Date:
20010418
Docket:
98-1750-IT-G
BETWEEN:
JACQUES ST-ONGE
INC.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Archambault, J.T.C.C.
[1]
Through 3091-5243 Québec Inc. (Salvage), a wholly
owned subsidiary, Jacques St-Onge Inc. (Management)
invested in a project (salvage project) that turned out
badly. In 1994, Management lost at least $186,010 in the project,
an amount corresponding to the cost of its shares in Salvage.
However, due to exceptional circumstances, Management might be
able to eliminate a very large portion of the loss by obtaining
tax benefits (double tax benefit) that are much more
generous than those the Minister of National Revenue
(Minister) is prepared to grant it. If successful in this
appeal, Management would be entitled to deduct for 1994 an amount
of $139,507.50 (75 percent of a business investment loss
(BIL) of $186,010) as an allowable business investment
loss (ABIL). As a result of the amalgamation of Management
and Salvage on May 15, 1997, it was able to deduct $211,202 from
its taxable income as a business loss incurred by Salvage.
Management would, in a manner of speaking, be deducting the same
loss nearly twice.
[2]
The main issue in these appeals is whether Management incurred a
BIL during its 1994 fiscal year on the shares it owned in
Salvage. The only reason given by the Minister's auditor for
not allowing Management to deduct the ABIL is that it was not
reasonable to expect on April 30, 1994, that Salvage would be
wound up or dissolved, as required by clause 50(1)(b)(iii)(D) of the Income Tax
Act (Act).
[3]
Since it carried over part of the loss to the 1991, 1992, 1993
and 1995 taxation years under section 111 of the Act, Management
is challenging the assessments made by the Minister for all of
those years. However, the disposition of the case depends
entirely on the tax treatment of the loss incurred in 1994.
Moreover, at the start of the hearing, Management amended its
Notice of Appeal to state that the BIL of $223,031 indicated in its 1994 tax return should be reduced to
$186,010. Accordingly, the ABIL that Management wishes to deduct
is no longer $167,273 (75 percent of $223,031) but rather
$139,507. On the other hand, Management is claiming in the
computation of its business income a deduction of $36,915
(additional expenses) for expenses it claims to have
incurred itself in carrying out the salvage project.
Facts
[4]
Management was incorporated in 1968 for the purpose of holding
interests in various corporations. Its head office is in Caplan
on the Gaspé Peninsula, and its fiscal year ends on April
30. Jacques St-Onge owns 99 percent of its shares, and his
son owns the rest. In 1994, Management owned:
-
51 percent of Pétroles Chaleurs (1987) Inc.
(Pétroles) (the
other shares were owned by Petro-Canada)
-
84 percent of Toyota Baie des Chaleurs Inc. (the other shares were owned by Jacques
St-Onge's brother)
-
81 percent of Bonaventure Nissan (the percentage varied
during the relevant period)
-
71 percent of Gaspésie Auto Inc. (the other shares
were owned by three other investors)
-
33 1/3 percent of Les Immeubles Landry et St-Onge
Inc. (the other shares were
owned equally by two other persons)
- 400
preferred shares of Automobiles Caplan (Bonaventure) Inc.
Mr.
St-Onge said that he created a new corporation each time he
started a new business.
[5]
Mr. St-Onge is the president and chief executive officer of
Pétroles, a corporation whose day-to-day
management he himself handles. As for the other corporations
owned by Management, Mr. St-Onge's role is limited to
being on the board of directors. Those other corporations are run
by full-time managers.
[6]
Mr. St-Onge testified that, during the 1980s, he or
Management had sold a ship to 2754002 Canada Inc. (MTI), a
corporation owned by Michel Tadros. Management had had to
guarantee the loan (ship loan) obtained to pay the
ship's purchase price. The ship was to be used for cod
fishing, but MTI had a great deal of difficulty operating it
profitably because of the disappearance of cod stocks in the Gulf
of St. Lawrence.
