REASONS
FOR JUDGMENT
Owen J.
[1]
This is an appeal by Mr. Osborne G. Barnwell of an assessment of
his 2011 taxation year by notice dated November 13, 2012. The assessment denied
a deduction claimed by Mr. Barnwell of an allowable business investment loss (“ABIL”) in the amount of
$39,150.
[2]
The Appellant is a certified general accountant and a lawyer and
he represented himself in this appeal. The Appellant himself and Mr. Nicholas
Austin testified on behalf of the Appellant. At the commencement of the hearing,
the Appellant advised the Court that he was revising his claim for an ABIL
downward to an amount of $36,500 based on aggregate loans of $73,000.
[3]
The Appellant is from the island of St. Vincent and came to
Canada in 1974. He initially lived in London, Ontario, but moved to Toronto in
1980.[1]
As a certified general accountant, he worked for the Canada Revenue Agency as
an auditor for a number of years before returning to school to obtain a law
degree so that he could specialize in tax law.[2]
The Appellant was called to the bar in 1993.[3]
[4]
The Appellant testified that he met Mr. Austin in the early
1980s.[4]
Mr. Austin was also from the island of St. Vincent and the two developed a
relationship. At that time, Mr. Austin was operating a business called
Carib-Can, which was a publisher of children’s books located on College Street
in Toronto. The Appellant stated that Mr. Austin was well known in the local
West Indian community and that he was committed to and passionate about his
work. He also stated that the relationship developed around activities such as
volunteering for literacy programs at a local school board.
[5]
At some point in the early 2000s, Mr. Austin indicated to the
Appellant that he wanted to publish a travel magazine that would be targeted at
passengers on commercial airlines. In or around 2004, Mr. Austin approached the
Appellant to co-sign for a loan from a bank to fund the new business venture. The
bank ultimately declined to make the loan. After failing to raise funds
elsewhere, Mr. Austin eventually approached the Appellant to fund the new
business. By this point in time, a corporation called Whitesand Group of
Companies Inc. had been incorporated by Mr. Austin. The Appellant stated:
. . . I was
approached by Mr. Austin to re-inquire as to whether I would invest in his
business, and just my disposition, my background as it is is [sic] I
consider myself quite blessed and fortunate, so I felt, given his passion,
given his commitment, I would invest in the business Whitesand.[5]
[6]
Mr. Austin indicated to the Appellant that the timeline to build
the business was two to three years, but not more than three years. The
Appellant recognized that it was a difficult business and that he was making a
commitment for a period of years, and stated that he would monitor how Mr.
Austin was doing.
[7]
The Appellant testified that there was no formal agreement with
Mr. Austin regarding the loans. However, to the best of his recollection, every
time he advanced money, he would ask Mr. Austin to attend at his office to sign
a promissory note.[6]
The Appellant entered into evidence as Exhibit A-2 four unsigned promissory
notes. Each note stated that it was signed, sealed and delivered at Toronto on
a particular date, and the blank signature line had Mr. Austin’s name
under it. The four dates are the 31st day of August, 2007, the 15th day of
November 2007, the 29th day of April 2008 and the 21st day of May 2009.
[8]
The Appellant also entered into evidence, as Exhibit A-1, a
redacted printout from his law firm’s computer system indicating that the
promissory notes were last modified on the dates stated on the notes. The name
of each note on the printout is “PROMISSORY
NOTE nicholos” followed by the date of the note.
[9]
In the body of the note dated August 31, 2007, it is stated:
I, Nicholos Austin, of the City of
Toronto, in the Province of Ontario, for valuable consideration, do hereby
promise to repay Osborne G. Barnwell, Barrister & Solicitor, the amount of
$10,300.
The commencement of the repayment
of this amount shall not be later than fifteen (15) months of [sic] the
date of the signing of this agreement. The exact repayment schedule shall be
determined at that time.
[10]
In the body of the note dated November 15, 2007, it is stated:
I, Nicholos
Austin, of the City of Toronto, in the Province of Ontario, for valuable
consideration, do hereby promise to repay Osborne G. Barnwell, Barrister &
Solicitor, the amount of $16,000.
