Allen v. The Queen, docket 97-3243-IT-I (Informal Procedure)

Date: 20000515

Dockets: 97-3385-IT-G; 97-3243-IT-I

BETWEEN:

GEORGE RAYMOND ALLEN and HELEN ALLEN

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Amended Reasons for Judgment

Margeson, J.T.C.C.

[1] It was agreed at the outset that these matters would be heard on common evidence and the evidence given in the matter of George Raymond Allen would be considered in the matter of Helen Allen, where applicable.

[2] In the case of the Appellant, Helen Allen, she claimed an Allowable Business Investment Loss, "ABIL" and non-capital losses from other years which were carried back from the 1995 taxation year. The Minister disallowed the ABIL and also disallowed the non-capital losses which were carried back from the 1995 taxation year.

[3] In the case of George Raymond Allen, in computing income for the 1995 taxation year, the Appellant sought to deduct an alleged allowable business investment loss (ABIL) with respect to an entity known as Cloud 9 Enterprises Limited, (“the Company” or “Cloud 9”). The Minister disallowed this alleged allowable business investment Loss.

[4] In both cases the Minister took the position that there was no substantiation for the losses.

Evidence

[5] Mr. George Raymond Allen testified that the allegations made in the Notice of Appeal were correct and in essence he agreed with the Reply to Notice of Appeal except with respect to paragraph 5 which alleged that no substantiation was tendered in support of his claim for the ABIL in issue here. He said that the loss did occur and that it was an allowable business investment loss within the meaning of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.) as amended (the "Act"). He also denied that he was properly assessed as alleged by the Minister in paragraph 8 of the Reply.

[6] He said that Cloud 9 was originally a partnership and was subsequently incorporated by a lawyer. The witness’s brother-in-law, Fred Churchill, had 50% of the shares and his wife Helen Allen had 50% of the shares. Later this was changed to 25% for himself; 25% for Helen Allen and presumably the 50% remained in his brother-in-law. His wife Helen was also the secretary and Fred Churchill was the President as well as being a Director. The financing was provided completely by himself and his wife by borrowing from their life insurance policies, obtaining money through their RRSPs, by obtaining lines of credit and by mortgaging their real estate. This Appellant worked as the Warehouse Manager for the Company and was in charge of receiving, shipping, stock control and also acted as a driver.

[7] The business of the Company was wholesale giftware, toys, crystal and party supplies. Its customers were small convenience stores, hospital gift shops and the area of their operation was Eastern Ontario including Ottawa, Pembroke, Sarnia, Barry and Toronto. It had a staff of six to ten people in addition to Mr. Allen and Fred Churchill. There was an Office Manager. All except the Office Manager were commission sales' people. The place of operation was located at 528 Gordon Baker Road, North York Industrial Unit. George Raymond Allen was at the location five days per week. He was not involved in the day-to-day financing but he would "back them up with money." Mr. Allen “put money in it at the beginning” and this process was ongoing. He “put money in” every week at first. He took out a loan against his real estate for $100,000.00. Whenever the Company needed money his brother-in-law asked for it and Mr. Allen and his wife put more than $300,000.00 into the Company. The money was “put in” by both of them and the house was in both of their names.

[8] Mr. Allen expected to have the return of his money in three to four months and in the first and second year they expected to make 50% profit, particularly at Christmas time. They believed that they had a good staff, his brother-in-law had business experience in the past, having been in sales and having owned his own business and operated successfully. This was a clothing store. Sometimes Mr. and Mrs. Allen made projections approximately every four to five weeks. They never received any money back that they had invested in the Company. During the first part of the summer of 1995, sales dropped off and the business was not receiving orders from stores.

[9] By consent, the parties introduced Exhibit A-1, which was a mortgage on their real estate to support the loan of $100,000.00 to the Bank of Montreal. It was dated December 14, 1994. This money was put into the Cloud 9 account and the whole $100,000.00 was used up.

[10] The witness identified Exhibit A-1 at Tab 4, which was documentation relating to the personal line of credit for $25,000.00. This was supported by George and Helen Allen. It was dated January 29, 1994. The purpose of this loan was to get the business started. It was from Mr. Allen's own account. He used it for Cloud 9 purposes. He wrote cheques on his personal account.

[11] He also identified Exhibit A-1 at Tab 5 which referred to a floating rate business improvement loan dated February 28, 1995 in the amount of $28,765.00. The witness did not seem to know much more about it than that.

[12] He also identified a document at Tab 6 which was a loan for $35,000.00 to the Bank of Montreal. He said that this was supported by a mortgage against the house. The document is dated the 18^th day of March of 1995. All of these funds were invested in the business.

[13] He was also referred to Tab 7 which related to the amount of $15,705.88. He said that it was borrowed by himself and his wife and invested in the business. The money was drawn out against their life insurance policies. The money probably went directly to the business account but it may have gone first into their own account and then into the business account.

[14] The witness was also referred to Tab 8 in reference to an RRSP withdrawal of his own accounts of amounts between $75,000.00 and $76,000.00. He said that he made a withdrawal every two to three weeks. All of this money went into the Company for its purposes.

[15] The witness was referred to Tab 9 which documents confirmed the actions of the bank in calling the loans. The witness said that the house was sold last summer and had a loan against it of $185,584.63. Other monies were invested into the Company as well, such as an advance by his wife for $10,000.00 from her GIC account. Another $10,000.00 was also invested which funds were obtained from the proceeds of an insurance policy.

[16] They received no money back from the Company for advances they had made to keep the business operating. His wife was working at the time. They used her money to live on.

[17] He identified an account at Tab 10 which he said was his wife's account with the National Trust. This was a savings account. He also identified duplicate cheques at Tab 11 and his line of credit which was indicated at Tab 12. He said that all of these were business expenses paid directly by their cheques. They were not personal expenses.

[18] The day-to-day business of the Company was conducted by Fred Churchill and Mr. Fox. They also had a bookkeeper by the name of Terry Placey. They had monthly meetings of the Company. He described the results of the operation as a "massive failure". By December 1995 the Company stopped operating. In March and April of 1995 there was a break even point and they were optimistic. Before that time they had lost money. However, the Company was not generating the sales that they needed to stay in business. The year 1995 turned out to be the worst year in decades in the retail business. This Company was new and they could not "weather the storm". They closed the business.

[19] They were owed amounts by customers. Some of them were collected. Some customers had to close up as well and these accounts were not collectible. They attempted to sell whatever assets remained but could not sell them. The proceeds that were obtained were paid on bills of the Company. They did not go bankrupt. The Company was wound up or dissolved.

