Date: 20020125
Docket: 2000-335-IT-G
BETWEEN:
DAVID ARNOLD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Miller, J.T.C.C.
[1]
David Arnold appeals the Minister's assessment of his 1995
and 1996 taxation years on two fronts:
1.
He did not receive $392,800 of management fees in 1995;
and
2.
He is entitled to certain allowable business investment losses,
capital losses or business losses in 1996, arising from
investments in three unrelated businesses.
[2]
Prior to the filing of an Amended Notice of Appeal the week
before trial, and the Amended Reply the day before trial, the
parties had disagreed on the inclusion of a $1,051,915 capital
gain in 1996 arising from the disposition of securities. The
parties however in their amended pleadings agreed this amount was
only $4,103.68 and that there was also an agreed interest income
of $4,038.88 to be included for 1996 pertaining to various
Treasury Bill redemptions. These agreed amounts are therefore not
at issue in this appeal.
[3]
Mr. Arnold was the president and the major shareholder of
Plasco Manufacturing Ltd. ("Plasco") from 1977 to
1998 when the company was sold to a branch of Azko, a Finnish
public company. Plasco was in the pipe manufacturing business.
The other shareholders of Plasco were Mr. Arnold's spouse and
children. The 1995 corporate return of Plasco indicated that
Mr. Arnold was a 48% shareholder and his spouse Elizabeth
Arnold was a 12% shareholder. Mr. Arnold did not recall
the breakdown of shareholdings amongst his four children. In
February, 1994 Mr. Arnold left his wife. It was clear this was an
acrimonious separation, as a result of which Mr. Arnold
maintained he did not withdraw any more funds from Plasco than
did his wife in 1995. This amount he suggested was $60,000. There
is some confusion as to whether this was repayment of a
shareholder's loan or more in the nature of a fee, though Mr.
Arnold's counsel in argument clearly referred to the $60,000
as salary rather than a loan repayment. This situation did not
prove satisfactory to Mr. Arnold and he sent a memo to his
wife in December, 1995 suggesting that he would not continue to
work for nothing and that a salary had to be agreed upon. The
salary agreed upon for 1996, 1997 and 1998 was $250,000 per year,
which amount was paid in 1996.
[4]
The financial statements of Plasco for the year ending January
31, 1997 showed a management services fee of $250,000, and a
management services fee for the previous year (February 1, 1995
to January 31, 1996) of $392,800. It was this latter amount that
Canada Customs and Revenue Agency ("CCRA") attributed
to Mr. Arnold in the 1995 assessment. Mr. Arnold testified he did
not know to whom the $392,800 fee was paid, other than it was not
to him. Although he was president and a major shareholder of
Plasco until 1998 and a director until 2000, Mr. Arnold did
not attempt to get the company's records during this period
to clarify the information in connection with the management fee.
Although Mr. Arnold's accountant testified, he too gave
no indication as to whom the fee was paid.
[5]
In his Amended Notice of Appeal Mr. Arnold states that, as he was
one of five people on the management team he accepted
responsibility for one-fifth of the fee or $78,560. In evidence
Mr. Arnold stated there were more than five managers and that
this statement in his appeal was more for settlement
purposes.
[6]
Mr. Arnold initially filed his 1995 and 1996 returns on the basis
that he had severed the "assumpsit contract" with the
Government of Canada, contending that he was no longer subject to
tax. This position was abandoned by Mr. Arnold by October, 1998
when he provided information to Mr. Sian, a collections officer
for CCRA. In that correspondence he acknowledged a potential tax
liability of $33,000 for 1996, though he had not included in the
calculation any interest or capital gain which he now
acknowledges should have been included.
[7]
With respect to his 1996 taxation year Mr. Arnold claimed he had
investments in three businesses which triggered losses; firstly,
in a business known as Koeye River Lodge Inc.
