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Citation: 2004TCC156
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Date: 20040316
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Docket: 2002-336(IT)G
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BETWEEN:
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DELBERT CURTIS,
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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
Margeson, J.
[1] In reassessing the Appellant's
1995, 1996 and 1998 taxation years by concurrent Notices of
Reassessment dated July 10, 2000, the Minister of National
Revenue ("Minister") denied losses claimed by the
Appellant of $3,135, $38,199 and $318 claimed in 1995, 1996 and
1998, respectively, on the basis that no non-capital loss
was available to be applied in those years. From these
assessments, the Appellant took this appeal.
Evidence
[2] The Appellant, Delbert Lyle
Curtis, testified that in the spring of 1994 his son approached
him as he needed money to assist in the purchase of an
Arby's Restaurant franchise ("Arby's"), in
Owen Sound, Ontario. The father agreed to assist him but he told
him that he would have to mortgage his house in order to acquire
the funds needed.
[3] He obtained the services of a
lawyer to prepare the mortgage. The money was borrowed from the
Canadian Imperial Bank of Commerce ("CIBC"). The son
was to make all of the payments on the mortgage. The
Appellant's wife also had to sign the mortgage as the house
was in both their names. She had to obtain independent legal
advice.
[4] Exhibit A-1 was admitted by
consent and at Tab 13 of that Exhibit there was a copy of the
mortgage document dated October 6, 1994. This mortgage was in the
amount of $131,250 with payments to be made at the rate of
$1,285.93 per month. In the application the interest rate was
listed at 11.25% per annum but more particularly described in a
schedule to be at 8.75%, apparently the prime rate, together with
2.5% per annum. The mortgage was signed by the Appellant and his
wife.
[5] The monthly payments were made by
the Appellant's son, Dwayne, until such time as he went into
bankruptcy.
[6] Exhibit A-1, Tab 19 was a copy of
a promissory note signed by Dwayne Lyle Curtis in
favour of the Appellant and his wife for $131,250 and interest at
the prime rate plus 2¼%.
[7] The Appellant said that there was
also a verbal agreement that "after he got on his feet, he
would pay us something for travelling".
[8] At Tab 24 was a document entitled
"Re: Promissory Note Dated [the] 7th day of October
1994".
[9] This document said as follows:
This is to confirm that all terms and conditions of the above
promissory note shall apply since I, Dwayne Lyle Curtis, have
become incorporated as:
Dwayne Curtis Restaurants Inc.
Arby's Heritage Place - City of Owen Sound
Dated at Owen Sound, Ontario this 9th day of April 1995.
[10] The witness said that Dwayne Lyle
Curtis made the payments out of the Arby's account at the
commencement and then after he became incorporated the payments
came out of the company account. The company made all of the
payments until the bankruptcy took place and then his son made
one more payment on his own.
[11] The Appellant took over the payments
and he tried to sell his house but it took him three years to do
so.
[12] Tab 3 was the T-1 General return of the
Appellant for the year 1997. At line 228, he claimed a gross
business investment loss of $121,847.73 and an allowable
deduction of $91,385.80.
[13] The $121,847.73 represents the balance
owing on the mortgage up to the time of the bankruptcy. The
Appellant then said that his son made no extra payments to
him.
[14] In cross-examination he said that the
business was not incorporated when he made the loan. He never was
a partner at any time in the business. He never became a
shareholder. He never reported any income from the note in 1995,
1996 or 1997. He made no profits from this transaction. The
interest rate shown was lower than the mortgage rate. That was an
error. There was a one-quarter percent difference in the two
rates. They were trying to set the same rate on the mortgage to
him and his wife as on the mortgage to the bank. There was never
any intention to pay him interest on the note. They did not
discuss any details when they made the verbal undertaking. He did
not know when they would receive any extra payments. The business
had to make more money than what it had to pay out before the
Appellant could receive any extra payments.
[15] There was no agreement or understanding
as to how much the son could take out of the business by way of
salary or profit before he was free to pay something to the
father and his step-mother. He received no other fee.
[16] It was suggested to him that he would
not have mortgaged his property had it not been his son who was
seeking his assistance. He said, "I can't say that. If
there was a good offer, I might do it". Then he said,
"Probably not".
[17] With respect to the document at Tab 24,
he made it up with his son. He said that the original applied.
His intention was to have the corporation as a debtor.
[18] In redirect, he referred to Exhibit
A-1, Tab 10, the Annual Mortgage Statement for the year ending
December 31, 1997. The interest rate was listed at prime (7%)
plus 1.5%. This was the rate at the end of that year. He did not
know about what the rate was for the balance of the year.