[20] The witness believed that the Company filed a tax return for the year 1995. His own income tax return was filed by Terry Placey, the accountant. He calculated the ABIL. He merely added up the total amount that was paid into the Company. This witness obtained a refund from Revenue Canada for $35,000.00 in two or three cheques. All of these monies were paid on the Company bills. The witness indicated that he was still paying off some debts for the Company.

[21] In cross-examination the witnesses was referred to Exhibit R-1 in the Respondent's Book of Documents. He identified his return at Tab 4 in which he claimed $155,000.00 as an ABIL. He was also referred to the questionnaire at Tab 5. He did not fill it out.

[22] He was also shown letters at Tabs 6 and 7 requesting information and he admitted that he had not provided the information but he did send in the information referred to in Tabs 8, 9, 10 and 11.

[23] The Exhibit at Tab 13 was his Notice of Objection. It referred to records that they were going to send in and did not. With respect to the entity in question, he said that Cloud 9 was originally a partnership operating on a small scale since 1993. The partners were himself, his wife and his brother-in-law. Again he identified Exhibit R-1, Tab 2 which was a 1993 income tax return showing that he had no income.

[24] Cloud 9 operated as a Limited Company since October 20, 1994. Some assets were transferred over into the Company from the partnership. There was no payment for these assets. The Company purchased a Nissan motor vehicle and a van and they were paid for by the Appellant.

[25] He was referred to Exhibit A-1 at Tab 1 and said that Fred Churchill and Helen Allen were shareholders. He was asked what document showed that he had a 25% interest in the Company and he said that there were none there. They decided to expand from the house and go bigger. They discussed business plans with Fred Churchill. They had to show the bank that they had a good plan in order to obtain loans.

[26] He agreed with the contents of Exhibit A-1 at Tab 12, the last page. He gave this information to the accountant. Cloud 9 was selling the same kind of goods as the partnership had sold earlier and the price did not go up much. They made an initial investment of $30,000.00 to $40,000.00 in the Company and included it in their ABIL calculation.

[27] Cloud 9 did not pay him anything for his work or expertise which was in graphics. He became the Warehouse Manager and occupied that position since 1993. He received no pay for his work. At Exhibit R-1 at Tab 3 he identified his 1994 income tax return. It showed no income from Cloud 9 and no payment for services rendered to it. He did identify a cheque, no. 256 and indicated that this was wages that he received from the Company from June 15 to June 30, 1995 in the amount of $800.00. He admitted that he collected unemployment insurance in the years 1993, 1994 and 1995 and referred to returns in Exhibit R-2. He admitted that he was not in the business of lending money. In January of 1996 he did consult someone with respect to bankruptcy. The Company wound up in December of 1995.

[28] In spite of this he identified Exhibit R-3 and identified purchase orders from Cloud 9. Some of these orders were filled after the business operations were closed. They had already had the orders on hand and they were trying to collect money.

[29] With respect to the bank accounts he said that Cloud 9 had one at the Royal Bank. In December of 1995 no money was owed. There was also a Bank of Montreal MasterCard for Cloud 9. He identified Exhibit R-4 which showed that as of January 31, 1996 the account had a credit balance of $24.26 in it. He agreed with this information. Exhibit R-5 was a Royal Bank account showing a credit balance of $4,303.17 as of January 5, 1996. He agreed with this information. He said that there was a Bank of Montreal business account, a line of credit and that these were guaranteed by the mortgage on the real estate.

[30] Exhibit A-1, Tab 9 was a notice of intent to enforce a claim and this was directed to him alone. The bank did not stop his line of credit until March. In spite of the fact that the notice was to him alone he said that it was in both names. Cloud 9 was not insolvent in March of 1996 since it had over $4,000.00 in the account.

[31] With respect to the Cloud 9 bank account at the Royal Bank he said that he had signing authority at the bank for this account. He could not remember whether he had written any cheques to cash but he was shown Exhibit R-6 dated May 27, 1996 to cash for $395.00. He agreed that it was his signature and that his wife's signature appeared also and that the cheque was cashed. He was asked whether or not there were any other cheques made out to him in 1995 and 1996 to go against their loans and he said that he could not recall. It was possible.

[32] He was also shown a cheque dated May 23, 1996 made out to him and signed by himself and Fred Churchill. He was asked why this cheque was made out. He said that it was for car expenses expended while they were trying to collect money. It had to do with the closing of the Company.

[33] He was referred to the figure of $155,000.00 as the ABIL and he was asked how he came up with that figure. He said that they figured that this was the amount that they were owed. The documents that they provided added up to this amount. They did not have any specific documents with respect to the individual advances but he gave the money to the Limited Company. He was involved from the very beginning to get it going and to keep it going. He did not think that any other cheques were issued after May 2, 1996.

[34] He was also questioned about whether or not he made an election under section 51 of the Act and he said he did not know whether he made it or not. He did not make any agreement with Cloud 9 before guaranteeing the loans and it was his position that no consideration passed. He did nothing to get it back at the end of 1995. He was asked why he concluded that he could not get the money back and he said that the Limited Company had nothing to take. He did nothing further.

[35] He was pressed with respect to documentation to show that his RRSP money and insurance money went into Cloud 9. He said that sometimes it went into his own account and then into Cloud 9. Sometimes it went directly into Cloud 9 account. There was no agreement for interest. When the Company had money they would get it back. They merely added up the total amount of money that Cloud 9 owed them and divided it by two for himself and his wife. Fred Churchill had no money in the Company and he did not ask him for any.

[36] He was shown Exhibit R-7 which was the Bank of Commerce account and he said that that was his personal account deposit record. He was shown some deposit notes between September 26, 1995 and December 8, 1995 and he identified them. He said that these represented shareholders loans by him to the Company. He identified Exhibit A-2 at Tabs 3 and 6 which were for the advances of $100,000.00 and $35,000.00. The conditions were the same and he guaranteed the present and future debts of the Company. He obtained the advance and deposited it to the Cloud 9 account. He was asked where the record showed the deposits and he said that they left that evidence up to his accountant. He did not know why the Bank went after him only. He said that $135,000.00 was paid to the Bank after March of 1996 and he was claiming it as part of the ABIL. There was no particular agreement about it with Cloud 9 nor with respect to the $185,000.00 figure.

[37] He identified the document in Exhibit A-1 at Tab 5 as a loan to Cloud 9 in the amount of $28,765.00. He did not know whether or not the Bank went after Cloud 9 or not. Then he said that they did in 1996 after the closing.

