Dworzak v. The Queen, 2003 TCC 411 (Informal Procedure)

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For the Appellant: The Appellant himself

Counsel for the Respondent: Vlad Zolia

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REASONS FOR JUDGMENT

(Delivered orally from the Bench at

Montréal, Québec, on May 8, 2003)

McArthur J.

[1]      This is an appeal from the Minister of National Revenue's assessment disallowing the Appellant's request for deduction of an allowable business investment loss (ABIL) for the 1999 taxation year. The parties agree that the issue is whether a certain mortgage or hypothec[1] constitutes payment.

[2]      The Appellant was a major shareholder in Ville-Marie Integrated Systems Inc. (the Corporation). Prior to carrying on the Corporation's business, he was a practising chartered accountant. He is a highly intelligent, well-spoken taxpayer whose evidence I accept. Over a period of years, the Corporation borrowed increasingly from Mr. Goldapple who was in effect its banker.

[3]      On February 10, 1998, the Corporation and the Appellant acknowledged a debt of $80,000 to Mr. Goldapple with an annual interest rate of 15%. On the same day, the Appellant personally guaranteed the Corporation's debt to Mr. Goldapple. Mr. Goldapple and the Appellant executed a surety dated October 5, 1998 and the Appellant secured the loan by granting a mortgage on his personal residence. He made no payments to Mr. Goldapple in 1999. His claim for an $80,000 deduction in 1999 was denied by the Minister of National Revenue pursuant to sections 38 and 39 of the Income Tax Act.

[4]      The issue is whether the mortgage constitutes payment. The Appellant presented the position that his situation is identical if he had granted a mortgage to an independent financial institution and paid off Mr. Goldapple in cash. He adds that had he exchanged an $80,000 cheque with Mr. Goldapple, it would clearly demonstrate proof of payment. He also refers to Article 1553 of the Civil Code which states:

Payment means not only the turning over of a sum of money in satisfaction of an obligation, but also the actual performance of whatever forms the object of the obligation.

[5]      Reference must be made to the evolution of the loan. In Exhibit R-1. Tab 5 is the acknowledgement of the debt of $80,000 at 15% by the Corporation to Mr. Goldapple dated February 10th, 1998. Tab 6 contains a promissory note from the Appellant and the Corporation to Mr. Goldapple for the same $80,000 and it is also dated February 10, 1998. Tab 7 contains a personal guarantee from the Appellant to Mr. Goldapple of the Corporation's $80,000 debt. Tab 8 is the grant of a mortgage from the Appellant and his spouse to Mr. Goldapple for $80,000, dated October 1, 1998. This is probably the key document. The preamble reads in part:[2]

The Surety has solidarily guaranteed the repayment of certain sums of money by the Corporation ... to the Creditor, as well as the fulfilment of the debtor's other obligations towards the Creditor, as evidenced by a promissory note dated the tenth of February nineteen hundred and ninety-eight ...

The obligations of Dworzak and the hypothec constituted in virtue hereof shall be neither lessened nor modified in any way whatsoever by an agreement which might be entered into between the Creditor and the Surety, in particular, if the Suretyship is renewed or the Creditor accepts delays or if the Creditor refrains from exercising its rights and recourses, whatever they may be. Moreover, the hypothecs and other rights created herein shall subsist, notwithstanding the fact that the Suretyship may be evidenced by any other document, whether in respect of the total amount of the Suretyship resulting from the Document Evidencing the Suretyship or in respect of a subsequently reduced amount of the Suretyship, until payment in full of the amount of the original Debt to the Creditor.

The replacement by the parties of the Document Evidencing the Suretyship or the document evidencing the debt shall not constitute novation, notwithstanding any law or usage to the contrary.

To secure the repayment of all amounts payable in virtue of the Suretyship and the fulfilment of all the obligations to the Creditor in virtue hereof and of the Document Evidencing the Suretyship, the Surety hereby hypothecates in favour of the Creditor, to the extent of ... $80,000, ... the immovable property:

The legal description of the Appellant's home follows.

[6]      After the careful reading of this, it is clear that it was never intended that the mortgage itself constitute a payment of the debt. One must look to what procedure was actually done and not what could have been done. The original promissory note of the Corporation and the Appellant's guarantee survive the granting of the mortgage. The mortgage was additional security, not payment in lieu of the promissory note and the guarantee. It was not, in itself, payment of the debt. The Corporation, which remains as a legal entity, was still indebted to Mr. Goldapple throughout 1999, although the Corporation may have been insolvent.

[7]      The Appellant's appeal could only succeed if the granting of the mortgage created a new loan. It did not. The indebtedness of the Corporation survived the granting of the mortgage. Counsel for the Respondent referred to Article 1661 of the Quebec Civil Code which reads in part:

Novation is not presumed; it is effected only where the intention to effect it is evident.

It is clearly stated in the mortgage that there is no intention to effect novation. It is signed by both parties, Mr. Goldapple and the Appellant before a notary.

[8]      In answer to the question whether the mortgage was payment of the debt, I answer, for these reasons that no, it was not and the appeal is dismissed.

Signed at Ottawa, Canada, this 6th day of August, 2003.