Date:
20021206
Docket:
1999-4399-IT-G
BETWEEN:
DONALD G.
MacKAY,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
(Delivered
orally from the Bench at
Kitchener,
Ontario, on October 30, 2002)
Mogan
J.
[1]
At all relevant times, the Appellant was a
shareholder in 426783 Ontario Limited ("the Company").
The three taxation years under appeal are 1994, 1995 and 1996. In
those years, the Appellant loaned to the Company the amounts of
$121,138, $120,839 and $127,614, respectively. When reporting his
income for those years, the Appellant reported the loans as
business investment losses, and he deducted an allowable business
investment loss in each year with respect to those amounts. In
the reassessments under appeal, the Minister of National Revenue
disallowed the deduction of the allowable business investment
losses. The Appellant has appealed from those reassessments. The
primary issue before the Court is whether the above amounts may
be regarded as business investment losses.
[2]
The Appellant was born and raised in Port
Elgin, Ontario, a small town near Southampton on Lake Huron. He
graduated from dentistry in 1976 and went back to Port Elgin to
practice dentistry. He and his wife became involved in the
affairs of the town. His wife was on the town council and, in
1981 he (either alone or with others) purchased a medical
building. Around 1983, he and a friend, Donald McCulloch,
assembled a group of people to build a sports facility which
would have primarily squash courts and racquetball courts. They
assembled 21 investors who became shareholders of the Company.
The Appellant and Donald McCulloch were each 25% shareholders and
the 19 other individuals collectively owned the remaining
50% of the shares.
[3]
In 1983, the shareholders paid $400,000 for
preference shares of the Company. The Company used this
subscribed capital and some borrowed money to build the sports
facility. It was completed in 1983 or 1984 at a cost of
approximately $900,000. The facility consisted of two squash
courts, three racquetball courts, a large weight room, a daycare
centre for the members, a restaurant of 90 seats and a banquet
hall of 300 seats. The sports facility was owned by the Company
but operated under the name Lakeshore Racquet and Recreation
Centre (referred to hereafter as "LR & R).
[4]
When LR & R was running at peak, it would
require a staff of 40 people, but many of them would have been
part-time employees. According to the Appellant's evidence,
there were about 15 full-time employees. The LR & R had an
advantage in the sense that there were no other racquetball
facilities in the Town of Port Elgin. The Company was in some
financial difficulty from the time it opened in 1983 or 1984
until 1990 because there were operating losses each year in the
range of $20,000. The Appellant regarded those losses as
manageable.
[5]
In order to put the Company on a better
financial footing, the original shareholders agreed in 1989 to
put another $400,000 into the Company for fresh shares and to use
the fresh capital to pay off the bank and get rid of a very
onerous loan. At that point in time, they had collectively
invested about $800,000 in the Company. As stated, the two
significant shareholders were the Appellant and
Mr. McCulloch each with 25% of the shares.
[6]
In 1990, the Company hired a new manager with
the expectation that the losses could be turned around. There was
a significant external event which happened in 1990 having a
direct effect on the economy of Port Elgin and also on the
Company. A new government was elected in Ontario which had
promised to close down all nuclear power plants. Soon after the
new government took office, there were moves to close down the
Bruce Nuclear Power Station which is very close to the Town of
Port Elgin. There were significant layoffs of employees. The
Appellant stated that in the preceding 20 years, the Bruce
Nuclear Station had been a significant employer in and around the
Town of Port Elgin; and the economy of the town was very much
tied to the Bruce Nuclear Station. Once the Ontario government
announced that it would close down and mothball all or a
substantial part of the Bruce Nuclear Station, people in the town
tended to stop spending money; they became more careful; they
used LR & R less, and the Company got into significant
financial difficulties.
