995, the interest
accrued only until a bank loan was obtained. Therefore the loan was
interest-free from the time the bank loan was obtained until the full amount of
the debt was repaid.
Although an interest‑free loan may be granted in order to earn business
income, the loan must therefore generate business income in some other manner,
such as through dividends or a salary increase. This was not
the case here, since the Appellant was not a shareholder, director, or employee
of the Corporation. The only possible business income that could be generated
by these loans was the interest on the capital loaned. Without this interest,
the Appellant could not earn any business income.
The Appellant's behaviour
[30] If the loan contract terms were indicators of the lack of the
Appellant's real intention to earn business income, the Appellant's behaviour
with respect to these loan contracts confirms it.
[31] The Appellant was
not an employee, director or shareholder of the Corporation. Furthermore, the
Corporation was directed by two shareholders: the Appellant's sons. In her
testimony, the Appellant affirmed that she had lent these amounts to the
Corporation rather than to her sons, in order to realize a small return. On the other hand, the Appellant admitted
she made these loans because her sons asked her, and to enable them to obtain a
bank loan. The Appellant stated: [TRANSLATION] "Because otherwise I would
not have lent it."
[32] The Appellant
explained that the loans were conditional upon obtaining a bank loan. However, the
Appellant did not conduct any real follow‑up to determine whether the
Corporation had in fact obtained a bank loan, nor did she even establish
whether the Corporation was attempting to obtain a bank loan. The Appellant
did not know which institutions the Corporation had approached, and
furthermore, she assumed that the Corporation had in fact made a loan
application.
This lack of follow‑up by the Appellant was a result of the confidence
she had in her sons, and therefore, in the Corporation:
[TRANSLATION]
Q. So, could we simply say that you did not
check because you trusted your sons?
A. Ah! Yes, certainly I trusted them, because I knew
that they were going to return the money to me.
[33] At the hearing, the Appellant still did not know whether the
Corporation had or had not obtained a loan from a banking institution. The last
time the Appellant inquired about the loan was in 1998, in which she did not
ask any questions about obtaining a bank loan:
[TRANSLATION]
Q. That means they got the bank loan?
A. I do not know, at all.
. . .
Q. Did you ask the question again, "What is
happening with your loan?"
A. No. The last time I asked them about it was in '98.
Q. O.K.
A. At the end of '98.
Q. And what...
A. I said, "You're still going to pay
me back?"
Q. Yes.
A. So they told me, "Yes."
Q. No, no, but did you ask them whether the
company had obtained a loan?
A. No, that, I did not ask that in '98.
Q. O.K. But in '96 and in '97, when you saw
the company operating, and, at a certain point, you ask the question, "Did
you get a loan?" Or, at some point, they asked you, "Lend us some
money because we're still waiting for the loan." But you see the company
operating, did you ask, "How are you operating? Where are you getting the
money?"
A. No, I didn't ask them that.
[34] The Appellant stated she had not received any amount of money in
repayment of the capital, or of the interest on the capital. Nonetheless,
the testimony of Marc Améziane demonstrates that the Corporation had
obtained financing between August 28, 1995, (the date of the
Appellant's first loan to the Corporation) and March 5, 1999, (the
date the Corporation declared bankruptcy).
Mr. Améziane explained that the Corporation was not able to repay the
Appellant because it had only obtained a line of credit. Therefore, the
Corporation did not have the funds to reimburse the Appellant:
[TRANSLATION]
Q. Why didn't you pay her back? Did you
obtain a loan from a bank?
A. We didn't get a bank loan. We had credit
lines but we didn't have access to new money. They simply allowed us to buy our
products up to a certain limit, but we, what we needed was an additional loan.
. . .
Q. A line of credit, ...
A. Yes?
Q. That's not a type of financing?
A. It is a type of financing.
Q. Well, O.K.
A. But it's not... In the agreement I had
with my mother, when I have new money to replace it that we will replace it.
Q. Ah!
A. That's what we want... A bank loan, if
I'd had a bank loan, it's simple: yes, I can pay her back. It's conditional
upon the bank's agreement that I pay her back.
. . .
Q. Good. So "bank loans", it was
said earlier that '96, they were $184,208; '97, they were $401,000, then in
'98, they were $514,234.