[7]
It was Michel Tadros who approached Mr. St-Onge in the
spring of 1993 to try to get him interested in the salvage
project, which involved salvaging 130 tonnes of nickel from
the liner Empress of Ireland, which had sunk on
May 29, 1914, off Ste-Luce-sur-mer near
Rimouski. The liner was 180 feet underwater. According to Mr.
Tadros, the cargo of nickel was worth $1,600,000, while the
salvage costs were not supposed to be more than $200,000.
Management therefore agreed to get involved in the
project.
[8]
For the purposes of the salvage project, MTI was to provide the
ship needed to transport personnel and salvage the nickel.
Salvage was not responsible for paying the marine insurance costs
or the interest expenses on the ship loan (except as a surety).
After all the expenses incurred in the salvage project were paid,
the profits were to be divided equally between the shipowner, the
divers and Salvage.
[9]
On April 29, 1993, to get the project under way, Management
advanced $11,400 for the purchase of diesel fuel for the ship
from Pétroles. The same day, Management also paid
$22,201.12 to the Caisse populaire de Caplan for the arrears owed
by MTI on the ship loan. Those amounts were supposed to be repaid
to Management after the salvage project was successfully
completed. However, MTI has not yet repaid the $22,201.12. Mr.
St-Onge said that MTI has had constant financial
problems.
[10] Having
noted the risks involved in diving more than 180 feet underwater,
Management decided to incorporate Salvage. According to
Salvage's 1993 tax return, it was incorporated on May 18,
1993. Its fiscal year ended on December 31. An agreement
dated May 25, 1993, between Management and Salvage states that Salvage
agreed to [TRANSLATION] "issue 265,000 Class D shares and
[sic] its capital stock to [Management]". It also
states that Salvage had [TRANSLATION] "received to date
$22,201.12 in advances and converted that amount into Class D
capital stock". In making his reassessment for 1994, the
Minister's auditor assumed that Salvage's capital stock
as at December 31, 1993, and December 31, 1994, was made up of
10 class A shares and 186,000 class D shares, for which the
total paid-up capital was $186,010. Counsel for Management
admitted that fact at the start of the hearing.
[11]
According to a handwritten summary by Mr. St-Onge (Exhibit
A-1) indicating the amounts invested by Management in the
salvage project, all of Management's outlays, aside from the
two referred to above, were made after Salvage was incorporated.
Most of the amounts invested by Management were first advanced to
Salvage, which then paid its suppliers.
[12] During
his testimony, Michel Bernier, a tax specialist with RCMP,
pointed out on a document (Exhibit A-5) the following
additional expenses that Management wishes to deduct as its own
expenses:
[TRANSLATION]
$
Balance as
at April 30,
1993
22,201.12
Cheque
transfer to [MTI]
And/or
Michel Tadros in connection with the project
B
882
4,999.00
B
902
5,000.05
B
941
300.00
10,299.05
Transfer to
Denis Boissonneault [sic]
07-10-93
B
976
400.00
Invoices
paid by [Management]
20-05-93
Centre Plongée Gaspé
Inc.
800.00
05-06-93
Boutique du Plongeur
Ltée
3,215.00
36,915.17
[13]
According to Mr. Bernier, these expenses are allowable in
computing Management's business income because they were all
paid by Management directly to the suppliers and not to
Salvage.
[14] Fifteen
15 or so people had to be hired for the salvage project,
including one team to operate the ship and another to dive. It
seems that the diving activities began in June 1993.
Unfortunately, a few weeks later the problems started.
Salvage's divers were paid a visit by the Sûreté
du Québec and the Royal Canadian Mounted Police.
Other government agencies such as the CSST also came to
investigate. Finally, an interlocutory injunction was obtained by
the Société touristique de l'Empress of
Ireland, which was disputing Salvage's right to explore the
wreck. Salvage had to stop its nickel salvage activities
temporarily. The only thing that had been salvaged by that time
was some teak, which was seized by the receiver of
wrecks.
