Aylward Estate v. The Queen, docket 98-2015-IT-G

Date: 20010613

Docket: 98-2015-IT-G

BETWEEN:

ESTATE OF THE LATE FABIAN AYLWARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan, J.

[1]            The late Fabian Aylward died suddenly in 1996. Prior to his death, he had resided in St. Lawrence, Newfoundland. At all relevant times, Mr. Aylward owned 80% of the issued shares of Provincial Tire Limited ("Provincial Tire"). A second corporation, also controlled by Mr. Aylward, had guaranteed certain debts of Provincial Tire. When Provincial Tire was not able to pay its debts, the second corporation was sued by two creditors of Provincial Tire relying on the guarantees. In 1994, Mr. Aylward personally paid a total of $305,000 to the two creditors of Provincial Tire on account of the guarantees given by the second corporation. In his 1994 income tax return, Mr. Aylward claimed a business investment loss (pursuant to paragraph 39(1)(c) of the Income Tax Act) equal to the $305,000 which he had paid to the two creditors of Provincial Tire. By notice of reassessment, the Minister of National Revenue disallowed the $305,000 as a business investment loss. The executors of Mr. Aylward's estate have appealed that reassessment. Only the 1994 taxation year is under appeal.

[2]            At the hearing of this appeal, the parties filed as exhibits two binders of common documents which were marked as Exhibits A-1 to A-44. Also filed as Exhibit A-45 is a schematic diagram showing the corporations controlled by Mr. Aylward and the minority shareholders of those corporations. I will rely on Exhibit A-45 to describe briefly Mr. Aylward's corporate empire in the relevant years 1988 to 1994. Aylward's (1975) Limited was the dominant holding company used by Mr. Aylward to hold controlling interests in four other corporations each of which carried on at least one active business. I shall refer to Aylward's (1975) Limited as "Holdco". Mr. Aylward owned 50.1% of the common shares of Holdco. His three brothers Gerard, Fintan and Gordon owned the remaining 49.9% of the common shares in unequal portions. Holdco owned common shares in four subsidiary companies in the following percentages:

                                                Aylward's Marystown Limited                           66 2/3%

                                                Aylward's Construction Limited         100%

                                                Aylward's Properties Limited                              100%

                                                Aylward's Limited                                                                 100%

[3]            Aylward's Marystown Limited owned and operated a motel at Marystown, Newfoundland. Aylward's Construction Limited carried on a general construction business installing water and sewer services. Aylward's Properties Limited operated three hotels or motels in the St. John's area but the real estate (land and buildings) was owned by and leased from Holdco. Aylward's Limited owned and operated a grocery supermarket and a Home Hardware store. Fabian Aylward could not, of course, testify but relevant evidence concerning his businesses was given by Jeffrey Pardy, a chartered accountant who is a partner in the firm of accountants who audit and prepare financial statements for the Aylward group of companies. Mr. Pardy knew Mr. Aylward for about 20 years preceding his death in 1996. All of the companies in the Aylward group were incorporated under the laws of Newfoundland.

[4]            Mr. Aylward was very enterprising as indicated by the businesses carried on within the Aylward group of companies. Mr. Pardy described Mr. Aylward as tough, practical and honest. He operated in a somewhat rough and tumble way. At the end of each year, Mr. Pardy and his associates required many hours to sort out the activities within the Aylward group, allocating expenses and newly acquired assets to the appropriate corporation, and separating Mr. Aylward's personal affairs from his business affairs.

[5]            Provincial Tire was a corporation standing apart from the Aylward group of companies. The common shares of Provincial Tire were owned 80% by Mr. Aylward and 20% by Scott Sharron (a person not related to Mr. Aylward). None of the minority shareholders of Holdco owned any shares in Provincial Tire which was incorporated in February 1988 to carry on the business of retailing tires, both regular road tires and large off-road construction type tires. Provincial Tire's first location was at Grand Falls, Newfoundland but it later expanded to Corner Brook, Marystown and St. John's. Provincial Tire had financial problems and ceased carrying on business sometime in the period April/May 1992. At that time, it owed significant amounts to its three principal suppliers: $359,000 owing to General Tire Canada Inc.; $150,000 owing to Toyo Tire Canada Ltd.; and $20,000 owing to Michelin Tires (Canada) Limited. For convenience, I shall refer to those three creditors as General Tire, Toyo Tire and Michelin, respectively.

