Tony Mele, Tony Mele Incorporated v. Minister of National Revenue, [1985] 1 CTC 2082, 85 DTC 88

M J Bonner:—Tony Mele Incorporated (the “company”) appeals from an assessment of income tax for its 1980 taxation year. Tony Mele appeals from assessments for his 1978, 1979 and 1980 taxation years. The appeals were heard together on common evidence. Mr Mele was at all relevant times controlling shareholder of the company. The only other shareholder was his wife.

In assessing the company for tax in 1980 the Minister added to declared income:

(a) $7,034 described as “Overstated rent expense”;

(b) $17,100 described as “Overstated sub-contracts expense”; and

(c) $9,000 described as “Overstated travel”.

The first two additions were disputed, the third was not.

In assessing Tony Mele for 1978 the Minister added to declared income $18,950, an item described in the notice of reassessment as “Appropriation of funds re Tony Mele Inc — Advances to Third Parties”. For 1979 the Minister disallowed a farm loss claimed in the amount of $11,175.80. For 1980 he disallowed a second farm loss of $11,297.65, and he added to declared income $17,100 described in the notice of reassessment as “Appropriation of funds re Tony Mele Inc (advances to Third Parties)”.

I will deal first with the appropriations and the so-called overstated subcontracts expense. The amounts totalling $18,950 were described by Mr Mele in evidence as loans made by the company to three persons, Joe Serratore, Carlo Diorio and Ray Leckyre. The amounts totalling $17,100 were described by Mr Mele as loans made to Joe Serratore.

None of the loans was repaid, save for the $1,150 advanced to Mr Diorio. No promissory note or other evidence of security for repayment of the various indebtednesses was ever taken, save for an acknowledgment said to have been signed by Mr Serratore a year or so after the 1978 advances were made. Mr Mele contradicted himself at various times in giving evidence as to exactly when that acknowledgment was obtained. There are perhaps two matters of some significance to be found in the acknowledgment:

(a) it states that the amounts were owing to the company; and

(b) it refers to interest at twelve per cent per annum.

The acknowledgment was prepared by Mr Mele’s accountant and given to Mr Mele so that he could arrange to have it signed.

Mr Mele’s evidence was vague as to what arrangements were made for the payment of interest and as to what interest, if any, was paid by Mr Diorio. For example, he said that Mr Leckyre was to pay about ten per cent interest. As to when the debt was due, Mr Mele said that Mr Leckyre said that he would pay shortly.

No attempts to collect appear to have been made by Mr Mele. He testified that Mr Leckyre has disappeared and that Mr Serratore is in jail in connection with a fraud.

Mr Mele knew Mr Diorio slightly. He had met Mr Leckyre through Mr Serratore and had met Mr Serratore at a racetrack and was only, so far as I can tell, slightly acquainted with him. To put it mildly, Mr Mele’s whole course of conduct in relation to these loans was rather strange.

The loans were made by cheques drawn on the company’s bank account. Mr Mele said that the loans were made by the company. I note again that the acknowledgment in relation to the $15,800 loaned to Mr Serratore states that the funds were owing to the company. I am not persuaded that the company was the creditor in respect of those loans. The company carried on a carpentry or construction business. It was not suggested that it carried on the business of a money lender, save in relation to these loans. Corporations can only act through their officers, agents and servants, but there is no indication that Mr Mele, in advancing the funds, was acting as officer, servant or agent of the company. The fact that the necessary funds were drawn directly from the company’s bank ac- count is as consistent with an appropriation of such funds by Mr Mele as it is with loans made by the company directly to the borrower. There was no evidence as to the basis on which the accountant reached the conclusion embodied in the acknowledgment that the $15,800 owing by Mr Serratore was owing to the company. It seems unlikely that Mr Serratore, who after all was only a racetrack acquaintance of Mr Mele, knew or cared when he signed the acknowledgment whether he had borrowed the money from Mr Mele or from his company. Mr Mele’s statements that the loans were made by the company were statements of a conclusion of fact totally unsupported by any other evidence. In a rather different factual context Jackett, CJ, in the case of Amelia Rose v MNR, [1973] CTC 74; 73 DTC 5083, (it was a case which dealt with the question whether corporate partners were engaged in a business) said at 80 [5087]:

In a case where the partners are corporations, however, I should have thought that, before individuals can carry on business on behalf of the partnership, they must have some authority from the corporate partners and that it would ordinarily be given by way of corporate resolutions. Even assuming corporate resolutions are unnecessary, at least the responsible officers of all the corporate partners should have given the necessary authority either in writing or verbally. There is no evidence of any such authority having been given in this case and, having regard to the way that the appellant’s case was presented, I have no doubt that, if any such authority had been given, it would have been proven.

