Docket: 2009-3864(IT)G
BETWEEN:
MARGARET SWAIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the
appeals of Randall W. Marusyk (2009‑2694(IT)G) and Scott R. Miller (2009‑2695(IT)G),
on June 2, 2011, at Ottawa, Ontario.
Before: The Honourable
Justice Patrick Boyle
Appearances:
|
Counsel for the Appellant:
|
Matthew G. Williams
Shaun Doody
|
|
|
|
|
Counsel for the Respondent:
|
Suzanie Chua
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under
the Income Tax Act with respect to the Appellant’s 2006 taxation year is
dismissed, with costs, in accordance with the reasons for judgment attached
hereto.
Signed at Ottawa, Canada, this 10th day of February 2012.
"Patrick Boyle"
Docket: 2009-2694(IT)G
BETWEEN:
RANDALL W. MARUSYK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the
appeals of Margaret Swain (2009‑3864(IT)G) and Scott R. Miller
(2009‑2695(IT)G), on June 2, 2011, at Ottawa, Ontario.
Before: The Honourable Justice Patrick
Boyle
Appearances:
|
Counsel for the Appellant:
|
Matthew G. Williams
Shaun Doody
|
|
|
|
|
Counsel for the
Respondent:
|
Suzanie Chua
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under
the Income Tax Act with respect to the Appellant’s 2006 taxation year is
dismissed, with costs, in accordance with the reasons for judgment attached
hereto.
Signed at Ottawa,
Canada, this 10th day of February 2012.
"Patrick Boyle"
Docket: 2009-2695(IT)G
BETWEEN:
SCOTT R. MILLER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the
appeals of Margaret Swain (2009‑3864(IT)G) and Randall W. Marusyk (2009‑2694(IT)G),
on June 2, 2011, at Ottawa, Ontario.
Before: The Honourable Justice Patrick
Boyle
Appearances:
|
Counsel for the
Appellant:
|
Matthew G. Williams
Shaun Doody
|
|
|
|
|
Counsel for the
Respondent:
|
Suzanie Chua
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under
the Income Tax Act with respect to the Appellant’s 2006 taxation year is
dismissed, with costs, in accordance with the reasons for judgment attached
hereto.
Signed at Ottawa,
Canada, this 10th day of February 2012.
"Patrick Boyle"
Citation: 2012 TCC 46
Date: 20120210
Dockets: 2009-3864(IT)G
2009-2694(IT)G
2009-2695(IT)G
BETWEEN:
MARGARET SWAIN,
RANDALL W. MARUSYK,
SCOTT R. MILLER,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
The three Appellants
are lawyers operating an intellectual property law firm in partnership in
Ottawa. They deducted a loss in computing the partnership’s 2006 income
relating to a loan to EM Diagnostics Inc. (“EM Diagnostics”) of approximately
$325,000 (approximately US$245,000) along with a further approximately $140,000
of accrued and unpaid interest.
[2]
According to the
taxpayers, Discovery Biotech Inc. (“Discovery Biotech”), a corporation somehow
involved with, or related to, EM Diagnostics, was a Nevada corporation
operating out of Arkansas. Discovery Biotech’s President and Chief Executive
Officer was a Canadian who died suddenly in Texas. The corporation claimed to
have some vague rights to some equally vague technology developed in Russia
which might be used to further develop in the US a patentable US version of the
Russian technology that could be used as, or lead to the development of, a device
to be used in screening for breast cancer creating value in Discovery Biotech
sufficient to allow it to be sold at a profit to a major player. Virtually no
supporting or explanatory evidence was put in on this point.
[3]
In order to develop a
breast cancer screening device, money needed to be raised and investors found. EM
Diagnostics was incorporated and introduced for this purpose. EM Diagnostics
was established because the Ontario Securities Commission (“OSC”) had earlier
barred the Canadian corporation, Discovery Biotech, from offering securities to
the public because it had been doing so in violation of applicable securities
law. The President and Chief Executive Officer of Discovery Biotech was also
the President and CEO of EM Diagnostics. It was not clear how or whether
applicable securities law was complied with in respect of the EM Diagnostics
loan from one or more Canadians.
