REASONS FOR JUDGMENT
D’Auray J.
I. INTRODUCTION
[1]
This is an appeal from a reassessment made on
October 16, 2012, under the Income Tax Act (the “ITA”) regarding the
2008 taxation year, through which the Minister of National Revenue (the
“Minister”) denied Claude Gingras a $51,256 allowable business investment loss
(“ABIL”).
[2]
The issue is whether the Appellant meets the ITA
criteria allowing him to claim an ABIL.
[3]
Three persons testified for the Appellant at the
hearing: the Appellant himself, Claude Gingras (“Mr. Gingras”), his
daughter, Stéphanie Gingras (“Ms. Gingras”) and Le Groupe Rassurance inc.’s
accountant, Gilles Gingras. Although the accountant and Mr. Gingras share
the same last name, they are not related. The Respondent called Sylvie Gélinas
from the Canada Revenue Agency (“CRA”) as a witness.
II. FACTS
[4]
During a trip to Europe, more specifically
England, Ms. Gingras became interested in a new type of restaurant that
offers take-out soups in a mug and has a few seats for clients to eat their
soup on site.
[5]
When she returned to Quebec, Ms. Gingras,
who was then working in the hotel and catering industry, wondered whether this
type of restaurant would work in Québec.
[6]
She discussed that concept with Mr. Darras
who was her colleague at the time. He had extensive experience in the hotel and
catering industry. Mr. Darras found that concept interesting and decided
to partner with Ms. Gingras. Together, they prepared a business plan and
organized a focus group to determine whether there was a demand for this kind
of restaurant. The focus group response was favourable.
[7]
However, Mr. Darras received an offer from
a major hotel chain. It was an offer that Mr. Darras could not refuse, and
he was forced to abandon the restaurant project in order to perform his new duties.
[8]
Ms. Gingras decided to pursue the
restaurant project on her own. She discussed the matter with her father,
Mr. Gingras. Mr. Gingras examined the business plan and the results
of the focus group and encouraged Ms. Gingras to open the restaurant. Funds
were needed to start the restaurant so he referred Ms. Gingras to the
Caisse populaire de Ste-Foy (“Caisse de Ste-Foy”).
[9]
Mr. Gingras is a businessman; he is the
sole shareholder and director of a corporation, Le Groupe Rassurance inc. The
main activity of this corporation involves providing appraisal and settlement
services.
[10]
The Caisse de Ste-Foy’s response was not
positive. It agreed to lend Ms. Gingras only 30% of the amount needed to
start the restaurant, which was $75,000. However, the Caisse de Ste-Foy agreed
to lend her the $75 000 if Mr. Gingras would agree to co-sign the loan.
[11]
Mr. Gingras was not happy with the Caisse
de Ste-Foy’s offer. By co-signing the loan, he would be taking a risk without
any benefit. Mr. Gingras believed that it would be preferable to lend the
amounts directly to Ms. Gingras and receive interest income. Therefore, he
helped his daughter start the restaurant, and at the same time he received a
yield on his investment. He discussed the matter with Groupe Rassurance inc.’s
accountant, Gilles Gingras. He supported Mr. Gingras’s approach. Both came
to the conclusion that a 6% interest rate on the loan was reasonable. The
interest rate was the same as the usual bank rate during this period.
[12]
According to the testimony provided by
Mr. Gingras, Ms. Gingras and Gilles Gingras, the 6% annual interest
rate was agreed upon as soon as Mr. Gingras agreed to lend the money to
Ms. Gingras.
[13]
Mr. Gingras was of the opinion that,
according to the business plan, it was better for him to lend his daughter the
restaurant start-up funds at a rate similar to that offered by the Caisse de
Ste-Foy. This would allow him to earn interest income and retain control over
the loan. Mr. Gingras said he offered Ms. Gingras a line of credit
loan, and every time an amount was requested, she would have to explain why it
was required.
[14]
On the basis of Mr. Darras’s involvement in
the business plan and the focus group response, which seemed favourable,
Mr. Gingras expected the restaurant to generate a profit. He was under the
impression that he would be lending her only the amounts needed to start the
restaurant and that the profits would be used to pay for the restaurant’s
operating expenses.