A. Yes.
Q. Are you going to tell me all that again,
it wasn't bank loans, that $514,000 in bank ... money from the bank?
A. Yes, but it's not necessarily, whether
they are loans or whatever, that I can repay my mother, because I have this
debt to pay to the banks.
Q. Yes. But you said ...
A. If I ... that amount ...
Q. Yes, but you told your mother, when she
loaned you the money the first, then the second, then the third, that we'll pay
you back when we get financing from a company ... from a bank ...
A. Yes, but if ...
Q. So, you were up to $514,000 and you
didn't pay her back?
A. Because I am unable to pay her back. I have ...
[35] In his testimony, Mr. Améziane added that
the Corporation could not have repaid the Appellant because the Caisse de
dépôt, which had become a "partner" of the Corporation, was not
permitting repayment of creditors:
Q. Why didn't you pay your mother back if
the Company was having problems?
A. In '98, we intended to pay her back. The Caisse de
dépôt became our partner – not a shareholder, but a partner – to help us grow,
except that one of the Caisse de dépôt conditions was that we pay ... that we
did not pay anything to any lenders until our situation had stabilized, and
they agreed to give us money to allow the company to grow.
[36] On these facts, the term which suspended payability of the loans had
expired, because the Corporation had obtained one, if not several, bank loans.
The fact that the Corporation did not have permission
to reimburse the Appellant, despite having obtained bank loans, does not affect
the fact that the term had expired, and consequently did not affect the
Appellant's right to claim the amounts due.
Nonetheless, the Appellant simply chose to ask her sons if and when she would
be paid, without actually conducting any real follow‑up.
[37] In March 1999,
the Appellant learned that she would not be reimbursed because the Corporation
had gone bankrupt.
The Appellant did not make any claims during the Corporation's bankruptcy
because it did not have sufficient funds to reimburse the guaranteed creditors.
Thus there was no chance the Appellant would be paid since she was not a
guaranteed creditor. The list of creditors drawn up by the
trustee in bankruptcy mentioned the Appellant as a creditor but, curiously, set
the amount owed her at $30,288.59 rather than $79,200. The Appellant explained
that despite her efforts, she never learned why the list of creditors indicated
the amount owed to her was $30,288.59 rather than $79,200.
Case law
[38] In Lowery v. M.N.R., 86 DTC 1649, Sarchuk J. of this court dismissed the
Appeal for the reason that the family relationship between the Appellant and
his son had motivated the Appellant to give a guarantee. Therefore, the
Appellant did not have a genuine intention to earn business income. In these
reasons, Sarchuk J. asserted that it is relevant to consider the
Appellant's intentions when the loan or guarantee was given, as well as the
Appellant's subsequent behaviour (my emphasis):
On the evidence adduced I am not satisfied that there
was any business purpose in the granting of the guarantee. Respondent's counsel
submitted, and I agree, that it is not sufficient to make a general allegation
that the appellant anticipated some participation in the profits of Threads at
some unstated time in the future and on that basis to argue that some
consideration for the guarantee existed. There was no arrangement as to
interest. There was no arrangement relative to repayment in the event of
default by Threads. There was no agreement, oral or written, setting out the
terms and conditions of the appellant's participation. No mechanism existed
enabling the appellant to control the level of earnings to be reached by
Threads before his alleged right to participate in the profits could be
invoked. The appellant stated that family matters did not require written
agreements. This statement however is in some measure inconsistent with the
manner in which his proposed investment in Empire was secured and documented.
In my view the appellant's involvement bears none of the hallmarks of a
commercial or business transaction.
Furthermore, there are inconsistencies in the evidence
of the witnesses on the matter of sharing profits. Glenn stated that no
discussions had taken place while Joanne maintained that an agreement had been
reached. Joanne stated that she and Glenn were to share their interest equally.
However, Exhibit A‑3, Threads' financial statement as at
July 31, 1979, disclosed that the net income of Threads had been
distributed 70% to Glenn and 30% to Joanne. Insofar as Betton's evidence is
concerned it is a fact that with respect to Threads his involvement was
minimal. I am constrained to say that his evidence as to the appellant's right
to share in Threads' profits appeared to be based on hearsay.
