Date: 19980324
Docket: 95-4042-IT-G
BETWEEN:
EVA MAY BLANCO,
EXECUTRIX OF THE ESTATE OF JOHN HENRY BLANCO, DECEASED,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur, J.T.C.C.
[1] The Appellant herein is Eva May Blanco, in her capacity as
Executrix of the Estate of John Henry Blanco, her late spouse,
who died on January 10, 1995. She seeks to deduct the amount of
$71,938 for the 1991 taxation year, as an allowable business
investment loss (ABIL), which deduction was disallowed by the
Minister of National Revenue.
[2] In 1989, the Appellant loaned $100,000 to a corporation,
50% of which was owned by her daughter and son-in-law. The
corporation used the money to acquire the Malibu Bar and Grill, a
bar/restaurant business which failed in 1991. The Appellant lost
the amount of $100,000 and the issue in this appeal is whether
the loan was made for the purpose of gaining income pursuant to
subparagraph 40(2)(g)(ii) of the Income Tax
Act.
[3] The facts in this appeal are substantially not in dispute
and are as follows. Mr. Blanco was mentally incompetent for
several years prior to his death, including the period of time
giving rise to the transaction which led to this appeal. Mrs.
Blanco implemented the relevant transaction on behalf of her
spouse by virtue of a Power of Attorney granted to her in
September, 1986. Mr. and Mrs. Blanco ran a successful farm
for over 30 years. They sold the farm in 1981 when Mr.
Blanco appeared to have been in the early stages of
Alzeimer's and they moved to Winnipeg.
[4] The Appellant's daughter, Teresa, her husband, Roman
Haderer and their three children lived rent-free, from about 1984
until the early 1990's in a home owned by Mr. and Mrs.
Blanco. For most of that period, Roman and Teresa were
unemployed and not only did they live rent-free but
Mrs. Blanco paid, for the most part, the taxes and utilities
on the property and advanced money as well for groceries and
other necessities to support Teresa and her family.
[5] In August 1989, Roman was introduced to a restaurant
business available for sale by his brother, Richard Haderer, who
was a real estate agent and Mrs. Blanco was approached to
lend the amount of $100,000 to assist in the purchase of the
business. Richard was a real estate agent in the Winnipeg area
for over ten years and Mrs. Blanco knew him from previous, a
business experience with respect to the construction of her home.
She trusted him explicitly and on the basis that he would get
involved with the restaurant operation, she felt comfortable with
the loan. She indicated that she wanted an interest rate of 12%
per annum on this loan because she was required to live on the
interest. She admitted in evidence that the primary purpose of
the loan was to assist Teresa and her family with the expectation
that she was creating jobs for Teresa and Roman and she would no
longer have to support them.
[6] In 1989, 2483981 Manitoba Ltd. was incorporated by Roman
and Teresa Haderer and Philippa Haderer, Richard
Haderer's spouse, Roman being the president and Philippa
being the secretary. The company acquired the Malibu Bar &
Grill in September 1989 and the Appellant advanced the amount of
$100,000 from personal cash reserves of her spouse to the company
for the purpose of completing the purchase transaction. The
uncertainty as to the terms of the loan gives rise to this
appeal.
[7] The solicitor for the company prepared a promissory note
which was completed in three versions. The Appellant urged me to
accept the following Promissory Note:
"Promissory Note
2483981 MANITOBA LTD. promises to pay to Eva Blanco the sum of
ONE HUNDRED THOUSAND DOLLARS ($100,000.00) together with interest
at the rate of 12% calculated half-yearly not in advance by equal
annual instalments of TWENTY THOUSAND DOLLARS ($20,000.00) each
plus accrued interest commencing September 15, 1990 and
continuing thereafter annually up to and including the 15th day
of September, 1994 when the full amount is due and payable.
DATED the 15 day of September, 1989.
2483981 MANITOBA LTD.
PER: Roman Haderer, pres.
