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Citation: 2003TCC634
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Date: 20030926
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Docket: 1999-1876(IT)I
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BETWEEN:
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KATHELYN M. BLACK,
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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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____________________________________________________________________
Agent for the Appellant: Frederick Black
Counsel for the Respondent: Laura Dalloo
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Ottawa, Ontario, on June 27, 2003)
McArthur J.
[1] These are appeals from assessments
for the Appellant's 1994, 1995 and 1996 taxation years. The
Appellant claimed expenses in these years of $14,001, $14,454 and
$15,358, respectively. The Respondent's position is that the
Appellant had no business and no source of income and is
precluded from claiming the expenditures. The Respondent further
contends that if it is found that there was a business, any
expenses claimed by the Appellant were not substantiated and were
not incurred for the purpose of gaining or producing income from
a business or property pursuant to paragraph 18(1)(a)
of the Income Tax Act, which states:
18(1) In computing the income of a taxpayer from a
business or property no deduction shall be made in respect of
(a) an outlay or expense except
to the extent that it was made or incurred by the taxpayer for
the purpose of gaining or producing income from the business or
property;
The primary issue in these appeals is whether there was a
business.
[2] The facts as presented, and as I
find them, are as follows. In 1988 and 1989, Mr. Leslie
Black loaned or advanced $6,000 and $15,813, respectively, to or
for the benefit of NsC Diesel Power Incorporated (the
"corporation" or "NsC").[1] Relatives of Leslie Black had an
interest in the corporation which was his motivation to advance
funds.
[3] On or about December 1991, the
corporation declared bankruptcy. The statement of affairs listed
that unsecured creditors were owed over $9 million. Leslie
Black died in June 1993 and his wife Kathelyn (the Appellant)
together with her son Frederick, continued Leslie's interest
in the corporation, which was now in bankruptcy. The trustee in
bankruptcy continues to hold the assets, which include a
technology agreement valued at $4 million. It is this
valuable asset which is the centre of attention. I believe it is
technology for diesel engines and in particular, marine diesel
engines originally anticipated to be used in Canadian
icebreakers.
[4] Evidence was adduced on behalf of
the Appellant by Paul H. McKechnie, C.A., and by the
Appellant and her son Frederick, who also acted as her agent.
During the relevant years, the Appellant has advanced, through
Frederick, funds to an entity in Halifax in participation in
recovering the technology through litigation and other means.
Those efforts apparently continue to this day.
[5] There was no explanation why
earlier advances to the corporation prior to bankruptcy were
referred to as loans and the subsequent ones referred to as
partnership advances in an active business. Also, there was no
evidence as to who was attempting the recovery and for what
purpose. I believe the original party, the corporation, that
purchased the technology is now bankrupt. Frederick stated that
he and his mother were in partnership in their efforts, with
unknown others I believe in Halifax, to obtain the valuable
technology.
[6] In the Appellant's 1994
return, the accountant referred to the $14,001 claimed as
expenses as: (a) administration $10,897; (b) office expenses
$1,512; and (c) professional fees $1,842 which I believe were the
accountant's own fees. In her 1995 return, the expenses are
titled: (a) office expenses $2,412; (b) legal and
accounting $1,900; and (c) administration $10,642. The 1996
expenses are somewhat similarly described. There was no
explanation what "administration" was. I am left to
guess it included advances to the corporation. There were also no
documents provided.
[7] The accountant's testimony was
general in nature and of very little assistance. Obviously, it is
very difficult for him to remember details going back seven,
eight and nine years, particularly with his having been involved
with, I am sure, hundreds of clients in the interim. His
credibility is without question. He believes he received a list
of expenditures each year and perhaps invoices. He could not
recall specifically what the expenditures were for, nor did he
have any personal knowledge with respect to the nature of the
Appellant's activity. Apparently there were receipts for
1995, however, none were included with the evidence. Frederick
stated that Canada Customs and Revenue Agency lost receipts for
other years. This was not pursued with any vigour.
[8] The accountant added that some of
the expenditures claimed might have been with respect to the
Appellant's writing business. She is 81 years old and
remains a very talented writer. Small amounts of income were
included in the years in question. Mr. McKechnie suggested
they may have been from her writing, but they were
co-mingled with the activity in question.
[9] No relevant documentation was
submitted to assist the Appellant's submission that she was
carrying on a business of recovery of technology amongst other
assets from the trustee in bankruptcy for the corporation. There
are no records such as partnership agreements between or amongst
anyone. There was no evidence with respect to who received funds
and on what basis. It may have been a loan to relatives. The
Appellant is intelligent and alert. While she had difficulty
walking and uses a wheelchair, she appears quite capable of
looking after her own business affairs. Possibly her business
relationship with her son can be described as a partnership, but
I believe that would be stretching things. Certainly, there was
no evidence that there was a business partnership with persons in
Nova Scotia with respect to the bankrupt corporation. Also, there
was no evidence as to how the recovery of the technology or other
assets would earn income for the Appellant.