[38] The Bank repossessed the car and sold it and he and his wife had to pay a small amount in the difference. He did not know exactly when this took place but he said it was in 1996.

[39] When pressed about how he knew whether or not certain amounts were personal or for the benefit of the Company, he was unable to be specific. They were unable to obtain the Bank statements.

[40] In re-direct he said that Exhibits A-1, Tabs 13 to 16 were prepared by the bookkeeper. Again he confirmed that the ABIL was obtained by adding up bank loan payments, the RRSP payments, the insurance loans and all of the amounts in the personal accounts and then dividing it by two.

[41] Helen Allen testified that she was familiar with Cloud 9 and was the Secretary Treasurer of that Company. She signed cheques for the Company. She was also a shareholder but she was not an employee. She became the Secretary Treasurer in November of 1994. Fred Churchill was the President and George Allen was the manager of the warehouse. She held 50% of the shares in the Company although she did not know what number that represented. She did not know how many shares were issued. She paid for those shares but she could not recall how much she paid for them.

[42] Then she said that herself, her brother and her husband were shareholders. Her husband became a shareholder about three months after the Company had been started. Her and her husband put money into the Company. They mortgaged their house for this purpose. They opened an account at the Bank of Montreal. It was a loan to the Company.

[43] George Allen, Fred Churchill and herself decided to start the Company in the fall of 1994. They had been selling party items before that time and Cloud 9 was operated as a partnership. It was a registered partnership according to this witness. Herself, Fred Churchill and her husband were the partners. It started in February of 1994. The three of them were salesmen as well. They discussed the new involvement with the Company and the position that each would hold. They had no business plan. Fred Churchill had been a successful merchant running his own store for about five years.

[44] She said that Cloud 9, the partnership, was in a positive position at the time they commenced to operate the business as a Limited Company. Terry Placey was the accountant for the partnership and became the accountant for the Limited Company. He also filed the individual tax returns for this witness and her husband. They met with no one else with respect to the incorporation and she believed it was done by Mr. Placey. She never saw any incorporation documents after the business was in place. They operated out of Baker Road. She did filing and packed orders and Fred Churchill ran the day-to-day operation. Her husband ran the warehouse. Fred Churchill did the banking. Herself and Fred Churchill signed the Company cheques (one or the other could sign). Sometimes she signed invoices. Her husband or Fred Churchill indicated to her the reasons for the cheques that were to be written. The Company had two bank accounts, one with the Bank of Nova Scotia and one with the Bank of Montreal.

[45] She was shown a cheque for $200.00 and she said that she had signed it. It was made out to George Allen. At that time they believed that there was enough money coming in to pay that amount. She received no salary and her husband received no more salary either. She signed Company cheques payable to cash for purchases for the Company, such as supplies. Some companies wanted to be paid in cash for their supplies.

[46] She and her husband made more than one loan to the Company. The first loan was for $100,000.00 to the Bank of Montreal and this was secured by a mortgage on their house. This property was jointly owned. She identified Exhibit A-1 at Tab 3 and said that she had seen it. This was the mortgage that was taken out in order to obtain the funds to start the business. It was dated December 14, 1994. They put the money in an account with the Bank of Montreal. This was a business account in the Company's name. She believed that her husband and herself deposited it into the Company account.

[47] She also referred to a loan in the amount of $35,000.00 which she said was money borrowed from the Bank of Montreal for which they also put a mortgage on their house. They deposited that in the business account at the Bank of Montreal as well. She referred to the document in Exhibit A-1 at Tab 6 which was the mortgage document dated March 18, 1995.

[48] She also referred to a loan which they took out on their life insurance policy with Prudential. She did not know the amount. The loan was not put in all at once but in six different occasions over the year 1995. The policy was in her husband's name.

[49] She was shown Exhibit A-1 at Tab 8 which were cheques from Prudential. She said that they put them into the business account. George deposited them.

[50] She also referred to advances to the Company from her own personal bank account with the National Trust. Her own pay cheques were deposited to that account. She referred to a $10,000.00 amount loaned to the Company in one lump sum. She wrote a cheque and it was deposited to the business account.

[51] She identified Exhibit A-1 at Tab 10 as her personal account and the cheques thereon. She also referred to her husband’s RRSP with Prudential and the advance of $40,000.00 which was put into the Company on a number of different occasions during the fall of 1995.

[52] Exhibit A-1 at Tab 7 was identified by her as a list of all money borrowed on the life insurance policy with Prudential. She never wrote personal cheques to pay Company accounts. She did not remember if she paid personally for any Company accounts. She and her husband loaned over $300,000.00 to the Company.

[53] She expected to get the money back from the Company. There was no written agreement. Nothing was recorded. George would have kept track of the loans. She never discussed any written agreement with respect to the loans. They expected to be paid back when the Company was doing well. She expected to receive part of the money back at least during the first or second year of the Company's operation. They did not charge interest on the loans to the Company. Fred Churchill approached them about loaning money to the Company. She did not know what the financial position of the Company was. She never loaned money that she did not expect to receive back. There was never a point where she believed that the Company was in financial trouble.

[54] At the end of 1995 she decided not to lend the Company any more money. They decided to close the Company out after Christmas of 1995. It had not been a good season and they had no more money to loan to the Company. The Company made no profit in 1995. In December 31, 1995 it ceased operating. They did not conduct business after that according to her.

[55] She believed that the Company’s bank accounts were closed. She did not know that the Company was legally dissolved. She never consulted a lawyer about it. They had their own accountant who was Terry Placey and he advised them. There was no bankruptcy. They talked to a Company who dealt with bankruptcies and they advised against the Company going into bankruptcy since she and her husband still had equity in the home which was mortgaged to support the Company loans.

[56] She admitted that the Company filed a tax return in 1995. The Company owned an automobile and a truck at that time. These were registered in the Company's name. They were returned to the Bank of Montreal and the amount received from their sale was applied to the loans against the vehicles. Most of the equipment was leased and it was returned to the owners. Some of the inventory was returned to the companies for payment. They stored the rest. It was never sold. There was no cash in the Company account. She did not know if the Company owed any other debts. There were accounts receivable. The Company tried to collect on them. Fred Churchill and George Allen went to see the customers and obtained some money. They took no other steps to collect on their own debt against the Company. Generally, the money went to pay Company bills. She took no other steps to collect money owed to her because the Company had no money to pay. She talked to the accountant and he advised her "to do their income tax thing". He filed the 1995 returns. She never saw them.