The commencement
of the repayment of this amount shall not be later than fifteen (15) months of
[sic] the date of the signing of this agreement. The exact repayment
schedule shall be determined at that time.
[11]
In the body of the note dated April 29, 2008, it is stated:
I, Nicholos
Austin, of the City of Toronto, in the Province of Ontario, for valuable
consideration, do hereby promise to repay Osborne G. Barnwell, Barrister &
Solicitor, the amount of $65,000. This amount [is] comprised of previous loans
of $40,000 plus $25,000 given on this date.
The commencement
of the repayment of this amount shall not be later than July 30, 2008.
[12]
In the body of the note dated May 21, 2009, it is stated:
I, Nicholos Austin, of the City of
Toronto, in the Province of Ontario, for valuable consideration, do hereby
promise to repay Osborne G. Barnwell, Barrister & Solicitor, the amount of
$80,000. This amount [is] comprised of previous loans of $71,000 plus interest.
[13]
The Appellant stated that at the time Mr. Austin was signing the
notes, he knew that Mr. Austin had incorporated a company, as that was required
in order to obtain grants. With respect to the mention of interest in the May
21, 2009 note, the Appellant explained that at the time the arrangement was
struck there was an expectation that he would receive 15% of any contract that
was secured with an airline for the travel publication.[7] This arrangement was not
committed to writing.
[14]
As of May 2009, things were not going well. The Appellant
described the situation as follows:
So in May of
2009, and I will get to that in a moment, in May of 2009 things seemed to be
going here or there because of a failed -- there was a fail situation in 2009
with I think U.S. Air, and I will explain that. And so I said to Nicholas that,
well, if this doesn’t work out, let’s agree as to how much interest you will
owe me on the money I have given you. So we agreed on $9,000 back in May 2009. That
is why you see the interest amount. But it wasn’t that I expected him to pay me
interest all along; it was a culminating amount given the situation in May
2009.[8]
[15]
The Appellant entered into evidence as Exhibit A-3 a series of
photocopies of cancelled cheques for varying amounts and one cheque stub for a
certified cheque in the amount of $25,000. The first cheque in the series is
dated June 29, 2007 and the last cheque is dated
September 10, 2010. The certified cheque stub is dated April 29, 2008.
[16]
Of 18 ordinary cheques, in four cases, the “Re” line
of the cheque indicates either “Whitesand”
or “magazine” or “Whitesand magazine”. However,
all of the ordinary cheques are made out to Nicholos Austin or Nicholas Austin
or N. Austin and the certified cheque stub indicates that the payee is Nicholos
Austin. When asked why this was the case, the Appellant stated:
Because he was the signing officer
for the -- that is how I -- okay. So Nicholas was the face of Whitesand, so he
was the signing officer for Whitesand. And that was how he advised me to write
the cheques, to him, because he was using the money for the Whitesand business.
That is why I tried to put what -- just as a reminder what the loan was for,
the Whitesand business.[9]
[17]
The Appellant went on to state:
He [Mr. Austin]
is the director of Whitesand. I knew that was the case. And again, it’s the
sort of -- I would say, Your Honour, sort of the factual context at that time. So
I knew that he had incorporated Whitesand. I knew that he tried to get monies
through the arts council on behalf of Whitesand to do the publishing business. So
my relationship with him was predicated -- the money relationship, that is, was
predicated on the basis of Whitesand.[10]
[18]
To further corroborate the amounts of the loans, the Appellant
entered into evidence as Exhibit A-5 a copy of the General Bank Journal for his
law firm. The excerpt showed a series of loans totalling $75,600. Each entry is
described by payment method (cheque), a date, the name of the payee (Nicholas
Austin or N. Austin), an entry number, an explanation (the word “Loan” or,
in one case, “Loan to Nicholas Austin”)
and an amount.
