Mercier v. R., [1996] 1 CTC 2898, 97 DTC 242

Bowman J.T.C.C.: — This appeal is from an assessment for the appellant’s 1990 taxation year. The issue is one of fact. It involves the question whether Mr. Mercier made loans of $21,000, $30,000 and $34,000 to three companies, 379437 Alberta Ltd., Wall of Fortune (W.E.M. No.l) Inc., and Arizona Gold Inc. The appellant claims a deduction of 3/4 of these amounts as an allowable business investment loss within the meaning of paragraphs 38(c) and 39(1 )(c) of the Income Tax Act. The Minister of National Revenue on assessing disallowed the losses claimed on the basis that it had not been established that Mr. Mercier had made the loans at all. A further point was raised with respect to the alleged loan to Arizona Gold Inc., that even if money had been loaned to that company, it was not a small business corporation as defined in section 248.

Paragraph 38(c) of the Income Tax Act read as follows in 1990:

(c) a taxpayer’s allowable business investment loss for a taxation year from the disposition of any property is 3/4 of his business investment loss for the year from the disposition of that property.

Paragraph 39(1 )(c) read in part as follows:

(c) a taxpayer’s business investment loss for a taxation year from the disposition of any property is the amount, if any, by which his capital loss for the year from a disposition after 1977

(i) to which subsection 50(1) applies, or

(ii) to a person with whom he was dealing at arm’s length

of any property that is

(iii) a share of the capital stock of a small business corporation, or

(iv) a debt owing to the taxpayer by a small business corporation other than, where the taxpayer is a corporation, a debt owed to it by a small business corporation with which it does not deal at arm’s length

exceeds the aggregate of

... [the rest of this paragraph is irrelevant for the purposes of this case].

“Small business corporation” is defined in section 248 as follows:

“small business corporation” at any particular time means a particular corporation that is a Canadian- controlled private corporation all or substantially all of the fair market value of the assets of which at that time was attributable to assets that were

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

(b) shares of the capital stock of one or more small business corporations that were at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that such small business corporation was at that time a “payer corporation” within the meaning of that subsection) or a bond, debenture, bill, note, mortgage, hypothec or similar obligation issued by such a connected corporation, or

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

and, for the purposes of paragraph 39(1 )(c), includes a corporation that was at any time in the 12 months preceding that time a small business corporation.

The main point here is whether Mr. Mercier has established, on a balance of probabilities, that he did in fact loan the amounts alleged to the companies mentioned above.

Although Mr. Mercier has engaged in the business of real estate sales and property management he has also been involved in other types of business ventures.

In filing his return for 1990 he originally claimed an AB IL of $24,750 (i.e. 3/4 of $33,000). In an amended return he claimed an AB IL of $38,250 (i.e. 3/4 of $51,000 [$21,000 + $30,000] the amount of the alleged loans to 379437 Alberta Ltd. and to Wall of Fortune (W.E.M. No.1) Inc.). In his appeal to this court he claimed of $41,250, made up as follows:

The story begins with the incorporation in 1987 by Mr. Mercier of Fullcorp Holdings Ltd. which carried on a real estate and property management business under the name of Fullcorp Realty and Property Management. Originally, Mr. Mercier owned all of the shares, but subsequently a Mr. Marjan Skrinjar became a 50 per cent shareholder, although at one point it appears that 20 per cent of the shares were owned by a company Profitable Holdings Ltd. owned by Mr. James Cox, Mr. Mercier’s lawyer. The appellant and Mr. Skrinjar owned a warehouse which they subsequently sold at a profit. In 1987 or 1988, they also bought an office building which was owned 1/3 by Fullcorp, 1/3 by Profitable Holdings and 1/3 by Mr. Skrinjar personally. They moved into the building and changed Fullcorp’s name to Realty World (Fullcorp) Ltd., a franchised real estate broker.

In the fall of 1987 they were approached by one David Toop who invited them to invest in a business of purifying sand. He proposed that they put up $70,000 by way of loan to the company exploiting the concept, Diversified Marketing Inc. (“D.M.I.”). The idea was that the money would be put up by 379437 Alberta Ltd., which was owned equally by Messrs Mercier and Skrinjar.

It was stated that Mr. Skrinjar put up $42,000, the appellant $21,000 and one Deborah Schreiner, $7,000, and that 379437 would hold the shares of D.M.I. in trust for the three investors.

The appellant contended that Mr. Skrinjar paid $63,000 to 379437 of which $42,000 was advanced on his own behalf and $21,000 on behalf of the appellant.

