Chapel v. R., [1996] 2 CTC 2457, 96 DTC 3213 (Informal Procedure)

Margeson J.T.C.C.: — The question for the Court is whether or not the Appellant, Zale Chapel, is entitled to a share of the losses claimed in the years 1989 and 1990, which losses allegedly were suffered by him as a limited partner of Golden-Tonkin Research & Development Limited, the “Company” which was a limited partnership under the Partnership Act of British Columbia.

The Appellant claimed a deduction of $6,189.00 in 1989 and $7,420.45 in 1990, as his allocated share of the company’s losses in those years.

The Minister took the position that these losses were not claimable on behalf of the Appellant during the years in question.

Argument of the Respondent

Counsel for the Respondent argued that there was no evidence adduced to satisfy the Court as to when any investment was made by the Appellant. The only investment there could have been was a transfer of shares of Nu Gold to the partnership in exchange for a percentage of the limited partnership. Her position was that you could not make an investment in the partnership by transferring these shares. The shares were supposedly transferred at a time prior to the partnership coming into existence and at the time the partnership did come into existence the shares in Nu Gold were not being traded anymore. They were of little or no value. It was not proved that they were of a value equivalent to the losses claimed by the Appellant. The Appellant was a limited partner under section 96(2.4) of the Act and his at-risk amount under section 96(2.2) of the Act with respect to the partnership, was nil.

Counsel for the Respondent argued further that the Minister was right in concluding on the basis of the evidence of the auditor, who gave evidence in Court, that there was no business carried on during the years in question with any reasonable expectation of profit so that a loss could be claimed. There was no other evidence which showed that the “company’s” business was carried on with any reasonable expectation of profit.

In spite of the fact that Dr. Kutney gave very credible and very interesting evidence it tended only to show that the company was involved in some form of an enterprise which was dealing with a number of products which somewhere down the road might have had a real profit potential but his evidence showed nothing more.

Counsel for the Respondent could see no nexus between that profit potential and the losses of the limited partner which are being claimed here. Further, there was no satisfactory evidence as to what the losses were. In spite of the best interpretation placed upon Dr. Kutney’s testimony one could not conclude that this business was carried on with a reasonable expectation of profit. There was insufficient evidence as to what the business consisted of. How can the Court determine what the responsibilities of the company were, how can the Court determine what the profit would have been, how much the company would have earned or what the company would have paid out?

Counsel referred to the limited period of time during which the partnership operated. In 1989 it only operated for two months, according to the returns. In 1990 for one year and in 1991 for five months. Where is the evidence that there was a reasonable expectation of profit for the company? Immaterial of the fact that the company was in some way interactive with other enterprises which had some interest in and some right to the benefits from certain product development if and when they started producing profits, that was insufficient to entitle the Appellant to the lossed claimed. Counsel further argued that Dr. Kutney had no financial knowledge of the business of the partnership.

Dr. Kutney admitted freely, he did not pretend that he knew. He apparently was a limited partner and his own evidence was that he received his share in the partnership in exchange for his expertise and the work that he did for the partnership. He had no information about the financial viability of the company or what the financial documents would have disclosed.

Counsel for the Respondent said that it is incumbent upon the Appellant to establish the losses, that the Minister has taken that position and pleaded that there were no such losses, they had not been established. The auditor for the Respondent who did the audit and disallowed the deductions took the stand and said that he saw no documentation which would allow him to conclude that these losses ever occurred.

In spite of the best endeavours of the Appellant in cross- examining this witness and attempting to extricate information, the end result was that his testimony was that there were no company documents, no general ledgers and no cheques which could be cross-referenced to the expenditures to show that this company actually expended the monies that resulted in the losses claimed.

Argument of the Appellant

For the Appellant’s part he said Dr. Kutney made an excellent presentation. His evidence is satisfactory, in his opinion, to establish that there was a reasonable expectation of profit on behalf of the company. The fact that there was a failure of the company later on after the years in question was not proof that there was no reasonable expectation of profit. Many companies may fail but yet that is not evidence that in the years 1989 and 1990, which are the two years under review, there was no reasonable expectation of profit.

With respect to the records, the Appellant argued that these records were available, there were financial statements introduced with respect to the 1989 and 1990 taxation years, those documents are sufficient to establish that these losses existed. One of the documents that was introduced was a statement from the accountants which showed expenses. There was a financial statement that showed that these losses were indeed incurred.

He said that there were 18 boxes of documents which were available to the Revenue Canada auditor, he should have been able to glean something from them. These, in his opinion, backed up the position that there were expenses made and that they were the expenses which are being claimed. The auditor did not look for names on the cheques of the general partner, did not look for names such as Anglo-American Holdings, but only looked for cheques which might have been related to Golden-Tonkin Research & Development Limited, the limited partnership, that does not mean that they were not there.

They were there, he said, they are available for Revenue Canada and Revenue Canada should have done a better job of looking at them. Such documents would satisfy the Court that the losses were incurred. (He was not arguing that such documents were placed before the Court).

With respect to the at-risk amount, the Appellant said that it is not strange that you might take a long period of time in lining up investors who are prepared to put money into a company, to make an investment long before the partnership was actually brought into existence and just because that might have happened here that does not mean that there was not a real transfer of an asset with a value, by the Appellant, equivalent to his share of the losses being claimed here.