[19]
The Appellant submitted copies of excerpts from three issues of Whitesand
magazine (Exhibit A-4) and stated that the magazines represented the only
evidence he had that Whitesand Group of Companies Inc. was carrying on an
active business.[11]
On page 3 or 4 of each issue, Mr. Austin is identified as the publisher of the
magazine. On the same page there also appear the name, address, website information
and contact details for “Whitesand
Group of Companies, Inc.”. After referencing these pages, the
Appellant stated:
As far as I was concerned, Your
Honour, Whitesand being managed by Nicholas Austin was producing a product, a
magazine as he wanted to do, to get onto the destination with tourists, and
tourism and so on.[12]
[20]
The Appellant testified that Mr. Austin pursued opportunities to
distribute the magazine with a couple of major airlines, but that it was clear
by 2010 that the loans would not be repaid. However, because of the ongoing
communications he had with Mr. Austin, there was no need to send a demand
letter.[13]
[21]
In cross-examination, the Respondent entered into evidence a copy
of a corporation profile report for Whitesand Group of Companies Inc. (Exhibit
R-2) issued by the Ministry of Government Services (Ontario). The report listed
Mr. Austin as a director and officer[14]
of the company commencing May 12, 2004 (the date of incorporation). The report
listed two other individuals as directors and officers (president and
treasurer) of the corporation commencing July 10, 2005.
[22]
In cross-examination, the Appellant stated that he viewed Mr.
Austin as being Whitesand, that he trusted Mr. Austin implicitly and therefore
did not feel the need for due diligence, and that he was in constant
communication with Mr. Austin and therefore did not need to demand
repayment even after the time limits set out in the first three promissory
notes had expired. The testimony also revealed that the Appellant had little or
no knowledge of Whitesand outside of what Mr. Austin had told him.
[23]
With respect to the ledger entries, cheques and promissory notes,
the Appellant acknowledged that they identified the debtor as Mr. Austin, but
he reiterated his position that Mr. Austin was Whitesand:
. . . Nicholas Austin, again,
forgive me for repeating, Nicholas Austin was Whitesand. Nicholas Austin owned
Whitesand. He epitomizes Whitesand. Whitesand was incorporated by Mr. Austin as
part of what was required for publication purposes. It was Nicholas Austin’s
Whitesand that was running, was developing a publication business. So yes, I
know after the fact I understand your concerns and I’m just testifying today
that Nicholas Austin was Whitesand.[15]
[24]
The Appellant acknowledged in cross-examination that he had made
loans to another corporation in 2010 and that the cheques in that case were
made out to the corporation and not to an individual. The cheques were entered
into evidence by the Respondent as Exhibit R-1.
[25]
Mr. Austin testified that he first came into contact with the
Appellant in 1994 when the Appellant invested in Carib-Can, which published a
book that was sold to a local school board.[16]
With respect to that investment, Mr. Austin stated that his partner at the time
paid back her half of the investment but that he did not pay back his half.[17]
[26]
Mr. Austin testified that he left Canada in 2000 and returned in
2005. He stated that the idea for Whitesand was “hatched” at the Appellant’s home with another
individual, who was the editor of the magazine at that time. Mr. Austin
described the launch of the magazine at an event in Yorkville.
[27]
Mr. Austin testified that 10,000 copies of the magazine were
produced in 2007 and that the magazine was shown at book fairs in Toronto and
New York as well as at different real estate symposiums. He described the talks
and meetings he held over a period of months with a major US airline regarding
a potential purchase of 250,000 copies of Whitesand magazine. The
meetings were held in Miami. The airline would not provide any upfront funding
for the magazines and in the end did not purchase any magazines. Mr. Austin also
referred to an e-mail from a Canadian carrier expressing some interest in the
magazine, but ultimately no sales resulted.
[28]
The Appellant asked Mr. Austin to explain the circumstances
surrounding the issuance of the cheques in his name:
Q. Is
there a reason why -- how did it happen, sir, that cheques were made out to
you, if you can recall? Can you take us back to -- did you have a conversation
with me at all as to who the cheque should be made out to?
A. Basically
you told me that I would be responsible, I’m personally responsible for monies
when Jo Lena and myself approach you. You said, I’m holding you responsible for
anything at all with regards to. So it was my responsibility, and consequently
you had me sign documents -- I don’t have it here with me -- in terms of
payments and how it would be paid, things that you mentioned to me.[18]
[29]
With respect to the promissory notes, Mr. Austin testified that
he signed the notes in the Appellant’s law office and that he recognized that
the monies were not gifts to him but had to be paid back.[19] With respect to the arrangement
with the Appellant for repayment, Mr. Austin stated:
Q. And what
was your -- can you recall what was -- the conditions of us [sic] to how
you were going to repay me?
