Ena M Casselman v. Minister of National Revenue, [1983] CTC 2584, 83 DTC 522

Tremblay, TCJ:—This case was heard on May 31, 1983, at the City of London, Ontario.

1. The Point at Issue

The point at issue is whether the appellant is correct in deducting the amount of $13,201 as business investment loss. The appellant indeed, in October 1978, had to repay the Royal Bank of Canada for loans made by Gordon R Casselman Limited. The appellant had guaranteed the said loans in 1976 and 1977.

The respondent’s contention is that the consideration to be paid pursuant to the guarantee obligations was nominal sums of $1, the quantum of consideration being relevant in determining whether the guarantees were given. Moreover, the respondent contends that the guarantees were not given for the purpose of earning and producing income from a business of property, and therefore the loss was nil.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195, 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

4. In assessing the Appellant for tax for the 1978 taxation year, the minister of National Revenue assumed that the said guarantees were not given by the Appellant for the purpose of gaining or producing income from a business or property of the Appellant.

3. The Facts

The material facts are not in dispute.

3.01 In early 1976, Gordon R Casselman Limited (hereinafter called the company) was incorporated, the only shareholder being Gordon R Casselman, the appellant’s son. The main object of the company was residential construction.

3.02 On October 14, 1976 and May 25, 1977, the appellant undertook to guarantee loans from the Royal Bank of Canada (hereinafter called the bank) to the company in the amounts of $30,000 at the rate of 1% per month and $20,000 at the rate of 9 /4% per annum respectively. Each “Guarantee and Postponement of Claim” signed on the bank form 812(3-76) was filed as Exhibits A-1 and A-2.

3.03 The same day the guarantees were signed agreements were entered into between the appellant and the company providing, among other things that the guarantees were given for consideration of one ($1) dollar. Each agreement was filed as Exhibits A-3 and A-4.

The only changes between Exhibits A-3 and A-4 are the dates and the amounts. Agreement A-3 reads as follows:

THIS AGREEMENT made this 14th day of October, 1976.

BETWEEN:

MABEL CASSELMAN

hereinafter called Casselman

OF THE FIRST PART

— and —

GORDON R CASSELMAN LIMITED

hereinafter called the Company

OF THE SECOND PART

NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the sum of ONE — ($1.00) — DOLLAR (the receipt whereof is hereby acknowledged), Casselman, for herself, her heirs, executors, administrators, successors, and assigns, covenants, promises and agrees with the Company, its successors and assigns, that she will at any time or times pay or cause to be paid to The Royal Bank of Canada (hereinafter called the Bank), any monies or payments due at any time or times, as a result of a loan secured on October 14th, 1976 in the sum of $30,000.00 by the said Company from the Bank, immediately upon the default of such monies or payments by the said Company.

Casselman further agrees to observe and perform, or cause to be observed and performed, all the covenants, terms provisoes, stipulations and conditions contained in said loans on the part of the said Company, and will at all times, indemnify, protect and save harmless the Bank from all loss, costs and damage in respect of the advance of the loan monies and every matter and thing therein contained, that no release and releases of any portion or portions and no indulgence shown by the Bank in respect of any default by the Company which may arise under the said loans and that no extension or extensions granted by the Bank observing or performing any covenant, agreement matter or thing therein contained to be done, observed or performed by the Company, nor any dealings between the Company performed by the Company nor the bankruptcy or insolvency of the Company, nor any other dealing between the Company and the Bank shall in any way modify, alter, vary or in any way prejudice the Bank or affect the liability of Casselman in any way under this covenant; which shall continue and be binding upon her as well after as before default and after as before maturity of these loans until the said monies are fully paid and satisfied.

The terms of the loan shall be a two year loan at which time the full amount of the loan shall become due and payable.

No amount of the principal shall be repayable before this time. The interest rate shall be one per centum (1%) per month, payable monthly.

Should the interest payments be missed for a consecutive three month period, the parties hereby agree that the two year term of the loan shall be rendered null and void and the loan shall immediately mature and be deemed a demand loan as of the date of the third consecutive interest payment becoming overdue.

IN WITNESS WHEREOF the Party of the first part has hereunto set her hand and seal, and the Party of the second part has hereto affixed its corporate seal attested by the hands of its duly authorized officers.

SIGNED, SEALED AND DELIVERED )

in the presence of: )

)

) (signed)

) MABEL CASSELMAN

GORDON R CASSELMAN LIMITED

PER: (signed)

3.04 On October 6, 1978, the company having not paid the principal to the bank, the latter demanded from the appellant the payment by October 20, 1978 of the sum of $50,000 plus interest. The letter was filed as Exhibit A-5.

3.05 On October 24, 1978, the appellant paid $21,535.40 and on November 1, 1978, $30,149.58, as it appears in a letter dated November 3, 1978 from the bank to the appellant. This is Exhibit A-6.

3.06 On October 27, 1978 and on November 3, 1978 an “Agreement of Loan” was entered into between the appellant and the company. These agreements were filed as Exhibits A-7 and A-8.