[15]
On January 4, 2007, Ms. Gingras registered
a restaurant at the Registraire des entreprises under the corporate name Bol et
Gobelet enr. In October 2007, the Bol et Gobelet enr. restaurant started up.
[16]
In 2007, there was no written loan agreement
between Mr. Gingras and Ms. Gingras. When they testified,
Mr. Gingras and Ms. Gingras said that they had reached an oral
agreement.
[17]
From August 3, 2007 to January 14, 2008,
Mr. Gingras lent Ms. Gingras $69,393.04 to operate Bol et Gobelet
enr.
[18]
On January 15, 2008, following the advice of her
friend Marie-Sol, a former work colleague, Ms. Gingras decided to continue
her operations, ceasing to operate the registered company and establishing a
business corporation operating under the company name Bol et Gobelet inc.
Ms. Gingras is the sole shareholder and director of Bol et Gobelet inc.
[19]
In 2008, Mr. Gingras lent $33,119.40 to Bol
et Gobelet inc.
[20]
The take-out soup concept was not as successful
as expected. Despite several attempts to diversify the menu to increase sales,
Ms. Gingras had no choice but to close the restaurant at the end of 2008.
[21]
Bol et Goblet inc.’s financial situation was
deplorable. Bol et Gobelet inc. had few assets, occupied a rented space, and
its income statement posted a $42,846 loss for the period from August 1, 2008
to December 31, 2008. In addition, Ms. Gingras did not draw any salary in
2008. Bol et Gobelet inc. could not pay its employees’ salaries or the
suppliers.
[22]
On June 30, 2010, Ms. Gingras declared
bankruptcy. The declaration of her liabilities to the bankruptcy trustee
included a debt relating to the commercial lease of the restaurant, which had
remained in Ms. Gingras’s name. The liabilities also included some unpaid
credit card balances. No claims by Bol et Gobelet inc. suppliers and creditors
were included on the list of debts reported to the bankruptcy trustee.
[23]
Ms. Gingras testified that because she was
not personally liable for the amount owed by Bol et Gobelet inc., she did not
have to include them in her list of personal liabilities. For the same reason,
she did not include the amounts owed to Claude Gingras in her list of personal
debts because, according to Ms. Gingras, Bol et Gobelet inc. had assumed
all the debts of her registered business.
[24]
In addition to testimony in this regard, three
documents were submitted as evidence in order to confirm that the persons
concerned intended to substitute the debtor, Ms. Gingras, with a new
debtor, Bol et Gobelet inc. and that Ms. Gingras would be released from
her 2007 debts to Mr. Gingras, and in order to confirm that
Mr. Gingras had agreed to these transactions. These documents are dated
January 15, 2008, January 16, 2008 and March 30, 2008.
III. ISSUES
[25]
Can Mr. Gingras claim a $51,256 ABIL for
the 2008 taxation year, half of the $102,512 business investment loss (“BIL”)?
IV. POSITIONS OF THE PARTIES
A. Appellant
[26]
Counsel for Mr. Gingras, Mr. Doyon,
argued that the Appellant met all the ITA’s criteria to be entitled to claim an
ABIL:
a) At the end of 2008, Bol et Gobelet inc. owed Mr. Gingras a
$102,512 debt;
b) Mr. Gingras had agreed to the loans in order to earn income;
c) Bol et Gobelet inc. was a small business corporation (“SBC”);
d) The debt became a bad debt in 2008.
[27]
In addition, Mr. Doyon argued that in this
case, a novation was effected. Consequently, the debt prior to 2008 was assumed
by Bol et Gobelet inc. According to Mr. Doyon, all the testimonies pointed
in that direction.
[28]
Mr. Doyon argued that the novation did not
have to be formally confirmed in writing to be in effect. Novation is effected
when there is a change in debtor and consent between the parties, and the
creditor’s intention to effect novation is clear. He maintained that in this
case the testimonies show that a novation was effected.