A. One of
them being is the terms of the contractual arrangements. If I made any
contractual arrangement to sell books, you know, you have -- you basically
would have to have your monies paid back. And there was a certain percentage,
and I don’t have it here in terms of what the per cent was. And you would
basically -- if I may be correct -- I may -- I think it’s about 15 per cent. I’m
not sure what the figure was, but I know there was a percentage attached to it.[20]
[30]
Mr. Austin testified that soon after the collapse of Whitesand,
he was unable to repay the people to whom he owed money and that, because of
his circumstances, any records he had for Whitesand were lost or destroyed.[21]
[31]
Mr. Austin stated that the amounts advanced to him after 2009
were not loans but were for advertising purchased by the Appellant in another
publication of Mr. Austin’s. Upon hearing this testimony, the Appellant
promptly withdrew these amounts from his claim for an ABIL.[22]
[32]
In cross-examination, Mr. Austin acknowledged that his LinkedIn
profile made no reference to Whitesand, but it did say that he was the owner of
“Festivals in Buffalo”
from February 2008 to August 2014.[23]
Mr. Austin also acknowledged that he had no documentary evidence to show that
he was the sole shareholder of Whitesand Group of Companies Inc.,[24] that the
corporation had never filed an income tax return in Canada but did file one GST
return, which showed no revenue,[25]
and that the majority of the cheques written to him by the Appellant in 2007
were deposited in his personal bank account.[26]
[33]
In re-examination, Mr. Austin stated that the expenses paid in
2009 were paid from his personal bank account.[27]
Mr. Austin also stated that he was the sole shareholder of Whitesand Group of
Companies Inc. and that, at the time he was operating Whitesand, he was a
resident of Canada.[28]
[34]
The Respondent made a number of assumptions of fact in paragraph
9 of the Reply, including the following:
n. the appellant never made a loan
in the amount of $78,300 to Whitesand;
o. in the alternative, if a loan
was made in the amount of $78,300 by the appellant to Whitesand, it was not
made for the purposes of earning income; and
p. if a loan was made, it did not
bear any interest.
I. The
Appellant’s Position
[35]
The Appellant commenced his argument with the following
proposition:
So there are, in
the normal course there are four driving underlying principles to claiming the
debt as an ABIL. The debt obviously has to be incurred by the Appellant. The
debt was acquired for gaining or producing income; the business has to be an
active business; it has to be a CCPC, Canadian-controlled private corporation. And
the debt has to be realized in the year of the claim.
[36]
The Appellant submitted that the evidence supported the
conclusion that Whitesand Group of Companies Inc. was a Canadian-controlled
private corporation that carried on an active business in Canada. With respect
to the assumption of fact in paragraph 9 n. of the Reply, the Appellant stated:
In the amount of
78,300 to Whitesand. The loan was made to Whitesand. My evidence as I have
given it, Your Honour, and I would submit to you that what is important here in
terms of evidence is assessing whether the witness has been credible. I have no
grounds, no reason to make a false presentation to this court. The monies were
paid to Mr. Austin. Mr. Austin was seen as Whitesand, and he’s correct. The
point was he was possible [sic] and he directed me to make the cheques
to him, because he is responsible. Plain and simple. The bank account shows
activity. It is not on the level of activity that one would expect, given the
loans, but the monies were based on the representations made to me to [sic]
Mr. Austin cheques were written in favour of Whitesand.[30]
[37]
The Appellant cited the decision of the Tax
Court of Canada in Sunatori v. The Queen, 2010 TCC 346 for the
proposition that a loan may yield an ABIL even if it bears no interest, and the
decision of the Federal Court of Appeal in Rich v. The Queen, 2003 FCA 38,
[2003] 3 F.C. 493 for the
propositions that it is for the creditor to honestly and reasonably determine
if the debt is bad, and that it is not necessary for a creditor to exhaust all
possible recourses for collection in order to conclude that a debt is bad.