[57] The Company accountant obtained the information from the Company records. He claimed an ABIL. She did not know how he claimed it. They left it up to him. They received a refund in the nature of $50,000.00 and they paid it against the Company indebtedness. They used all of the $50,000.00 for such purposes and they also used some of the proceeds of the sale of their own home to pay off the Company indebtedness and the mortgages on the house before it was sold. The Company owed no more debts after May.

[58] When they started the Company they were well off and now they were not very well off. They loaned 90% of their assets to the Company and received no repayment from it.

[59] She identified Exhibit A-1 at Tab 14 which was a letter to her husband from Revenue Canada. She said that they took it to their accountant. She also identified Exhibit A-1 at Tab 21 which was a letter to her. She also took that to her accountant. They never followed up on these letters with Revenue Canada since their accountant had the expertise. They relied upon him. He was working on these replies. They kept calling him. At one point in time they considered a lawyer but did not retain one.

[60] In cross-examination she said that she claimed $155,000.00 as a loss and wanted it to apply to earlier years as well. Her husband claimed an ABIL for the sum of $155,000.00. The loss they incurred was $310,000.00 even though the Company was in business less than two years. She was asked how the business did as a partnership and she said that it was doing alright. She was shown the income tax returns for the years 1993 and 1994 and they showed no income. She received no salary as a Secretary Treasurer.

[61] It was her position that her husband was a shareholder although there were no documents that showed him as a shareholder. Money from the mortgage which they took out on their house went into the bank on behalf of the Company. There was no document in Exhibit R-2 which showed the money going into the bank account at the Bank of Montreal. The money was not deposited to her husband's account. It was deposited to the Bank of Montreal account on behalf of the Company.

[62] Her husband was employed between 1965 and 1990 by one employer and after that with several small companies for a short time. She was referred to some figures which showed the cost of purchases of the Company at $307,362.00; the expenses to sell the purchased goods at $240,045.00 and the sale price of the goods at $242,461.00. She was asked how the Company could be profitable based upon those figures. Her answer was that she felt that it would be okay later on if they continued. She believed that it would be profitable. The sales were picking up.

[63] She was referred to two cheques to George Allen, one in the sum of $200.00 and one in the sum of $800.00 and she identified those. She said that she signed the cheques to cash. She was shown Exhibit R-6 which was a cheque dated May 27, 1996 in the sum of $395.00 to cash and when asked why this would have been so in light of the fact that the business closed in December of 1995, she said that it may have been for expenses on the road. It was not for supplies. George Allen asked for it.

[64] She was asked if she could trace the money from their line of credit or life insurance policies into the Cloud 9 account. She said that Exhibit A-1 at Tab 4 mentions it. She was shown this document and she admitted it was dated February 28, 1995 and was a loan to Cloud 9 for the car. She also identified the documents at Tabs 3 and 5. She said that Cloud 9 repaid none of the money that they had loaned to it.

[65] Exhibit R-8 was placed into evidence by consent and she admitted that cheques were written to her and her husband. She did not think that the accountant had recorded any payments to her. She did not recall receiving a cheque in the amount of $50.00 as a payment on the loan in November of 1994. She did not know whether she received a $4,000.00 amount by way of cheque or cash as a repayment on the loan in December. Likewise she did not remember a cheque for $280.00 as a repayment on the loan in February of 1995. She did not receive any other amounts.

[66] In 1996 she wrote a cheque for $150.00 and that was the only one. She could not say whether that was a repayment on the loan. Fred Churchill put no money into Cloud 9 although he ran the operation. He knew about the advances. Fred Churchill was not called as a witness because they did not need him according to her accountant. Herself and her husband guaranteed Cloud 9's loans.

[67] She was shown a letter dated August 7, 1996 from London Life with respect to loan amounts and dates which was Exhibit A-1 at Tab 7. One amount was for $2,500.00 dated June 13, 1995. She was asked which account it went into and she said all of it should have gone into the Bank of Montreal Company account. Also, all of the other amounts would have gone into the Company account, at least she expected George to do that. She did not know herself.

[68] She was asked who would have received the profit in the event that the Company would have been profitable. She said that Fred Churchill would have received 50% of the profit even though he did not share in the loss. They kept the inventory but she did not know what happened to it. With respect to any money collected, she wrote cheques to herself for these amounts. There was no money left in the Cloud 9 account in 1995. She was shown Exhibit R-5, the bank statement, showing a balance of $4,303.15 as of January of 1995. She did not know where it went.

[69] Terry Placey was an accountant. He was not a chartered accountant. He had been in business since 1973. He had obtained all of his credits enabling him to become a chartered accountant but he did not pass the examination. He also took a financial planner's course. He worked for three years in industry and has been on his own for the last ten years. He dealt with a variety of businesses during his ten years as an accountant. Most of his accounts dealt with corporations. He was familiar with Cloud 9 which was started in late 1994.

[70] He had been Fred Churchill's accountant and he was retained by Cloud 9 as a financial advisor and accountant. He was retained by George Allen and Fred Churchill. At the time he was retained, Cloud 9 was a proprietorship according to him. Soon it was incorporated. Before the incorporation George and Helen Allen owned the business. He recommended a lawyer for the incorporation. He recommended limited liability to them as the most important aspect. He said that Helen Allen did not participate too much in the discussion. George Allen had little business experience on his own. Fred Churchill was a reasonably good businessman. Helen Allen had worked for the Provincial Government. Fred and George had a business plan drawn up. They had projections which were reasonably optimistic. Money was to be obtained from the Allens for the business. The only collateral they had was their house.

[71] He was satisfied that the Allens had spoken to salespeople and received some input with respect to business possibilities. Before the incorporation the business of Cloud 9 was negligible. It operated mostly at flea markets.

[72] At the time the business was started the participants believed that they could do $175,000.00 of profit the first year. This witness believed that this was realistic if they obtained the sales which they projected. For instance one person in London, Ontario who was a sales person indicated that she could bring in $600,000.00 of sales to the business. Generally speaking, the possibilities were average or slightly above average.

[73] He did not think that the Allens ever met the lawyer but this witness saw the incorporation documents. Fred Churchill was the president. Someone else was vice-president and another was treasurer. The shareholders were the Allens and Fred Churchill. After about a month this was changed. Then only the two Allens remained as 50% shareholders. Shares were valued at $1.00 per share.