[6]            When Provincial Tire started business in 1988 and sought credit from its principal suppliers, those suppliers asked Mr. Aylward for a personal guarantee supported by his personal balance sheet. Mr. Pardy recalls being asked by Mr. Aylward in 1988 to prepare a personal balance sheet on short notice. Mr. Pardy knew that such a balance sheet would be complicated because of Mr. Aylward's extensive business assets and obligations and told him that it would take two weeks to prepare. When Mr. Aylward heard about the two-week delay, he told Mr. Pardy not to bother without ever telling Mr. Pardy why he had asked for the personal balance sheet. Unbeknownst to Mr. Pardy, Mr. Aylward caused Aylward's Limited to issue two guarantees. Aylward's Limited guaranteed the liabilities of Provincial Tire to General Tire and to Toyo Tire. Michelin accepted Mr. Aylward's personal guarantee without seeing his personal balance sheet.

[7]            Provincial Tire was in desperate financial circumstances in the spring of 1992. Exhibit A-23 consists of two letters dated May 29, 1992 written by the law firm representing Toyo Tire addressed to Provincial Tire and to Aylward's Limited, respectively, demanding payment of $150,005.83. Exhibit A-32 consists of two letters dated January 25, 1993 written by the law firm representing General Tire addressed to Provincial Tire and to Aylward's Limited, respectively, demanding payment of $438,664.52. It is admitted in the pleadings that Mr. Aylward settled these claims of General Tire and Toyo Tire for a total agreed amount of $527,500 to be paid by him in instalments. Of this amount, Mr. Aylward paid $305,000 in 1994; and it is the amount paid ($305,000) which is the basis of his claim to a "business investment loss" in 1994.

[8]            In addition to the aggregate amount of $305,000 paid to General Tire and Toyo Tire in 1994, Mr. Aylward also paid $20,000 in 1994 to Michelin with respect to the personal guarantee he had delivered for the debts of Provincial Tire. The Minister of National Revenue has accepted and allowed a business investment loss with respect to the $20,000 which Mr. Aylward paid to Michelin in 1994. It is only the $305,000 which is in dispute.

[9]            A "business investment loss" is defined in paragraph 39(1)(c) of the Income Tax Act. The relevant parts of paragraph (c) are:

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)           ...

(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)            ...

or

(C)            ...

exceeds the total of

...

(viii)         the amount determined in respect of the taxpayer under subsection (9) or (10), as the case may be.

The definition of "small business corporation" in subsection 248(1) contains a specific provision which, for the purpose of paragraph 39(1)(c), extends for a period of 12 months the time when a corporation will be regarded as a small business corporation. Similarly, subsection 39(12) may extend for a period of 12 months the time when a corporation will be regarded as a small business corporation for the purpose of paragraph 39(1)(c). I infer from these statutory provisions that Parliament is attempting to expand the area within which a business investment loss may be claimed.

[10]          The Appellant's claim to a business investment loss is based on the following propositions: (i) by paying Provincial Tire's debts to General Tire and Toyo Tire, Mr. Aylward became subrogated to the rights of those two creditors against Provincial Tire; (ii) any debts owing by Provincial Tire to Mr. Aylward as a result of such subrogation became bad debts in 1994; (iii) subsection 50(1) of the Income Tax Act applied to the bad debts of Provincial Tire in 1994 and so Mr. Aylward was deemed to have disposed of his two bad debts for proceeds equal to nil; and (iv) at all relevant times, Provincial Tire was a Canadian-controlled private corporation which was a small business corporation. There are some problems with the Appellant's claim to the business investment loss because Mr. Aylward did not personally guarantee the debts of Provincial Tire to General Tire or Toyo Tire; he did not have a personal liability to those two creditors; and his payments to those two creditors may have been a voluntary action. Also, there is some question as to when Provincial Tire ceased to be a small business corporation.