[29]
According to Mr. Doyon, Mr. Gingras’s
testimony indicated that, as the creditor, he agreed that Ms. Gingras, the
debtor, be substituted by a new debtor, Bol et Gobelet inc., and that
Ms. Gingras be released from her obligations to Mr. Gingras. In that
regard, he argued that all of the documents confirm the testimony provided by
Mr. Gingras and provided by Ms. Gingras.
i)
Respondent
[30]
The Respondent argued that the testimony of
Mr. Gingras, Ms. Gingras and Gilles Gingras was not credible and
should be disregarded. In addition, the Respondent argued that the agreements
regarding Mr. Gingras’s loans to Ms. Gingras were made after the ABIL
application was rejected by the CRA in 2012. For example, the Crown argued that
the document dated January 15, 2008, was provided to the CRA only after the
ABIL was rejected. According to the Respondent, all the evidence submitted by
Mr. Gingras is not reliable.
[31]
The Respondent argued that Mr. Gingras
cannot claim an ABIL for the loans made in 2007. The Respondent submitted that,
in order to be entitled to claim an ABIL, the loans must have been made to a
Canadian-controlled private corporation. The Respondent argued that, in this
case, the loans made in 2007 were made to Ms. Gingras. She did not
incorporate Bol et Gobelet inc. until 2008. Consequently, Mr. Gingras
cannot claim an ABIL for the loans made in 2007.
[32]
The Respondent also argued that there was no novation
in this case, because the documents regarding the transfer of assets and
liabilities from Ms. Gingras to Bol et Gobelet inc. do not comply with the
novation regulations. According to the Respondent, Ms. Gingras was not
expressly released by Mr. Gingras from her personal debt. The Respondent submitted
that it was an imperfect delegation of payment, because a new debt was not
created.
[33]
The Respondent submitted that Mr. Gingras
could not claim an ABIL for 2007 in any event, because the loans were made solely
to help his daughter, Ms. Gingras, and not to earn income.
[34]
With respect to the loans made in 2008, the
Respondent argued that even if Bol et Gobelet inc. was a private company, more
specifically an SBC, Mr. Gingras could not claim an ABIL, because the
loans made by Mr. Gingras to Bol et Gobelet inc. were solely to help his
daughter, Ms. Gingras, and not to earn an income. Also, according to the
Respondent, the loans were interest-free.
V. ANALYSIS
[35]
Mr. Gingras will be entitled to deduct an
ABIL if the following conditions are met:
1.
He had a debt owed to him at the end of 2008, in
accordance with subparagraph 39(1)(c)(ii) and paragraph 50(1)(a);
2.
The debt was acquired by Mr. Gingras in
order to earn income, in accordance with subparagraph 40(2)(g)(ii);
3.
The debtor is an SBC under clause 39(1)(c)(iv)(A);
4.
The debt is bad at the end of the year, in
accordance with paragraph 50(1)(a).
[36]
However, before determining whether these
conditions are met, I must first consider whether in this case a novation was
effected. If a novation has been effected, Bol et Gobelet inc. will be the new
debtor. Consequently, Bol et Gobelet inc. will be liable for the loans that
Mr. Gingras made to Ms. Gingras in 2007.
i)
Novation
[37]
In Quebec civil law, novation is effected when a
debt is substituted for the former debt and with the consent of the new
creditor, a new debtor is substituted to the former debtor, who is discharged
by the creditor. Section 1660 of the Civil Code of Québec
(“C.C.Q.”) presents as follows:
1660. Novation is
effected where the debtor contracts towards his creditor a new debt which is
substituted for the former debt, which is extinguished, or where a new debtor
is substituted for the former debtor, who is discharged by the creditor; in
such a case, novation may be effected without the consent of the former debtor.
Novation is also effected where, by the
effect of a new contract, a new creditor is substituted for the former
creditor, towards whom the debtor is discharged.
[38]
In his treatise, Les obligations, Vincent Karim, summarizes the
conditions relating to novation by substitution of debtor. He writes:
3075. [translation] To effect novation by substitution
of debtor, three conditions must be met. First, a new debtor must replace the
former. Second, the creditor must expressly consent to novation. Furthermore,
although a creditor expressly agrees to the debt being assumed by a new debtor,
this does not necessarily mean that novation has been effected; it may simply
mean that payment has been delegated within the meaning of section 1667
C.C.Q. In this case, the original debtor and the new debtor, who is another
person, will both be liable for the debt due to the creditor.