[19] The payment was always the same. When
asked when he would receive the extra payment, as earlier
referred to, he said: "When Arby's became profitable. I
had no agreement if he (the son) would receive a salary before I
got anything".
[20] Dwayne Lyle Curtis testified that he
was an employee of Honda Canada. He has always paid taxes in
Canada. He is the son of Delbert Curtis, the Appellant. In 1994
he was working at Arby's in Owen Sound, Ontario with two
other partners. He then became the sole owner and approached his
father about assisting him financially. His father and his
step-mother backed him financially to the extent of
$131,250 or thereabout. In September, 1994 he became the owner
and the first payment was made on the mortgage in October.
[21] When asked about the deal he said that
it was around $131,000 and he was to be responsible for repaying
the debt. There was a promissory note. Once the business was
established and monies were coming in the Appellant and his wife
could expect "something in return".
[22] The note at Tab 19 dealt only with the
amount of money borrowed. It did not deal with what would happen
if the store did well. The business paid every payment until the
bankruptcy took place and then his father took over the
payments.
[23] The document at Tab 14 contained the
financial statements for Arby's Heritage Mall as at
March 31, 1995. The last page indicated the unpaid balance owing
to his father which was standing at $129,049.
[24] The purpose of the document at Tab 24
was to provide that all of the terms of the original note would
be carried forward.
[25] Tab 15 was an authorization for the
bank payments to be made out of the corporate account. The
shareholders of the incorporated body were his ex-wife,
Trish, and him.
[26] He was asked what happened in regard to
the matter and he said that the business did well until 1996 when
the new mall owners prohibited smoking in the mall. Sales dropped
off by 30% due to the smoking ban and one of the anchor stores
moved out of the mall.
[27] In 1997 he told his father that he was
going to have to go into bankruptcy. Tab 15 is a copy of the
Bankruptcy Notice. All of his records went to the Trustee and he
did not try to get them back.
[28] Tab 22 was a financial statement of the
incorporated restaurant dated September 4, 1997. It showed a
balance owing to his father on the mortgage of $121,848. One year
later he went into personal bankruptcy.
[29] In cross-examination he said that he
never made any interest payments to his father. He went to his
father for the financing because he did not believe he could get
a loan personally from the bank. Any responsibilities that he had
under the first note were to be carried on in the second
so-called note found at Tab 24. His father prepared it and gave
it to him. When he signed the second document he believed that he
relieved himself of any personal liability. He made one personal
payment after the bankruptcy. He felt a "guilt".
[30] The document never stated that he was
relieved personally from the liability. There was no
documentation that the corporation was taking over the debt.
There was no agreement as to how much he might draw from the
business before his father would be paid anything extra.
[31] In redirect, he was asked what his
understanding was of when he would make an extra payment to his
father. He said there was nothing definite, only when the company
was profitable. That meant that when everything else was caught
up and all their bills were paid.
[32] Debra Leanne Curtis was the daughter of
the Appellant and sister of Dwyane Lyle Curtis. She was
aware of the fact that her father had made an investment in
Dwayne Lyle Curtis's business. They met and the brother told
her about the business. She knew the conditions were that all of
the mortgage payments would be made by the son and the father
would obtain some return after the business got on its feet. The
discussion took place before the mortgage was placed. She was not
privy to the details. Her step-mother died in
April, 1996.
[33] In cross-examination she said that her
father's actions amounted to an investment. Her understanding
was that they would have to mortgage their house and give the
funds to the brother. She considered it to be an investment in
which her father and step-mother could expect money over
and above the payments when the business got profitable. When
pressed, she said that her father said that he would get some
money afterwards. It was an investment and not a loan.
[34] Exhibit A-2 was admitted by consent.
This was a certificate of status for the incorporated body.
Argument on Behalf of the Appellant
[35] Counsel for the Appellant said that
there is a very narrow issue in this case. That issue can be
found under subparagraph 40(2)(g)(ii) of the Income Tax
Act, ("Act").
[36] He characterized the question,
"was the debt incurred by the taxpayer to produce
income?" He answered the question in the positive and said
that the son, and later the company, would make the payments plus
an extra amount, if possible, and this was the consideration for
making the investment. The parties agreed to these terms. The
original documents were flawed and the intention was to make the
terms of the note signed by the son to be the same as the terms
of the mortgage.
[37] The second document was a document
showing the assumption of the mortgage by the incorporated body.
The son made all of the payments until the incorporation and then
the company made the payments. This was consistent with the
explanation of the business deal which was given by the Appellant
and his son.