[7]
The new manager hired in 1990 was not
effective, and some of the staff were less than honest. The
shareholders did not realize this at the time and so, over the
next three or four years from 1990 to 1994, the Company was in
real difficulty losing approximately $100,000 a year. By 1991,
with the slowdown of the economy in Port Elgin, most of the other
shareholders had lost confidence in putting more money into the
Company. They wanted to keep it running in the hope that they
would get their initial investment back, but they could not
afford to keep financing annual losses in the range of
$100,000.
[8]
The Appellant made a business decision that he
would attempt to finance the LR & R operations because he
thought that the economy of the town would eventually turn around
and that the Company could be made profitable. In 1990 or 1991,
the Appellant started making substantial advances to the Company
in the range of $100,000 each year. He claimed those advances as
business investment losses and the corresponding deductions were
permitted by Revenue Canada. He described the manner in which he
computed the amount of the loss. The fiscal period of the Company
ended on September 30. The Appellant would determine the amount
of money he advanced to the Company in its 12-month fiscal
period ending in a particular year, for example 1992, and when he
filed his income tax return for 1992 in the spring of 1993, he
would claim 75% of that amount as an allowable business
investment loss. That is the pattern he followed each year from
1991 to 1996. As stated, Revenue Canada accepted 75% of those
amounts loaned to the Company as allowable business investment
losses for each year until sometime in the calendar year 1997
when the character of the amounts loaned to the Company was
challenged by Revenue Canada. Later in 1997, reassessments were
issued to the Appellant disallowing the deduction of allowable
business investment losses for 1996 and the two preceding years,
1995 and 1994.
[9]
The Appellant objected to those assessments
and ultimately appealed to this court: the appeals I am hearing
today. The definition of "business investment loss" in
section 39 of the Income Tax Act is as follows (excluding
words that I do not regard as relevant):
39(1) For the purposes
of this Act,
...
(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)
...
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 ... that is
(A) a
small business corporation,
(B)
...
exceeds
the total of
(v)
...
50(1) For the purposes
of this subdivision, where
(a)
a debt owing to a taxpayer at the end of a taxation year ...
is established by the taxpayer to have become a bad debt in the
year, or
(b)
a share ... of the capital stock of a corporation is owned
by the taxpayer at the end of a taxation year and
(i)
...
(ii)
...
(iii)
at the end of the year,
(A)
the corporation is insolvent,
(B)
...
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.
The above definition
and the terms of subsection 50(1) provide that a debt which has
become a bad debt may be regarded as a business investment
loss.
[10]
The Appellant's position is that the
amounts he loaned to the Company had in fact become bad debts at
the end of each of its fiscal years. Because there was no
possibility of recovering the amounts loaned as at September 30
in any particular fiscal year, those amounts should be regarded
as business investment losses. Revenue Canada takes the position
that, as long as the Company was operating, those amounts could
not be regarded as bad debts and the Appellant should have made
an attempt to collect on them either by putting the Company out
of business or into bankruptcy.
[11]
After 1991, the Appellant was the only
shareholder financing the operation of the Company. He made it
clear, however, that the other shareholders had not given up on
their investment; they had only given up on their ability or
willingness to put more money into the Company. There were
shareholders' meetings each year which he said were
well-attended. Each year, they heard a report on how the
Company was doing; they elected a board of directors with
different individuals except for the Appellant and
Mr. McCulloch, the other substantial shareholder, who were
always re-elected to the board. And so at all relevant times, the
Appellant was a director of the Company but the other directors
rotated on and off as elected by the shareholders. The other
directors took an active role in the operation of the Company
from its inception until around 1997.
[12] The
Appellant said that the board of
directors took an active role to the point that, in 1994, they
fired the person who was the manager of the club and they
determined at that time that they could not afford to hire a new
manager. They formed an "operating committee" composed
of the bookkeeper, the head of maintenance, the receptionist, and
the banquet manager, and they caused that committee to operate
the club, reporting directly to the board. The Appellant's
evidence is, however, that because he was the sole director who
was financing the operation of the Company, the operating
committee would usually come to him on a day-to-day
basis if there were problems, but they would report to the board
of directors from time to time as the directors met.
