Citation: 2010 TCC 304
Date: 20100603
Docket: 2003-4046(IT)G
BETWEEN:
RANDY POLOWICK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1]
The Minister of
National Revenue (the “Minister”) assessed the Appellant’s tax liability for
the 2000 taxation year pursuant to subsection 152(7) of the Income Tax
Act (the “Act”) by notice of assessment dated November 25, 2002, and
the Appellant appealed therefrom.
[2]
In the Amended Notice
of Appeal, the Appellant raised several issues, but at the time of trial the
only issue remaining was whether or not the Appellant was entitled to claim a
deduction in respect of a business investment loss for the 2000 taxation
year.
[3]
Further, the Appellant
abandoned his appeals in respect of the 2001, 2002 and 2003 taxation years and
those appeals are dismissed.
Evidence
[4]
Randy William Mark
Polowick testified that he was the owner of RCL Heating & Cooling
Services Inc. (the “Company”). He and his wife owned the shares on a 50-50
basis. They were also the directors of the Company.
[5]
In 1997, the Company
ran into financial difficulties. Clients were not paying their accounts and the
Appellant was forced into borrowing money to put into the Company. As a result,
he executed mortgages on his personal residence to secure financing for the
Company, and also borrowed money from his sister and brother‑in-law and loaned
that money to the Company. He said that the borrowed funds were used for the
Company’s operations.
[6]
Exhibit A-1 (Appellant’s
Book of Documents), Tab 1, was a copy of a mortgage on his personal residence
for $31,000 where he is noted as the “Chargor”. He said that the mortgage was
to guarantee the line of credit for the Company for $51,000.
[7]
The mortgage contained
in Exhibit A-1, Tab 1, was for $31,000 and was to guarantee payment to Heritage
Credit Union Inc. (“Heritage”).
[8]
In 1999, the Company
was unable to make payments on the mortgages. Heritage seized the Company’s
assets and the Company could not do any more work. By the end of July or
August, he was broke.
[9]
He borrowed money from his
sister and brother-in-law and gave it to his lawyer who paid off the credit
union through his trust account. This payment amounted to $83,691.27. By
September of 1999, the Company was ruined and it defaulted on three jobs and
they were withdrawn from the Company.
[10]
He sued a number of
clients and recovered judgment against them to the extent of $30,095.12
together with $1,500 in costs, but he was unable to collect any of the debt.
[11]
The financial
statements as at November 30, 1999 show shareholders’ advance totalling $82,947
and this was transferred to contributed surplus on the financial statements
dated November 30, 2000.
[12]
He said that the
judgment debt was not collectible by the year 2000 even though he made efforts
to collect it.
[13]
In cross-examination,
he admitted that the Company had a November 30th year-end. He denied that any
of the monies borrowed went to pay off any personal debts.
[14]
He agreed that he was
the President of the Company and signed all Company documents. The first
seizure occurred in 1999 and the Company ceased operations in July of 1999. By
November 30, 1999, the Company was destroyed.
[15]
He was unable to
explain why there was a small discrepancy in what he was claiming in the Notice
of Appeal and the claim made in Court. He agreed that the loans to shareholders
as indicated on the Company’s financial documents in 1994 were $17,000; in
1995, $2,000 and in 1996, $18,000.
[16]
He also agreed that in
1997 and 1998, the Company loaned money to the shareholders.
[17]
He was shown the tax
return for the Company as of November 30, 2000, and agreed that the loans were
eradicated in 1999 and became contributed surplus. He reiterated that he took
steps to collect the judgment debt but it was uncollectible.
[18]
In re-direct, he said
that the only dealings with Heritage Savings were the amounts of $52,077.33 and
$29,386.29, and those were paid out.
Argument on behalf of the Appellant
[19]
The Appellant testified
truthfully. His evidence was credible. The amounts that were paid out were on
behalf of the Company. He had no other loans. He tried to collect the judgment
debt but was unsuccessful.
[20]
He should be allowed to
claim a business investment loss of $82,947. The appeal should be allowed.
Argument on behalf of the Respondent
[21]
The Minister refused to
allow the deduction claimed as a business investment loss because he refused to
hold the Government responsible for the Appellant’s investment choices. In essence,
the Appellant revised the form of his investment from loan to shareholders’
contribution.
[22]
The Appellant was not a
guarantor of the Company’s loan nor did he have an obligation to pay it off.
[23]
The Company’s records
show that for three consecutive years after 1999, the Appellant’s
contributions to capital were by the same amount as the debt. It was eliminated
in 1999 and therefore no debt remained owing to the shareholders.
[24]
The Court must be
cognizant of the distinction between the shareholder and the corporate entity:
they are separate legal persons and the Company is not the agent of the
shareholder.