II.
The Respondent’s Position
[38]
Counsel for the Respondent submitted that the
decision in Rich lists in paragraph one the requirements to be met in
order to claim an ABIL, which counsel summarized as follows:
. . . At
paragraph one the Federal Court of Appeal lists the requirements that need to
be made which my friend previously noted, and that is: whether a debt was owed
by a Canadian-controlled private company to the taxpayer; whether the debt was
incurred for the purposes of gaining of [sic] producing income; whether
the Canadian-controlled private company was an eligible small business in the
year of claims [sic] the ABIL, and that means whether they had
substantially all or all of their assets in their active business in Canada.
[39]
In addition, counsel noted that, under the
definition of “small business
corporation” in subsection 248(1) of the Income
Tax Act (the “ITA”), the business has to have been active in the 12 months prior to
the claim of the loss.
[40]
The Respondent submitted that the Appellant had
not met any of the requirements described in Rich that must be satisfied
in order to claim an ABIL.
III.
The Statutory Rules
[41]
Paragraph 3(d) of the ITA allows a
taxpayer to deduct an ABIL in computing the taxpayer’s income. That paragraph
states:
3. Income for taxation
year — The income of a taxpayer for a taxation year for the purposes of this
Part is the taxpayer’s income for the year determined by the following rules:
. . .
(d)
determine the amount, if any, by which the amount determined under paragraph (c)
exceeds the total of all amounts each of which is the taxpayer’s loss for the
year from an office, employment, business or property or the taxpayer’s
allowable business investment loss for the year,
[42]
Under paragraph 38(c) of the ITA, a
taxpayer’s ABIL is one half of the taxpayer’s business investment loss for the
year:
38. Taxable
capital gain and allowable capital loss — For the purposes of this Act,
. . .
(c)
[allowable business investment loss] — a taxpayer’s allowable business
investment loss for a taxation year from the disposition of any property is ½
of the taxpayer’s business investment loss for the year from the disposition of
that property.
[43]
A taxpayer’s business investment loss is
described in paragraph 39(1)(c) of the ITA as follows:
(c) a
taxpayer’s business investment loss for a taxation year from the disposition of
any property is the amount, if any, by which the taxpayer’s capital loss for
the year from a disposition after 1977
(i) to which subsection 50(1) applies, or
(ii) to a person with whom the taxpayer was dealing at arm’s length
of any property
that is
(iii) a share of the capital stock of a small business corporation,
or
(iv) a debt owing to the taxpayer by a Canadian-controlled private
corporation (other than, where the taxpayer is a corporation, a debt owing to
it by a corporation with which it does not deal at arm’s length) that is
(A) a small business corporation,
(B) a bankrupt (within the meaning assigned by subsection 128(3))
that was a small business corporation at the time it last became a bankrupt, or
(C) a corporation referred to in section 6 of the Winding-up [and
Restructuring] Act that was insolvent (within the meaning of that Act) and
was a small business corporation at the time a winding-up order under that Act
was made in respect of the corporation,
exceeds the total
of
(v) in the case of a share referred to in subparagraph (iii), the
amount, if any, of the increase after 1977 by virtue of the application of
subsection 85(4) in the adjusted cost base to the taxpayer of the share or of
any share (in this subparagraph referred to as a “replaced share”) for which the share or a replaced share was substituted or
exchanged,
(vi) in the case of a share referred to in subparagraph (iii) that
was issued before 1972 or a share (in this subparagraph and subparagraph (vii)
referred to as a “substituted
share”) that was substituted or exchanged for
such a share or for a substituted share, the total of all amounts each of which
is an amount received after 1971 and before or on the disposition of the share
or an amount receivable at the time of such a disposition by
(A) the taxpayer,
(B) where the taxpayer is an individual, the taxpayer’s spouse or
common-law partner, or
(C) a trust of which the taxpayer or the taxpayer’s spouse or
common-law partner was a beneficiary
as a taxable dividend on the share or on any other share in respect
of which it is a substituted share, except that this subparagraph shall not
apply in respect of a share or substituted share that was acquired after 1971
from a person with whom the taxpayer was dealing at arm’s length,
(vii) in the case of a share to which subparagraph (vi) applies and
where the taxpayer is a trust referred to in paragraph 104(4)(a), the
total of all amounts each of which is an amount received after 1971 or
receivable at the time of the disposition by the settlor (within the meaning
assigned by subsection 108(1)) or by the settlor’s spouse or common law partner
as a taxable dividend on the share or on any other share in respect of which it
is a substituted share, and
(viii) the amount determined in respect of the taxpayer under
subsection (9) or (10), as the case may be.