[11]          On balance, for the reasons set out below, I am inclined to the view that Mr. Aylward satisfied the conditions in paragraph 39(1)(c), and that he had a business investment loss of $305,000 in 1994. There is no doubt that Mr. Aylward (the 80% shareholder of Provincial Tire) caused Aylward's Limited to guarantee Provincial Tire's debts to General Tire and Toyo Tire. According to Mr. Pardy's evidence, this action by Mr. Aylward was typical of his pragmatic and efficient management methods in which he was not concerned with legal niceties. He would not have stopped to consider that he owned only 50.1% of Holdco; that Holdco owned 100% of Aylward's Limited; and that the minority shareholders of Holdco did not own any shares in Provincial Tire. In terms of fairness, Aylward's Limited should not have guaranteed any debts of Provincial Tire because the two corporations did not have common shareholders and Aylward's Limited did not receive any compensation for the guarantees.

[12]          The two guarantees to General Tire and Toyo Tire were not known to anyone but Mr. Aylward until the spring of 1992 when Provincial Tire was on the brink of insolvency. When the guarantees became known, Mr. Pardy and his accounting firm were shocked because they had issued audited statements for Aylward's Limited in 1990 and 1991 without any reference to the guarantees; and the Bank of Nova Scotia was concerned because of the loans made to Aylward's Limited on the basis of its audited statements. Mr. Pardy stated that Mr. Aylward's failure to tell anyone about the guarantees was not a reflection on his honesty. He would not have thought that the guarantees were important so long as Provincial Tire was operating. The two guarantees became common knowledge at a meeting around April 8, 1992 attended by Mr. Aylward, Mr. Pardy and representatives of the Bank. Mr. Aylward immediately said that he would personally assume responsibility for the guarantees.

[13]          Appellant's counsel argued that Mr. Aylward did not have any choice because he had an obligation to indemnify Aylward's Limited from the time when he caused that corporation to guarantee the debts of Provincial Tire. In Leigh v. Dickson, (1884) 15 Q.B.D. 60, Brett, M.R. stated at page 64:

... If money has been expended at the express request of another, an action will lie at the suit of the person expending it against the person pursuant to whose request it has been expended. ... But the law has gone further; it has been laid down that if one person has requested another to do an act which will cost him money, that is, which will expose him to a legal liability to pay money, the law will imply a promise on the part of the person making the request to indemnify the other for the expenditure to which he has been subjected. ...

Similarly, in Birmingham and District Land Company v. London and North Western Railway Company, (1886) 34 ch. Div 261, Cotton L.J. stated at page 273:

... if A. requests B. to do a thing for him, and B. in consequence of his doing that act is subject to some liability or loss, then in consequence of the request to do the act the law implies a contract by A. to indemnify B. from the consequence of his doing it. In that case there is not an express but an implied contract to indemnify the party for doing what he does at the request of the other. ...

As a consequence of Mr. Aylward's obligation to indemnify Aylward's Limited, the liabilities of Aylward's Limited under the guarantees were in substance his own liabilities; and he recognized this after the meeting with Mr. Pardy and representatives of the Bank on April 8, 1992.

[14]          Exhibit A-36 is an assumption agreement made effective December 31, 1993 between Aylward's Limited and Fabian Aylward in which the corporation assigned to Mr. Aylward all of its obligations under the guarantees to General Tire and Toyo Tire; and he accepted the assignment of such obligations. I should have thought that the parties to Exhibit A-36 needed the consent and release of the two creditors to whom the guarantees were first given before the assignment of obligations would be effective, but the agreement does refer to the fact that each creditor had agreed to accept a fixed sum in full satisfaction of its claim against the guarantor (Aylward's Limited). Mr. Aylward was acting in accordance with the terms of Exhibit A-36 when he paid the $305,000 in 1994 to General Tire and Toyo Tire.