[13]
The Company continued on that basis from the
time the new committee was put in place in 1994 until early 1997
when a truly significant event happened. There had been a period
of cold and snow in the early part of February 1997 followed by
several days of excessive rain and flooding in the Town of Port
Elgin. The flooding was disastrous. It flooded the building in
which the Company operated LR & R and it did significant damage
to the hardwood floors of the squash courts and racquetball
courts. They were under water.
[14]
The Company was not able to operate its sports
facilities but it was able to operate the banquet hall on the
upper floor which had not been damaged by the flood. The Company
was effectively out of business from February 21, 1997 until the
end of the year. As a consequence of the flooding, a number of
things happened. There was an allegation that the Town had
arranged its storm sewer or gutter facility in such a way that it
caused the excessive water in that part of the Town to be
diverted onto the Company's property. Also, for the first
time in many years, the snow had been removed from the streets of
the town and stored on the land adjoining the LR & R facility.
The result was that when the rain started with milder weather,
the snow melted and contributed to the flooding which damaged the
Company's building. The Company commenced legal proceedings
against the Town of Port Elgin for negligence and contributing to
the damage to the facility by the way it had channelled the
surplus waters off the streets, and had stored the snow without
permitting or allowing for adequate drainage when the snow
melted.
[15] After the
flood in February 1997, a significant
number of the other shareholders simply gave up on their
investment and concluded that they would never get their money
back from the Company. The LR & R building was totally shut
down from February until November 1997 and no one was willing to
put any more money into the Company. At that point in time, the
Appellant had invested several hundred thousand dollars on loans
to the Company; and he was clearly the individual among all
shareholders who had the most to lose if the facility was to be
sold as a damaged building, using the proceeds of disposition to
pay municipal taxes which had gone into arrears of about $150,000
and to pay a loan from the Business Development Bank which the
Appellant described as a "bank of last
resort".
[16]
The Appellant and his wife felt that
their investment in the Company was too significant to walk away
from. They decided that they would put their own money into the
building to rehabilitate it and get the facility running again.
The Appellant's wife agreed to give up her employment
elsewhere in the Town of Port Elgin to manage the racquet club
for no consideration but they would not open the banquet
facility. Also, the Appellant would work two or three evenings a
week in the bar at the club for no consideration to reduce the
operating costs.
[17]
With his own capital, the Appellant caused the
building to be repaired in the last two months of 1997 and the
early months of 1998, and the facility was reopened for business.
The building, however, was still owned by the Company and there
were still minority shareholders, even though they had given up
on ever getting back any money for their shares. The Appellant
decided that if he was going to put in fresh capital following
the flood damage, and if no one else was going to make a
contribution, he should own the building. In the latter months of
1999, there was an agreement entered into between the Company and
a new company incorporated by the Appellant alone (or with his
wife and children) identified as 1117636 Ontario Limited which I
shall simply refer to as the "New
Corporation".
[18]
An agreement of purchase and sale was signed
in December 1999 under which the Company sold the real estate,
the land and building, to the New Corporation for $400,000. The
transaction could not be closed or effected in December 1999
because of the ongoing litigation against the Town of Port Elgin.
That litigation was settled in the spring of 2000. Following the
settlement, the transfer of the property took place in June 2000
when the Company transferred the land and building to the New
Corporation. According to the Appellant's evidence, the New
Corporation continues to manage that facility to this
day.
[19]
The Company used the proceeds of sale
in the amount of $400,000 to pay the Business Development Bank
about $178,000, the Town of Port Elgin municipal tax arrears of
about $110,000, and to pay the balance of about $111,000 to the
Appellant with respect to the many loans he had made to the
Company. He stated in evidence that he thinks that his New
Corporation paid too much for the building, but the purchase
amount was suggested by someone representing Revenue Canada who
wanted to ensure that the property was transferred at "fair
market value". In any event, the total consideration was
$400,000.
