Romain Audet v. Minister of National Revenue, [1976] CTC 2436, 76 DTC 1320

REASONS FOR JUDGMENT

The case at bar was heard at Montreal, Quebec on september 21, 1976.

1. Summary

The issue is whether the sum Of $7,974.10 received by the appellant during the year 1971 for guaranteeing a loan to clients is a capital receipt or income resulting from a business venture.

2. The Burden of Proof

The appellant has the burden of showing that the respondent’s assessment is unjustified. This burden of proof results not from a specific section of the Income Tax Act but from several court decisions, including the judgment of the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

Most of the facts, which were proven by the appellant and were not disputed by the respondent, are well described in the appellant’s Notice of Appeal:

3.1 In May 1971, Messrs Aubry and Bibeau, controller and sales manager respectively of IMBREX INC, liquidation of which had just been decided on by the parent company NEONEX LTD, made an offer to purchase the inventory, furniture and equipment of IMBREX INC. The offer of Messrs Aubry and Bibeau was accepted on condition that the price of the inventory be paid for in cash, amounting to about $250,000. Neither Aubry nor Bibeau had such a sum at his disposal, and so they sought among their family, friends and relations for someone who would be likely to lend them this sum. One of my personal friends, Mr Francois Vinet of F VINET INC Said he was prepared to make a loan through his Company of the sum of $50,000.00, but on the express condition that I personally intervene as guarantor for the amount of $63,000.00 on a personal note.

The agreement between Aubry and Bibeau and myself, as accountant and advisor in the transaction to be made, was based Strictly on an hourly rate of pay, payable to the company in which l practised my profession. When Mr Vinet required that l personally guarantee a note for $63,000.00, 1 advised Messrs Aubry and Bibeau of this condition and as guarantor of this loan asked them for the basic sum of $5,000.00, plus $500.00 per month, for as long as l remained responsible for the loan; the loan was to be repaid within two to three months, according to Messrs Aubry and Bibeau. On October 20, 1975, the Department of National Revenue issued to me a notice of reassessment for the year 1971, adding to my taxable income for the said year the sum of $7,974.10 received from Messrs Aubry and Bibeau in my capacity as guarantor of the loan made by VINET, and representing additional tax of $1,186.00.

3.2 According to Mr François Vinet, a witness for the appellant, it was during a social meeting that Mr Audet spoke to him of the need for money of two of his clients, Messrs Aubry and Bibeau. He did not know whether Mr Audet would be repaid. Mr Vinet had not seen the financial statements of Messrs Aubry and Bibeau or of Imbrex Inc and Neonex Ltd. Since Mr Audet had confidence in the undertaking, Mr Vinet said he would agree to make the loan, but on the condition sine qua non that the appellant guarantee the loan personally.

3.3 In his testimony, Mr Audet contended that his work as an accountant was paid for separately from the sum of $7,974.10 and included in the income of the accounting firm of which he was a member. Finding a loan for his clients was for him a friendly service gratuitously performed. However, for the personal guarantee required and the risk he would run, he was forced to demand the sum of $5,000, plus $500 per month. As a result of monthly instalments received, plus a note for $5,000 payable in January 1972 and discounted on December 30, 1971, the appellant received in all the sum of $7,974.10.

3.4 Mr Audet received no income as a commission or otherwise from the purchase and sale of the inventory of Imbrex Inc by Messrs Aubry and Bibeau. Mr Audet did not take part in this transaction or in Distributeurs Delorimier (1971) Inc, the new company of Messrs Aubry and Bibeau, who had transferred the inventory purchased.

3.5 The appellant has never received, before or since, any other sum from persons for whom he acted as guarantor.

3.6 The promise to pay and the endorsement were entered as Exhibit A-1:

Montreal, May 28, 1971.

For value received, we promise to pay on September 30, 1971, at the office of F Vinet Inc or to his order, the sum of sixty-three thousand dollars ($63,000.00) with interest at the rate of twenty per cent (20%) per annum after that date.

SIGNED:	(signed)
Yves Aubry
(signed)
Jacques Bibeau
ENDORSERS:	(signed)
Yves Aubry
(signed)
Jacques Bibeau
(signed)
Romain Audet

We waive presentation for payment, notice of refusal, protest and notice of protest of this note.

(signed)

Yves Aubry

(signed)

Jacques Bibeau

(signed)

Romain Audet

4. The Issue

Should the sum of $7,974.10 received be considered a capital gain or income?

5. Comments

After studying the facts entered in evidence, the cases cited by the parties Ryall v Hoare: Ryall v Honeywill, 8 8 TC 521; Sherwin v Barnes, 16 TC 278; Wilson v Manooch, 21 TC 178: Tercier et al v MNR, 11 Tax Tax ABC 113: 54 DTC 537; Fengstad v MNR, 13 Tax ABC 299; 55 DTC 449; MNR v Steer, [1966] CTC 731; 66 DTC 5481; Sanders v MNR, 6 Tax ABC 159; 52 DTC 136, and considering the burden of proof, the Board finds, for the following reasons, that the appellant has discharged this burden and that his appeal should be allowed, and the sum of $7,974.10 considered as a Capital gain.

In the cases cited above, the taxpayer, who was the guarantor or who simply found financing, was either a director of the company or a paid associate, paid at a fixed rate or at a percentage, in the transaction in question.

Citing the Steer case, the appellant argued that the Supreme Court has held that the loss incurred by an endorser who guaranteed the repayment of a loan was a capital loss. Accordingly, the appellant contends, the sum received as consideration for the guarantee given must be a capital gain.

In fact, dividends received by the taxpayer from the trustee following the bankruptcy of the borrowing company, which operated oil wells, was considered a repayment of capital paid as a guarantor.

Counsel for the respondent pointed out that the consideration received by the taxpayer in the Steer case was taxed. It is true that the Minister of National Revenue taxed the consideration received by the taxpayer for his endorsement. However, it should be noted that the consideration consisted of one-quarter of the shares of the oil company and a percentage of the royalties which the company would receive. A consideration of this. type, it must be remembered, made the guarantor a person with an interest in the exploitation of the company’s oil wells, who was not dealing at arm’s length.

In the case at bar, according to the evidence, the appellant was in no way a a party to the transaction of Messrs Aubry and Bibeau, nor did he own shares in the new company, Distributeurs Delorimier (1971) Inc formed by the said Messrs Aubry and Bibeau.

It should also be remembered that, according to the evidence presented, this was an isolated transaction on the part of the appellant. Moreover, the appellant was not paid for finding financing, but for guaranteeing the loan.

The Board is convinced that the appellant meets the principal standards relied on by the courts in deciding that a a capital gain is in question. In the case at bar, the guarantee of repayment of the loan is not an enterprise or undertaking of a business nature.

6. Conclusion

The appeal is allowed.

Appeal allowed.