Normand Berthold v. Minister of National Revenue, [1979] CTC 2760, 79 DTC 648

Roland St-Onge [TRANSLATION]:—The appeal of Mr Normand Berthold was heard by me in the city of Sherbrooke, Quebec on May 29, 1978.

The issue was whether a sum of $48,207 can be considered a deductible capital loss in the 1974 taxation year.

The facts set out in subparagraphs (a), (b), (c), (d), (e) and (f) of paragraph 2 of the reply to the amended notice of appeal were admitted, and I quote:

[TRANSLATION]

2.(a) The appellant owned 62 common shares when ‘Les Entreprises Nor-Guy Inc’ was established during the 1970 taxation year;

(b) during the 1971 taxation year the appellant acquired the other half of this same company’s issued share capital for $16,000;

(c) during the 1973 taxation year the said company declared bankruptcy;

(d) the appellant claims that the respondent should allow the deduction of $48,207 as a capital loss since this amount became a bad debt after the company declared bankruptcy;

(e) the said amount of $48,207 is subdivided as follows:

Advance by the appellant to the company	$7,484
Shares in the company	$40,723

(f) there was no deposition of the shares either during the year of the bankruptcy or during the year in question.

At the hearing of the case the evidence revealed the following:

1. Michel Lacasse, official receiver for the province of Quebec, became trustee of the assets of Les Entreprises Nor-Guy Inc on March 13, 1973.

2. The trustee took possession of all the bankrupt’s books and papers.

3. The appellant and his partner each paid some $5,000 when the company was first incorporated.

4. The appellant, who worked as a construction contractor for the company, received only $135 instead of $300 in wages per week, the difference constituting a loan to the company at the rate charged by the banks, namely 8 4 to 8V2 %. His partner paid the equivalent of this balance in cash.

The arrangements were apparently recorded in the company’s books but the appellant was unable to produce them despite a subpoena duces tecum served on the depositary of the documents in question.

5. Mr René Rodrigue, a chartered accountant residing in Sherbrooke, testified for the respondent and stated that according to the financial statements prepared by an employee in his office, advances of money had been made by the appellant and his partner but that the said statements were not audited financial statements and that therefore he could not certify that these advances had been made to the company, with interest.

Counsel for the appellant divided his arguments into two parts:

1. the advances made to the company by the appellant, and

2. is there a disposition of property for a common shareholder of a company that declares bankruptcy?

On the first issue he referred the Board to Interpretation Bulletin IT 239R, which replaced IT 239.

In the original bulletin it was stated that a loss resulting from the disposition of a debt is deductible only if the said debt was acquired by the taxpayer for the purpose of gaining or producing income from a business or property.

The second version reads in part as follows:

Where a shareholder or partner has loaned money at no interest to his corporation or partnership or has guaranteed its debts for no consideration, any subsequent loss arising from the inability of the corporation or partnership to discharge its obligation in respect of that loan or guarantee may be, despite the absence of consideration, a deductible capital loss. . . .

He explained that the appellant had used the best evidence to establish his interest-bearing advances to the company and that the latter had made this a bad debt as a result of its bankruptcy in 1973.

On this point he referred to a decision of my colleague Guy Tremblay in Jean Crevier v MNR, [1976] CTC 2271; 76 DTC 1208.

On the second point he said that owing to the company’s bankruptcy the appellant had lost the right to dispose of his shares; that since 1966 no charter could be surrendered in the province of Quebec unless all the company’s debts and obligations had been discharged by the shareholders and all its assets divided among them (section 26 of the new Income Tax Act) and that under the legislative provisions (section 90 of the Quebec Companies Act), c 281 section 24 of the Statutes of Quebec, there was nothing a shareholder could do to operate a company that was bankrupt.

He also explained that according to Art 387 of the Civil Code and section 47 of the Quebec Companies Act, a share in a company was an incorporeal movable or an au ad rem and that as a result of the bankruptcy the shareholder had lost various share rights such as the right to vote, to call meetings, to share in profits and to share the assets.

Counsel for the respondent for her part explained that the appellant had always remained the owner of his shares and that no positive action, such as selling or cancelling his securities, had been taken by him.

She relied on a definition from the dictionary Le Robert, and I quote:

[Translation]

Act of disposition: act aimed at removing an asset or security from the estate . . .

With regard to the first issue, counsel for the respondent referred the Board to three cases:

(1) Donald Preston McLaws v MNR, [1972] CTC 165; 72 DTC 6149;

(2) Canada Safeway Limited v MNR, [1956] CTC 71; 56 DTC 1239;

(3) Robert Weill v MNR, [1969] CTC 1049; 69 DTC 734.

She also pointed out to the Board that the interpretation bulletins do not have the force of law. She admitted that the debt had become a bad one but maintained that the capital advances were not made directly enough for the purpose of gaining or producing income.

With respect to the first issue, the Board is of the view that the taxpayer provided the best evidence that interest-bearing advances were made to his company, and it is reasonable to assume that this was for the purpose of gaining or producing income from this business.

This having been said, subparagraph 40(2)(g)(ii) and subsection 50(1) of the Income Tax Act apply in this case and the appeal is consequently allowed on the first issue.

Regarding the second issue, the Board is of the view that there was no disposition of property since the common shareholder, who owns the company, always continued to own his shares, even though the trustee became the depositary of them.

There was no disposition of property since the shares never changed hands and always remained part of the taxpayer’s estate.

The fact that the shares were of no value does not make this a disposition of property since there are cases where the property has no value or even has a negative value but where this does not prevent the holder of this property from remaining the owner.

A person who owns a building that is of no economic value often has to pay a considerable sum of money to have it removed from his property. There will be no disposition of property until the building is demolished; in that case it will no longer be in his estate and the definition in Le Robert will thus apply.

The appellant was always the regular holder of the shares even though he did not have full enjoyment of them, like the owner of a building that is rented out. He has the us in re but not the us ad rem. An owner who is occupying his property has both. It is only when he loses the us in re that there is a disposition of property.

In subparagraph 54(c)(1) of the Act it is provided that the share must be sold or cancelled. There is no evidence to this effect in the present case.

Even though this interpretation may seem to be harsh and not to take equity into account, there is a principle in tax law that there is no equity in tax matters.

The sections must therefore be interpreted individually, and since in the present case the shares were not sold or cancelled, the appeal must be dismissed on the second issue.

The appeal is therefore allowed in part and the matter referred back to the respondent for reassessment in accordance with the reasons for judgment.

Appeal allowed in part.