[15]          Appellant's counsel also argued that Mr. Aylward was subject to an "oppression remedy" in the hands of the minority shareholders of Holdco, none of whom owned any share in Provincial Tire. The Newfoundland Corporations Act provides for such a remedy (sections 368 to 373) where a majority shareholder has taken advantage of his control to the detriment of minority shareholders. I do not doubt that an oppression remedy exists in corporate law but, in the circumstances of this case, the minority shareholders of Holdco did not suffer any detriment; and so they did not have to seek any remedy. Any such remedy would have required an action commenced by the minority shareholders. Mr. Aylward would have had a number of defences, probably including "consent" having regard to the fact that all minority shareholders of Holdco were related to him. In my opinion, the oppression remedy argument is too imprecise and too remote to be of any value in this case.

[16]          After Mr. Aylward caused Aylward's Limited to deliver its guarantees to General Tire and Toyo Tire, there was under common law an implied contract requiring him to indemnify Aylward's Limited with respect to those guarantees. Mr. Aylward's actual payments to General Tire and Toyo Tire in 1994 were made in accordance with that implied contract. Having made the total payments of $305,000 to those two creditors, he was subrogated to their rights against Provincial Tire. Black's Law Dictionary, Sixth Edition (1990) page 1427, describes subrogation as follows:

The substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities. Gerken v. Davidson Grocery Co., 57 Idaho 670, 69 P.2d 122, 126. Subrogation denotes the exchange of a third person who has paid a debt in the place of the creditor to whom he has paid it, so that he may exercise against the debtor all the rights which the creditor, if unpaid, might have done. Subrogation appears commonly in construction contracts, insurance contracts, suretyship, and negotiable instrument law. Insurance companies, guarantors and bonding companies generally have the right to step into the shoes of the party whom they compensate and sue any party whom the compensated party could have sued.

[17]          Following Mr. Aylward's payments to General Tire and Toyo Tire, Provincial Tire was indebted to him in the amount of $305,000. Having regard to Provincial Tire's insolvency, its debt of $305,000 to Mr. Aylward was a bad debt in 1994. Under subsection 50(1) of the Income Tax Act, Mr. Aylward was deemed to have disposed of that bad debt for proceeds equal to nil. Accordingly, Mr. Aylward suffered a capital loss of $305,000 in 1994 unless that loss was denied to him by some other provisions of the Act. Specifically, subparagraph 40(2)(g)(ii) stated:

40(2)        Notwithstanding subsection (1),

                ...

(g)            a taxpayer's loss, if any, from the disposition of a property, to the extent that it is

(i)             ...

(ii)            a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length,

...

is nil;

[18]          In order to avoid the "nil loss" consequence in subparagraph 40(2)(g)(ii), the debt must have been acquired for the purpose of gaining or producing income from a business or property. Mr. Aylward's 80% shares in Provincial Tire were property. Also, the guarantees which were delivered to General Tire and Toyo Tire soon after Provincial Tire commenced business were delivered for the purpose of earning income from property (i.e. Mr. Aylward's shares in Provincial Tire). Mr. Aylward's payments in 1994 were made as a consequence of the guarantees but at a time when it was no longer possible to earn income from his shares in Provincial Tire. In Easton and Freeman v. The Queen, 97 DTC 5464, the Federal Court of Appeal held that an amount paid by a shareholder to honour a guarantee which he had delivered on behalf of his company was an outlay on capital account. Robertson J.A. stated as page 5468:

As a general proposition, it is safe to conclude that an advance or outlay made by a shareholder to or on behalf of the corporation will be treated as a loan extended for the purpose of providing that corporation with working capital. In the event the loan is not repaid the loss is deemed to be of a capital nature for one of two reasons. Either the loan was given to generate a stream of income for the taxpayer, as is characteristic of an investment, or it was given to enable the corporation to carry on its business such that the shareholder would secure an enduring benefit in the form of dividends or an increase in share value. As the law presumes that shares are acquired for investment purposes it seems only too reasonable to presume that a loss arising from an advance or outlay made by a shareholder is also on capital account. The same considerations apply to shareholder guarantees for loans made to corporations. ...

[19]          In The Queen v. Byram, 99 DTC 5117, the Federal Court of Appeal held that certain interest-free loans made by a shareholder to his company could result in a capital loss and also avoid the "nil loss" consequences in subparagraph 40(2)(g)(ii). McDonald J.A. stated at pages 5120-5121:

The language of section 40 is clear. The issue is not the use of the debt, but rather the purpose for which it was acquired. While subparagraph 40(2)(g)(ii) requires a linkage between the taxpayer (i.e. the lender) and the income, there is no need for the income to flow directly to the taxpayer from the loan.