[15] Because
of all the problems it encountered, and even though it was able
to have the interlocutory injunction quashed, Salvage decided to
abandon the salvage project for good. Notices of termination were
sent to nine employees on September 16, 1993. They
included one of the two captains, some divers, a mechanic and a
cook. The last day of work for those employees was
August 20, 1993. The other captain left voluntarily on
September 15, 1993, while the last two employees were let go on
September 18 and October 9, 1993, because of a lack of
work.
[16] Mr.
St-Onge said that, on April 30, 1994, Salvage had no
intention of reviving the salvage project and that Management had
given up all hope of recovering its investment in Salvage. The
way Mr. St-Onge put it was that Salvage was [TRANSLATION]
"dead" after December 31, 1993, and he had no intention
of using that corporation for another business. Moreover, no
financial statements were drawn up for Salvage during the months
that followed the end of the 1993 fiscal year, and no
investment in Salvage is shown in Management's financial
statements for the fiscal year ending on April 30, 1994, or for
the following fiscal years. It was only at the request of the
Minister's auditor that financial statements were prepared
for 1993 to 1996. However, Salvage regularly filed declarations
with the Ministère des Institutions financières to
avoid any penalties.
[17] The
only assets shown on Salvage's balance sheet as at
December 31, 1993, are cash on hand of $703 and a
$2,981 tax claim. It contains no reference to the teak salvaged
in 1993 that had been seized by the receiver of wrecks. The teak
was finally released from seizure, and Salvage got it back for
$500. It is still on a dolly in Mr. St-Onge's back
yard. He said that he considers it part of Canada's national
heritage and intends to donate it once his challenge to the
Minister's assessments has been sorted out.
[18] Mr.
St-Onge stated that he never intended to [TRANSLATION]
"wind up or dissolve" Salvage and that there was no
question of that corporation going bankrupt. Since he was a
well-known businessman in the area, it was important that
all of Salvage's creditors be paid, even the government
agencies, given his obligation as a director to ensure that the
amounts owed were paid.
[19] Mr.
Bernier confirmed that Mr. St-Onge had lost all interest in
Salvage and did not want to pay any accounting fees to have its
financial statements prepared. He explained that that the company
was not wound up or dissolved because of the existence of legal
proceedings or threatened legal proceedings that had not yet been
settled. Salvage's financial statements as at December 31,
1994, show an account payable of $28,076 on December 31, 1993,
and $26,697 on December 31, 1994. It would have been unwise
to wind up Salvage in view of certain statutory provisions,
including the provisions of the Companies Act and the
Civil Code under which Salvage's directors could have
been held liable if it had been dissolved while it had
outstanding debts.
[20]
Moreover, there was no question in 1994 of amalgamating Salvage
and Management. The decision to amalgamate was apparently not
made until after the Minister disallowed the deduction of the
ABIL. That decision by the Minister was sent in a proposed
assessment dated January 30, 1997. Since Management was being
denied the ABIL, a way for it to deduct Salvage's business
losses was sought. At that point Mr. Bernier indicated that
that goal could be achieved either through a winding-up,
under section 88 of the Act, or through amalgamation, under
section 87. Amalgamation was opted for because it was easier
and less costly. When the amalgamation occurred on May 15, 1997,
Salvage's negative shareholders' equity amounted to
$25,192 because of an accumulated deficit of $211,202. Moreover, Salvage's
account payable of $26,697 was still outstanding. It was
therefore assumed by Management, and the debt was apparently paid
after that.