[20]
That is the history of the racquet sports
facility in Port Elgin and the way it was operated over the
years. I now return to the years under appeal. There was put
before the Court as exhibits two binders of documents: Exhibit
R-1 containing 19 documents with separate tabs, and Exhibit
R-2 containing additional documents numbered from 20 to 41.
The documents which impress me most are the income tax returns of
the Company for the fiscal years ending September 30, 1994, 1995,
1996 and 1997 which appear at tabs 11, 12, 13, and 14 of Exhibit
R-1.
[21]
The Appellant stated that the actual amounts
which he loaned to the Company have never been contested by
Revenue Canada. The only issue before the Court is the character
of those amounts and whether they can be regarded as business
investment losses. I will refer briefly to the financial
statements of the Company as they appear in the corporate income
tax returns. Tab 11 is the financial statements at September 30,
1994 showing assets at a book value of approximately $560,000;
total liabilities of $492,000; capital stock of $1,124,000; a
deficit of $1,056,000; and a net shareholder equity of $68,000,
which causes the liability side of the balance sheet to match the
assets.
[22]
I noted that there were no "shareholder
loans" among the liabilities. I should have thought that the
Appellant's advances to the company from 1990 or 1991 up to
and including 1994 would have made a significant shareholder loan
on the books of the company. But the statement of operations for
September 30, 1994, shows revenue of $416,000, expenses of
$625,000, for an operating loss of approximately $209,000. Then
there is a notation, "gain on settlement of debt,
$121,138," and an adjusted loss of $76,000. That amount
($121,138) is precisely what the Appellant claims to have
advanced to the Company in 1994. Also, there is a note beside
the, "gain on settlement of debt." which explains that
this amount relates to a write-off of a loan payable to a
shareholder.
[23]
The Appellant explained the absence of any
"shareholder loans" on the balance sheet as follows. At
the end of each fiscal year after he looked at the financial
status of the Company, he concluded that it was virtually
impossible to expect his loans to be repaid because of the debts
of the Company and its assets which were encumbered by debt.
Therefore, he wrote off the loans and informed the auditors of
the Company so that they would put this notation in the financial
statements. That is why there was no entry for "shareholder
loans" on the balance sheet of the Company. What I have
described for the financial statements of the Company in 1994
happened also in 1995 and 1996. The relevant amounts are that at
September 30, 1995 the statement of operations, which shows the
loss in the year, also contains this notation, "gain on
settlement of debt, $120,839," which is the precise amount
the Appellant loaned to the Company in that fiscal period. Also,
there is the same notation for note 10 in the financial
statements that it relates to the write-off of a loan
payable to a shareholder and, of course, the Appellant is the
shareholder. And for the fiscal year ending September 30, 1996,
the same thing happened and on the statement of operations, there
is the same notation, "gain on settlement of debt,
$127,615," which is the amount the Appellant loaned to the
Company in that year. The same note 10 to the financial
statements states that a shareholder had written off the
debt.
[24]
The Appellant stated that he went through this
process of writing off his debt each year because there was so
little opportunity to recover his money from the Company which
was operating at a loss, quite apart from his writing off the
debt. The economy of Port Elgin was in a disastrous state because
of the closing of the nuclear power station. He stated that in
the period under appeal (1994, 1995 and 1996) the Chamber of
Commerce in Port Elgin recorded that there were 80 vacant
business facilities on the main street of Port Elgin. That is 80
facilities that might otherwise have been a retail store, a shop,
a professional office, etc.
