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Citation: 2003TCC535
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Date: 20030730
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Docket: 2000-5125(IT)G
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BETWEEN:
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JACK L. ISAMAN,
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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
Sarchuk J.
[1] This is an appeal by Jack L.
Isaman with respect to his 1996 taxation year in which he claimed
a business investment loss of $250,000 arising from a shareholder
loan made to Vantage International (1996) Inc. In reassessing the
Appellant for that taxation year, the Minister of National
Revenue (the Minister) denied his claim.
[2] The Appellant testified that in
1992 individuals representing a company, Failsafe Direct
Marketing Inc. (Failsafe), approached him to invest in a board
game called "High Five" to be produced by Banta
Company, one of the largest game manufacturers in the world.
Following negotiations the amount of $150,000 was provided to
Failsafe in exchange for a "royalty agreement that would pay
me back a percentage of the sales of that game". On or
before February 29, 1992, the amount of $25,000 was advanced to
Failsafe and subsequently was followed by further advances of
$75,000 and $50,000. According to the Appellant an additional
amount of $118,000 was subsequently provided by him to permit
Failsafe to complete the purchase of the games and that the books
of Failsafe show it as having been paid to Banta. He said
problems arose and Banta failed to produce the games required and
since Failsafe needed to protect its rights which meant filing
trademark registrations, cost of legal fees, etc., the Appellant
was required to provide additional financing. He further
testified that Vantage International Products and Services Inc.,
a company owned by the inventors of the game with whom Failsafe
had a royalty licensing agreement was involved in this endeavour.
Since all of the product information made reference to this
company name, a decision was taken to change the name Failsafe to
Vantage International Incorporated[1] effective February 28, 1994. He
referred to the Vantage International Incorporated balance sheet
as of February 28, 1995 to demonstrate that as of that point of
time a balance of $345,428.59 was due to him.[2]
[3] The Appellant testified that
further problems developed in 1996, sales were virtually
non-existent, Banta had sued to collect the balance owing on the
games and additional financing was required to "do a test
market". Efforts were made to seek out venture capitalists
for this purpose and in the meantime "to keep the rent up, I
continued to pay various expenses of keeping the operation
going". These problems led to a reorganizational meeting in
May 1996 at which a decision was taken to "start new with a
restructured company, new shareholders or new shareholding
percentages. We did do that and we incorporated a new company in
1996 called Vantage International (1996) Ltd." (Vantage
(1996)).[3]
According to the Appellant, share structures had changed but
"all assets and liabilities were rolled into that and the
old company ceased to exist".[4] Further expenses arose and by the end
of 1996, the Appellant says that he was unable to put any more
money into Vantage (1996) and "it basically died a natural
death". As a result of the foregoing the Appellant, in his
1996 income tax return, claimed the business investment losses in
issue. The Appellant also maintains that Vantage (1996) is still
active today and that "attempts are still being made to try
and revive it because the games are there, the product is there,
it's a good product, but it would take a $2 million
investment to get it off the ground, to get Vantage off the
ground and without venture capitalists of some kind, that is
never going to happen, and I honestly, since late 1996, believed
that that wasn't going to happen and I quit throwing good
money after bad".
Analysis
[4] The cross-examination of the
Appellant disclosed a number of inconsistencies in his testimony.
First, it became obvious that the initial investment was the
result of an arrangement between Failsafe and a syndicate, 520660
Alberta Limited (520660), structured by the Appellant for the
purpose of having other people invest in the project and that it
was the source of the initial advances of $25,000, $50,000 and
$75,000.[5] This
fact is confirmed by the agreement entered into by 520660 and
Failsafe dated April 24, 1992.[6] The Appellant conceded that this document
governed monies provided to Failsafe for the venture capital that
he had referred to in the course of his testimony-in-chief, but
qualified that by saying it only applied to the amount of
$150,000.
[5] As previously noted, the Appellant
maintained that by 1995, a balance of $345,428.59 was due to him
and that by the time he stopped injecting further funds in 1996,
his investment amounted to some $470,000. In support, the
Appellant provided the Respondent with a number of cheques to
assist in the tracing of the monies that went into Failsafe.[7] A list of these
documents shows 26 such payments during the period April 29,
1992 to February 6, 1996 totalling $253,227 all of which were
made by numbered companies. The Appellant did not dispute that
these cheques had been identified by him as forming part of his
claim for the $250,000 business investment loss in issue but
provided no other documentation to substantiate his position. The
first three cheques shown in this list relate to the initial
amount of $150,000 provided to Failsafe as venture capital during
the formative year 1992 but, no documentary or other evidence
exists to support his assertion that he personally invested that
amount. With respect to the remaining 23 payments shown in
Exhibit R-5, the following exchange took place between the
Appellant and counsel for the Respondent:
Q. Would you agree,
Mr. Isaman, that these cheques that you submitted provide your
evidence, as you claim it to be, that you paid monies into
Vantage International or Failsafe Direct Marketing at various
points?