[21] During
his audit, the Minister's auditor learned that Salvage had
signed an agreement on October 14, 1994, promising to pay
165927 Canada Inc. (BLI) $25,000, including a
$5,000 deposit, for the nickel salvage rights. Salvage was also
supposed to pay BLI 10 percent of the net value of the salvaged
nickel. Mr. St-Onge explained that the letter of
agreement had been signed following negotiations conducted at his
office by him, Mr. Tadros and Bruce Lynch. Mr. Lynch had
spent the entire day trying to convince him that it was
worthwhile from a business standpoint to resume work on the
salvage project. When he got home at the end of the day, and
after discussing the matter with his new wife,
Mr. St-Onge decided that he had made a mistake by
getting involved in such a project again. The next day, he
contacted his bank to stop payment on the $5,000 cheque. Neither
Management nor Salvage subsequently resumed work on the salvage
project. Mr. St-Onge received a letter from Mr. Lynch
threatening to sue him for unilaterally cancelling the agreement
of October 14, 1993, but no legal proceedings were ever
brought.
[22]
According to the Minister's auditor, it was more likely that
Salvage would be amalgamated or used to carry on a new business.
To reach that conclusion, he relied on his own experience as an
auditor and on the fact that there was a substantial tax loss
associated with Salvage. The auditor also said that
winding-up is more likely than amalgamation only where
amalgamation is not possible, such as where an individual
directly holds shares in a corporation or the two corporations
involved are not governed by the same companies
legislation.
Analysis
The BIL
with respect to the shares in Salvage
[23] The
provisions that are relevant in disposing of the first issue
raised by these appeals are paragraphs 39(1)(c) and
50(1)(b) of the Act, which read as follows:
39
(1) For the purposes of
this Act,
. .
.
(c)
a taxpayer's business investment loss for a
taxation year from the disposition of any property is the
amount, if any, by which the taxpayer's
capital loss for the year from a disposition after
1977
(i)
to which subsection 50(1) applies, or
(ii) to a
person with whom the taxpayer was dealing at arm's
length
of any
property that is
(iii)
a share of the capital stock of a small business
corporation, or
(iv)
a debt owing to the taxpayer by a
Canadian-controlled private corporation (other than, where
the taxpayer is a corporation, a debt owing to it by a
corporation with which it does not deal at arm's
length) that is
(A) a small
business corporation,
(B) a
bankrupt (within the meaning assigned by subsection 128(3)) that
was a small business corporation at the time it last became a
bankrupt, or
(C) a
corporation referred to in section 6 of the Winding-up
Act that was insolvent (within the meaning of that Act)
and was a small business corporation at the time a winding-up
order under that Act was made in respect of the
corporation,
. .
.
50
(1) For the purposes of
this subdivision, where
. .
.
(b)
a share (other than a share received by a taxpayer as
consideration in respect of the disposition of personal-use
property) of the capital stock of a corporation is owned by the
taxpayer at the end of a taxation year and
(i) the
corporation has during the year become a bankrupt (within the
meaning of subsection 128(3)),
(ii) the
corporation is a corporation referred to in section 6 of the
Winding-up Act that is insolvent (within the meaning of
that Act) and in respect of which a winding-up order under that
Act has been made in the year, or
(iii)
at the end of the year,
(A) the
corporation is insolvent,
(B) neither
the corporation nor a corporation controlled by it carries on
business,
(C) the
fair market value of the share is nil, and
(D)
it is reasonable to expect that the corporation will be
dissolved or wound up and will not commence to carry on
business
and the
taxpayer elects in the taxpayer's return of income for the
year to have this subsection apply in respect of the debt or the
share, as the case may be, the taxpayer shall be deemed to
have disposed of the debt or the share, as
the case may be, at the end of the year for proceeds equal
to nil and to have reacquired it immediately after the
end of the year at a cost equal to nil.
[Emphasis added.]
[24] The
first observation that must be made here is that it is possible
to incur a BIL on a share of the capital stock of a small
business corporation or with respect to a debt owing by such a
corporation. However, subparagraph 39(1)(c)(iv) provides
for an exception: a debt owing to a corporation (such as
Management) by another corporation (such as Salvage) with which
it does not deal at arm's length is not eligible for the
beneficial BIL scheme. Since Salvage was a wholly owned
subsidiary of Management, a loss on a debt owing to Management by
Salvage could not be a BIL. This explains why Management is
seeking to deduct an ABIL solely on its shares in
Salvage.