[25]
He said there was no market for real estate
and, in 1994, 1995 and 1996, the only significant real estate
sold on the main street of Port Elgin was a bowling alley and a
movie theatre. They were both sold under a power of sale and, in
each case, the proceeds of sale were less than the debts
encumbering those properties. He said that the property of the
Company was similarly encumbered, the economy was in a depressed
state, and if the Company had put the property up for sale, it
would not have recovered enough money to pay the shareholders
anything or to pay him anything, and the money would have gone to
the Business Development Bank and also to the Town of Port Elgin
because the company had ongoing arrears of municipal taxes in the
range of $150,000. He said that they tried to keep the tax debt
to the Municipality down to approximately $150,000. He said if
you added the amount owing on the mortgage and the amount owing
on the municipal debt, the proceeds from the sale of the building
would not have left anything to pay him as a principal
shareholder-creditor or to pay to the shareholders anything with
respect to their shareholder investments.
[26]
I was impressed with the credibility of the
Appellant as a witness. He is lucid and intelligent. He appears
to be a reflective and prudent man, not the kind to run up debts
foolishly, but with enough common sense to know when to try and
stay the course in difficult circumstances. He made an attempt to
stay the course with this Company through the years under appeal
up to and including the flood in 1997.
[27]
The real question is whether the amounts owed
to the Appellant in the years under appeal were bad debts.
Counsel for the Respondent relies on the decision of the Federal
Court of Appeal in Flexi-Coil Ltd. v. The Queen, 96
DTC 6350. It is a unanimous decision in which MacGuigan J.A.
delivered the reasons for the Court. I find the decision in
Flexi-Coil to be distinguishable because the
corporate taxpayer in that case was attempting to claim bad debts
with respect to amounts it was owed by two foreign subsidiaries,
a Swiss subsidiary which was 100% owned by the Canadian taxpayer
corporation and the other being a United Kingdom subsidiary which
was 75% owned by the Canadian taxpayer corporation. In that case,
the Canadian taxpayer corporation's appeal was dismissed in
the Tax Court and a subsequent appeal to the Federal Court of
Appeal was also dismissed. On the facts, I would say that the
Flexi-Coil case is easily distinguished because the Court
was not satisfied that, when two foreign subsidiaries were so
dominated by a Canadian parent company, the parent company had
proven that the amounts it had loaned to the subsidiaries were
not recoverable. The Court found that the Canadian parent company
simply had not proved that the loans owing by the subsidiaries
could not be recovered. In other words, Flexi-Coil had not
proved that its debts were bad debts. The case is useful,
however, because the Federal Court of Appeal quotes from an
observation of the trial judge who stated: "The question of
when a debt becomes bad is a question of fact to be determined
according to the circumstances of each case. Primarily, a debt is
recognized to be bad when it has been proved uncollectible in the
year". Therefore, the question before me is a question of
fact as to whether the amounts owing to the Appellant by the
Company were bad at the end of each respective taxation year
under appeal.
[28]
The only evidence in this case was given by
the Appellant. There was no evidence other than his own with
respect to the value of the LR & R facility; and I accept his
evidence that its value was not adequate to discharge the
Company's debts to the Business Development Bank and the
Town. The Appellant owned a home in Port Elgin. He also was the
co-owner of a medical building. There is no reason to doubt
that he would have some sense of real estate values within the
Town. His description of the economy of Port Elgin is not
disputed. He said that during his negotiations with Revenue
Canada after filing the Notices of Objection, he provided them
with more than one newspaper article from the newspaper in Port
Elgin with statements from the Chamber of Commerce decrying the
bad economic situation in the Town, the poor business facilities,
the fact that there were 80 places of business closed on the main
street and that the real estate market was in a severe
recession.