[38] The terms of contracts do not have to
be in writing, there can be verbal conditions as well. He
referred to the case of Grand Trunk Railway Co. of Canada v.
Fitzgerald (1881), 5 S.C.R. 204, in support of this
proposition. He admitted that the decision in Lowery v.
M.N.R., [1986] T.C.J. No. 740 (Q.L.), Court No.
84-1927(IT) created a problem for him. In that case the Court
decided that there was no business purpose in the granting of the
guarantee. The Court held that the involvement of the taxpayer
bore none of the hallmarks of a commercial or business
transaction.
[39] Likewise, the case of Ena M.
Casselman v. M.N.R., 83 DTC 522, came to the same conclusion.
The motivation was the mother's desire to help the son and
there was no business purpose. It was not done for the purpose of
gaining or producing income.
[40] However, with respect to Lowery,
supra, the trial judge had determined that there was no
agreement, oral or written, setting out the terms and conditions
of the Appellant's participation. That was not the case
here.
[41] He relied favourably upon the case of
Burns v. Canada, [1994] T.C.J. No. 26 (Q.L.), Action
Nos. 91-2290(IT)G, 91-2291(IT)G and 91-2289(IT)G. There, the
trial judge concluded that the facts of that particular case did
not justify a finding of the sort in Lowery or
Casselman, supra, where the loans were made only for the
purpose of assisting a family member and were totally without any
business component.
[42] He relied upon the case of McKissock
v. Canada, [1996] T.C.J. No. 1192, Court File No.
96-593(IT)I. There the Court found in favour of the taxpayer and
found the requisite business purpose even though there was no
consideration. The business in that case could have provided some
income to the father as a consultant even though the father did
not know when or how much.
[43] In Corriveau v. Canada, [1998]
T.C.J. No. 1068 (Q.L.), Court File No. 95-1888(IT)G,
the Court held that there may be more than one
"main purpose" that may give the requisite
business purpose.
[44] In Aylward Estate v. Canada,
[2001] T.C.J. No. 391 (Q.L.), Court File
No. 98-2015(IT)G, the Court found that the taxpayer
did not personally guarantee the debts and consequently payments
to the two creditors may have been a voluntary action. The Court
still held that the taxpayer was entitled to the business
investment loss. Counsel used this case to demonstrate his
position that the Court has some latitude in these matters. In
Lowery, supra, there was no agreement to pay any
set amount as there was in the case at bar. He again asked the
question, "was one of the purposes to obtain a future
gain?" Here, one of the purposes was to gain interest. There
was some agreement to pay something.
[45] He admitted that there was no
documentation with respect to assumption of the debt by the
corporation but he said that the action of the shareholders and
the action of the company in paying back some of the debt was
enough to bind the company.
[46] He submitted that the appeal should be
allowed, with costs.
Argument on Behalf of the Respondent
[47] In addition to the cases referred to in
the Appellant's Book of Authorities, counsel for the
Respondent relied upon the case of Blanco Estate v. R.,
[1998] CarswellNat 390 and 98 DTC 1678.
[48] In the case at bar there was only an
informal understanding as to what the Appellant might get back.
There were no details. He relied upon Lowery,
supra, in support of this argument and said that the
taxpayer and the corporation here had a chance to write in the
terms but the document remained silent with respect to profits.
If there was an oral agreement, there were no particulars.
[49] He agreed that the real question was
whether or not the purpose of the loan was to gain income.
However, he did not agree that it was sufficient for the Court to
find that the need to gain income need not be the main purpose
but one of the purposes. He argued that it has to be the main
purpose.
[50] In Blanco Estate, supra,
McArthur, T.C.J., concluded that the Act requires that a
loan be made for the purpose of earning income. The facts must be
examined at the time the loan was made. The Court held that the
loan was a family loan and the Appellant's primary concern
was to assist her family.
[51] The Appellant had the burden of proving
that he granted the loan for the purpose of earning income. He
did not meet that burden. The main purpose has to be to gain
income.
[52] Counsel opined that if the borrower had
not been the son of the lender in the case at bar, he would not
have issued the loan and certainly not on those terms.
[53] In Strecker v. R., 95 DTC 3
(T.C.C.), the Court held that it was not sufficient to make a
general allegation that the Appellant anticipated some
participation in the profits of the company at some unstated time
in the future. There has to be some consideration for the
guarantee that existed. There was no arrangement as to interest
in that case. There was no arrangement relative to repayment in
the event of default by the company.
[54] In dealing with the future
participation argument the trial judge relied upon the statement
of Judge Sarchuk, as he then was, in Lowery, supra,
wherein he dismissed the appeal.