As I appreciate the evidence in this case, the five individuals in question, believing that a partnership agreement had been executed and knowing that there was intended to be a services agreement, decided in their own minds that they would act on behalf of the partnership in performing the services to be provided under that agreement. In my view, where corporations are involved and the existence of such relationship is important as against third persons such as the Revenue, this is not sufficient.

Those remarks apply mutatis mutandis here. I cannot find that the loans were made by the company. It follows then that they were made by Mr Mele with funds which he appropriated from the company.

The $17,100 in loans made by Mr Mele to Mr Serratore in 1980 which the company sought to deduct under the wildly improbable heading of “subcontracts expense” were a disposition of profits earned and not a deductible cost of earning profits.

I turn next to the farm losses. The activity involved was the maintenance of horses for racing. It was carried on in 1979 by Mr Mele in partnership with Marsilio De Dominicis. In that year Mr Mele owned a farm in partnership with Gloria De Dominicis. Subsequently the partnerships merged into one in which Mr Mele had a 50 per cent share and Mr and Mrs De Dominicis each had a 25 per cent share. Mr Mele had no prior experience in the racing of horses. There is no evidence that his partners did either. Counsel submitted that there was a reasonable expectation of profit because some money was generated and the horses were raced. The appellant testified that he believed that one of the animals might make money and counsel further said that the appellant did all the things which a person in the business would do to make money. As to that last submission, I can only say there was no evidence to support it. The only evidence was that the appellant owned a brood mare, raced one or two horses (and how often was not indicated) and won one purse for a total of about $400. An activity involving the ownership of a few horses and the occasional entry of one of them in perhaps one or two races may be a business or it may be a hobby. However, such activity does not necessarily carry with it a reasonable expectation of profit. The evidence did not demonstrate the existence of any organized or systematic operation which had a realistic potential for earning revenues in excess of expenses. This branch of the appeals also fails.

I turn now to the final issue, rent expense. It seems that since 1973 the company occupied space in the appellant’s home. That space was used as an office. In 1978 and 1979, in talking to a tax department auditor, Mr Mele discovered that the amount which the company had been paying to him as rent was less than what the respondent would have permitted. He discussed the matter with his accountant who thereupon put an entry in the company’s books charging as an expense for 1980 the difference between what might have been charged up to that year and what had, in fact, been charged up to then. The Minister disallowed the adjustment so far as it related to the period before 1977 because those years were, according to the assessor, statute-barred. The disallowance is, in my view, correct, although I do not think that subsection 152(5) of the Income Tax Act has anything to do with the matter. The essential question, as I see it, is what was the profit of the company for 1980. That profit would be distorted if, in computing it, a deduction were allowed for the rent of prior years. It might be helpful to refer to what Viscount Simon said in IRC v Gardner Mountain & D’Ambrumenil, Ltd, 29 TC 69 at 93:

In calculating the taxable profit of a business . . . services completely rendered or goods supplied, which are not to be paid for till a subsequent year, cannot, generally speaking, be dealt with by treating the taxpayer’s outlay as pure loss in the year in which it was incurred and bringing in the remuneration as pure profit in the subsequent year in which it is paid, or is due to be paid. In making an assessment .. . the net result of the transaction, setting expenses on the one side and a figure for remuneration on the other side, ought to appear . . . in the same year’s profit and loss account, and that year will be the year when the service was rendered or the goods delivered.

The same principle, in my view, applies to the rent. It would distort the profit for 1980 if the adjustment for prior years’ rent were charged solely to 1980 revenues. It follows then that the appeals fail on this issue.

No entitlement to relief has been demonstrated in any of the appeals and all will therefore be dismissed.

Appeals dismissed.