...

The ultimate purpose of a parent company or a significant shareholder providing a loan to a corporation is, without question, to facilitate the performance of that corporation thereby increasing the potential dividends issued by the company. ...

There is a growing body of jurisprudence that considers current corporate reality as being sufficient to demonstrate that the expectation of dividend income justifies a capital loss deduction under subparagraph 40(2)(g)(ii). ...

The shareholders of a company are directly linked to that corporation's future earnings and its payment of dividends. Where a shareholder provides a guarantee or an interest free loan to that company in order to provide capital to that company, a clear nexus exists between the taxpayer and the potential future income. Where a loan is made for the purpose of earning income through the payment of dividends, this connection is sufficient to satisfy the purpose requirement of subparagraph 40(2)(g)(ii).

[20]          In National Development Ltd. v. The Queen, 94 DTC 1062, this Court was concerned with a loss suffered by a "corporate shareholder parent" when it paid an amount to the subsidiary's creditor and thereafter became subrogated to the creditor's rights against the subsidiary. The corporate shareholder parent claimed a capital loss with respect to the amount ($951,177) of its subrogated claim against the subsidiary. Judge Bell of this Court held that the taxpayer's right to receive the amount $951,177 from the subsidiary (by subrogation) following the taxpayer's payment of that amount to the subsidiary's creditor related back to the time when that amount was pledged to the creditor. Judge Bell also held that the taxpayer had suffered a capital loss which was not reduced to nil by subparagraph 40(2)(g)(ii).

[21]          By parallel reasoning, I conclude that the payments to General Tire and Toyo Tire, made by Mr. Aylward in 1994, relate back to the time when the two guarantees were first given and the later time when those two creditors demanded payment from Provincial Tire (as debtor) and from Aylward's Limited (as guarantor). The capital loss incurred by Mr. Aylward in 1994 upon his payment of the $305,000 was not reduced to nil by subparagraph 40(2)(g)(ii). It is necessary, however, to consider the status of Provincial Tire as a Canadian-controlled private corporation and a small business corporation.

[22]          At all relevant times, Mr. Aylward was resident in Canada and he owned 80% of the issued shares of Provincial Tire. Therefore, Provincial Tire was a Canadian-controlled private corporation within the meaning of subsection 125(7) of the Income Tax Act. A "small business corporation" is defined as follows in subsection 248(1) of the Act:

"small business corporation" , at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are

(a)            used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,

(b)            shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a "payer corporation" within the meaning of that subsection), or

(c)            assets described in paragraphs (a) and (b),

including, for the purpose of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation, and, for the purpose of this definition, the fair market value of a net income stabilization account shall be deemed to be nil;

For the purposes of this case, it is important to note that a small business corporation is defined with reference to "any particular time". Having regard to Provincial Tire, all or substantially all of the fair market value of its assets "at that time" must have been used principally in an active business carried on primarily in Canada. According to the evidence, Provincial Tire carried on business from 1988 to 1992 only in Newfoundland; and all of its assets were used in the business of retailing tires. Therefore, I find that Provincial Tire carried on an active business only in Canada and that it did not own any assets which were not used in that active business.

[23]          The definition contains a specific reference to paragraph 39(1)(c) and, for that purpose, includes a corporation which was at any time in the 12 months preceding "that time" a small business corporation. When the status of Provincial Tire as a small business corporation must be determined on a particular day, it can qualify if it was a small business corporation at any time in the 12 months preceding that day. According to the evidence, Provincial Tire actually carried on business until some time in April or May 1992 when its business terminated. Therefore, it may be regarded as a small business corporation at any time up to April or May 1993 under the definition in subsection 248(1).

[24]          Subsection 39(12) is aimed specifically at a business investment loss and it deals with an amount paid under a guarantee in respect of a corporate debt.