("Koeye"). Mr. Arnold knew the principals of this
business, Douglas Raffan and Christopher Haley. He provided funds
of $111,000 to the enterprise and received a promissory note from
each of the principals of $55,000 along with a hypothecation of
shares in a company called Ye Old Work Shop Ltd.. The fishing
lodge was not successful and I am satisfied that by the end of
1996 it was clear Mr. Arnold would not receive any return of his
$111,000.
[8]
Mr. Arnold included in his investment in Koeye interest of
$7,700, trips to the lodge invoiced at $14,185, legal costs in
connection with the loan of $1,457, pipes supplied at an amount
of $3,232 and general costs of $268. The trips to the lodge
consisted of two visits, one of which included two customers of
Plasco, paid for by Plasco. Mr. Arnold stated the reason for the
trips was to check on his investments. It was clear that he also
enjoyed the normal pleasures that a four and five day trip to a
fishing lodge had to offer. With respect to the free pipe supply,
this was evidenced by a Plasco invoice of $3,231.59 to Koeye.
There was no indication the materials came from Mr. Arnold, nor
that he paid the invoice. Mr. Arnold claimed the $137,842
investment qualified for an allowable business investment
loss.
[9]
The second investment in which Mr. Arnold became involved was the
Handy-Sand Mitt ("Handy-Sand"), a form of sandpaper
worn as a mitt. Mr. Arnold invested $36,250 in this project,
$25,000 of which was paid in 1997 and the balance in late 1996.
He indicated that he expected to eventually receive shares in a
company. The company however was never incorporated and,
according to Mr. Arnold, the project fell apart due to the
drinking problems of the manager, Mr. Barry Morton.
[10] Although
the Amended Notice of Appeal suggested an allowable business
investment loss resulted from this investment, Mr. Arnold's
evidence was that he and an accountant, Mr. Brian Dougherty, were
joint venturers as to 75% and 25% respectively in the project,
and that the joint venture had salary or contractor expenses of
$14,664.50 and equipment expenses of $2,969. The invoice for the
equipment came from Stollco Industries Ltd. and was dated
May, 1997. The invoice for the services of Fenton totalling
$4,664.50 was dated in January, 1997. The $10,000 paid to Mr.
Morton was pursuant to an arrangement of $2,500 per month
commencing in December, 1996. No documentation was provided to
support a joint venture agreement.
[11] Finally,
Mr. Arnold paid $45,000 U.S. in 1995, through a Canadian broker,
for three debentures of $15,000 U.S. each in Rockafeller
Investment Inc. ("Rockafellers"), a company operating a
coffee house in California. The coffee house eventually shut
down. Mr. Arnold never filed a tax return claiming this loss but
raised it in his objection to CCRA's reassessment.
[12] Mr.
Arnold's counsel, Mr. Skogstad, argued that while Mr. Arnold
did not present any documents to refute the Minister's
assumption that a $392,800 fee was paid to him, Mr. Arnold did
provide his sworn evidence to that effect. Further, rather than
drawing a negative inference from Mr. Arnold not obtaining any
corporate records, I should find that due process has not been
followed as required by the Bill of Rights, because CCRA could
have and did not invoke their inspection rights pursuant to
section 231.1 of the Act. Mr. Skogstad presented no case
law to support this proposition, as I am satisfied there is none
to present. There is no onus on the Minister to invoke the
inspection powers in section 231.1 to support assumptions relied
on in the Reply. To suggest such is to ignore the
well-established procedure for hearings in this Court. I fail to
see how this in any way offends the Bill of Rights.
[13] In
connection with the management fee of $392,800 in 1995, the
Minister's assumption is based entirely on the financial
statements for Plasco for the year ending January 31, 1996. Mr.
Arnold categorically denied receiving $392,800, but claims to
have withdrawn $60,000. Mr. Torrie, counsel for the Respondent,
maintains, firstly, that the evidence is neither sufficient nor
credible. He suggested Mr. Arnold could have done a number of
things to assist the Court in determining who the fee was paid
to. He could have, as a director, obtained corporate records
himself - he did not. He could have called the bookkeeper from
Plasco as a witness - he did not. He could have called his
ex-wife or sons as witnesses - he did not. Mr. Torrie cited Judge
Lamarre in Huneault v. The Queen, [1998] 3 C.T.C.