[74] He said that he understood the term "perfecting a share". That meant to buy the share and to pay for it. He debited the shareholders' account and credited the capital account in order to account for sale of the shares. He was shown Exhibit A-1 at Tab 13 and he said that the shareholders equity was $2.00. He also identified a letter at Tab 1 from the incorporating lawyer. There were ten common shares to Fred Churchill and Helen Allen at $1.00 each. However, only $2.00 in shareholder equity was indicated because he set it up at $2.00 whereas it should have been $20.00, being 10 common shares at $2.00 a share.

[75] He confirmed that he was the Company accountant and oversaw the operations, gave advice and did the year end documentation. He did not regularly view the bank records although he did see them at year end. Fred Churchill and Helen Allen had signing authority but Fred Churchill and George Allen were the contact persons. Twice a month he discussed the operation with them. Sometimes they discussed them over the telephone and sometimes it was in person. He was "somewhat aware of the financial matters but not every item."

[76] He confirmed that the Allens put in money and took out a collateral mortgage on their house to support the Bank of Montreal loan for $100,000.00. This money was advanced through a line of credit (he set the matter up as a shareholders' loan to the corporation in the Company's books). They decided that it would be an interest free loan. There were no discussions about repayment. He did believe that it would eventually be paid back.

[77] He confirmed that monies were advanced to the Company from the personal bank accounts of the Allens and from their life insurance policies. The $25,000.00 was advanced through a Master Card for purchases for the Company. It was his position that at least $300,000.00 (by way of estimate) was advanced by the Allens on behalf of the Company. He was not aware of every advance at the time it was made. However, he did go to the bank with the Allens and they increased their line of credit to $135,000.00 based upon the security of the mortgage on their home. There was no loan agreement although it was discussed.

[78] He was asked what consideration there was for the loans and he said that the Allens owned their own Company and they looked upon it as a way to make a living.

[79] He was shown Exhibit A-1 at Tabs 14, 15 and 16 and confirmed that the liability to the Allens from the Company was $306,094.00. These transactions went through the bank statements, represented monies obtained through the RRSP documents, confirmed by cancelled cheques from the Allens that he saw and from life insurance loans. He confirmed the $100,000.00 line of credit and this was further increased by $35,000.00. He confirmed that he saw this in the bank statements of the Bank of Montreal through the business chequing account of Cloud 9.

[80] The Company had bank accounts at the Royal Bank, the National Bank and the Bank of Montreal. Some of the advances he saw going into the account. He also saw “too many” personal cheques deposited to the Company account. The interest on the loans was over $2,500.00 per month. He had the Allens open up personal accounts and Company accounts in order to enable them to pay suppliers so that the Bank of Montreal would not take the money out of the account to pay on the loan. The bank did send back cheques marked NSF.

[81] He was shown Exhibit A-1 at Tab 16 and said this was summary of shareholders' loans to the Bank of Montreal in the amount of $10,876.00. He said that he would have cross-checked this with the deposit slips between December 1994 and July 1995. He confirmed that between February 1995 and December 1995 the amount of $100,930.38 was placed into the Cloud 9 account from the Allens. This came from their personal accounts and from their RRSPs. He cross-checked this with the bank records. He also confirmed the amount of $29,038.68 going into Cloud 9 account at the National Trust from the Allens personal accounts from RRSPs and from life insurance policies between August 1994 and January 1995. He further confirmed the amount of $9,000.00 going into the Cloud 9 account at the Royal Bank and this represented the last time that the Allens cashed in an RRSP.

[82] Again he confirmed the payments of $100,000.00 and $35,000.00 by way of line of credit to the Company account from the Allens. He said that this was reflected in his work sheet at the end of January 1996 which showed a balance of $139,887.56. This amount was owed to the Allens by the Company. The bank added on interest. They took out a mortgage in the equity remaining in their home and paid it off.

[83] He also confirmed that the Allens had drawn out approximately $15,000.00 to $16,000.00 during the year but this amount was charged back to them against their shareholders loan account and credited to the bank account at the Bank of Montreal. These amounts were $10,876.00 and $5,717.06 for a total of $16,593.06. These were shown at Tab 16. He explained to the Allens that they could claim an ABIL if they suffered a loss, equivalent to three-quarters of the amount of the loss. He also explained to them that they could go back three years and forward seven years by way of loss carried back. He told them that this would not get all the money back for them but it would be helpful. He did go back with respect to Mrs. Allen.

[84] He looked at their personal accounts in calculating the shareholders loans. This was done after they ran out of the money in the line of credit. All of these amounts went through the Company accounts.

[85] He was referred to Exhibit A-1, Tab 11 which showed duplicate cheques and not cancelled cheques. He said that the cancelled cheques must have been lost. He picked up everything that they would have paid into the Company. The document at Tab 12 represented payment for Company expenses and suppliers.

[86] The witness said that the Allens advanced loans up to three to four weeks before the closing. He had a meeting with them and told them to loan no more money to the Company. The Christmas season of 1995 was the last opportunity for the Company to stay in business. They hoped to be able to make it over that period of time but they were not able to do so. The only amounts recovered by the Allens were the amounts that have earlier been referred to and these were reflected in the shareholders' loans account. He admitted that there were a few cheques made payable to cash. The bulk of inventory went back to the suppliers as a payment on account. All office equipment was returned because it was leased. There was no cash available at the end. With respect to Exhibit R-5, and the amount of $4,303.00 shown in the Company bank account, the witness said that he thought it went to pay off a few bills and that amount came from a deposit by the Allens personally. The Company was not legally dissolved.

[87] The witness read a letter from the Bank of Montreal demanding the payment of the monies owing by the Cloud 9 and said that the Allens put on a regular mortgage against their interest in their home. This was signed by both. This witness saw this document.

[88] With respect to collection of amounts owing to the Company, he said this was not very successful. The inventory that was left went back to suppliers to pay some of the bills. Then the Company went out of business. The Company did not go into bankruptcy and it was not forced into bankruptcy.

[89] The 1995 corporate return was not filed because the Company was out of business. He did 1995 personal returns for the Allens. He obtained the information for the loss because he knew about it personally. He came up with an ABIL of $310,000.00. This was divided 50 – 50 between the Allens because both were shareholders and the money came from both of them. He believed that it was fair to divide it 50-50. He did not adjust the $310,000.00 figure.

[90] He was shown Exhibit A-1 at Tab 13 and he said that he had prepared these documents for the ABIL for the 1995 taxation year. He used the figure of $310,000.00 and each received 75% of $155,000.00. In Court he said that the figure should have been $306,094.00 since this statement was completed subsequent to the personal returns that were filed earlier. This was at the end of January of 1995.

[91] He had dealt with Revenue Canada and gave them about 80% of the documents that they needed and perhaps all of them. They wanted financial statements for the Company but at that time there was no way that the Company could pay for them so he did not do them until later.

