Chiarelli v. The Queen, docket 2000-3428-IT-I (Informal Procedure)

Date: 20010508

Docket: 2000-3428-IT-I; 2000-3430-IT-I

BETWEEN:

DIANA CHIARELLI and

BARARA M. LICHMAN

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Agent for the Appellants: Stan Lichman

Counsel for the Respondent: Andrea Jackett

____________________________________________________________________

Reasons for Judgment

(Delivered orally from the Bench at Toronto, Ontario, on April 6, 2001)

McArthur J.

[1]            These appeals were heard together on common evidence and the issue is whether the Appellants are entitled to deduct allowable business investment losses in the amount of $17,781 in each of their 1995 taxation years. Both Appellants are schoolteachers and could not appear at the hearing because they were needed in their classrooms during a teachers' strike. They were represented by Stan Lichman, the husband of Barbara Lichman, who was the most knowledgeable to give evidence.

[2]            Mr. Lichman is an accountant, entrepreneur and former auditor with Special Investigations, Revenue Canada. He is also described as a tax consultant. He stated that Diana Chiarelli was a long-time friend of both himself and his wife, Barbara. She has been divorced for some 20 years and since that period, he and his wife have taken the role of assisting her over the years. He apparently invested her money on her behalf. Mr. and Mrs. Lichman blended their funds in investments which he managed.

[3]            In 1995, Mr. Lichman advanced funds directly from his personal bank account to CaraVac Vacations Ltd. He submits that approximately $47,000 of a total in excess of $200,000 was a contribution advanced to him by the Appellants. The Caribbean Cultural Committee (CCC) is a charitable corporation incorporated under the laws of the province of Ontario. It appears that 1099212 Ontario Ltd. carried on the same business as CaraVac Vacations Ltd. CaraVac was established in 1994 or 1995 to exploit the business opportunities flowing from the Caribbean Festival in Toronto which is an annual event.

[4]            I found the evidence in these appeals, in many instances, imprecise or not supported by clear documentation. Oral agreements were entered into by Mr. Lichman and representatives of CCC and CaraVac where in return for the advance of an unspecified amount of money, Mr. Lichman would receive up to 5/11 or approximately 49% of the shares of 1099212 or in CaraVac. John A. Eversley, Barrister and Solicitor, gave evidence on behalf of the Appellants to the effect that negotiations in late September and early October, 1995 led to several agreements, including a share purchase, shareholder and licensing agreements. The only document placed in evidence was a rough copy or unsigned draft of a memorandum of agreement (Exhibit A-1) dated October 3, 1995 between CCC, Flight One Marketing Inc., Stan Lichman and 1099212, carrying on business under the name CaraVac Vacations Ltd. This document appears to be a boilerplate shareholders agreement that is of little or no assistance to the Court.

[5]            One of many confusions is that CaraVac is referred to as an existing corporation, CaraVac Vacations Ltd., and yet 1099212 purports to carry on business under the name CaraVac. As best I understand it, Mr. Lichman's evidence is that he eagerly advanced over $200,000 to CaraVac for the purchase of shares in October, November and December, 1995, having been satisfied that CaraVac Vacations would be a profitable business by exploiting the Caribbean festival trademark. No shares were issued to him.

[6]            I find the following assumptions of the Minister taken from paragraph 6 of the Reply to the Notice of Appeal to be accurate:

(a)            1099212 Ontario Limited was incorporated in the Province of Ontario on October 6, 1994 and registered as "Caravac Caribbean Adventures & Vacations" (the "Corporation");

(b)            the Corporation is a wholly owned subsidiary of The Caribbean Cultural Committee;

(c)            the Corporation did not file any corporate tax returns and no formal financial statements were prepared by the Corporation;

(d)            Mr. Stan Lichman ("Stan"), the Appellant's representative stated that he had advanced funds in the amount of $94,837.50, on behalf of his wife (25%), Michel Benchimol (50%) and Diana Chiarelli (25%) pursuant to a trust agreement, to the Corporation for the purchase of the Corporation's shares;

According to the agent for the Appellants, Mr. Benchimol did not pursue the ABIL appeal with Revenue Canada for personal reasons.

(e)           there was no formal trust agreement for this particular transaction;

(f)             although a Memorandum of Agreement was to have been entered into on or about November 6, 1995 to sell 60% of the Corporation's shares by The Caribbean Cultural Committee ...

[7]            Late in December 1995, CCC reneged on the transfer of the shares. Therefore, the question boils down to whether the Appellants, through Mr. Lichman, provided adequate documentary evidence to prove that the monies were advanced to CCC and that Mr. Lichman was in fact acting on the Appellants' behalf and that he was reimbursed for the advances which he claimed he made on their behalf.

[8]            On December 27, 1995, a meeting of CCC was held at Toronto's Ryerson Institute where over 200 members or shareholders of that organization attended. The meeting was apparently unruly and CCC refused to ratify arrangements between Mr. Lichman and CaraVac. In a letter dated December 31, 1995 (Exhibit A-2), Glen Logan, the chief executive officer of CaraVac wrote the following letter to Mr. Lichman:

Dear Sir:

I am writing on behalf of the Board of CARAVAC to thank you for your faith in our company, as evidenced by your advances to date in the amount of $94,837.50. The funds have been used primarily for operating expenses and legal and accounting costs.

Unfortunately, I must inform you that the company is insolvent and it will not be possible to repay any of the above amounts.

Sincerely,

"Glen Logan"

C.E.O.