3076. For novation to be effected, the creditor must
express his intention to release the debtor from his obligation within the
meaning of section 1668 C.C.Q. However, this intention to renew may be
inferred from the circumstances or conduct of the parties. This is the case, for
example, where the obligations incurred and the actions instituted are
incompatible. […]
3077. In short, to effect novation by substitution
of the debtor, the creditor must release the former debtor of his obligation.
This condition in fact requires the creditor’s approval; failure to comply with
this formality will result in imperfect delegation. The debtor cannot
unilaterally be replaced by a new debtor, thus causing prejudice to his
creditor.
[39]
In determining whether novation was effected,
the Respondent asks that I disregard the documents submitted as evidence by
Mr. Gingras, because, according to the Respondent, these documents were made
after the Minister rejected the ABIL. According to the Respondent, I should
also ignore the testimony, because it is not credible.
[40]
I am of the view that it has not been proved
that documents were made after the 2012 audit pursuant to which the ABIL
claimed by Mr. Gingras was rejected. On the contrary, it was shown at the
hearing that the March 30, 2008 agreement between Mr. Gingras and Bol et
Gobelet inc. was part of Mr. Gingras’s 2008 income tax return, produced on
April 29, 2009.
In April 2009, Mr. Gingras could not have known that the Minister would
reject his claim for an ABIL.
[41]
At any rate, as stated by Vincent Karim, novation
does not have to be confirmed in writing. The intention to renew can be
inferred from the circumstances or conduct of the parties.
[42]
In that regard, Mr. Justice Baudouin of the
Appeal Court of Québec in Banque Laurentienne du Canada v. Mackay, clearly stated that novation
is not assumed, but it can still be tacit and does not have to be confirmed in
writing. At paragraph 24 of the decision, he wrote as follows:
[24] [translation]
Admittedly, although novation cannot be assumed, it may, nevertheless, be tacit
(for example, arise from the behaviour or conduct of the creditor who clearly
demonstrates his intention to release the original debtor. (See: Rémy v.
Gagnon, [1971] C.A. 554 p. 557; Nadeau-Mercier v. Barbeau, [1988
CanLII 555 (QC CA),] [1988] R.J.Q. 1159 (C.A.); Trust Général du Canada v.
Immeubles Restau-bar inc., J.E. 94-706 (C.S.); Trust Royal v.
Entreprises B.M. St-Jean, [1997 CanLII 8959 (QC CS),] J.E. 97-1158 (C.S.); Caisse
Populaire Desjardins v. Auclair, [1998 CanLII 11729 (QC CS),] R.E.J.B.
1998-09747 (C.S.); Banque Laurentienne du Canada v. Adeclat, J.E.
99-1643 (C.S.); [1999 CanLII 12173 (QC CS),] R.E.J.B. 1999-13740 (C.S.).)
However, again, the intention to do this must not be ambiguous, we must prefer
the solution, which maintains the creditor’s rights. However, it is certainly
not necessary that the novation be formally confirmed in writing.
[43]
I am of the opinion that the testimony of by
Mr. Gingras and of Ms. Gingras was clear as to the intent to renew.
The credibility of the witnesses, Mr. Gingras, Ms. Gingras and Gilles
Gingras, was not challenged at the hearing.
[44]
Mr. Gingras and Ms. Gingras both
testified they had agreed that pursuant to the incorporation of Bol et Goblet
inc. in 2008, Ms. Gingras would be released from all debt incurred prior
to 2008 relating to the Bol et Gobelet registered business. The evidence also shows
that Mr. Gingras agreed that Bol et Gobelet inc. would assume all of
Ms. Gingras’s assets and liabilities, including those of 2007, and that
the former debtor, Ms. Gingras, would be substituted by Bol et Gobelet
inc.