[29]
He provided that information to Revenue Canada
to show that the underlying value of the business and the real
estate within the Company was not adequate to pay off the debts
of the Company. I have no hesitation in finding that the Company
was not able to pay back to the Appellant the amounts he loaned
to the Company in its fiscal year ending September 30, 1994. I am
satisfied that that amount of $121,138 could not have been repaid
to the Appellant on December 31, 1994. Similarly, I am satisfied
that the $120,839 which he loaned to the Company in its fiscal
period ending September 30, 1995, could not have been paid back
to him by the Company on December 31, 1995. And further, I am
satisfied that the amount of $127,614, which he advanced to the
Company in its 1996 fiscal period could not have been repaid to
the Appellant on December 31, 1996. As such, those amounts were
bad debts. They simply could not be repaid by the
debtor.
[30]
The Appellant appears to have recognized this
reality when he caused the debts to be written off on the books
of the Company but there is a footnote to that write-off. In
1997, when Revenue Canada challenged the deductibility of those
amounts and suggested that they were not business investment
losses, the Appellant went back to the Company, the directors and
the audit firm that prepared the financial statements and
complained that, if he was not going to get the deduction of a
business investment loss, then he should have those amounts
restated so that they would appear as actual liabilities of the
Company owing to him, even though he knew in his heart that there
was no possibility in 1997 of the Company repaying those
amounts.
[31]
As a result, the financial statements for the
fiscal period ending September 30, 1997 were changed from
what they had been in the three preceding years. On the statement
of operations there was no indication that there had been any
write-off of a debt. And in note 11 to the financial
statements, the auditors state:
Amounts of
$121,138, $120,839, and $127,615 were written off in the
company's 1994, 1995 and 1996 years respectively. These
amounts remain as liabilities of the company, and thus prior
years' amounts have been changed to correct this error. As a
result, the amount owing to shareholders has been increased by
$369,592, and the deficit has increased by $369,592.
In other words, the
auditors acknowledge that they have reviewed these amounts and
are now recording them as loans from a shareholder.
[32]
That restatement of prior year results
was caused by the reassessment from Revenue Canada which
challenged the Appellant's business investment losses. That
restatement did not, however, change circumstances year by year
in Port Elgin in 1994, 1995 and 1996. The state of the economy in
that Town remained the same whether the 1997 financial statements
were adjusted or not. There were the same number of vacant stores
on the main street, the same desperate real estate situation, the
same minor recession in the Town resulting from the closing of
the nuclear power station, the same level of unemployment, and
the same losses suffered by the Company.
[33]
I am impressed by the extent to which the
Appellant attempted to recover his investment. He stated that
from 1990 to 1995, he had remortgaged his house, refinanced his
line of credit, run up his credit-card debts, borrowed
money from friends, and cashed in his RRSPs, all as a means of
obtaining funds to inject into the Company in the hope that it
would be revived and that he could recover his investments. He
said that he was virtually bankrupt apart from the fact that he
did have a successful dental practice which is what sustained him
throughout, but that his debts were equal to his assets except
for the dental practice.
[34]
It was suggested by counsel for the Respondent
in argument that the Appellant had become emotionally involved
with the Company and that, therefore, his decision to continue to
invest money in the Company should be given less weight. I
observed the Appellant closely and I would be reluctant to
conclude that he was the kind of man who became emotionally
involved in a commercial operation. Even if the Appellant was in
part motivated by his emotions, he was still investing money in a
Canadian-controlled private corporation carrying on a
business, and the amounts he invested year by year were bad
debts. Whether he was driven by emotion or reason, I would say is
irrelevant but, having observed the Appellant, I think he was
driven by reason. He does not appear to be a person who would get
carried away emotionally and throw away the "family
fortune" because he had fallen in love with a racquet club
business.
[35]
There was an alternative argument put forward
by the Respondent to the effect that the loans were made without
interest and, therefore, they were not made for the purpose of
gaining or producing income from a business or property. This
argument could be fatal to the Appellant under subparagraph
40(2)(g)(ii) of the Act. In my view, this
alternative argument for the Respondent is answered by the
decision of this Court in Business Art Inc. v. M.N.R., 86
DTC 1842, in which Rip J. stated at page 1848:
However,
even if no interest was chargeable I do not believe that would be
fatal to the appellant's alternate submission. The fact that
there may have been no interest attached to the debts in question
is not relevant in deciding whether they were acquired for the
purpose of gaining or producing income. See The Queen v.