[25] As
already mentioned, only the application of clause
50(1)(b)(iii)(D) is problematic here in terms of
Management's right to deduct the ABIL on its shares in
Salvage. Based on subparagraphs 8(g), (h) and (k) of the Reply to
the Notice of Appeal, it seems reasonable to
think that the Minister first concluded that it was not
reasonable to expect "on April 30, 1994, that [Salvage]
would be dissolved" given the activities in October 1994,
which suggested that that corporation had not abandoned its
salvage project. The onus was on Management to prove that the
facts on which the Minister relied in making his assessment were
wrong. Management could do so by showing that Salvage had
abandoned its salvage project, that it had no intention of
reviving the project and that it was reasonable to expect that
Salvage would be dissolved or wound up.
[26] It is
important to note that the relevant date for determining such
reasonableness is, as stated in subparagraph 50(1)(b)(iii)
of the Act, the end of the year, which in this case was April 30,
1994. Moreover, clause 50(1)(b)(iii)(D) does not set
any time limit for the corporation to be dissolved or wound up. To satisfy the
condition that the expectation of dissolution or winding-up
be reasonable, it is therefore not necessary that Salvage could
have been wound up or dissolved on April 30, 1994. It is enough
for it to have been reasonable to expect that Salvage would be
dissolved or wound up at some point.
[27] Based
on the evidence adduced before me, I believe that Management has
succeeded in proving what it had to prove. On December 31, 1993,
Salvage had given up any intention of continuing the salvage
project. Its inactivity between September 1993 and October 14,
1994, obviously supports this conclusion. If Salvage's intent
had been to continue carrying on its business, there would
certainly have been evidence that it had engaged in some
activities in the summer of 1994. The signing of the agreement
reached on October 14, 1994, could not really have been foreseen
on April 30, 1994. Moreover, that agreement was nothing but
an abortive attempt to get the project started again. The day the
agreement was signed, Mr. Lynch did everything he could to
convince Mr. St-Onge to revive the project. He almost
succeeded: at the end of a long day of negotiations,
Mr. St-Onge signed a new agreement on behalf of
Salvage. However, after thinking about it, Mr. St-Onge
realized that it was not in his interest to get involved in such
a venture again. He therefore decided the next day to terminate
the agreement of October 14 and stop payment on the $5,000
cheque. In my view, the negotiation and signing of the agreement
of October 14, 1994, cannot be considered a recommencement of
business.
[28] Even if
the salvage project had been abandoned for good, could it be
expected on April 30, 1994, that Salvage would be wound up or
dissolved and that it would not commence to carry on business
again? Counsel for Management argued that a subjective test must
be applied in examining this question. He said that Salvage never
intended to carry on its salvage business again or to carry on
another business. Mr. St-Onge had completely lost interest
in Salvage, which he considered a dead corporation with no
future. Possible legal proceedings were feared, and it took some
time to settle the accounts payable. There were, for example, the
legal proceedings that BLI could have brought to enforce the
agreement of October 14, 1994. After a certain time, it became
clear that that corporation had given up any idea of suing, and
that was why Salvage and Management were finally able to be
amalgamated. Obviously, the fact that the Minister disallowed the
deduction of the ABIL also seems to have prompted Management to
carry out the amalgamation.
[29] Counsel
for the respondent argued that the test to be applied is, rather,
an objective one. She relied on the decision rendered by my
colleague Judge Rip in Bailey v. Canada, [1989] T.C.J. No.
602. Although that case did not concern section 50 of the
Act or an analogous provision, Judge Rip did have to determine
how to interpret the word "reasonable" in the context
of paragraph 152(5)(c) of the Act. The interpretation he
adopted was as follows:
What is
"reasonable" is not the subjective view of either the
respondent or appellant but the view of an objective observer
with a knowledge of all the pertinent facts: Canadian Propane Gas
& Oil Limited v. M.N.R., 73 DTC 5019 per Cattanach J. at
5028.