[4]
The loan advance was
made in February 2004 by Dr. Swain from her personal bank account. The
written agreement was between Dr. Swain, EM Diagnostics, Discovery Biotech
and another affiliated corporation, Oakhill Investments Limited (“Oakhill
Investments”). The role of Oakhill Investments remains a mystery
notwithstanding some testimony on the point. The funds were actually advanced
to another individual who was said to be a key contractor or employee working
on the US development of the device who threatened to quit if the money was not
received right away.
[5]
Discovery Biotech’s
President and CEO assured Dr. Swain that he had the needed money all lined
up but it would take another month, two at the most, so if the needed money
could be loaned to him for three months and repaid from the money to come from
the other investors he had lined up. Dr. Swain says she suggested to just
make it six months because she was a busy international business traveller but to
pay her back as soon as he could. The loan advance was not accounted for in the
firm’s partnership accounts for some time; it appears to be not before
December 31, 2006 and probably in February 2007. Dr. Swain was
not paid or reimbursed for her advance in cash but rather by an adjustment to
her capital account. The firm’s Chief Financial Officer and accountant
responsible for the partnership’s accounts did not testify. Mr. Miller,
one of three partners, was not aware of the loan having been made until told
about it in 2006.
[6]
The 2004 loan agreement
is titled Promissory Note Agreement and subtitled Given for a Patent Right. The
agreement included demand promissory note language within the body of the
agreement which also purported to grant security in the device in the event of
default. The lender agreed in the promissory note portion not to demand
repayment within the first six months. The lender in the agreement is identified
only as Dr. Swain. The borrower is defined as Discovery Biotech, EM
Diagnostics and Oakhill Investments. In an addendum dated in May 2006 to
the 2004 Promissory Note Agreement – Given for a Patent Right, the lender is
consistently described as Dr. Swain although Mr. Marusyk did witness
her signature in 2006. (Dr. Swain’s signature page to the original 2004
agreement was not put in evidence so I do not know who witnessed her
signature when she advanced the money and signed the original agreement as lender.)
The 2006 addendum says the purpose of Dr. Swain’s loan had also been to
allow the borrower corporations to pay their accrued legal bills owing to the
firm. The 2006 addendum also purported to have her agree to exchange her debt
for shares of EM Diagnostics valued at US$2.00 per share. A separate Promissory
Note Agreement between EM Diagnostics and the Appellants’ law firm was also
entered into in 2006, dated somewhat before Dr. Swain’s 2006 addendum,
dealing with the outstanding professional fees, disbursements and interest
owing to the law firm.
[7]
By the time the loan
was advanced in 2004, the OSC proceedings against Discovery Biotech and its
President and CEO were underway. There had been a number of OSC press releases and
public notices regarding this between June 2003 and June 2004.
Charges were laid against Discovery Biotech, its President and CEO and two
other individuals. Convictions were obtained, however the President and CEO had
already died.
[8]
The taxpayers’ position
is that the loan was worthless in 2006. One witness said EM Diagnostics had
gone bankrupt, another said it had been dissolved. The only written evidence
I was given indicated EM Diagnostics was in default in providing the
Secretary of State of Nevada with its list of officers. There was no evidence
as to what became of the group’s rights to the Russian technology. There was no
evidence that indicated that Dr. Swain or the partnership pursued the lender’s
rights under the promissory notes or questioned a liquidator, receiver or
trustee of the corporation. There was no evidence as to what was in fact done
with the money raised by the corporation. There was no evidence as to what
other money was raised by the corporation from other investors at any time, how
much was needed to be raised to pursue the development of a potentially
patentable device, nor how any other moneys raised were in fact spent.
[9]
The taxpayers deducted a
loss in respect of the full amount of the loan and accrued interest. It is
their position that this was a loss of their law partnership that was incurred
as part of the firm’s business of providing intellectual property legal
services and thus resulted in an income loss. EM Diagnostics and Discovery
Biotech had been clients of the firm since 2000 and the firm continued to do
legal work in 2004 and 2005. These legal bills were not paid. It is the taxpayers’
position that they hoped that the cash loaned to EM Diagnostics would help it to
develop a device based on the Russian technology that would be patentable and
thus in turn lead to significant legal work for a broad range of specialized
and profitable intellectual property legal services. It does not appear that any
of the taxpayers or the law firm obtained any commitment or retainer from the
corporations to use its services in the future. It does not appear that a
budget or estimate of the costs and timeframes of future legal services were
ever developed and discussed with the corporations.