He said that Revenue Canada recognized on the one hand the return filed by himself claiming a capital gain but now it says that in spite of that for this case there are no losses that can be claimed because they do not accept the valuation. How can they have it both ways? He argued that the appeal should be allowed and the losses should be deductible.

Analysis and Decision

The Court has touched upon the evidence that has been given in the matter. The Court will not go into it at any length. Suffice it to say that the evidence with respect to some of the important issues was very sparse. There was a considerable amount of evidence from Dr. Kutney which was very interesting, but it did not touch upon the issues which are involved here.

As a matter of fact the doctor readily admitted that he knew nothing about the financing of the partnership and certainly did not attempt in any way to specify the expenses, nor did he attempt to verify in any way that the expenses claimed here or a portion of the expenses claimed were indeed paid out by the Appellant.

With respect to the at-risk amount argument, the relevant sections of the Act are referred to in the Reply to Notice of Appeal. I need not repeat them but they obviously have as their purpose the limiting of claims for losses to the amount of the money which a taxpayer has at risk.

The Court agrees with the argument of counsel for the Respondent that there has been unsatisfactory evidence presented to the Court with respect to the amount that the Appellant had at risk. Indeed, if you look at the evidence given, there is contradictory evidence that there was any at-risk amount, or if there was an at-risk amount certainly the Court is not satisfied as to what that amount might have been.

The fact that the company was established after the transfer of the consideration raises a question of credibility, it raises an issue as to whether or not those shares could have been the consideration.

The second issue raised is the actual value of the consideration shares because the evidence showed clearly that they were of little value at that period of time and were not even being traded.

The Appellant did not give evidence and he did not attempt to equate the value of the shares that were traded to the value of his interest in the company. That could have been done. The Appellant had the carriage of his own case. It is not for the Court to try to tell him what to do. It would have been preferable, indeed almost necessary, for him to have led some evidence as to what the value of the transferred shares was, that the transfer took place at the time alleged and was in exchange for his interest in the partnership.

With respect to the business being carried on with a reasonable expectation of profit the Court again finds that the Appellant has not met the burden upon him in this case. The evidence of the auditor from Revenue Canada was that from all the records that he looked at, he was not satisfied that there was any reasonable expectation of profit. The Court is not bound by his conclusion, of course. It is the Court’s duty to decide whether there was a reasonable expectation of profit. In spite of the fact that the Court is impressed by the evidence of Dr. Kutney the Court is not satisfied that his evidence is such that the Court could conclude from it that there was a reasonable expectation of profit by the company during the period in question.

It may very well be that somewhere down the road these products will produce a profit but there was no evidence to connect them to the actions of the company during the years in question and indeed Dr. Kutney did not attempt to do so. Further, this company was in operation for a short period of time during the years in question as indicated.

The Court accepts the argument that Dr. Kutney had no financial knowledge of the facts and this could have been supplied, presumably, by somebody. The Appellant’s argument was that the records were available but unfortunately that does not help him.

With respect to the proof of the losses, the Court is satisfied that there was no evidence whatsoever before it from which it could conclude that the losses claimed were actually suffered by the company in the years in question. There was some suggestion with respect to amounts and some suggestion with respect to expenses but the evidence did not amount to proof as to what the expenses were or that the expenses were reasonable under the circumstances.

The auditor testified that the expenses were not verifiable. There was no evidence before the Court to show that the expenses were as they were alleged to be as to the amounts or that they were related to the partnership so that the Appellant could claim his share of those expenses.

The Appellant said that there were 18 boxes of records which the auditor might have looked at but it is not the job of the Respondent or the Courts to make the Appellant’s case, that is the Appellant’s job. He may have had 18 boxes of documents to look at but the auditor’s evidence was that there was nothing that he found in any of them that would have assisted him in any way in verifying the claim of the Appellant, even though it was not his job to do so.

It is no answer to come to Court and say, the Minister of Revenue should have made my case for me, or should have established my expenses. That is not the Minister’s job. In spite of the argument of the Appellant that Dr. Kutney’s evidence established that there was a reasonable expectation of profit the Court has already indicated it does not accept that argument and does not accept any argument as to why the records are not here. Even if there was some valid reason why they were not here that would not be proof of the facts upon which the Appellant must rely to make its case.

With respect to the at-risk amount, the Court has already found that there has not been satisfactory evidence on that, in spite of the fact that the Appellant argued that the company or the limited partnership took some period of time to line up investors and that it is not strange that the partnership might not have been set up until sometime later.

In spite of that argument and in spite of the fact that there appears to have been a return filed by the Appellant in which he claimed a capital gains tax on these shares that were transferred, that supposedly being the consideration for his interest in the limited partnership, this does not prove to the Court what the value of the Appellant’s interest in the company was so that one could establish the “at-risk” amount.

The auditor might have been completely wrong in accepting that return and for whatever reason he did it, that is not for this Court to consider. From what he said himself one would imagine that he was trying to be as fair as he could to the party who filed the return but he was leaving open, of course, the possibility that the Court might decide differently.

In any event, even if he accepted on behalf of the Minister the return setting out the value of the capital gains on the shares, that does not bind this Court to find that that was the amount that the Appellant had at risk. Indeed the Court is satisfied that that has not been established.

For all those reasons the Court will dismiss the appeal and confirm the Minister’s assessment.

Appeal dismissed.