Although the relevant time with respect to
the "purpose of earning income test" is the time at which the
guarantee was given, it is proper in this case to consider as well the
appellant's conduct after he was called upon to pay the debt by the bank. None
of the normal commercial considerations were given to collecting the debt from
the partners. Not only does this call into question the basis upon which the
appellant established the debt to be a bad debt in that year but it also
suggests that the risk in guaranteeing the debt had its justification only in
the fact of the father/son relationship and was not made for any business or
commercial reasons.
[39] In O’Blenes v. M.N.R., 90 DTC 1068,
Justice Garon, as he then was, subscribed to the words of Sarchuk J.,
referring to, among other things, his decision in Lowery. According to
Garon J., the Appellant did not intend to earn business income when she
guaranteed the credit margin to the debtor corporation. On this fact, her
subsequent actions could not change this absence of an initial intention.
Justice Garon said (emphasis added):
On the whole of the evidence it is abundantly clear
that when the Appellant agreed to guarantee Glenwood's line of credit and to
pledge through her husband the subject term deposits, she was not motivated by
any benefit she might herself receive. Her purposes were not business
purposes as far as her own situation was concerned. Family considerations
played a key role. She wanted to assist Glenwood in which shareholding her
husband owned a third interest. As well, that company was also at the time her
husband's employer.
Subparagraph 40(1)(g)(ii) of the Act when
it mentions the purpose of the acquisition of a debt, refers of course, to the
creditor's purpose of earning income for her own account. The indirect
advantage the Appellant would derive in providing financial assistance to a
company which in turn would procure a direct financial benefit to her husband
is definitely too remote to meet the requirements of that subparagraph.
It has been suggested by the Appellant that in 1981 as
a result of the mortgage agreement dated June 1st, 1981
and of the debenture of June 18, 1981, compensation was provided to
the Appellant. There is no question that by these two indentures the Appellant
would have received a significant benefit if Glenwood had been able to survive
and pay off its indebtedness to the Appellant. However, as pointed out by
Judge Sarchuk in the case of Hugh Lowery to which case reference will
be made later that the critical time at which the Appellant's purpose must be
examined is the time at which she gave the guarantee and pledged her term
deposits. Almost two years after undertaking to assist Glenwood she
moved to secure her position at the time of the refinancing of Glenwood's operations.
This belated action had nothing to do with the reason why she agreed in the
first place to give the guarantee and pledge her term deposits. The
evidence is clear that in 1981 the Appellant was not released from her
guarantee given to the Bank. The mortgage and the debenture given by Glenwood
were not in respect of a new guarantee provided to the Bank or a new pledge of
the term deposits. There was no new injection of capital into Glenwood's
business on the Appellant's part.
On the whole of the evidence, I therefore come to the
conclusion that the Appellant has not established that when she undertook to
grant the guarantee to the Bank and to pledge her term deposits she was
motivated by the prospect of a financial gain or reward for herself. Her motives
however commendable they are, are of a personal or private nature.
[40] As a result, a taxpayer cannot deduct an amount as a non-capital loss
unless he or she had, when the loan or guarantee was granted, a genuine
intention to earn business income: this intention
cannot arise at a later date. Furthermore, the taxpayer's behaviour after
granting a loan or guarantee may be an indicator of this initial absence of an
intention to earn business income.
[41] It is important to
emphasize that it is not necessary for this initial intention to earn business
income to be the main reason for granting a loan or a guarantee. Secondary
intention is sufficient. This was affirmed by the Federal Court of Appeal,
under the hand of Rothstein J.,
in Rich v. Canada,
[2003] 3 F.C. 493 (emphasis added):
. . . The Minister agrees that, though
gaining or producing income need not be the exclusive or even the primary
purpose of the loan, as long as it was one of its purposes, that is sufficient
to meet the requirements of subparagraph 40(2)(g)(ii) (see Ludco
Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, at
paragraph 50). I believe the Tax Court Judge was also of that view, from
comments he made during the argument before him, at page 388 of the
transcript:
His Honour: Mr. Sood, are you suggesting that the
familial relationship was the only purpose for the advance of these funds?
Mr. Sood: Well, Your Honour, if not the only purpose,
then the primary purpose indeed.
His Honour: Well, there is [sic] a big
difference there, whether it's the primary purpose or the only purpose, I mean
there can be a number of purposes.
The documentary evidence indicates that the loan was
intended to bear interest and there was no finding of sham or "window
dressing". In addition, the appellant was a 25% shareholder of DSM.
