Macmillan v. R., [1999] 1 CTC 2274

Sarchuk T.C.J.:

This is an appeal by G. Lee MacMillan (the Appellant) from an assessment of tax with respect to his 1991 taxation year. The events which ultimately led to this assessment began on August 9, 1990 when the Appellant incorporated a company under the name and style of 898673 Ontario Inc. (the Company). It operated a taxi service during all or parts of 1991 using its own vehicle and others registered in the name of the Appellant.

When the Appellant filed his 1990 income tax return he claimed business income as the sole proprietor of a taxi service. The Minister of National Revenue (Minister) assessed his return as filed. The Appellant did not file his 1991 income tax return until 1996. In it he claimed a $16,132.45 loss from a sole proprietorship carrying on a taxi business under the name of the Company, as well as reporting income from the Company (the requisite T4 supplementary was filed with his return). The Minister assessed the Appellant’s return as filed on July 2, 1996 and on September 3, 1996, reassessed the same year for an unknown issue that is not in dispute in the present appeal. The Minister further reassessed the Appellant’s 1991 taxation year on June 12, 1997 and disallowed the aforesaid business losses on the basis that the Appellant was not carrying on business in 1991 and was not entitled to deduct the losses incurred by the Company in computing his personal taxable income for that taxation year. Accordingly, the Minister assessed federal income tax of $273.90, charged accrued interest of $184.97 and levied a late filing penalty of $46.56.

In so reassessing the Appellant’s tax, the Minister made the following assumptions of fact:

(a)

(b) during the 1991 taxation year, the Appellant was a shareholder and employee of 898673 Ontario Inc. (the “Corporation”);

(c) the Corporation was incorporated on August 9, 1990;

(d) the business activities conducted or services carried on by the Corporation were Owing (sic) and operating taxis (the “Business”)

(e) in computing income for the 1991 taxation year, the Appellant deducted $16,132.45 as business losses with respect to the Business:

(f) the losses referred to in subparagraph (e) above were losses incurred by the Corporation for the 1991 taxation year;

(g) the Appellant was not carrying on a business during the 1991 taxation

year;...

The Appellant’s primary position is that although he incorporated the Company, it never carried on business and that at all times, the taxi business was being conducted by him in a sole proprietorship. He said no organizational meeting of directors was held, no directors were ever appointed, no records containing minutes of meetings and/or resolutions were maintained and no shares were issued or allocated.[1]

In his Notice of Appeal, the Appellant contended that the Minister erred in disallowing his business losses for a number of reasons, inter alia:

(a) the company did not have operational taxis until September 1991;

(b) the Appellant had three vehicles that he used as taxis during 1991;

(c) the business expenses claimed by him in calculating the business loss included capital cost allowance and loan interest incurred on his personally owned vehicles;

(d) the Minister was barred or estopped from determining that the taxi business was operated by the company and not by the Appellant because, ignoring the later assessments, the Minister had accepted the Appellant’s 1990 and 1992 returns as initially filed;

(e) the Minister failed to discharge his duty to act fairly;

The issue is whether the Appellant was engaged in a business in taxation year 1991 or whether the business loss was that of the Company in which instance, the losses claimed by the Appellant were properly disallowed by the Minister.

The Appellant contends that although the Company operated as a taxi service supplier during the relevant period of time, it was his business, carried on as a sole proprietorship, and conducted under the Company name.

The evidence fails to support the Appellant’s proposition. He testified that the taxi business commenced in the middle of 1990 at or about the same point of time that the Company was incorporated and the Appellant transferred one of the vehicles he owned to it. It is also a fact that at least two other vehicles registered in his name were used in the taxi business.[2] The conclusion that the Company was carrying on the taxi business is also supported by the fact that the Company kept the daily records for the busi- ness, paid all of the operating expenses with respect thereto, and maintained a bank account for that purpose. In addition to attending to the day-to-day expenses, it paid for the insurance, the taxi stand rent and the cost of the taxi plate leases. Furthermore, the Appellant’s testimony as well as his representations to Revenue Canada at various times, demonstrates that he considered the entire business as a single entity and a single source of income for the purposes of sections 3 and 9 of the Income Tax Act. Nothing in his testimony supports a proposition that the vehicles which were registered in his name and were used by the Company in the taxi business were leased or rented by the Appellant to the Company or were the subject of some other form of financial arrangement between them.

On the evidence before me, I am unable to conclude that in taxation year 1991 the taxi business was carried on by the Appellant as a sole proprietorship. Accordingly, the Minister’s assessment that the income from the business was that of the Company was correct.

In the alternative, the Appellant says that if the taxi business was being carried on by the Company, then he should be able to deduct in the computation of his income an allowable business investment loss (ABIL) in taxation year 1991. Although his testimony was at times difficult to follow, it appears that the ABIL the Appellant claims is composed of two items.

The first component arises out of the fact that no bank would lend the Company sufficient money to purchase equipment and that in or about June 1990, he personally borrowed the amount of $16,000 from Municipal Trust for the purpose of acquiring a 1986 Mercury and a 1985 Pontiac. These vehicles remained registered in his name but were at all times utilized in the taxi business. He says that he made payments of principal and interest of $386.95 per month and that by his calculation, the amount of $2,500.50 should be treated as an interest expense of the Company. Since he has never been reimbursed for this expenditure, this amount, if I understood him properly, should be included in his ABIL in taxation year 1991.

The second component is what he claims to be a bad debt in the amount of $5,252.60. In his Answer to the Minister’s Reply, he described this amount as part of the sum advanced by him to “the then proposed corporate taxpayer for the purpose of earning income pursuant to subparagraph 40(2)(g)(ii) of the Act. From his testimony, it became apparent that the advance he referred to represented the cost (or part thereof) of the acquisition in 1990 of the 1984 Pontiac Parisienne. This vehicle was transferred to the Company, registered in its name and was used in its taxi business. Accord

ing to the Appellant, the Company was unable to pay for the vehicle and ultimately, in his words “was sold by the corporation” at some point of time in 1992.

With respect to both aspects of his claim, the Appellant relied on the decision of Rouleau J. in Brown v. R..^[3] This case he argued supported the proposition that where a shareholder loaned money to a company for the purpose of allowing the company to pay interest to the Bank, such a loan was made for the purpose of earning income.

The Minister’s position with respect to the ABIL is that the Company was not dissolved until 1994 and that if such a loss actually occurred (1.e. amounts that the Appellant paid on behalf of the company represented advances or loans made for the purpose of earning income) then such loss would be created upon receivership and/or dissolution and would be available in his 1994 tax year (and which might then be carried forward and/or backward). On the evidence, this point seems to be well taken. The Appellant himself testified that the taxi business was wound down in 1992 and in fact, ceased operating as such that year. Since it is fairly clear from the evidence that the taxi business was being carried on throughout 1991 by the Company and since there is no other evidence that an allowable business loss actually occurred in the Appellant’s 1991 taxation year, he cannot succeed on this issue.

As counsel for the Minister observed, in order to properly make such a claim, it would be necessary for the Appellant to seek to amend the Company’s T2 return for the year in which the loss was crystallized before adjustments of any kind might be considered to his personal returns with respect to any ABIL which might have been sustained by the Appellant. This Court has no jurisdiction to deal with this matter since the only tax year before it is 1991. The resolution of this issue rests properly with the Appellant and the Minister of National Revenue.

The appeal is dismissed.

Appeal dismissed.