2788 as follows:
25.
On the $10,000 expense which the appellant claimed as an expense
incurred in the course of his professional occupation, I consider
that he did not succeed in showing that he was entitled to such
an expense. To begin with, on the evidence I agree that this
amount is attributable to money paid by Mr. Rioux in connection
with salaries paid to employees. However, I draw a negative
conclusion from the absence of any testimony by Mr. Rioux. I
would recall here the comments contained in The Law of
Evidence in Civil Cases, by Sopinka and Lederman, which were
cited by Judge Sarchuk of this Court in Enns v. Minister of
National Revenue, (1987), 87 D.T.C 208 (T.C.C.), at
210:
In The Law of Evidence in Civil Cases, by Sopinka and
Lederman, the authors comment on the effect of failure to call a
witness and I quote:
In Blatch v. Archer (1744), 1 Cowp. 63, at p. 65, Lord
Mansfield stated:
It is certainly a maxim that all evidence is to be weighed
according to the proof which it was in the power of one side to
have produced, and in the power of the other to have
contradicted.
The application of this maxim has led to a
well-recognized rule that the failure of a party or a
witness to give evidence, which it was in the power of the party
or witness to give and by which the facts might have been
elucidated, justifies the court in drawing the inference that the
evidence of the party or witness would have been unfavourable to
the party to whom the failure was attributed.
In the case of a plaintiff who has the evidentiary burden
of establishing an issue, the effect of such an inference may be
that the evidence led will be insufficient to discharge the
burden. (Lévesque et al. v. Comeau et
al., [1970] S.C.R. 1010, (1971), 16 D.L.R. (3d) 425)
(emphasis added)
[14] Mr.
Arnold acknowledges that the $250,000 management fee shown on the
Plasco financial statements for the year ending January 31, 1997
was paid to him, yet he has no idea who was paid $392,800 in
1995. I find it was well within Mr. Arnold's power to adduce
evidence that might have clarified this issue. I do draw a
negative inference from these circumstances. Section 230 of the
Act requires that every person carrying on a business keep
appropriate records for the determination of taxes. I believe
that Mr. Arnold could have with very little effort accessed the
necessary information from such corporate records. I also find it
unusual that the president and major shareholder of a company
would not, even without having to access the corporate records,
know the details of a $392,800 management fee, an amount
representing over a third of the total administrative expenses of
the corporation. The $392,800 was presumably paid to someone, and
I find on balance that Mr. Arnold has not refuted the crown's
assumption that it was paid to him.
[15] With
respect to the allowable business investment loss Mr. Arnold
seeks from his investment in Koeye, I do believe that he advanced
the $111,000 cash to this project by means of lending that amount
to the two principals involved. The documents presented as
exhibits support loans to these individuals. I am not convinced
that the balance of Mr. Arnold's "investment"
represents anything of the sort. There is no evidence that the
pipe was paid for by Mr. Arnold. Also, the cost of the fishing
trips is not a cost that can in any way be seen as an advance of
monies to the lodge or any other form of investment. Similarly,
the other smaller costs do not qualify as a debt owed by the
fishing lodge to Mr. Arnold. I am left however with the cash
investment by Mr. Arnold of $111,000. To qualify as an allowable
business investment loss, paragraph 39(1)(c) of the
Act requires certain elements to exist. That paragraph
reads in part as follows:
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)
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 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 ...
[16] Firstly,
the debt must be owed by a corporation, not by individuals. Even
if I were to accept that the payment to the individuals went
effectively through them directly to the corporation, it must
then be shown that the corporation was a Canadian controlled
private corporation qualifying as a small business corporation.
No evidence was provided to me to satisfy that requirement. While
Mr. Arnold may well have experienced a loss, he has not shown
that the loss was an allowable business investment loss. His
counsel did not distinguish between an allowable business
investment loss and a capital loss in his argument, and made no
representations as to whether the loss is qualified as something
other than an allowable business investment loss. For
completion's sake, I would note that no election was ever
made by Mr. Arnold in accordance with subsection 50(1) of the
Act to have this section apply to the bad debt arising
from his investment in the fishing lodge project.