[30] I
consider the approach described by Judge Rip to be entirely
appropriate for the purposes of section 50 of the Act. In view of
all the relevant facts, including certain legal and tax
considerations, was it reasonable to expect on
April 30, 1994, that Salvage would be dissolved or
wound up and would not recommence business?
[31] In her
written submissions of July 7, 2000, counsel for the respondent
defended her position as follows:
[TRANSLATION]
The
existence of those accounts payable is an important factor in
concluding that it was not reasonable for [Salvage] to be wound
up, if one considers things from a 1994 perspective.
It must also be said that, given [Salvage's] accounts payable
as well as certain legal proceedings, it was not reasonable to
expect that that company would be wound up, but it was
reasonable-in view of the conditions to be met-to expect that
[Salvage] and the appellant would be amalgamated. Although this
last point is not as such the test to be satisfied, it is
important to consider the reasonableness of amalgamation in order
to determine the reasonableness of winding-up or
dissolution. The fact that amalgamation is simpler than
winding-up means that it was not reasonable to expect that
[Salvage] would be wound up. A reasonable person would not choose
a path that is full of pitfalls but would choose the path that is
the simplest and most direct way to reach the desired goal and
the one that does not involve any obligation to pay the
debts.
[32] I find
it very difficult to follow the logic of this statement. How
could the existence of accounts payable have been more of an
obstacle-or at least a factor unfavourable-to the
winding-up of Salvage than to its amalgamation with
Management? If the two corporations had amalgamated, the
resulting corporation would have become the debtor as regards all
the accounts payable of the amalgamating corporations. The
amalgamated corporation would also have been subject to any legal
proceedings that could have been brought against the amalgamating
corporations. It therefore seems to me that the existence of
accounts payable and possible legal proceedings was an
unfavourable factor in the case of both winding-up and
amalgamation.
[33] Whether
it was decided to wind up Salvage or to amalgamate it with
Management, it would have first been necessary to determine the
extent of any liabilities to which Management and the directors
of Salvage may have been subject. On April 30, 1994, I
think that it was reasonable to expect that the threats of legal
proceedings would not be carried out and that they were not a
serious impediment to either winding-up or amalgamation. It
was necessary to be cautious and to wait for time to do its work.
It would have been possible, if necessary, to negotiate the
settlement of the disputable debts. The fact that things ironed
themselves out and that it became possible to amalgamate the
corporations confirms, after the event, the reasonableness of
this assessment. What remains to be determined is whether the
best way to proceed was through winding-up or
amalgamation.
[34] It
seems that Management could have hoped to obtain the double tax
benefit by winding up Salvage. One way to be able to deduct the
ABIL provided for in section 39 of the Act was to meet all the
conditions set out in subparagraph 50(1)(b)(iii). One
of those conditions was that it had to be reasonable to expect
that the corporation would be wound up or dissolved. A taxpayer
that had been given good advice would certainly have concluded
that it was more advantageous to wind up or dissolve Salvage than
to amalgamate it with Management, even if doing so could have
been a little more costly. By winding up or dissolving Salvage,
Management could have hoped to have the best of both worlds, that
is, to be able to deduct the ABIL incurred with respect to the
shares it owned in Salvage and then to be able to deduct the
business losses incurred by Salvage itself.
[35] This
conclusion is not changed by the fact that Mr. St-Onge said
he did not intend to wind up Salvage or the fact that
amalgamation is what subsequently occurred. It must be recalled
that what is being applied here is an objective test, not a
subjective one. Moreover, Mr. St-Onge seems to have wrongly
believed that winding up or dissolving a corporation meant
evading the payment of its debts. He also seemed to be more
inclined to want to forget the setback he had suffered. It must
be remembered as well that it was not until after the Minister
disallowed the deduction of the ABIL that the amalgamation of
Salvage and Management was contemplated, on the advice of
Management's tax specialist.