[10] On February 6, 1997,
Mr. McKechnie wrote the following letter of explanation to
CCRA. I will comment as I read the letter on some of its
comments:
In late 1989 and the early 1990's, Mrs. Black
invested heavily in a Nova Scotia business venture.
My comments include that it was in 1988 and 1989 and it was
not the Appellant but her husband Leslie. Also, I do not believe
it was an investment but rather, it was referred to as a
loan.
The company became insolvent.
In fact, the company went into bankruptcy and Mrs. Black
has not made a claim for those losses yet.
The company, struggling with its receiver, is still attempting
to recover its assets, pay its creditors and overcome its
losses.
I do not believe there is a receiver, but there is a
trustee-in-bankruptcy and he must be referring to former
corporation officers.
Mrs. Black continues to work with two of the executives
of the company as the business struggles to recover and carry on.
Her invoices ...
As mentioned above, I saw no invoices:
... and her expenses are slow to be recovered or have not been
recovered to date. There is a reasonable expectation that success
will be encountered in the near future.
On an ongoing basis Mrs. Black assists in the writing,
research, administration and operates the service from her
home.
We have collected the supporting ...
In that regard, I add that there was no evidence to support
that the corporation is attempting to recover its assets and that
Mrs. Black continues to work with two executives of the
corporation.
We have collected the supporting documentation for her claim
for the 1995 year and it is attached hereto.
Even after hearing the evidence, I do not know what he meant
by:
On an ongoing basis Mrs. Black assists in the writing,
research, administration and operates the service from her
home.
The only writing referred to in evidence was her continuing to
write books. This activity should have nothing to do with the
matter before me.
[11] In a letter of objection dated
November 19, 1998 to CCRA, Mr. McKechnie wrote
that:
Kathelyn M. Black and Frederick Black have participated in a
partnership identified as NsC:
1) The objective is to
develop the equipment business started as NsC Diesel and
owned by NsC Corp;
2) The asset development
of NsC reached in excess of $15 million ...
3) The equipment business
is still not fully operational ...
4) The partnership has
operated to develop and protect NsC's assets.
5) To that end the
partnership has operated since 1992 with K.M. Black
participation commencing in 1993.
There was little or no evidence to support these claims,
either from Mr. McKechnie, the Appellant or Frederick. In
her returns, the Appellant indicates that she was the sole
proprietor of the business, yet the Notice of Appeal refers to a
partnership with Frederick, as does Mr. McKechnie. The
Appellant also submits that there was a partnership between the
Appellant herself and a Nova Scotia entity. The Nova Scotia
partners were never identified except as relatives. No
documentation was presented that would lead me to conclude that
there was partnership.
[12] Counsel for the Respondent referred me
to Backman v. The Queen[2] in Tab 10 of her Book of Authorities,
paragraph 26, which reads:
Courts must be pragmatic in their approach to the three
essential ingredients of partnership. Whether a partnership has
been established in a particular case will depend on an analysis
and weighing of the relevant factors in the context of all the
surrounding circumstances. That the alleged partnership must be
considered in the totality of the circumstances prevents the
mechanical application of a checklist or a test with more
precisely defined parameters.
With this in mind, looking at the totality of the evidence
leads me to the question dealing with substantiating of expenses.
In this regard, the evidence fell far short and no documentation
was presented, such as receipts or evidence of payment. I am left
with very inadequate evidence with respect to what money was
expended and for what purpose, other than the three headings
referred to in the returns. There were no receipts of proof of
payment submitted. I was left to guess or speculate that some
money was advanced to someone in Nova Scotia for the purpose of
earning income. That is not sufficient.
[13] The Appellant suggested that her
earlier return was treated differently. In this regard, I refer
to Tab 9, paragraph 42 of Admiral Investments Ltd.
v. Canada,[3] Exchequer Court, where Cattanach J.
stated:
It is well settled that while a decision reached by the
Minister in one taxation year may be a cogent factor in the
determination of a similar point in a following year, the fact
that a concession may have been made to a taxpayer in one year,
does not, in the absence of any statutory provisions to the
contrary, preclude the Minister from taking a different view of
the facts in a later year when he has more complete data on the
subject matter. There is nothing inconsistent with the Minister
altering his decision according to the facts as he finds them
from time to time. An assessment is conclusive as between the
parties only in relation to the assessment for the year in which
it was made.
I agree with the Respondent's position that the Appellant
has not established that there was a partnership, a business or a
source of income in accordance with sections 3 and 4 of the
Income Tax Act.
[14] There is no need to discuss the
timeframe of losses or the principles in the Stewart v.
Canada[4] case because the Appellant has not
established there was a business. The fact that there were
10-plus years of losses is not conclusive that there was a
business. While it is not necessary to proceed further, it is
obvious, for the reasons set out earlier, that had I found there
was a source of income in a business, there is insufficient
evidence to conclude that the expenses or losses were incurred to
gain income pursuant to paragraph 18(1)(a) of the
Act. For these reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 26th day of September,
2003.
McArthur J.
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