[44]
Subsection 39(9) of the ITA addresses the case
of an individual taxpayer who has claimed a deduction under section 110.6 of
the ITA:
(9) Deduction
from business investment loss — In computing the business investment loss of a
taxpayer who is an individual (other than a trust) for a taxation year from the
disposition of a particular property, there shall be deducted an amount equal to
the lesser of
(a) the amount that would be the taxpayer’s business
investment loss for the year from the disposition of that particular property
if paragraph (1)(c) were read without reference to subparagraph (1)(c)(viii),
and
(b) the amount, if any, by which the total of
(i) the total of all amounts each of which is twice the amount
deducted by the taxpayer under section 110.6 in computing the taxpayer’s
taxable income for a preceding taxation year that
(A) ended before 1988, or
(B) begins after October 17, 2000,
(i.1) the total of all amounts each of which is
(A) 3/2 of the amount deducted under section 110.6 in computing the
taxpayer’s taxable income for a preceding taxation year that
(I) ended after 1987 and before 1990, or
(II) began after February 27, 2000 and ended before October 18,
2000, or
(B) the amount determined by multiplying the reciprocal of the
fraction in paragraph 38(a) that applies to the taxpayer for each of the
taxpayer’s taxation years that includes February 28, 2000 or October 18, 2000
by the amount deducted under section 110.6 in computing the taxpayer’s taxable
income for that year, and
(i.2) the total of all amounts each of which is 4/3 of the amount
deducted under section 110.6 in computing the taxpayer’s taxable income for a
preceding taxation year that ended after 1989 and before February 28, 2000
exceeds
(ii) the total of all amounts each of which is an amount deducted by
the taxpayer under paragraph (1)(c) by virtue of subparagraph (1)(c)(viii)
in computing the taxpayer’s business investment loss
(A) from the disposition of property in taxation years preceding the
year, or
(B) from the disposition of property other than the particular
property in the year,
except that,
where a particular amount was included under subparagraph 14(1)(a)(v) in
the taxpayer’s income for a taxation year that ended after 1987 and before
1990, the reference in subparagraph (i.1) to “3/2” shall, in respect of that
portion of any amount deducted under section 110.6 in respect of the particular
amount, be read as “4/3”.
[45]
Paragraph 40(2)(g)(ii) of the ITA deems a
loss on a disposition of a debt to be nil if the debt was not acquired for the
purpose of gaining or producing income from a business or property or as
consideration for a disposition of property to an arm’s length person:
(g) [various
losses deemed nil] — a taxpayer’s loss, if any, from the disposition of a
property (other than, for the purposes of computing the exempt surplus or
exempt deficit, hybrid surplus or hybrid deficit, and taxable surplus or
taxable deficit of the taxpayer in respect of another taxpayer, where the
taxpayer or, if the taxpayer is a partnership, a member of the taxpayer is a
foreign affiliate of the other taxpayer, a property that is, or would be, if
the taxpayer were a foreign affiliate of the other taxpayer, excluded property
(within the meaning assigned by subsection 95(1)) of the taxpayer), to the
extent that it is
. . .
(ii) a loss from the disposition of a debt or other right to receive
an amount, unless the debt or right, as the case may be, was acquired by the
taxpayer for the purpose of gaining or producing income from a business or
property (other than exempt income) or as consideration for the disposition of
capital property to a person with whom the taxpayer was dealing at arm’s
length,
[46]
Subsection 50(1) of the ITA is an elective
provision that will deem a disposition of a debt for nil proceeds in certain
circumstances:
50. (1) Debts
established to be bad debts and shares of bankrupt corporation — For the
purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a taxation year
(other than a debt owing to the taxpayer in respect of the disposition of
personal-use property) is established by the taxpayer to have become a bad debt
in the year, or
. . .
and the taxpayer
elects in the taxpayer’s return of income for the year to have this subsection
apply in respect of the debt or the share, as the case may be, the taxpayer
shall be deemed to have disposed of the debt or the share, as the case may be,
at the end of the year for proceeds equal to nil and to have reacquired it
immediately after the end of the year at a cost equal to nil.