[45]
The actions of the individuals involved,
Mr. Gingras and Ms. Gingras, also confirmed that a novation was
effected. For example:
i) I note that in the context of Ms. Gingras’s bankruptcy, the
statement of debts attributable to Ms. Gingras does not include any debts
attributable to the Bol et Gobelet inc. restaurant;
ii) In the December 31, 2008 Bol et Gobelet inc. balance sheet prepared
by Marie-Sol, Mr. Gingras’s $104,330.30 debt was posted to the “Long-term
liability” line item and represented all loans for 2007 and 2008;
iii) In
his 2008 income tax return produced on April 29, 2009, Mr. Gingras claimed
a $102,512 BIL, representing all loans for 2007 and 2008, equal to a $51,256
ABIL.
[46]
Also, I am of the view that the documents,
although incomplete, confirm the testimony provided by Mr. Gingras,
Ms. Gingras and Gilles Gingras regarding the novation.
[47]
The first document, the January 15, 2008
agreement between Bol et Gobelet inc., Mr. Gingras and Le Groupe
Rassurance inc., provided that [translation]“the
amount already borrowed and any additional amounts will be reimbursable by 120
monthly payments starting on January 1, 2009 plus interest at a 6% annual
interest rate.”
[48]
The second document, dated January 16, 2008,
written by Ms. Gingras but not signed, [translation]
“confirms that the Bol et
Gobelet restaurant was converted from a registered business to an incorporated
company.... All of the assets, liabilities and operations since July 2007 are
therefore assumed by the incorporated company starting on January 15, 2008.”
[49]
The third document is the March 30, 2008
agreement between Mr. Gingras and Bol et Gobelet inc. represented by
Ms. Gingras. In this agreement, [translation]
“the lender agrees to
provide a line of credit loan, which will be disbursed in accordance with the
borrower’s needs in order to facilitate start-up of the business, acquisition
of equipment and leasehold improvements. This loan will bear a 6% annual
interest rate and will be reimbursable starting January 2009, by 120 monthly
payments.” This agreement was part of
Mr. Gingras’s 2008 income tax return filed with the CRA on April 29, 2009.
[50]
The Respondent argued that there were
contradictions in the testimonies. The witnesses could not say when the
documents had been signed. First, as I have already indicated, a novation does
not have to be confirmed in writing. In addition, we cannot overlook the fact
that Mr. Gingras learned in November 2007 that he had cancer and that
he began undergoing treatment at that time. His priority at that time was to
cure his cancer. In this regard, Mr. Gingras did not attempt to hide that
he could not say exactly when the documents were signed. Ms. Gingras
indicated that the documents were not signed contemporaneously, because she did
not dare disturb her father, due to his illness. The hearing was held in 2016,
eight years after the events, and it is understandable that the witnesses were
unable to remember all the dates accurately.
[51]
As to why there were two documents that contained
essentially the same terms and conditions, the January 15, 2008 and March 30,
2008 agreements, Mr. Gingras explained that he did not want to confuse the
CRA by including his company, Le Groupe Rassurance inc. Therefore, he preferred
to sign another agreement without Le Groupe Rassurance inc. as party to the agreement.
That explanation makes sense.
[52]
For these reasons, I am of the opinion that in
this case a novation was effected.
ii)
Were the 2007 and 2008 loans made to earn income
from a business or property?
[53]
The Respondent argued that Mr. Gingras had
lent money to Bol et Gobelet inc. only to help his daughter. According to the
Respondent, the debt was not acquired by Mr. Gingras in order to earn
income. Consequently, Mr. Gingras cannot claim an ABIL.
[54]
Under subparagraph 40(2)(g)(ii) of
the ITA, Mr. Gingras can claim an ABIL only if he shows that the debt was
acquired to earn income from a business or property.
[55]
Mr. Gingras and Ms. Gingras testified
that they had agreed from the outset that the amounts loaned generated 6%
interest income. The January 15, 2008 and March 30, 2008 agreements were
consistent in this regard.
[56]
Also, Mr. Gingras testified that it was
only when the Caisse de Ste-Foy asked him to co-sign Ms. Gingras’s loan
that he decided to lend the money directly to Ms. Gingras.
Mr. Gingras explained that he would benefit from lending the money
directly to Ms. Gingras because the risk was the same, but at least he
would earn interest income. This would enable him to help his daughter start
her business, and at the same time he would earn interest income.