The appellant relied upon Exhibit A-3 to support the conclusion that he paid $21,000 to Mr. Skrinjar. This is a five page document in Mr. Mercier’s handwriting setting out debits and credits reflecting the financial dealings between him and Mr. Skrinjar. The relationship (loosely, a sort of partnership) was obviously a good one, and they trusted each other. As a means of periodically settling accounts between them it seems to have worked, but as evidence demonstrating, even on a balance of probabilities, that $21,000 was loaned by Mr. Mercier to 379437, it is simply insufficient. Mr. Mercier and Mr. Skrinjar appear to have been involved in a variety of commercial enterprises together — a warehouse, a truck wash, a company called Rosetown, shares purchased through a stockholder, Fullcorp, various numbered companies, a company called Ronmar, a shopping centre (Erminskin), and Profitable Holdings Ltd. (in which the lawyer Mr. Cox was involved) — to mention only a few. Moneys flowed into these companies or businesses from Mr. Mercier or Mr. Skrinjar, or they flowed out to them and the only record seems to have been Exhibit A-3. The idea was to divide everything up between them, but, at least in one case the pluses and minuses got mixed up. Evidently no real recognition was given to the existence of corporate entities which might have been the owners of the various assets. Sometimes one entity would be said to be holding in trust for another, but is was not always clear who was holding what or for whom. Mr. Mercier seems to have carried a great deal of information around in his head. The system seems to have worked for Mr. Mercier and Mr. Skrinjar, but to an outsider such as myself, who is trying to find a logical pattern leading to a conclusion that the appellant made loans in specific amounts to certain companies, the evidence is haphazard to the point of incomprehensibility. This case does illustrate the point that if a taxpayer expects tax consequences of business arrangements to be recognized there should be a modicum record keeping. Having a variety of companies floating about with some vague indication that some of them may be holding in trust for other persons only serves to confuse matters more.

So far as the alleged loan of $30,000 to Wall of Fortune (W.E.M. No.l) Inc. is concerned two things seem reasonably clear. First, Wall of Fortune (W.E.M. No.l) Inc. issued a debenture for $195,000 to 379790 Alberta Ltd. and to General West Developments Ltd. whose respective interests in the debenture were 75 per cent and 25 per cent.

Second, 379790 Alberta Ltd. held shares in Wall of Fortune (W.E.M. No.1) Inc. in trust for the following persons:

Rosetown Holdings Ltd.: 10

373400 Alberta Ltd.: 50

Ron Mercier: 15

Wall of Fortune was a concept developed by Wall of Fortune Inc. It was a publicity scheme involving a wall 25’x 9 1/2’ to be erected in the West Edmonton Mall. Due to an apparent personality conflict between the promoters and the manager of the West Edmonton Mall the wall was never put up and the project fell apart and the money was lost.

The evidence on this alleged investment is confusing but it is marginally better than in the case of the alleged investment in 379437. Mr. Cox testified that $35,000 went from Rosetown into the Wall of Fortune investment through 379790 from the proceeds of the sale of a shopping centre of which $15,000 was on behalf of Mr. Mercier. Also, the appellant testified that he paid $7,000 directly to Mr. Cox which he invested in the venture. I am unable to account for the further $8,000 making up the $30,000. I am however satisfied that the appellant did in fact invest $22,000 in the Wall of Fortune debenture and that he lost it.

Concerning the Arizona Gold venture moneys allegedly were paid to Arizona Gold Inc. through one Kozak or a firm of chartered accountants. The history of this venture was that in 1990 the appellant and another person incorporated Arizona Gold Inc. which was to hold shares in Kozak Minerals (U.S.) Inc., an Arizona corporation. The other shareholder was Kozak Mining (U.S.) Inc., a Delaware corporation. Kozak Minerals (U.S.) Inc. was to participate in a joint venture with North Continental Energy Ltd. to use technology developed by Diversified Marketing Inc. to screen gold from old goldmine mine tailings in Arizona.

It is by no means clear just who got the money that the appellant allegedly by invested in Arizona Gold Inc. Some of it went to Kozak and some appears to have been paid to a firm of chartered accountants. It is unclear whether any of it ended up in the hands of Arizona Gold Inc. Some may have gone to Kozak Minerals and some may have gone to Kozak Mining. I do not think that the evidence establishes that a loan was made in the amount of $34,000 to Arizona Gold Inc.

Moreover, even if the loan to Arizona Gold Inc. had been established I do not think that Arizona Gold Inc. was a small business corporation. Its only asset appears to have been a licensing agreement with Kozak Minerals (U.S.) Inc. permitting the latter company to exploit a process in the United States of screening gold. It cannot be said that all or substantially all of the fair market value of the assets of Arizona Gold Inc. was attributable to assets that were used in an active business carried on primarily in Canada.

Out of the business investment loss of $55,000 claimed by Mr. Mercier I think that he has established $22,000, 3/4 of which is deductible as an allowable business investment loss. As to the balance claimed, his case fails largely because of the haphazard state of his records. I found Mr. Mercier a very credible witness, but, notwithstanding the fact that the court can make findings of fact that are based on evidence that might not satisfy an assessor from the Department of National Revenue, I do need some sort of evidentiary peg upon which to hang a conclusion.

The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to permit the deduction by the appellant in computing his income for 1990 of an allowable business investment loss of $16,500.

Success is divided. There will be no order as to costs.

Appeal allowed in part.