[92] In cross-examination he said that he delivered one box of documents to Revenue Canada. It would have supported about 90% of the claim. This included cancelled cheques from suppliers and other statements.

[93] He visited the offices of Cloud 9 and checked the statements and the $135,000.00 figure was not going down. The Allens showed him what they were putting into the Company. Every month they were putting money into the Company. After five months they were relying on the Christmas season to help them recover. They were attempting to obtain new personnel, obtain new accounts and going to new towns. By the end of December he told them not to put any more money into the Company.

[94] The witness indicated that there was a business plan in effect. He went over the projections with the Allens and Mr. Churchill. The mark up was 15% to 30% to 35% on most items based upon what they told him. He also did projections on the basis of what they believed that they could generate in sales. The business plan was written down. They lined up customers. There were a few smaller towns outside of the Toronto area. They also worked in the Toronto area and they delivered to customers. They also lined up salespersons.

[95] When referred to Exhibit A-1 at Tabs 13 to 16 he said that these documents were all prepared on March 18, 1999 for Court purposes.

[96] He referred to the date of January 31, 1996, shown in Tab 13 as the date that they stopped accounting but that the proper amount was $306,094.00, $153,047.00 for George and Helen Allen. This figure was accurate.

[97] The Master Card account was used for business purposes only and the Allens had another card for personal use. The $100,000.00 limit was reached within about three months and the $35,000.00 extra was reached by the end of April. The money that was put in was for working capital according to him and went into the shareholders' loan account.

[98] The witness admitted that Cloud 9 never filed a corporate tax return.

Argument on behalf of the Appellants

[99] Counsel for the Appellant conceded that there was some inconsistency between the evidence of George Allen and Helen Allen because they were unsophisticated persons and business matters were delegated to the accountant. Further, the evidence was not fresh in their minds, the facts having occurred some time ago. However, the accountant was very forthcoming and illuminating.

[100] She said that the evidence disclosed that the Appellants decided to get into business in 1994 although this basically amounted to going to flea markets and selling some goods. Then they decided to incorporate and the Appellants advanced all of the start-up capital and the shareholders’ loans. These monies were put into the Company accounts and the Appellants also paid debts of the Company directly. The sources of the loans could be tracked. Ultimately, the business did not succeed and they could not continue loaning money to the Company. The Appellants tried to pay all of the creditors, they even had to sell their own home. They had exhausted all other funds. Had they not acted as they did the bank would have acted and they would have lost their home.

[101] According to counsel, the appropriate sections of the Act are subsection 38(c) and paragraph 39(1)(c). The question to be asked is whether or not the Appellants loaned the money as alleged, to Cloud 9 in the form of shareholders’ loans. The evidence of Terry Placey, the accountant, was that he completed the 1995 returns and made his calculations in accordance with his statements found in Exhibit A-1 at Tab 13. There was $306,094.00 claimable as an ABIL which was split 50 – 50 between the Appellants. There was sufficient evidence from Mr. Placey put forward to enable the Court to accept these figures. Mr. Placey indicated that he saw documents which corroborated these figures. The Appellants also gave some corroboration such as the mortgage shown in Exhibit A-1 at Tab 3 for $100,000.00. The stated purpose of this mortgage was to secure the Limited Company’s debts.

[102] There was also corroboration for the $35,000.00 loan through the viva voce evidence of the Appellants who were honest and forthright. The accountant took part in the financial arrangements, perused the bank statements, confirmed the records to support these payments and averaged the payments between the two Appellants.

[103] There was evidence of the $25,000.00 line of credit to the Bank of Montreal and the $10,000.00 advance by Mrs. Allen to the Limited Company. This money came out of her personal account. There was also evidence of the cashing of the RRSP’s belonging to George Allen and the monies drawn down from the life insurance policies of both Appellants. At Exbibit A-1 Tab 10, cash infusions could be seen from the personal checking account of Helen Allen. Further, the duplicate cheques shown at Tab 11 confirmed loans of $25,800.00 to the Company. Further, at Tab 12 the personal cheques of Mr. Allen confirmed advances by him to the Limited Company in the amount of $57,000.00. On the balance of probabilities, it is clear that some loans were made and therefore the issue is only the total amount of the loans made.

[104] Tabs 7 and 8 of Exhibit A-1 evidenced the withdrawals from the London Life Insurance Policy for George and Helen Allen of amounts totalling $47,000.00. Therefore, even if the Court did not find the evidence of Mr. Placey as being credible and even if there was no specific agreement about repayment, it is obvious that the parties intended that these amounts be repaid. The fact that the loans were non-interest bearing is non-consequential. No adverse inference should be drawn against the Appellants because of that.

[105] The question has to be asked as to whether or not as of December 31, 1995, the loans became bad debts? Three witnesses testified that the Company ceased operating and after that time only a cleanup took place. There were only a few assets to be liquidated and these were liquidated. The amounts were used to pay Company debts. Parties discussed bankruptcy but they decided against it. The Appellants were forced to sell their house to pay the debts. There was no way in which they could recover the debts.

[106] Another question to be asked is how much of the loans were recovered by the Appellants? The evidence of the Appellants was inconsistent but Mr. Placey cited a figure of $15,000.00 as a repayment and that was much higher than what the Appellants said that they had been reimbursed by the Company. However, these amounts were taken into account by Mr. Placey in his calculations.

[107] Even if the Court does not accept the evidence of Mr. Placey, the amount of the indebtedness of the Company to the Appellants, which they did not receive back, was at least $147,000.00. There was no evidence whatsoever that the Appellants were dishonest.

[108] This appeal should be allowed, with costs, and the matter referred back to the Minister of National Revenue for reassessment and reconsideration on the basis that Mr. Placey’s figures be accepted or in the alternative that at least the $147,000.00 figure be accepted.

Argument on behalf of the Respondent

[109] Counsel for the Respondent said that the Appellants put a lot of weight on the cancelled cheques but many of these cheques were not made out to the specific creditors of Cloud 9. Further, there was some conflict as to what Mr. Allen’s interest was and as to whether or not he was a shareholder.

[110] The Appellants have to meet several burdens in this case under the provisions of sections 38, 39 and 40 of the Act. The Appellants have to establish that the amount in question was a debt, that the debt was made to generate income and that it was bad at the end of the year in question. In the case at bar there was no evidence of reasonable expectation of profit, consequently the amount to be deducted is nil. The amount of the loss is questionable on the basis of the evidence in this case.