[47]
Subsection 248(1) defines “active business” and “small business
corporation” for the purposes of the ITA:
248. (1) Definitions
— In this Act,
“active business”, in relation to any
business carried on by a taxpayer resident in Canada, means any business
carried on by the taxpayer other than a specified investment business or a
personal services business;
. . .
“small business corporation”, at any
particular time, means, subject to subsection 110.6(15), a particular
corporation that is a Canadian-controlled private corporation all or
substantially all of the fair market value of the assets of which at that time
is attributable to assets that are
(a) used principally in an active business carried on
primarily in Canada by the particular corporation or by a corporation related
to it,
(b) shares of the capital stock or indebtedness of one or
more small business corporations that are at that time connected with the
particular corporation (within the meaning of subsection 186(4) on the
assumption that the small business corporation is at that time a “payer corporation” within the meaning of that subsection), or
(c) assets described in paragraphs (a) and (b),
including, for
the purpose of paragraph 39(1)(c), a corporation that was at any time in
the 12 months preceding that time a small business corporation, and, for the
purpose of this definition, the fair market value of a net income stabilization
account shall be deemed to be nil;
IV.
Analysis
[48]
In order to claim an ABIL in respect of a debt,
a number of conditions must be satisfied. One such condition that is found in
the description of a “business
investment loss” in paragraph 39(1)(c) is
that the debt must be “a debt
owing to the taxpayer by a Canadian-controlled private corporation”.
[49]
The evidence in this case is that the Appellant
earnestly believed that he was advancing funds to Mr. Austin as the alter ego
of Whitesand Group of Companies Inc. so that the corporation could pursue the
publication of Whitesand magazine. I do not doubt the Appellant’s
subjective belief in that regard, but the documentary evidence is clear in
identifying the actual debtor as Mr. Austin and not Whitesand Group of
Companies Inc.
[50]
The cheques by which the advances were made are
all made out to Mr. Austin personally. The promissory notes that evidence
the debt, which Mr. Austin says he signed in the office of the Appellant,
all state:
I, Nicholos Austin, of the City of
Toronto, in the Province of Ontario, for valuable consideration, do hereby
promise to repay Osborne G. Barnwell, Barrister & Solicitor . . .
[51]
In addition, the General Bank Journal for
the Appellant’s law firm describes the amounts as loans to Mr. Austin. Although
the “Re” line on one of
the cheques references “Whitesand”
and another two cheques reference “magazine”
and still another references “Whitesand magazine”, that does not alter the fact
that the payee named on each of the cheques is Mr. Austin. It also appears from
Mr. Austin’s testimony that a majority of the cheques issued in 2007 were
deposited by him in his personal bank account.
[52]
Mr. Austin appears to have understood that the amounts advanced
to him were debts owed by him personally. In examination in chief, he stated:
A. Basically
you told me that I would be responsible, I’m personally responsible for monies
when Jo Lena and myself approach you. You said, I’m holding you responsible for
anything at all with regards to. So it was my responsibility, and consequently
you had me sign documents -- I don’t have it here with me -- in terms of
payments and how it would be paid, things that you mentioned to me.[32]
[53]
The Canadian income tax jurisprudence is clear
that, in order to achieve a particular income tax result for a transaction, the
form of the transaction matters. In Friedberg v. Minister of National
Revenue, 135 N.R. 61,[33]
the Federal Court of Appeal stated at paragraph 4:
In tax law, form matters. A mere
subjective intention, here as elsewhere in the tax field, is not by itself
sufficient to alter the characterization of a transaction for tax purposes. If
a taxpayer arranges his affairs in certain formal ways, enormous tax advantages
can be obtained, even though the main reason for these arrangements may be to
save tax (see Irving Oil Ltd. v. Minister of National Revenue, (1991),
126 N.R. 47; 91 D.T.C. 5106, per Mahoney, J.A.). If a taxpayer fails to take
the correct formal steps, however, tax may have to be paid. If this were not
so, Revenue Canada and the courts would be engaged in endless exercises to
determine the true intentions behind certain transactions. Taxpayers and the
Crown would seek to restructure dealings after the fact so as to take advantage
of the tax law or to make taxpayers pay tax that they might otherwise not have
to pay. While evidence of intention may be used by the courts on occasion to
clarify dealings, it is rarely determinative. In sum, evidence of subjective
intention cannot be used to “correct”
documents which clearly point in a particular direction.