Per: P. Haderer, sec."
This note was never delivered to the Appellant and the
solicitor for the company had writtren "inoperative" on
the original note. A second version of the promissory note
entered as Exhibit A-1 is dated September 1989, does not
include a specific day nor an interest rate and is executed by
only one officer of the company. The third version entered as
Exhibit A-1 is dated September 15, 1989, does not include an
interest rate but is executed by Roman and Philippa.
[8] The Appellant received no personal guarantees from the
principals of the company, nor did she obtain any legal advice.
She advanced the $100,000 to the trust account of the
company's lawyer in September 1989 without receiving any
documentation, promissory notes or other security. She trusted
the parties and she released the funds as she would have done to
a chartered bank or trust company for the purchase of a
guaranteed investment certificate. She anticipated earning 12%
interest which she required for living expenses and she stated
the loan was motivated to assist her daughter and family.
[9] The solicitor for the company arranged to have a debenture
in favour of the corporation registered in the Personal Property
Registry for Manitoba. The debenture at 0% interest was intended
to provide security to the Appellant for her capital. Also, the
debenture was not executed, nor agreed to, by Mrs. Blanco. The
solicitor for the company explained in evidence that an interest
rate other than 0% was intended but something lower than 12% was
being negotiated with Mrs. Blanco. Also, Richard Haderer
stated in evidence that subsequent to the 12% interest rate
agreed upon, he and Roman negotiated a 10% interest rate with
Mrs. Blanco and the debenture was registered to protect her
capital.
[10] At no time did the company make any payments to Mrs.
Blanco toward either the principal amount of the loan or the
interest thereon. In September 1990, Mrs. Blanco arranged
for a solicitor to write a collection letter to the company,
demanding payment of the principal, without mention in that
letter of interest. In 1991, the company's restaurant
business failed and the company became insolvent, making the loan
uncollectible. It appears that Roman was incapable of operating
the restaurant and at the time the business failed, Roman and
Teresa separated.
[11] At the time the funds were advanced, Mrs. Blanco was
satisfied that the restaurant would provide work for Roman and
she assumed that the business would be supervised by Richard
Haderer. Also, she expected to receive monthly or quarterly
payments. When no payments were received after the first three
months, she spoke to Roman at the restaurant, with no result.
Later in 1990, she arranged for a demand letter to be sent to the
company, requesting payment of the $100,000 pursuant to the terms
of the debenture.
Analysis
[12] There is no dispute that there was an enforceable loan.
The question is whether the loan was made for the purpose of
gaining or producing income pursuant to subparagraph
40(2)(g)(ii) of the Act, which states that a
taxpayer cannot claim any amount unless the loss from the
disposition of the debt was acquired for the purpose of gaining
or producing income from a business or property.
[13] The Appellant is a kind and giving person who assisted
her daughter and family over the years from her investment
income. When Roman and Richard approached her in August 1989,
Richard presented her with projections of income from the
restaurant business demonstrating to her how the restaurant could
generate sufficient income to repay her loan together with
interest thereon. She relied on this advice and advanced the
funds. She trusted the borrowers beyond what they deserved and
she cannot be faulted for that, but I cannot escape reality.
[14] The Act requires that a loan be made for the
purpose of earning income. I have no difficulty in finding that
the Appellant made the loan for the purpose of assisting her
daughter and family and her primary consideration was her family.
The time at which the Appellant's purpose must be examined is
the time the loan was made[1].
[15] This is a very sympathetic case and I have struggled to
find in favour of the Appellant, but I cannot. Although she
anticipated receiving interest income on her investment, I cannot
ignore the fact that this was a family loan and the
Appellant's primary concern was to assist her family. Neither
Roman nor Theresa testified. The Appellant had the burden of
proving that she granted the loan for the purpose of earning
income. She has not met that burden.
[16] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 24th day of March 1998.
"C.H. McArthur"
J.T.C.C.
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