[57]
In MacCallum v. The Queen, Madame Justice Miller
stated that the taxpayer’s intention to help his son did not prevent him from
meeting the requirements of subparagraph 40(2)(g)(ii) of the ITA.
In that case, the parties had not drafted a loan contract. The answer to the
question regarding the intention to earn income from a business or property was
therefore based solely on the credibility of the witnesses. Miller J. found
that there had been no written agreement between the parties, but that the
Appellant intended to earn interest income.
[58]
In this case, the testimonies provided by
Mr. Gingras, Ms. Gingras and Gilles Gingras were consistent:
Mr. Gingras lent Bol et Gobelet inc. sums of money to earn interest
income.
[59]
The documents confirm these testimonies; under
January 15, 2008 and March 30, 2008 agreements, the loans bore a 6% annual
interest rate. I am of the view that Mr. Gingras clearly intended to earn
interest income.
[60]
However, the Respondent argued that interest
only started being charged on the debt on January 1, 2009. The Crown cited Bol
et Gobelet inc.’s income statement for the period from August 1, 2008, to
December 31, 2008, produced by Marie-Sol, in which no interest was reported.
[61]
I do not agree with the Respondent. In that
regard, Mr. Gingras and Gilles Gingras testified that interest started to
be charged on the loans when the loans were paid to Bol et Gobelet inc.
According to the January 15, 2008 and March 30, 2008 agreements, loan payments
were to start on January 1, 2009. However, this did not prevent interest from
being charged as soon as the loans were made.
[62]
At the hearing, an explanation was provided as
to why interest was not included in the income statement prepared by Marie-Sol.
According to Mr. Gingras’s counsel, the interest was not entered because
Ms. Gingras was under the impression that interest charges only started on
January 1, 2009.
[63]
However, we note that in the long-term liability
section of the statement prepared by Marie-Sol, the debt owed to
Mr. Gingras included interest because the debt due to him amounted to
$104,330.30 on December 31, 2008.
This amount included interest.
[64]
Consequently, the testimony of by
Mr. Gingras and of Gilles Gingras that interest was charged as soon as the
loans were made are also confirmed by the documents offered in evidence.
[65]
I therefore find that the debt was acquired by
Mr. Gingras to earn interest income.
iii)
SBC and bad debt
[66]
Two other conditions must be met in order for
Mr. Gingras to be entitled to claim an ABIL.
[67]
The first condition is that the company must be
a SBC, a small business corporation, in accordance with
subparagraph 39(1)(c)(iv) of the ITA.
[68]
In this case, there is no doubt that Bol et
Gobelet inc. was an SBC.
[69]
To meet the second condition, Mr. Gingras
must show that his debt was bad at the end of 2008.
[70]
In Rich v. Canada, Mr. Justice Rothstein, who
was sitting on the Federal Court of Appeal at the time, indicated that the
taxpayer is in the best position to determine whether a debt is bad. Nor is it
necessary for the creditor to exhaust all his remedies before it can be found
that a debt has become bad. According to Rothstein J.A., “[a]ll that is required is an honest and
reasonable assessment.” He also stated that “[t]he non-arm’s length
relationship may justify closer scrutiny than in non-arm’s length situations.
But a non-arm’s length relationship alone, without more, cannot lead to a
finding that the creditor did not honestly and reasonably determine the debt to
be bad.”
[71]
In this case, the Bol et Gobelet inc. restaurant
ceased operations at the end of December 2008. The restaurant posted a $42,846
loss for a five-month period. According to the testimony, the restaurant’s
equipment was sold below purchase cost prices. The proceeds were used to pay
the employees. Furthermore, Ms. Gingras declared bankruptcy.
[72]
In the light of these uncontested facts, I am of
the opinion that Mr. Gingras made an honest and reasonable assessment that
enabled him to find that the loans he had made to Bol et Gobelet inc. had
become bad in 2008. Mr. Gingras may therefore claim a $51,256 ABIL.
[73]
The appeal is therefore allowed with costs.
Signed at
Calgary, Alberta, this 3rd day of November 2016.
“Johanne D’Auray”
Translation certified true
On this 21st day of June 2017.
François
Brunet, Reviser
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