In each case, it was for a two-year term loan at the rate of 1% per month. The capital was in sum the capital she had to pay to the bank,. $20,002.87 (Exhibit A-7) and $29,999.13 (Exhibit A-8).

3.07 The appellant said that before signing the guarantees and agreements (Exhibits A-1, A-2, A-3, A-4, A-7 and A-8) she had a lawyer study and prepare the documents to protect her interest.

3.08 The name of the company was changed to 2332297 Ontario Limited.

3.09 On April 27, 1979, the appellant filed her Federal and Ontario income tax return for the taxation year 1978 claiming a business investment loss of $13,201. The return was filed as Exhibit R-1. The financial statement concerning the business investment loss reads as follows:

MABEL CASSELMAN

ALLOWABLE BUSINESS INVESTMENT LOSS 1978

Capital Investment —

2332297 Ontario Limited

March 1, 1976	$ 5,007
October 24, 1978*	50,000
Total investment, A AC B	55,007
Proceeds	Nil
Loss	55,007
Allowable business investment loss	27,504
Applied to 1978	13,201
Carry forward to 1979	$14,303

*Royal Bank Guarantee Called

3.10 In November 1979, the appellant received from the company (or from her son — she did not remember) the amount of $21,535.40.

3.11 In its operational life the company built one house. Now the company is in existence only on paper.

3.12 In her examination-in-chief the apellant said that the money she used to pay the bank was money received from her father’s estate.

3.13 In cross-examination, the appellant said that it was because the company was owned by her son that she guaranteed the loan. She would not have guaranteed a loan for another person.

4.1. Law — Case at Law — Analysis

4.01. Law

The main provision of the Income Tax Act involved in the instant case is subparagraph 40(2)(g)(ii). It reads as follows:

40 (2) Notwithstanding subsection (1),

(g) a taxpayer’s loss, if any, from the disposition of a property, to the extent that it is

(i) a superficial loss,

(ii) a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm’s length,

(iii) a loss from the disposition of any personal-use property of the taxpayer other than listed personal property,

(iv) a loss from the disposition of property to

(A) a trust governed by a plan referred to in any of clauses 54(c)(v)(B) to (D) under which he is a beneficiary or immediately after the disposition becomes a beneficiary, or

(B) a trust governed by a registered retirement savings plan under which he or his spouse is an annuitant or becomes, within 60 days after the end of the taxation year, an annuitant, or

(v) where the taxpayer is a trust governed by a plan referred to in any of clauses 54(c)(v)(A) to (D), a loss from the disposition of property to a beneficiary or annuitant thereunder,

is nil.

4.02 Case at law

Helmut Mueller v MNR, [1982] CTC 2182; 82 DTC 1174.

4.03 Analysis

4.03.1 Pursuant to subparagraph 40(2)(g)(ii) quoted above, the taxpayer’s loss from the disposition of a debt or other right to receive an amount is nil unless it was acquired for the purpose of gaining or producing income from a business or property.

In the instant case, the crux of the matter is whether the appellant acted for the purpose of gaining income when she signed the guarantees in 1976 and in 1977.

The intention is more particularly expressed in the collateral of the guarantees in the agreements A-3 and A-4. The agreements A-7 and A-8 are only a consequence of the fact that the company had not paid the bank and that the appellant had to pay it.

4.03.2 The counsel for the appellant contends that it was a business venture. In the collateral, agreements A-3 and A-4 indeed provided that if the appellant is obliged to pay the loan, the company shall reimburse the appellant at the rate of one per centum (1%) per month. The loan made in May 1977 of $20,000 was only at the rate of 9%% per annum (para. 3.02). The difference between the two rates would be sufficient to justify the appellant to sign “for the purpose of gaining income”.

4.03.3 The counsel for the appellant also submitted that the quantum of consideration is not a factor to be considered in determining whether a guarantee is given for the purpose of gaining income. Moreover, the appellant had a lawyer to protect her interest in the transactions.

4.03.4 The Court thinks that the appellant well summarized the whole matter when she said that if the company had not been owned by her son, she never would have signed the guarantees.

The requirements she made to sign the guarantees are indeed not ordinary requirements between businessmen. She required only that the amounts she would have to pay to the bank, because of the guarantees, should have to be reimbursed to her. The amounts of interest paid to the bank by the appellant were not even included as capital amounts in the agreements A-7 and A-8. If, in fact, in the fall of 1979 the company paid $21,535.40 to the appellant, it was the exact amount paid by the appellant to the bank in capital and in interest on October 24, 1978 (para 3.05). Therefore no interest was charged on this amount.

The difference between the rate of 9%% per year and 1% per month, as alleged by the counsel for the appellant, cannot be taken into consideration as incentive, when one considers that the interest paid to the bank was not even included as Capital in the agreement A-7. Moreover, the risk involved in guaranteeing a debt of $50,000 can have its justification only in the quantum of the consideration when the guarantee was given. In fact, there was no quantum at all. Because of the mother-son relationship, the mother desired to help her son. That was the only motivation in this transaction. There was no business purpose, it was not done for the purpose of gaining or producing income.

The Court must maintain the reassessment.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.