Wayne Taylor v. Her Majesty the Queen, [1996] 3 CTC 2942 (Informal Procedure)

Taylor J.T.C.C. : — These are appeals heard in London, Ontario on August 27, 1996 under the Informal Procedure, against assessments in which the Respondent disallowed claims for the “Allowable Business Investment Loss” (A.B.I.L.) as follows:

In summary, the position taken by Mr. Taylor in the pleadings, in Court, and by the documentation filed was that the loans and the guarantee had been made for the purpose of gaining or producing income, and that he had satisfied himself there was no opportunity for collection - hence the claims. Further that while these loans and the guarantee had been made to the company “Future Alarms Systems and Signals Inc.” while his son was the director, shareholder and officer of the corporation, these amounts had become uncollectible only after his son no longer was in the company, and it was under the sole direction of an unrelated party.

Counsel for the Respondent however disagreed with all the points noted above. As she saw it, for the guarantee ($15,000) the documentation filed gave no evidence that there had been any opportunity for profit at all, no consideration or security had been provided to Mr. Taylor for the guarantee, and no arrangement was made (other than some limited conversations with the son and the new owner) for payment in case of default. Further there was no indication that Mr. Taylor had tried to collect in any formal way, from the son, from the company or the new owner, albeit that Mr. Taylor understood the company and business with no longer in existence.

With regard to the loans, a similar situation obtained according to Counsel. For the $2,000 loan, there was a minor question whether it had ever reached the company itself, or perhaps a predecessor unincorporated business, or the son personally. For the other amounts ($6,000 and $5,000) the only documentation available indicated that from the interest rates which could be charged to the Appellant by his bank for the funds, in order for him to make these advances to the son’s company, he (Mr. Taylor) could not possibly make a profit - indeed on one of them he would be paying more interest that he could received - since the stated rate of interest on the “Promissory Notes” he held from the company was 12 % per annum - even though no interest was ever received, and he continued to increase his loans from $2,000 to $8,000, finally to $1,300. Again there was no evidence of attempts to collect, or to be formally assured there was no use in pursuing the debts.

Counsel referred to two cases from this Court:

Lowery v. Minister of National Revenue, [1986] 2 C.T.C. 2171, 86 D.T.C. 1649 (T.C.C.);

Strecker v. R. ((sub nom. Strecker v. Canada), [1994] 2 C.T.C. 2341, 95 D.T.C. 3).

Analysis

In my view the comments from Counsel regarding the guarantee amount ($15,000) are correct and appropriate. I would add no more, other than the fact that the financial statements of the company for 1990, filed by the Appellant in support of his case, do not contain any direct reference to such a guarantee from Mr. Taylor, although a bank loan of that amount was shown as a liability of the company presumably supported by other security. Mr. Taylor was called on by the bank to make good on his guarantee, which he did, and that forms part of the basis for this claim and appeal. The difficulty for Mr. Taylor is that, even though he paid the guarantee, there is no basis for concluding that it was his money (the $15,000) which was injected into the company in the first place, and much to support a view that he guaranteed for the company an already existing loan, and that without prospect of gaining or producing income from it, as noted above.

With regard to the loan amounts ($13,000) the same situation and result obtains, but augmented by the fact that no reference was made in the financial statements (see above) to the loans at all. As to the assertion of Mr. Taylor’s agent that the situation had changed when the new owner took over — (no longer a father-son relationship) I find that to be unacceptable. The fact is that the limited financial information made available to the Court, supplemented by Mr. Taylor’s testimony, leaves no doubt that when the new owner took over, the company was insolvent, and the prospects of Mr. Taylor collecting on his promissory notes, or escaping from his guarantee, was nil.

In my opinion, the circumstances of this case reflect broadly the principles laid down in the case law submitted by Counsel for the Respondent, supra, and the result must be the same. The loans and guarantees (finally paid) were not made for the purpose of gaining or producing income, in any event they were made during the time Mr. Taylor’s son was in charge of the company, if uncollectible were in that state when he sold his interests, and finally that there is no clear evidence that proper collection procedures were ever attempted, let alone pursued. The financial accom- modation provided by Mr. Taylor was for his son’s business purposes as I see it, not for the Appellant’s business purpose, as he maintains. When an “investment” strategy is pursued at a time when the situation is tinged with “non-arm’s length” circumstances, the parties must be doubly vigilant, and not benignly negligent in understanding, recording and dealing with the events which transpire, to ensure that the record will stand up to examination in support of any later claims made under the Income Tax Act. I am well aware that such a standard goes against the normal familial relationship, but it is crucial when things do not turn out as hoped for.

The appeals are dismissed.

Appeal dismissed.