[54]
The form of a transaction must be determined under the law of the
jurisdiction in which the transaction is consummated:
46 In
determining whether a legal transaction will be recognized for tax purposes one
must turn to the law as found in the jurisdiction in which the transaction is
consummated. Often that determination will be made without the aid of guiding
precedents which are on point and, hence, the effectiveness of a transaction
may depend solely on the proper application of general common law and equitable
principles. In some instances it will be necessary for the Tax Court to
interpret the statutory law of a province. As for the Minister, he must accept
the legal results which flow from the proper application of common law and
equitable principles, as well as the interpretation of legislative provisions.
This leads me to the question of whether the Minister is bound by an order
issued by a superior court, which order has its origins in the interpretation
and application of the provisions of a provincial statute.[34]
[55]
The taxpayer is not, however, held to a standard of perfection:
45 There is also little
doubt that the courts have been diligent in requiring adherence to legal
formalities imposed at law or by statute if certain tax advantages are to be
accorded. I am not suggesting that the standard to be met by the taxpayer is
best described as one of “perfection”.
In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, the
Supreme Court of Canada acknowledged that certain deficiencies may be found to
be inconsequential. In that case there had been, among other things, a failure
to ensure that the buyer of the appellant’s business held a licence under the Excise
Act [R.S.C. 1952, c.99] in conjunction with that business. Despite that
omission, it was held that the contract of purchase and sale of the business
was complete and the associated tax reduction scheme valid.[35]
[56]
Here, the Appellant is not asking this Court to overlook a mere
deficiency in the form of the transaction but rather to ignore entirely the
legal steps that were in fact taken to put into place the loans in issue. Those
steps involved the issuance of cheques by the Appellant in the name of Mr.
Austin and the execution by Mr. Austin of promissory notes evidencing that the
debt in issue was a debt owed by Mr. Austin to the Appellant.
[57]
The Appellant testified that Mr. Austin was the alter ego of
Whitesand Group of Companies Inc. — in effect, the physical representation of
the company — and urged me to consider the circumstances in play at the time.
[58]
Mr. Austin was a director and officer of Whitesand Group of
Companies Inc. However, an Ontario corporation is a legal entity that has a
legal personality separate and apart from its directors, officers and shareholders.[36] There is no
suggestion on the face of the cheques or the promissory notes that Mr. Austin
was acting in his capacity as a director or officer of Whitesand Group of
Companies Inc. when he received the cheques or signed the promissory notes, and
in his testimony Mr. Austin did not suggest that he was acting in any such
capacity. There was no agency agreement and Mr. Austin did not suggest in his
testimony that he received the cheques as an agent on behalf of Whitesand Group
of Companies Inc. In fact, as already noted, Mr. Austin stated that he accepted
that he was personally responsible for the debt.
[59]
Under the circumstances, this Court cannot simply ignore the
legal form and substance of the transactions that did in fact take place in
favour of the Appellant’s subjective appreciation of events. The documentation
and the testimony of Mr. Austin clearly indicate that the loans in respect of
which the Appellant is claiming an ABIL were made by the Appellant to Mr.
Austin personally. Accordingly, the loans did not create “a debt owing to the taxpayer by a
Canadian-controlled private corporation” as
required by the description of a business investment loss in paragraph 39(1)(c)
of the ITA.
[60]
For the foregoing reasons, the appeal is dismissed without costs.
Signed at Ottawa, Canada, this 21st day of April 2015.
“J.R. Owen”
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