[17] With
respect to the Handy-Sand investment, as noted previously,
Mr. Arnold's argument has shifted to a claim for a
direct business loss claiming that he was involved in an
adventure in the nature of trade as a joint venturer with
Mr. Dougherty. Although he claims to have initially
injected funds in the project in anticipation of shares, which
never materialized, at some point the investment became the
injection of funds into a joint venture of which he was a 75%
joint venturer. In either event, the monies invested went towards
the project in December, 1996 and January, 1997. Although there
was no documentation in support of a joint venture, it is clear
no other organizational structure was put in place. Accepting
that Mr. Arnold and his associate Mr. Dougherty stepped in
directly in some fashion to handle this business, I cannot find
they did so anytime before 1997. Mr. Arnold stated that he
advanced the monies in the expectation of shares; the majority of
the funds he advanced in 1997. I do not see how Mr. Arnold
can claim any business expenses for 1996, before even he
considered himself to be engaged in an adventure in the nature of
trade. The timing does not support any deductible expenses for
Mr. Arnold in 1996 in connection with this business.
[18] Finally,
with respect to the $45,000 U.S. investment in Rockafellers, I
believe Mr. Arnold made such an investment and that the
investment did not materialize. The sole issue is whether Mr.
Arnold is deemed to have disposed of this investment in
accordance with paragraph 50(1)(b) of the Act. As
noted earlier part of paragraph 50(1)(b) requirements is
that a "taxpayer elects in the taxpayer's return of
income for the year to have this subsection apply".
Mr. Arnold's counsel argued that I should deem Mr.
Arnold to have so elected through his objection. This is taking
more liberties with the plain wording in the section than I am
prepared to take. As Associate Chief Judge Bowman pointed out in
Svidal v. The Queen, [1995] 1 C.T.C. 2692:
...Moreover, under clause 50(1)(b)(iii)(B) of the
Income Tax Act one of the conditions necessary to the
application of subsection 50(1) is that the taxpayer should
have elected in the return of income for the year to have the
subsection apply. No such election was made and the
appellant's notice of objection does not constitute a
notification before December 11, 1993 of the type contemplated by
the transitional legislation implementing the amendment of
subsection 50(1). Indeed the matter of an allowable business
investment loss was not raised until the amended notice of appeal
was filed.
By not making the section 50(1) election Mr. Arnold is
precluded from claiming the loss.
[19] For these
reasons, I dismiss these appeals, with costs to the
Respondent.
Signed at Ottawa, Canada, this 25th day of January,
2002.
"Campbell J. Miller"
J.T.C.C.
COURT FILE
NO.:
2000-335(IT)G
STYLE OF
CAUSE:
David Arnold v. The Queen
PLACE OF
HEARING:
Kelowna, British Columbia
DATE OF
HEARING:
January 15, 2002
REASONS FOR JUDGMENT BY: The
Honourable Judge Campbell J. Miller
DATE OF
JUDGMENT:
January 25, 2002
APPEARANCES:
Counsel for the Appellant: Donald W. Skogstad
Counsel for the
Respondent:
Tom Torrie
COUNSEL OF RECORD:
For the
Appellant:
Name:
David W. Skogstad
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-335(IT)G
BETWEEN:
DAVID ARNOLD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 15, 2002 at Kelowna,
British Columbia, by
the Honourable Judge Campbell J. Miller
Appearances
Counsel for the
Appellant:
Donald W. Skogstad
Counsel for the
Respondent:
Tom Torrie
JUDGMENT
The
appeals from the reassessments made under the Income Tax
Act for the 1995 and 1996 taxation years are dismissed in
accordance with the attached Reasons for Judgment.
The
Respondent is awarded costs.
Signed
at Ottawa, Canada, this 25th day of January, 2002.
J.T.C.C.
Email this Content