39(12)      For the purpose of paragraph (1)(c), where

(a)            an amount was paid by a taxpayer in respect of a debt of a corporation under an arrangement under which the taxpayer guaranteed the debt,

(b)            the amount was paid to a person with whom the taxpayer was dealing at arm's length, and

(c)            the corporation was a small business corporation

(i)             at the time the debt was incurred, and

(ii)            at any time in the 12 months before the time an amount first became payable by the taxpayer under the arrangement in respect of a debt of the corporation,

that part of the amount that is owing to the taxpayer by the corporation shall be deemed to be a debt owing to the taxpayer by a small business corporation.

In my view, Mr. Aylward has satisfied the condition in paragraph (a) because his common law obligation (i.e. an implied contract) to indemnify Aylward's Limited means that, in substance, he guaranteed Provincial Tire's debts to General Tire and Toyo Tire. Alternatively, after April 8, 1992 he acknowledged to all concerned parties that he personally would pay Provincial Tire's debts to those two creditors. This acknowledgement was confirmed in the assumption agreement (Exhibit A-36) effective December 31, 1993. The actual payments in 1994 were made in accordance with Mr. Aylward's common law obligation and the terms of the assumption agreement. Mr. Aylward easily satisfied the conditions in paragraph (b) because he was always at arm's length with General Tire and Toyo Tire.

[25]          Under paragraph (c), it is necessary to ask when an amount first became payable by Mr. Aylward under the arrangement which included the guarantees given by Aylward's Limited to General Tire and Toyo Tire. Mr. Aylward had a common law obligation to indemnify Aylward's Limited as soon as he caused that company to deliver guarantees to General Tire and Toyo Tire but his obligation was only a contingent liability so long as Provincial Tire was solvent and in business. I would not conclude that any amount "became payable" by Mr. Aylward upon the delivery of the guarantees. In paragraph 7 above, I have described letters written by two law firms representing Toyo Tire and General Tire, respectively, demanding payment from Provincial Tire (as debtor) and Aylward's Limited (as guarantor).

[26]          The letters demanding payment to Toyo Tire (Exhibit A-23) are dated May 29, 1992. In my opinion, that is the time when an amount first became payable by Mr. Aylward under the Toyo Tire guarantee. The letters demanding payment to General Tire (Exhibit A-32) are dated January 25, 1993. In my opinion, that is the time when an amount first became payable by Mr. Aylward under the General Tire guarantee. Under paragraph (c), the question is whether Provincial Tire was a small business corporation at any time in the 12 months before the time an amount first became payable. According to the evidence, Provincial Tire was carrying on business until some time in April or May 1992. Therefore, it was carrying on business within 12 months of May 29, 1992 and January 25, 1993. I therefore conclude that Provincial Tire was a small business corporation within 12 months of the time when amounts first became payable by Mr. Aylward under the arrangement which included the guarantees to General Tire and Toyo Tire. Accordingly, Mr. Aylward has satisfied the conditions in paragraph (c).

[27]          If the conditions in paragraphs (a), (b) and (c) are satisfied, subsection 39(12) provides that the amount that is owing to the taxpayer by the corporation is deemed to be a debt owing by a small business corporation. Applying the terms of subsection 39(12) to the facts of this case, because Mr. Aylward has satisfied the conditions in paragraphs (a), (b) and (c), the amount of $305,000 that was owing to him in 1994 by Provincial Tire (after his payment of $305,000 to General Tire and Toyo Tire) is deemed to be a debt owing to Mr. Aylward by a small business corporation.

[28]          Returning to the definition of "business investment loss" in paragraph 39(1)(c) of the Act, I find that the Appellant has satisfied all of the conditions to qualify Mr. Aylward as having had a business investment loss of $305,000 in 1994. First, there was a debt of $305,000 owing to Mr. Aylward by Provincial Tire following his payment of $305,000 in 1994 to General Tire and Toyo Tire. Second, that debt became a bad debt in 1994 to which subsection 50(1) applied. Third, Mr. Aylward suffered a capital loss of $305,000 pursuant to the application of subsection 50(1). And fourth, Provincial Tire was at all relevant times a Canadian-controlled private corporation and a small business corporation.