[111] The method used by the accountant for preparation of his statement is questionable. First of all he prepared the statements and then he cross-checked them. There were no Company books to be accessed and the records kept by the Company leave a lot to be desired.

[112] There were no terms of repayment, only that the amounts would be repaid sometime in the future. There was no interest payable on the loans. This is evidence that the money was not expended for the purposes of earning or producing income.

[113] Counsel argued that if any money was given to Cloud 9 by the Appellants then it was a capital outlay only, for the purpose of giving the Company working capital and cannot be deducted, in accordance with the decision in Peter Whitehouse v. M.N.R., 79 DTC 383 at page 384, where Goetz, J. cited that the advances by way of loans to the Company were capital investments and therefore not deductible as a business loss.

[114] The Appellants in the case at bar were not dealing with the Company at arm’s length. They were dealing with their own money. The Company was an extension of themselves. They dealt with it as if it were a partnership. No interest was payable on the monies advanced. There was no repayment schedule. They intermingled Company accounts with their own accounts and Company money with their own money and therefore the transactions are suspect.

[115] The money, if advanced at all, went into personal accounts and then some debts of the Company were paid out. What portion was personal, if any and what portion was for business purposes? These questions were not answered by the evidence.

[116] In order for the amounts to be deductible the Company must have had a reasonable expectation of profit. In the case at bar they were selling their stock-in-trade at a price lower than what they paid for it according to the evidence. How could they reasonably then expect to make a profit under these circumstances?

[117] Under the propositions laid out in Moldowan v. The Queen, 77 DTC 5213, this business was undercapitalized. Only one shareholder had experience. The intended course of action of the parties was insufficient for them to be able to make a profit. The shareholders were warned that the Company was in trouble but they continued on making loans to the Company because they believed that they could write them off as a debt against their own additional income. Therefore, under the intended course of action criteria, they should have ceased operations rather than continue to loan money to the Company. Any plan that they had was not good enough. There were no concrete orders on the books from which they could reasonably expect to be able to make a profit.

[118] Counsel referred to the case of Lowery v. M.N.R., 86 DTC 1649 and O’Blenes v. M.N.R., 90 DTC 1068 in support of her position that there was no consideration for the loans and that it was merely wishful thinking that they might make a profit. There was no business purpose involved here and the debts incurred were not for the purpose of “gaining or producing income from a business or property”. Therefore, the losses according to income tax purposes should be deemed to be nil or not deductible. This appeal should be dismissed.

Rebuttal

[119] In rebuttal, counsel for the Appellants referred to the case of Jack Steckel v. M.N.R., 92 DTC 1904 in support of the proposition that just because the interest was not charged on the loans does not mean that they cannot be deducted nor that they were not incurred for the purpose of gaining income from a business. In that case the failure to charge interest was not fatal.

Analysis and Decision

[120] Counsel for the Appellants was prepared to admit that some of the evidence given by the two Appellants was inconsistent in some respects. This she attributed to their unsophistication in business matters and the fact that business related information was delegated to their accountant whom they believed and whom they trusted. Further, some of the problems were created by the fact that the material was not fresh in their minds and the Appellants expected their accountant to be able to furnish the information which they lacked or for which they could not be completely specific.

[121] The Court is prepared to accept this argument after assessing the evidence of the two Appellants. The Court finds that in spite of the shortcomings, these two witnesses were direct, forthright, even though at some times lacking in specifics and were prepared to tell exactly what they knew and remembered, were not evasive in any way and in essence the Court finds that they are credible witnesses. There can be no doubt in the Court’s mind that they went into business with the full intention of making a profit and were quite confident that they could do so. This belief was not completely unfounded. They sought advice from a knowledgeable accountant and relied upon the opinions of a family member who had been a businessman. They had the advice, assistance and instruction of an accountant who prepared a business plan to assist them in their endeavour. It is true that the exact nature and extent of the business plan was not presented to the Court but the Court is satisfied that they did have a business plan when they embarked upon this enterprise.

[122] The Appellants sought out possible sales persons to market their product, relied upon some of these salespersons for information regarding the quantity and the value of sales that such salespersons might bring to the business and based upon this information together with their accountant came up with projections which their accountant considered to be “reasonably optimistic”. Armed with these projections, relying upon the business acumen of Fred Churchill, to a very minimal extent relying upon their own business experience but yet armed with considerable enthusiasm and optimism they were able to convince the bank to advance them considerable amounts of money by way of loans. One must remember though that the bank was fairly well guaranteed that it would recover any money that it advanced to Cloud 9 since the Appellants were bound personally to secure these loans and the loans were further secured by mortgages on real estate owned by the parties.

[123] One of the main issues relied upon by the Minister at the time of the assessment in question in this case was his position that the Appellants had not produced evidence to satisfy the Minister that the funds were advanced to the corporation. If the Appellants are not able to do so then they cannot be successful in this appeal.

[124] The history of this matter shows that the Minister was seeking further information, documents and proof from the Appellants that they had advanced the monies in question. The Appellants readily admitted on the stand that they had not provided the information sought. The Court is satisfied that part of this problem developed because the Appellants themselves relied upon the accountant to provide the information but once the Appellants had advanced all of the resources to the Company, when it was obvious that no more money was to be forthcoming, when the bank gave every indication that it was going to insist upon repayment, when it became impossible for the business to operate, when the accountant was satisfied that there were no monies available from the Company to pay him then it became difficult for the Appellants to obtain any further advice that they needed. Consequently the financial statements of the Company for the years in question were not completed in a timely fashion and so the Minister was not satisfied at that stage that the Appellants were entitled to the deductions which they sought.

[125] It is possible that if the financial statements of the Company had been provided at an earlier stage, those financial statements together with the information that the accountant said that he had already provided to Revenue Canada might have been sufficient for the matter to have been resolved at that stage. However, this is not completely certain in light of the various arguments which counsel for the Respondent relied upon at the time of trial, both of a factual and legal nature.

[126] At the time of trial the Appellants were able to produce as a witness Terry Placey, their accountant. This accountant came to Court armed with a very considerable knowledge of the business of the Appellants from the time that it was a partnership through incorporation, through its operating days and to the very end when it went out of business and when the Appellants themselves considered bankruptcy. The accountant was very familiar with the documents presented on behalf of the Appellants, he was fully conversant and knowledgeable of the financial statements of the Company, with the bank statements, with invoices of the Company, with cancelled cheques, with duplicate cheques, with the corporation documents and completed the year-end documentation for this Company. He confirmed that he, “oversaw the operations, gave advice and did the year-end documentation”. Even though he did not regularly view the bank records he did see them at year-end. Twice a month he discussed the operation with the shareholders. “He was somewhat aware of the financial matters but not every item”.