[36] Given
the double tax benefit that could be hoped for and the likelihood
that the disputable debts owing by Salvage could be settled in a
satisfactory manner, it was reasonable to expect on
April 30, 1994, that Salvage would end up being dissolved or
wound up. In my opinion, the condition set out in
clause 50(1)(b)(iii)(D) of the Act has been met
here.
[37] Before
finishing, I would like to comment on two aspects of the
Minister's assessments that, in my view, have been
sidestepped. First of all, certain pieces of evidence lead me to
doubt that Salvage actually issued all of its shares. According
to Salvage's financial statements as at December 31, 1993,
its issued and paid-up capital was $186,010. However, an
analysis of the account showing the advances made to Salvage by Management reveals
that the balance as at April 30, 1994, was $196,809.05. Two
entries (probably amounts paid to Salvage's suppliers) were
added to that amount by hand, resulting in a new balance of
$200,824.05. Beside that figure is the following handwritten
annotation, which may have been added later: [TRANSLATION]
"advances on shares to be issued". Those shares were
thus apparently issued, if they were in fact issued, not only
after Salvage abandoned its salvage project in September 1993 but
also after April 30, 1994. It is therefore
likely that, on April 30, 1994, Management claimed a deduction
for an ABIL on shares that, in whole or in part, had not been
issued. However, since the
Minister assessed Management on the basis that 186,010 shares had
been issued as at December 31, 1993, for consideration of
$186,010, I cannot blame Management for not adducing evidence
that the shares were in fact issued. Accordingly, the shares must
be considered to have been issued.
[38] Second,
I am by no means certain that Management has met the condition
set out in clause 50(1)(b)(iii)(A), namely that Salvage
had to be an insolvent corporation on April 30, 1994. Indeed,
even though that corporation was running a deficit at that time,
Mr. St-Onge and Management, who both controlled Salvage,
always intended to ensure that it paid all its creditors.
Management's intention was to finance all of Salvage's
financial requirements. The agreement of May 25, 1993,
states that Salvage had agreed to issue 265,000 class D shares.
According to Salvage's financial statements, only 180,000
shares of that class were issued and the negative
shareholders' equity was only $25,192. It is therefore
reasonable to think that Management's intention was to
provide the funds needed to pay all of Salvage's creditors by
subscribing for shares. It can even be seen that it would not
even have been necessary to issue all of the 265,000 class D
shares to pay the last of Salvage's debts.
[39] To this
must be added the circumstances surrounding the financing of
Salvage. Management generally provided Salvage with the funds it
needed to pay its suppliers. If one is to go by the agreement of
May 25, 1993, the money was first advanced as a loan and later
converted into shares. That agreement also indicates that Salvage
had agreed to issue 265,000 class D shares. It would have been
interesting to determine whether Management had formally
undertaken to subscribe for them. In any event, Salvage's
situation could perhaps have been more appropriately described as
being that of a corporation in a deficit position or lacking
adequate financing rather than that of an insolvent corporation.
Determining whether a person is insolvent is a question of mixed
fact and law, and the determination could have been made using an
approach similar to the one I adopted in Flexi-Coil Ltd.
v. Canada, [1995] T.C.J. No. 1558 ([1996]
1 C.T.C. 2941) (affirmed by the Federal Court of Appeal,
[1996] F.C.J. No. 811 ([1996] 3 C.T.C. 57,
96 DTC 6350)).
[40]
However, this question was never raised either in the
respondent's pleadings or at the hearing. The facts set out
in the Reply to the Notice of Appeal, which the Minister relied
on in making his assessment, make no reference to Salvage's
solvency status. No application was made to amend the Reply to
the Notice of Appeal. The argument related only to the issue of
whether it was reasonable to expect on April 30, 1994, that
Salvage would be dissolved or wound up. According to the case law
concerning the burden of proof, what a taxpayer must do is
demolish the facts on which the Minister relied in making his
assessment. If the Minister did
not state a relevant fact in his Reply to the Notice of Appeal,
it is difficult to criticize the taxpayer for not having
demolished it. It would therefore be totally inappropriate to
dismiss Management's appeal on the basis of its
solvency.
