McArthur T.C.J.:
This is the appeal of David Ciebien from the Minister of National Revenue’s reassessment of the Appellant’s 1990, 1991 and 1992 taxation years. The Appellant sought to deduct the amounts of $50,780, $65,777 and $70,840 — I have dropped the cents — being purported business losses from the operation of two hair salons. The Appellant later revised his claim to $50,942, $101,961 and $95,321 in losses for those years respectively.
In adjusting these revised claims, the Minister disallowed certain expenses, including those relating to motor vehicle use, credit card interest and legal expenses. I am satisfied that the Minister correctly disallowed those amounts and I accept the Minister’s revised loss figures of $46,082, $76,917 and $74,873 for the respective years. These amounts are the amounts in dispute for the reasons set out by the Respondent in argument, which briefly include: The travel submitted by the Appellant was disallowed as not having been proved. The car expenses and capital cost allowance are disallowed, there was no relevant evidence to substantiate this claim. The credit card interest was personal. I accept the Respondent’s submission with respect to the Minister of National Revenue and Bronfman case and the requirement set out therein of a direct rather than an indirect use and the computer cost I find was personal. The computer, at least in the second year, was contained in the Appellant’s home.
The Appellant had commenced his appeal under this court’s informal procedures, which would have limited his claims to the informal amounts which would be expenses not to exceed $24,000 in any one year. At the outset of trial, I ordered that the appeal be bumped up from informal status to the general procedure of this court.
The Appellant’s spouse, Christa Ciebien, also filed an appeal under the informal procedure. It was heard immediately after the present case. Much of the evidence is common to both appeals. There is a separate judgment for each appeal. Mr. Ciebien was the only witness in his case. His evidence proceeded in a cautious and calculating manner, making it difficult to piece together the relevant facts.
In my findings of facts, I have been assisted by the brief but forthright evidence of Christa Ciebien in her appeal. I will not review the Appellant’s testimony in detail, but feel compelled to comment that at times it was confusing, inconsistent and self-serving.
In July of 1998, the Appellant and his wife entered into an agreement of purchase for hair salon franchises known as Fantastic Sam’s. In October of 1988, the Appellant incorporated Venture 22 Enterprises Ltd. The Appellant was the sole shareholder of that corporation. He is a certified general accountant, and during the relevant years was employed as a financial planner with the Department of Corrections, earning approximately $70,000 annually.
In 1990, he was on sick leave of absence for approximately one year, suffering from what I believe was narcolepsy. During the period of Mr. Ciebien’s illness, the businesses were for the most part managed by Mrs. Ciebien. The Appellant and his wife worked hard to succeed and I have struggled to permit them some relief.
There is no doubt that the hair salons lost a substantial amount of money. The issue is who is entitled to deduct the losses. The Respondent’s position is that the losses were incurred by the corporation, Venture 22 Enterprises Ltd., and the Appellant had the burden of proving that they were his losses.
In K.J. Beamish Construction Co. v. Minister of National Revenue (1990), 90 D.T.C. 1584 (T.C.C.), Associate Judge Christie reviewed the fundamental principle that a corporation is a legal entity distinct from its shareholders and managers. He quoted at page 1592 from the dissenting judgment of Pigeon, J. in Appleby v. Minister of National Revenue (1974), [1975] 2 S.C.R. 805 (S.C.C.), at 813:
Ever since Solomon v. Solomon it has been accepted that although the shares of a limited company may be beneficially owned by the same person who also manages it, its business is nevertheless in law that of a distinct entity, a legal person having its own rights and obligations. The Income Tax Act unmistakably implies that this rule holds good for tax purposes. Only in very rare circumstances will this principle be disregarded.
In Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2 (S.C.C.) at pages 10 and 11, Wilson, J. said, writing for the majority:
As a general rule, the corporation is a legal entity distinct from its shareholders. Solomon v. Solomon [supra] the law on when a court may disregard this principle by lifting the corporate veil and regarding the company as mere agent or puppet of its controlling shareholder or parent corporation, follows no consistent principle. The best that can be said is that the separate entities principle is not enforced when it would yield a result too flagrantly opposed to justice and convenience or the interest of the revenue.
Venture 22 was incorporated by the Appellant to carry on the business of hair salons. This it did, I find, until December 31st, 1991. While the corporation was dissolved by the Registrar of B.C. Corporations for non filing of returns in June of 1992,1 find as a fact that the company ceased to function on December 31st, 1991. The Appellant received the following letter dated December 20th from the Registrar of Companies for the Province of British Columbia that stated:
Pursuant to Section 281 of the Company Act I hereby notify you that the above- named company has failed for two years to file with me an annual report required to be filed by the said Act and that it is default under the Act. If within one month no response to this letter is received by me, that the failure has been or is being remedied in a manner satisfactory to me, a notice will be published in the Gazette stating that any time after the expiration of one month from the date of publication, I may under subsection (4) of section 281, cause to the contrary not being previously shown, strike the company off the Register and thereupon it will be dissolved.
I accept the Appellant’s evidence that he had no intention of the company continuing and he permitted the Corporations branch to strike it from the record. For all practical purposes the company did not operate after the 31st of December, 1991.
Up until that time, the losses resulting from expenditures incurred in the running of the hair salons were those of Venture 22 and not the Appellant, and there is no reason in the present appeal why the separate doctrine entity should be ignored to allow the Appellant to treat the losses as his own. However, after Venture 22 ceased operation, the hair salon businesses were carried on by the Appellant in his personal capacity, and that is from the 1st of January 1992. Accordingly, all the losses for the 1992 taxation year are properly attributable to the Appellant. The Appellant’s personal testimony was pivotal to the success of his appeal. Facts and documents appeared to have been used to suit these circumstances, nor were they supported by sufficient independent evidence to conclude that the Appellant has refuted the Minister’s assumption of facts.
I find that the corporation was incorporated to operate the businesses in 1998. A mortgage loan of approximately $56,000 pledging the assets in the business as a going concern was taken in the corporation’s name. Revenues and expenses were paid into and from the corporation’s bank account. Leases for the premises were in the corporation’s name. The Appellant was the sole shareholder. The corporation defaulted in payment of franchise fees and Christa and David Ciebien were ordered by the B.C. Supreme Court to cease operation under the name of Fantastic Sam’s in the fall of 1990. After that time the operation commenced under the firm name of Surrey Hair World.
While the Appellant filed a notice of sole proprietorship for Surrey Hair World, that was not the reality of the operation. One must look to the actuality of events and not solely at how it is described by the taxpayer. I need not elaborate on the well-established jurisprudence on the common law principles of substance over form. In fact, Christa Ciebien may have a stronger argument that it was her business than that put forth by the Appellant. It would appear that she was the driving force behind the business.
In 1992 the businesses claimed a loss of $100,800. For the first time the Appellant indicated that he and his wife were in partnership. He was as to a 70 per cent share and she as to a 30 per cent share, effectively negating his $70,000 income and her $30,000 income. Later he reversed this position.
In conclusion, the appeal is allowed in part, such that the losses for the 1992 taxation year are allocated to the Appellant. The matter is referred back to the Minister for redetermination and reassessment accordingly.
Appeal allowed in part.
Email this Content