A. Yes, between me
and other contributors as I said.
HIS
HONOUR:
Sorry, between?
A. Between me and
other contributors, yes.
Q. But you will
agree with me when we look down the list of whom the cheques are
from, not once in there does your name actually appear,
correct?
A. Not in that list,
no.
Q. Well, isn't
these the cheques that went to the company that you identified as
being part of your claim of the $250,000.00 business investment
loss?
A. That is part of
my claim, yes, but if you are to look at all of the information I
gave you, you did receive a spread sheet which showed me in there
to the tune of 380 plus 90,000,that is 470,000.
Q. Isn't it the
case though that a lot of the amounts that you've got down as
your shareholdings at that date, and we are talking, I think you
mentioned this is the reorganizational meeting in May of
1996?
A. Yes.
Q. Isn't it the
case that the amounts that you used to compile that shareholding
amount are actually amounts that you claim came out of some of
these numbered companies from your shareholding's accounts in
those companies.
A. Absolutely. Some
of them did come from my shareholder's loans in some of these
numbered companies, yes.
Q. Well, isn't
it the case that you haven't actually provided us with any
documentation in your own name that went from you as an investor
directly into Failsafe Direct Marketing Inc.?
A. That's true,
I did not provide you with any.
Q. Do you have any
documentation that you did that?
A. No, because if I
did, I would have provided it.
Q. Am I correct in
understanding that when we see this chart where monies are coming
out of various companies and going into various other companies
or into other named entities, that this is how you claim to have
an amount owing to you by, I take it, Vantage International 1996
Incorporated?
A. Essentially, that
is correct, yes.
Q. Well, isn't
that what the claim for the business investment loss on your
income tax return in 1996 essentially is?
A. Yes.
Q. So you claim that
you invested an amount of $250,000.00 in Vantage International
1996 Incorporated that you claim has become a bad debt?
A. Yes, some of it
through some of these other companies that I own part of and lost
all of.
Q. Isn't it the
case that in a number of these companies you were not a sole
shareholder, is that correct?
A. That's
correct.
Q. And wouldn't
it be the case then that if monies were directed from any of
these companies in which you were not a sole shareholder to
Vantage International Incorporated resolutions would have had to
have been passed by the companies for their contributions and it
would be the company contributing to Vantage International or to
Failsafe Direct Marketing?
A. There was no
resolutions passed. There were agreements between me and the
other shareholder or shareholders. In most cases, all but one,
there was no more than one shareholder besides myself.
Q. So you are saying
that all of these companies, except for one, were sole
shareholding companies of your own?
A. No, I did not say
that.
Q. I'm sorry
then.
A. You're not
listening. I said there was no more than one other shareholder in
these other companies except for 520660.
Conclusion
[6] An allowable business investment
loss (ABIL) arises pursuant to paragraph 39(1)(c) of
the Act where there is a debt owing to a taxpayer by a
Canadian controlled private corporation that is a small business
corporation. For this Appellant to succeed in his claim it is
necessary for him to establish the following:
(i) that Vantage (1996) was
indebted to him;
(ii) that the debt was acquired
by him for the purpose of gaining or producing income from a
business;
(iii) that the debt became bad in the
year giving rise to a deemed disposition for the purposes of
subsection 50(1) for proceeds equal to nil; and
(iv) that accordingly a business
investment loss for the purposes of paragraph 39(1)(c) was
sustained.
Quite simply, the evidence adduced by the Appellant falls
short of establishing that he personally advanced the amount in
issue to Vantage (1996) which loan became a bad debt. There is no
question that funds, some of which undoubtedly were the
Appellant's, flowed from various numbered companies in some
instances to other numbered companies and on other occasions in
payment of certain costs related to Failsafe or to Vantage
Products International but there is no evidence from which it
would be appropriate to attribute a specific amount to him.
Furthermore, what is most damaging to the Appellant's case is
the fact that there is no evidence capable of establishing that
any amounts whatsoever were advanced by him to Vantage (1996)
other than his comment that "I continued to pay some
expenses".
[7] The failure to adduce adequate
evidence with respect to the debt allegedly owed to the Appellant
by Vantage (1996) by itself provides a sufficient basis to
disallow the appeal. Added to that is the fact that there is no
substantive evidence to support the Appellant's contention
Vantage (1996) was carrying on an active business during the
relevant period of time. Indeed, he stated that no active
business was being carried on by it and that by the end of 1996
it "basically died a natural death". He conceded it had
no income from business at all since its incorporation and that
it did not have any assets that were primarily used in an active
business in Canada.
[8] A small business corporation is
defined in the Act, subsection 248(1), as a
Canadian-controlled private corporation which all or
substantially all of the fair market value of its assets are used
in active business carried on primarily in Canada. The evidence
before this Court falls well short of satisfying that
requirement.
[9] For the foregoing reasons, the
appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 30th day of July, 2003.
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