Mr. Logan did not give evidence. The amount of $94,837 referred to in his letter is somewhat confusing because throughout his evidence, Mr. Lichman contended that he advanced over $200,000. Mr. Lichman informed the Court that the audit of the two Appellants arose because of a criminal investigation involving him in another unrelated matter which resulted in a vendetta by Jack Meggetto, CMA, Revenue Canada Special Investigations, who Mr. Lichman suggested was unreasonable in his investigation and audit. However, I found Mr. Meggetto's testimony on behalf of the Respondent impressive and see no basis for these allegations.

[9]            Mr. Meggetto requested from Ms. Chiarelli, inter alia, the following:

13.            Original copies or certified true copies of the front and back of cancelled cheques that confirm the amount invested or other documentary evidence that clearly shows the transfer of money from your personal account to the corporation account. THIS DOCUMENTATION IS IMPERATIVE AND YOUR CLAIM MAY BE DISALLOWED IN FULL IF NOT SUBMITTED.

In response to the above question, Mr. Lichman replied as follows:

13.            Enclosed are my original returned cheques from CIBC, Avenue Road and Fairlawn, dated October, November and December for a portion of funds invested into Caravac as advances which total $24,500. Additional funds were advanced through Canada Trust account #511674-2 and a CIBC account #350737, which amounts comprised more than the balance claimed. The cancelled cheques from these accounts are being obtained from the financial institutions involved; it is anticipated that they will be ready for delivery within two weeks. Payments were made by me through CIBC Visa and Canada Trust MasterCard for Caravac expenses concerning Jamaican hotels and travel and in respect to other company business. Request for original documentation (approximately $20,000) has been made and I will forward to you immediately upon receipt.

Documentation with respect to the funds advanced to me in Trust from the above-captioned taxpayers is being assembled and should be ready in about a week. I apologize for the delay in this documentation but as you know I was in the Czech Republic until March 27 and then in Vancouver until April 4.

The documentation referred to by Mr. Lichman was never sent.

[10]          In conclusion, there is evidence that Diana Chiarelli advanced $8,400 in cash and transferred her cottage property for a value of $30,000 to Mr. Lichman. This totals $15,000 more than the $23,000 she allegedly invested in CaraVac. Mr. Lichman could not explain the discrepancy. He presented Canada Trust bank statements of Diana Chiarelli showing withdrawals from April 1995 to January 1997, totalling $8,400, but there is no evidence that the money was given to Mr. Lichman or indeed used in the CaraVac transaction. There is a deed from Diana Chiarelli to Stanley Lichman conveying her cottage property on July 31, 1996. Mr. Lichman stated that Ms. Chiarelli was in arrears under her mortgage, which was approximately $100,000, and in financial difficulty. He took the property to recover her indebtedness to him. He swore a land transfer tax affidavit that he paid $145,000 in cash for the property. This does not appear to coincide with his evidence that his purchase price was $175,000 of which $5,000 was commission and $30,000 forgiveness of a debt. I was left with inconsistent amounts and asked to draw a conclusion through inference.

[11]          I find that there is no conclusive evidence of debt owing to the Appellants by CaraVac. There is insufficient evidence that Mr. Lichman was advancing his own money on the understanding they would reimburse him. There was no trust agreement, promissory notes, cancelled cheques, transferred shares, written terms and conditions, and the Appellants did not appear at their own hearing. The only evidence of this arrangement is a statement by Mr. Lichman which I do not find credible. It would appear that Diana Chiarelli is a somewhat innocent victim and it is difficult to believe that she would invest in such a dubious venture when she was in financial difficulty.

[12]          We have not seen documentary evidence other than cancelled cheques (Exhibit R-1) written by Mr. Lichman himself to CaraVac for $19,000. We do not know if this $19,000 is part of the $200,000 that he has stated he invested himself personally in the company. The remaining $75,000 allegedly advanced is unaccounted for completely. We have not seen anything which indicates that either Appellant reimbursed Mr. Lichman for their proportionate share of the funds transferred. There was no documentary evidence whatsoever of any money advanced by Mrs. Lichman to her husband or to CaraVac. The presentation on behalf of the Appellants was of generalities only.

[13]          Mr. Lichman, who is an experienced tax accountant, presented vague explanations that would take a leap of faith to accept, which I am not prepared to take. I agree with the representations made on behalf of the Respondent that Mr. Lichman understands the requirements of an ABIL and understands the documentation required to support this. He was asked for this information by Mr. Meggetto and did not produce it although he had since 1997 to do so.

[14]          In order to qualify for an allowable business investment loss, a taxpayer must meet the conditions set out in paragraph 39(1)(c) of the Income Tax Act. That paragraph defines "business investment loss" as including capital losses arising from a disposition to which subsection 50(1) applies to shares or debts of a small business corporation. Subsection 248(1) of the Act defines a small business corporation as being a Canadian controlled private corporation where all or substantially all of the fair market value was at that time used principally in an active business carried on primarily in Canada. Subsection 50(1) deems a taxpayer to have disposed of a debt or share of a corporation at the end of a taxation year for nil proceeds and to have reacquired it immediately thereafter at a cost of nil or, in the case of a debt, the debt is owing to a taxpayer at the end of the taxation year and is established by the taxpayer to have become a bad debt.

[15]          As mentioned, there is no documentary evidence that CaraVac was a corporation which was bankrupt or insolvent in 1995. There was insufficient proof of loans, debts or capital losses. I find that the Appellants did not incur a business investment loss in accordance with paragraphs 39(1)(c) and 50(1)(a) of the Act in the 1995 taxation year and are not entitled to claim an ABIL under paragraph 38(1)(c) of that Act in 1995. The appeals are dismissed.

Signed at Ottawa, Canada, this 8th day of May, 2001.

"C.H. McArthur"

J.T.C.C.