Management's additional expenses
[41] As
regards the $36,915.17 in additional expenses that
Management is seeking to deduct in computing its own business
income, I conclude that Management has failed to discharge its
burden of showing that they were expenses it incurred for the
purpose of earning such income. First of all, I do not think that
Management ever undertook the salvage project. It must be
recalled that Mr. St-Onge said that he used a new
corporation every time he started a new business. Salvage was
incorporated on May 18, 1993, scarcely more than a few days after
the first outlays made on April 29, 1993.
[42]
Moreover, the additional expenses are all expenses that were
incurred after Salvage's incorporation, with the exception of
the $22,201.12 that appears in Exhibit A-5 as the
"balance as at April 30, 1993". Since that amount
corresponds to the penny to the amount paid to the Caisse
populaire for interest on the ship loan, and since there are not
really any other expenses that were incurred before
May 18, 1993, aside from the $11,400 paid for the
diesel fuel, it must be concluded that the $22,201.12 represents
interest on the ship loan. Still, Management was not the borrower
but merely the surety. It was therefore entitled to repayment of
that amount.
[43]
Furthermore, Management apparently later considered that
$22,201.12 to be an advance to Salvage. Note 8 to
Management's balance sheet as at April 30, 1993,
states that $22,201 was advanced to Salvage. Adjusting entries
found in Exhibit A-6 also confirm that accounting treatment
of an amount of $22,201.12. We must recognize the obvious, namely
that Management viewed the interest expense of
$22,201.12 not as one of its expenses but rather as an
advance to Salvage-just like the other advances made to
Salvage-and as one of Salvage's expenses. According to the
agreement of May 25, 1993, that advance was even converted into
class D shares. The amount is therefore part of the BIL of
$186,010. It follows, therefore, that Management's argument
with respect to that amount is clearly unfounded. It cannot be
treated as an expense incurred by Management to earn business
income.
[44] The
other additional expenses were all incurred after Salvage was
incorporated. Even if those amounts were paid directly by
Management to Salvage's suppliers, they cannot be considered
to have been incurred by Management for the purpose of gaining or
producing income from a business since, at the same time, the
salvage business was being carried on by Salvage. Rather, they
must be viewed as amounts paid by Management on Salvage's
behalf and, accordingly, as advances to Salvage, just like the
other amounts paid directly to that corporation. When the
advances became uncollectible, Management incurred a capital
loss. However, that loss does not allow it to benefit from the
application of the more advantageous BIL scheme.
[45] For
these reasons, Management's appeals are allowed with costs
and the assessments for the 1992, 1993, 1994 and 1995 taxation
years are referred back to the Minister for reconsideration and
reassessment on the basis that Management incurred a BIL of
$186,010 in 1994.
Signed at
Ottawa, Canada, this 18th day of April 2001.
J.T.C.C.
Translation certified
true on this 18th day of November 2002.
Erich Klein,
Revisor
[OFFICIAL
ENGLISH TRANSLATION]
98-1750(IT)G
BETWEEN:
JACQUES
ST-ONGE INC.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on June 21, 2000, at New Carlisle, Quebec, by
the
Honourable Judge Pierre Archambault
Appearances
Counsel
for the
Appellant:
William Assels
André
Lévesque
Counsel
for the
Respondent:
Valérie Tardif
JUDGMENT
The appeals from the assessments
made under the Income Tax Act for the 1992, 1993, 1994 and
1995 taxation years are allowed, with costs, and the assessments
are referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the
appellant incurred a
business investment loss of $186,010 in 1994.
Signed at
Ottawa, Canada, this 18th day of April 2001.
J.T.C.C.
Translation certified
true on this 18th day of November 2002.
Erich Klein,
Revisor
[OFFICIAL
ENGLISH TRANSLATION]
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