[29]          The Respondent's counsel, in his notes of argument, submitted that, because Provincial Tire had ceased carrying on business on May 7, 1992, "it was not a small business corporation in 1994 when Fabian Aylward paid the indebtedness (to General Tire and to Toyo Tire) nor was it a small business corporation within the previous 12 months". This argument is not consistent with the decision by Revenue Canada on April 20, 1998 to allow a business investment loss with respect to the $20,000 paid in 1994 by Fabian Aylward to Michelin. See paragraphs 10 and 14 in the Notice of Appeal, both admitted in the Reply concerning the payment to Michelin. Revenue Canada must have relied on the provisions of subsection 39(12) to allow a business investment loss with respect to the $20,000 paid to Michelin because that subsection is concerned primarily with a payment by a person in respect of a debt of a corporation in circumstances under which the person guaranteed the debt. See paragraph 39(12)(a) in paragraph 24 above.

[30]          Admittedly, the Michelin guarantee was given directly and personally by Mr. Aylward, quite different from the guarantees given to General Tire and Toyo Tire. That distinguishing fact, standing alone, would not permit Mr. Aylward to have a business investment loss with respect to the $20,000 paid to Michelin unless he could satisfy all of the conditions in subsection 39(12). Mr. Aylward could satisfy the condition in subparagraph 39(12)(c)(ii) only if Michelin demanded payment from him on his guarantee sometime in the 12 months following May 7, 1992 when Provincial Tire ceased carrying on business. That is precisely the same basis on which I have found that Mr. Aylward satisfied the condition in subparagraph 39(12)(c)(ii) with respect to the guarantees given to General Tire and Toyo Tire.

[31]          Toyo Tire demanded payment on May 29, 1992. See Exhibit A-23. General Tire demanded payment of January 25, 1993. See Exhibit A-32. Both dates are within the 12 months following May 7, 1992 when Provincial Tire ceased carrying on business. The Minister of National Revenue and Revenue Canada are not estopped by their decision to allow a business investment loss with respect to the $20,000 paid to Michelin, but they ought to be consistent in their interpretation and application of subsection 39(12).

[32]          The appeal is allowed, with costs, and the assessment for 1994 is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Mr. Aylward had a business investment loss (within the meaning of paragraph 39(1)(c) of the Act) of $305,000 in 1994 as a consequence of his payments to General Tire and Toyo Tire.

Signed at Ottawa, Canada, this 13th day of June, 2001.

"M.A. Mogan"

J.T.C.C.

COURT FILE NO.:                                                 98-2015(IT)G

STYLE OF CAUSE:                                               Estate of the late Fabian Aylward and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         St. John's, Newfoundland

DATE OF HEARING:                                           June 19 and 20, 2000

REASONS FOR JUDGMENT BY:      The Honourable Judge M.A. Mogan

DATE OF JUDGMENT:                                       June 13, 2001

APPEARANCES:

Counsel for the Appellant: Edwin C. Harris, Q.C.

Counsel for the Respondent:              Peter J. Leslie and Dominique Gallant

COUNSEL OF RECORD:

For the Appellant:                

Name:                      James R. Chalker, Q.C.

Firm:                        Chalker Green & Rowe

Name:                      Edwin C. Harris, Q.C.

Firm:                        Daley, Black & Moreira

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

98-2015(IT)G

BETWEEN:

ESTATE OF THE LATE FABIAN AYLWARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on June 19 and 20, 2000, at St. John's, Newfoundland, by

the Honourable Judge M.A. Mogan

Appearances

Counsel for the Appellant:                    Edwin C. Harris, Q.C.

Counsel for the Respondent:                Peter J. Leslie & Dominique Gallant

JUDGMENT

          The appeal from the assessment of tax made under the Income Tax Act for the 1994 taxation year is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Fabian Aylward had a business investment loss (within the meaning of paragraph 39(1)(c) of the Act) of $305,000 in 1994 as a consequence of his payments to General Tire Canada Inc. and Toyo Tire Canada Ltd.

Signed at Ottawa, Canada, this 13th day of June, 2001.

"M.A. Mogan"

J.T.C.C.