Lalande and Watelle, 84 DTC 6159 at page 6164. It is not
uncommon for a shareholder to lend money without interest and
without security to the corporation since he anticipates that the
loans will assist the corporation to earn income and to pay him
income by way of dividends; the loan is made for the purpose of
earning income from a property. Although the shareholder is a
creditor of the corporation when he advances money to the
corporation the shareholder does not see his advance of money to
the corporation and his subscription for shares of the
corporation as separate investments in two watertight
compartments; rather he sees his money entering two compartments
which open up into a single compartment for the use of the
corporation. Purchasing shares and advancing money to a
corporation are two ways of making an investment in the
corporation. This is a sensible interpretation.
...
It is not unusual for a person to invest in a corporation by
subscribing for share capital and lending money without interest;
as far as he is concerned the shares and his loans constitute a
single investment and if later on, he is called on to advance
further funds without interest he is only increasing his
investment. I cannot subscribe to the theory that in such an
example the non-interest bearing loans were not incurred for the
purpose of earning income from property; if the loans were not
advanced the corporation may have become bankrupt and the shares
may have become worthless. Clearly the loans were made to earn
income from property, that is, to place the corporation in a
position where it will be successful and pay
dividends.
[36] In
Cadillac Fairview Corporation Ltd. v. The Queen, 97 DTC
405, Bowman J. (as he then was) stated at page 412:
...
The ultimate purpose of any parent company of a corporate
organization is to earn income from its subsidiaries, generally
in the form of dividends. To have the treatment of capital losses
that it sustains in respect of shares or debts of its
subsidiaries depend upon whether interest or guarantee fees are
charged is, in today's world of business, simply not an
acceptable criterion to apply. That theory has been laid to rest
in such cases as Charles A. Brown v. The Queen, FCTD, No.
T-2712-91, January 15, 1996, Byram v. The Queen, 95 DTC
5069, Business Art Inc. v. M.N.R., 86 DTC 1842 and
National Developments Ltd. v. The Queen, 94 DTC 1061.
...
[37] I find that
the Appellant's loans to the Company in the years 1994, 1995
and 1996 were made for the purpose of gaining or producing
income. Also, the loans made in each year had become bad debts by
the 31st day of December in each respective year. The appeals are
allowed, with costs.
Signed at
Ottawa, Canada, this 6th day of December, 2002.
J.T.C.C.
COURT FILE
NO.:
1999-4399((T)G
STYLE OF
CAUSE:
Donald G. MacKay and
Her Majesty the Queen
PLACE OF
HEARING:
Kitchener, Ontario
DATE OF
HEARING:
October 30, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge M.A.
Mogan
DATE OF
JUDGMENT:
December 6, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
Shatru Ghan
COUNSEL OF
RECORD:
For the
Appellant:
Name:
N/a
Firm:
N/a
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-4399(IT)G
BETWEEN:
DONALD G.
MacKAY,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeals
heard on October 30, 2002, at Kitchener, Ontario, by
the
Honourable Judge M.A. Mogan
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Shatru Ghan
JUDGMENT
The appeals from assessments of tax made under the Income Tax
Act for the 1994, 1995 and 1996 taxation years are allowed,
with costs, and the assessments are referred back to the Minister
of National Revenue for reconsideration and reassessment on the
basis that the Appellant's loans to 426783 Ontario Limited
(operating as "Lakeshore Racquet and Recreation
Centre") in the years under appeal became business
investment losses within the meaning of paragraph 39(1)(c)
of the Act in the following respective amounts:
1994
$121,138
1995
$120,839
1996
$127,614
Signed at
Ottawa, Canada, this 6th day of December, 2002.
J.T.C.C.
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