[55] The appeal should be dismissed with
costs.
Analysis and Decision
[56] The Court is satisfied that in order
for the advance in this case to be deductible under subparagraph
40(2)(g)(ii) of the Act, it must be satisfied that
the Appellant has established on a balance of probability, on the
facts, that the borrowing of the money from the CIBC and payment
of the interest thereon were "for the purpose of gaining and
producing income". The Court is satisfied that the
appropriate time to consider this "purpose" is the time
that the loan was made.
[57] In some of the cases, and in this case,
counsel used certain modifying words before the word
"purpose". Some of the words that have been used are
main purpose, primary purpose and principle purpose. However no
such modifying words are found in the legislation.
[58] The Court is satisfied that in the
cases that use some of those terms, they are not intended to be a
modifier but were merely used for the purpose of generally
describing what the parties intended. The Court is not satisfied
that any particular assistance can come from defining the word
"purpose" this way.
[59] In that regard, it is interesting to
note that at no time was any question asked of any witness with
respect to primary, secondary, main or multiple purposes. Even if
the question had been asked and if some evidence had been given
that one of these terms was used by the parties, it might not
necessarily be conclusive in any event. What is most important is
the action of the parties and the documents that they used for
the loan.
[60] The only purpose that could be gleaned
from any of the documents was that the purpose of the loan was to
enable the taxpayer's son to go into business. None of the
documents provide anything more than the bare statement that the
father would be repaid on the basis of the mortgage made in
favour of the CIBC. This particular document provided a set rate
of interest and a set payment. There was no documentation to
support the Appellant's position that he could be expected to
earn additional interest. Indeed, there would appear to be no
likelihood that he could since the amount of interest charged to
the debtor was not greater that the amount of interest to be paid
to the bank. Again, no income was earned on the loan in that
regard.
[61] The only evidence of any nature which
would even suggest that the Appellant entered into this
arrangement on the basis of a commercial or business transaction,
was the viva voce evidence of the Appellant, his son and
daughter. That was to the extent that if the company were to
profit, then the Appellant at some time in the future, if and
when profits were made, might receive something. There was no
specificity as to how much this might be, how it might be paid or
when it might be paid. This amounted to nothing more than a wish
or hope as far as the Court is concerned and obviously could not
have been a primary concern to the taxpayer when he entered into
the loan.
[62] The Court is satisfied that a taxpayer
might very well have several purposes in mind in making or
guaranteeing a loan. But one of those purposes must be for the
purpose of gaining or producing income.
[63] The Court is satisfied that it is not
sufficient merely to state, as a matter of fact, in some general
way that the taxpayer was to receive something in the event that
the company made money. As in Lowery, supra, the
manner in which the taxpayer participated in the securing of the
loan in favour of the bank ensured that that institution would
gain upon its investment.
[64] It was the taxpayer's duty to show
that this was his purpose at the time of the granting of the
loan. There was a large amount of money involved in this matter.
In light of the knowledge of the Appellant and the son with
respect to how the bank intended to secure its position, this
dictated that if the taxpayer entered into the loan for the
purposes of gaining or producing income, he should have found
some means of expressing the intention in some more meaningful
way than an after the fact statement that he hoped to receive
something from it in the event that the company prospered.
[65] The best case scenario for the
Appellant, of course, is Blanco, supra. Even there,
as sympathetic as the trial judge was, struggling to find in
favour of the Appellant, he could not do so. Just like McArthur,
J., this Court cannot ignore the fact that this was a family loan
and the intention of the Appellant was to assist his son. Had
there been any documentary evidence in the way of schedules,
statements or timetables which purported to show any possible
income which might accrue to the Appellant, the result may have
been different.
[66] The Court is satisfied that all of the
witnesses were straightforward in their evidence and attempted to
tell it as it was. At the end of the day, looking at all of the
facts, and drawing any reasonable inferences that the Court is
entitled to do, the Court cannot help but find that in essence,
this was a family loan advanced for the purposes of assisting the
son. The father did not have any intention, at the time of the
making of the loan, of obtaining income from it, at least to the
extent that one could have considered it to have been commercial
in nature.
[67] As in Blanco, supra, the
Court has great sympathy for the taxpayer but cannot ignore the
facts or disregard the failure of the Appellant, in establishing
on a balance of probabilities, that the purpose of the loan was
to gain or produce income.
[68] Regretfully, the appeals will have to
be dismissed, with costs to the Respondent, on the basis of one
counsel only. The assessment is confirmed.
Signed at Ottawa, Canada, this 16th day of March, 2004.
Margeson, J.
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