[127] He confirmed from his own personal knowledge and from documents that were placed into evidence that the Appellants had indeed loaned money to the Company, the amount of those loans and the fact that they never received back any of the monies which now form the basis of their claim.

[128] Insofar as the Court is concerned the accountant gave credibility and corroboration to the position of the Appellants that they had made loans to the Company and had not received the monies back. He was able to corroborate the source of these loans, the nature of the loans, the time period over which the loans were made, the use to which these loans were put and the amounts of money repaid. At the end of the day, he confirmed that the amount of money outstanding from the Company to the two Appellants at the end of January 1995 was the sum of $306,094.00 and each of the two Appellants was entitled to claim one half of this amount.

[129] The Court accepts this evidence of the accountant and finds it corroborative of the evidence given by the two Appellants, to the extent that the Court is satisfied that the amount quoted by Mr. Placey as the amount outstanding and owing by the Company to the Appellants was the correct amount which could form the basis for the amount claimed by the two Appellants as an ABIL for the years in question. Without this evidence having been given and without this evidence having been believed, the Appellants would have found themselves in a difficult position indeed.

[130] The Court accepts the fact that there were some difficulties with tracing every specific dollar through the accounts of the Appellants into and out of the accounts of the Company, but at the end of the day, the Court is satisfied on a balance of probabilities that the amounts in issue did flow from the private resources of the Appellants by the various means referred to in the evidence into the accounts of the Limited Company, were expended for the purposes of the Company and that the amounts of $306,094.00 remained outstanding when the Company went out of business.

[131] Counsel for the Respondent was correct in referring to some of the shortcomings in the records, the fact that many of the cancelled cheques were not made out to specific creditors of the Limited Company and as to conflict of the two Appellants with respect to some of the corporate matters and as to what amounts, if any, were paid back by the Company to the two Appellants. However, the Court is satisfied that when it considers all of the evidence, including the evidence of the accountant, these discrepancies have been explained and they are insufficient to discredit the evidence of the witnesses called on behalf of the Appellants. The Court accepts their evidence even where there is an apparent discrepancy.

[132] Counsel for the Respondent not only argued that there was insufficient evidence that the amounts in question were paid by the Appellants to the Company and were not repaid but counsel also raised the issue as to whether or not any amount paid was indeed a debt owing by the Company to the taxpayers under the provisions of paragraph 39(1)(c) of the Act. If it were, whether or not the debt was acquired by the taxpayer for the purpose of gaining or producing income from a business or property in accordance with the provisions of subparagraph 40(2)(g)(ii) of the Act. Counsel argued that in the case at bar there was no reasonable expectation of profit and consequently the loss should be deemed to be nil. She took the position that the amount of the loss was questionable because the way that the accountant prepared the statements was questionable. He did the statements first and then cross-checked them subsequently. Further, she argued that there were no Company books which could confirm that the method used was proper and consequently the accountant’s work leaves a lot to be considered.

[133] Counsel also argued that there were no terms of repayment for the loans and that the loans were merely to be paid back some time in the future. There was nothing in writing to confirm the terms of the debt and there was no interest payable. There was no consideration made for the loans.

[134] Further, counsel argued that the amount owing to Cloud 9 was a capital outlay only and was not deductible by the Appellants as they sought to do here. They were a capital loss.

[135] All of these arguments were well taken and as earlier indicated, these arguments might have prevented an earlier resolution of the matter even if the financial statements had been available when they were asked for by Revenue Canada.

[136] The Court has given due consideration to these able arguments made by Counsel for the Respondent. The Court has considered the cases referred to by the Respondent in making these arguments but the Court is satisfied on the basis of all of the evidence that the Appellants in question were shareholders of Cloud 9 during the period in question. The Court is satisfied as to the amount of the loss as confirmed by the accountant, Terry Placey, in spite of the misgivings raised by counsel for the Respondent about the nature of the bookkeeping work. The Court is satisfied that the fact that there were no specific terms of repayment do not prevent the Appellants from being able to claim the loss in question. The Court is satisfied that the monies in question were not capital outlays but they were advances for the purposes of allowing the Company to continue in business. At the end of the day if the Company profited, the Appellants themselves would have profited. Further, the Court is satisfied that the Appellants had every intention of receiving their money back sometime in the future and held out this hope until the very end when it became obvious that the Company would have to go out of business.

[137] The Court is satisfied that the Appellants were acting at arm’s length with the corporation even though they were shareholders in it. They were not dealing with the money as if it were their own or as if it were an extension of themselves. The fact that there was no interest payable and no specific repayment schedule in effect does not taint this relationship in light of the other evidence given in this case.

[138] The Court is not satisfied that the Appellants intermingled their own money in their own accounts with those of the Company. The monies were obtained by the Appellants from their own sources but those monies were transferred into the Company accounts and used for Company purposes. The Court is satisfied that any amounts repaid by the Company to the Appellants have been properly traced and accounted for in the figure set forth by Mr. Placey as the amount outstanding by the Company to the Appellants, that these amounts were not repaid and that they were a bad debt at the end of the year.

[139] The Court is satisfied that the Appellants embarked upon this enterprise as a business, they had a reasonable expectation of profit during the years in issue and that the reason that the Appellants continued to put money into the Company was not so that they could claim a loss but because they expected to keep the Company afloat for such a period of time as the Company would be able to turn things around and they would be repaid the money that they had loaned to the Company. This did not occur. That does not mean they did not have a business purpose in mind when they loaned the money to the Company or that the Company did not have a reasonable expectation of profit at that time.

[140] The plan that they produced was not perfect and obviously it did not work but it was not a plan which was completely without merit. Even the accountant believed that, “generally speaking, the possibilities were average or slightly above average” that the Company would be successful. The Court rejects the argument of counsel for the Respondent that a reasonable expectation of profit was merely wishful thinking on behalf of the Appellants.

[141] The appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment based upon the Court’s findings that each of the Appellants was entitled to an ABIL of $114,785.25 in the year in issue and that the Appellant, Helen Allen was entitled to claim non-capital losses carried back to the 1992, 1993 and 1994 taxation years, respectively, calculated on the basis of the ABIL in the 1995 taxation year which the Court found to be $114,785.25.

[142] The Appellants will be entitled to their costs to be taxed.

Signed at Ottawa, Canada, this 15^th day of May 2000

"T.E. Margeson"

J.T.C.C.