[10]
The evidence
established that neither the partnership nor these three lawyers had ever
before made any direct investment in, or loan to, a client, nor have they ever
since. Nor had the lawyers or the firm ever loaned money to others as part of
their business. They were never repaid any of the principal of this loan; they
were never paid interest on this loan. (It is not clear that they ever included
in income the accrued and unpaid interest they deducted as a loss. They
abandoned their position on the accrued interest at trial.)
[11]
There was no evidence
this loan to a client was ever reported to the Law Society of Upper Canada or
to any other law society in another jurisdiction in which they are called.
[12]
In this case, there is clearly
not sufficient credible, corroborated and contemporaneous evidence to allow me
to conclude as a factual matter on a balance of probabilities that the loan was
made by or on behalf of the partnership. Further, I am unable to conclude
that, even assuming the loan was made by the partnership, the loan was made as any
part of the legal business carried on by the partnership. Similarly, to the
extent the loan may have been made by Dr. Swain, I am unable to
conclude it was made as any part of the law practice she carried on through the
partnership. For these reasons, I must dismiss these appeals.
[13]
I can only
conclude on the evidence presented that, assuming this was not an outright case
of being defrauded, swindled or scammed, whoever owned the debt owned it on
capital account which would give rise to a capital loss, and not on income
account giving rise to an income loss. In the case of a taxpayer being
defrauded, scammed or swindled outside the ordinary course of a pre‑existing
bona fide business, as in Heppner v. The Queen, 2007 TCC 667,
2008 DTC 2001 (Nigerian faxes), and Hammill v. The Queen,
2005 FCA 252, 2005 DTC 5397 (gemstones), taxpayers may not
even have a capital loss recognized for tax purposes.
[14]
This is not a case of a
self‑represented ordinary Canadian coming to Court perhaps somewhat
unsure of what evidence may be needed or appropriate. The three taxpayers are
successful lawyers and are represented by an experienced tax litigator.
[15]
The Respondent asked
that I make certain specific adverse credibility findings against the
taxpayers. It is not necessary for me to do so in order to decide this case and
dismiss the appeals for the reasons given above. However, I can say that
I do not believe I was told a full and coherent story by these
taxpayers. The taxpayers’ version of events was possible, it was perhaps
plausible notwithstanding that the testimony of Dr. Swain and
Mr. Marusyk was inconsistent in several respects with what documents
I was given. It remained however a far cry from the requisite degree of
probability. I suspect this is because Dr. Swain appears to have been
duped. Nothing else makes sense on the very limited evidence I was given.
If that is indeed the case, this has been a very poor performance by the
taxpayers.
[16]
The appeals are
dismissed, with costs. I understand from counsel they wish to make
submissions as to the amount of costs.
Signed at Ottawa,
Canada, this 10th day of February 2012.
"Patrick Boyle"
CITATION: 2012 TCC 46
COURT FILE NOS.: 2009‑3864(IT)G, 2009‑2694(IT)G, 2009‑2695(IT)G
STYLE OF CAUSE: MARGARET SWAIN AND HMQ, RANDALL W. MARUSYK AND HMQ,
SCOTT
R. MILLER AND HER HMQ
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: June 2, 2011
REASONS FOR JUDGMENT BY: The
Honourable Justice Patrick Boyle
DATE OF JUDGMENT: February 10, 2012
APPEARANCES:
|
Counsel for the
Appellants:
|
Matthew G. Williams
Shaun Doody
|
|
|
|
|
Counsel for the
Respondent:
|
Suzanie Chua
|
COUNSEL OF RECORD:
For the Appellants:
Name: Matthew G. Williams
Shaun Doody
Firm: Thorsteinssons
LLP
Toronto,
Ontario
For the
Respondent: Myles J. Kirvan
Deputy
Attorney General of Canada
Ottawa,
Canada
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