The Tax Court Judge found that the predominant purpose
of the loan was to help the appellant's son and his son's company.
At paragraph 31, he stated:
Dad was helping his son and his son's company with an
expectation to be repaid. This, I find was the predominant purpose, while the
normal purpose of a bona fide commercial investor to reap interest and
dividends was, in this situation, a faint hope.
The finding of the Tax Court Judge that the
"predominant purpose" of the loan was to help his son necessarily
implies that there was another subordinate purpose. The evidence was that the loan was to bear interest.
In addition, the appellant was a shareholder of DSM entitling him to dividends.
The Court is not to second-guess the business acumen of taxpayers (see Stewart
v. Canada, [2002]
2 S.C.R. 645 (S.C.C.), at
paragraph 55). The subordinate purpose is sufficient. The
requirement of subparagraph 40(2)(g)(ii) is satisfied.
[42] I wish it emphasize that this decision was not unanimous, since
Evans J. would have dismissed the appeal for the
following reasons:
It is admirable that parents help their children to
become established in their careers. However, when parents ask other taxpayers
to share the burden of assisting a child's struggling business by deducting
from their own income part of a loan as a bad debt, they can expect the tax
authorities and the courts to examine the claim with care.
I am unable to agree with my colleague
Rothstein J.A. that the Tax Court Judge made a reversible error in
concluding that Larry W. Rich had not proved that he made an honest
and reasonable determination that, at the end of 1995, the debt owed to him by
his son's business, DSM Foods Inc., was not collectible. Accordingly, in my opinion,
the Tax Court Judge did not err when he found that Mr. Rich could not rely
on the ABIL provisions to partially write off the debt against his income
for 1995.
[43] In my opinion, the Appellant's behaviour following her consent to the
loans clearly illustrates that the Appellant's main objective was not to earn
business income. Based on all the facts, I conclude that these loans were
essentially motivated by the mother‑son relationship between the
Appellant and the Corporation's shareholders. The issue therefore becomes
whether the Appellant had a secondary intention to earn business income in
lending the total amount of $79,200 to the Corporation.
[44] I am convinced that
the Appellant did not have any genuine secondary intention to earn business
income. The Appellant did not conduct any concrete follow-up to determine
whether the Corporation had obtained a bank loan or if it had applied for one.
The Appellant made no attempts to recover the capital loaned or the interest
accrued during the entire period from the time of the first loan
(August 28, 1995) to the day of the bankruptcy
(May 5, 1999). I recall that the Corporation had in fact obtained
bank loans in 1996 and 1997. Finally, the Appellant made no claim during the
Corporation's bankruptcy and in no way defended, before the trustee in
bankruptcy the amount of $79,200 owed to her that was erroneously indicated as
being $30,288.59.
[45] On the other hand,
the Appellant in Rich was the accountant for the debtor
Corporation when he arranged the guarantee, aside from the fact that, the
Appellant eventually became a shareholder in the Corporation. Moreover, the
Appellant had sent a letter to the debtor corporation claiming payment of the
overdue amounts. In such a situation, I agree that at the very least a
secondary intention to earn business income must be recognized, despite the
primary intention of helping a family member. In this case, the only evidence
supporting the Appellant's claim that she had a genuine intention to earn
business income from these loans is a short remark made by the Appellant during
her testimony:
[translation]
A. That company, I knew that it was growing because my
sons asked me if I couldn't give them a loan rather than keeping it at home,
that at least I would earn a small percentage. So I agreed.
[46] All the evidence, that is, the loan contracts and the Appellant's
behaviour, tends to demonstrate that the Appellant did not have any genuine
intention, not even a secondary one, in earning business income though her
loans to the Corporation. The only comment the Appellant made to this effect is
not sufficient to counteract the balance of probabilities that illustrates the
absence of an intention to earn business income. I must
conclude that the Appellant did not lend the amount of $79,200 in order to earn
business income. Accordingly, the Appellant could not deduct the amount of
$28,381 as a non-capital
loss in her income tax return for the
2000 taxation year and as a result, the appeal must be dismissed.
Signed at Ottawa, Canada, this 5th day
of May 2004.
Bédard J.
on this 22nd day
of September 2004.
Shulamit Day, Translator
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