[25]
The determination of
facts in any given scenario is governed by bona fide legal
relationships, not economic realities.
[26]
The Appellant chose to
convert the form of his investment in the Company from loan to contributed
surplus. This amount was thereafter locked into the Company’s capital. There
was no debt existing in 2000. No amendment to the tax filing or financial
information has been recorded or reported by the Company. The Appellant’s
pleading that there were “other transactions”, i.e., loans or advances to the
Company, is not supported by the tax filing information of the Company. This
information from the Minister’s ordinary records indicates the details
contained in the financial statements have been accepted by the Tax Court of
Canada in many cases.
The Appellant’s assertion in the pleadings as to the amount of the debt in
dispute, based on “other transactions”, lacks factual foundation.
[27]
There is no confusion
from the financial information filed by the Company for income tax purposes.
Further, the burden of proof is on the Appellant to prove this allegation and
present documentation and details thereof.
This has not been done. Such a position is contradicted by the tax filing
information.
[28]
Under the provisions of
paragraph 39(1)(c) of the Act, the Appellant is required to show:
(a) he acquired a debt;
(b) an actual or deemed disposition of
the debt occurred; and
(c) the Company
qualified as a “small business corporation” at the time of the deemed or actual
disposition.
[29]
The tax filing
information and the financial information presented show that there was no debt
owing in 2000.
[30]
If the Court should
find that a debt existed in 2000, there is no evidence that there was an actual
disposition of the debt. Therefore, the Minister’s presumption that there was
no actual disposition of the debt stands. Therefore, subparagraph 39(1)(c)(ii)
of the Act does not apply.
[31]
The Appellant must rely
upon the application of subsection 50(1) to effect a deemed disposition for the
purposes of subparagraph 39(1)(c)(i) of the Act.
This section only applies if the Appellant made an election and the debt
is established by the Appellant to have become bad.
[32]
The Appellant did not
file an income tax return for the 2000 taxation year and the assessment under
appeal was made on November 25, 2002. There was no subsection 50(1) election
made by the Appellant for any taxation year. Therefore, the Appellant cannot
succeed in his appeal.
[33]
The Appellant pleaded
that the debt became bad in 1999, not 2000. As stated, the Company ceased
operations in 1999. The Minister’s assumption that the debt was not established
to have been bad in 2000 stands.
[34]
The Appellant was
required to have made an honest attempt to collect the debt. He took no steps
to make that determination. Collection of the judgment may have been possible.
[35]
Further, the Company
was not a “small business corporation” at any time during the 12-month period
that precedes the time of the disposition of the debt, which would be
any time preceding December 31, 2000. However, the evidence shows that the
Company ceased operations by November 30, 1999. Therefore, the Company
cannot satisfy the condition in subparagraph 39(1)(c)(iv). Therefore,
the Appellant’s claim for a deemed business loss must fail.
[36]
The Appellant was not a
guarantor to Heritage. The guarantor clause was not executed and it was not
pleaded. In any event, the payments were made to allow the Company to extricate
itself from the unsatisfactory business arrangement with Heritage and not for
the purposes of gaining or producing income from a business or property.
Therefore, the loss suffered is deemed to be “nil”.
[37]
The appeal should be
dismissed with costs.
Analysis and Decision
[38]
As indicated by counsel
for the Respondent, in order for the Appellant to be successful in this appeal,
he must satisfy the Court that he has met the requirements of paragraph 39(1)(c)
of the Act.
[39]
That paragraph requires
that the Court be satisfied on the evidence that he acquired a debt, that there
was an actual or deemed disposition of the debt, and that the Company qualified
as a “small business corporation” at the time of the actual or deemed
disposition.
[40]
Counsel for the
Appellant did not address these requirements in his submissions but was content
to argue that the evidence of the Appellant should be accepted as he had
testified truthfully that he had advanced these monies to the Company, that he
had no other loans or debts to Heritage, and that he had been unable to collect
the debt.
[41]
The Court is satisfied
that the Appellant testified to the best of his ability about the facts of
which he was aware, although he tendered no evidence of any value on the main
arguments raised by counsel for the Respondent.
[42]
The Court is satisfied
that the Appellant knew very little about the corporate records or how they
might affect his right to claim the loss which he seeks to claim here.
[43]
The Court is satisfied
that he did his best to recover the judgment debt against the Company’s former
clients and was unable to collect any of that debt. In that regard, the
Court accepts his evidence as well as his evidence as to how the funds were
obtained by him, how the mortgages were executed against his personal residence,
and how the funds eventually were disbursed to cover the debts incurred by the
Company.
[44]
No one appeared on
behalf of the Company to explain how the funds were treated by the Company in
its books and records or as to the way they were treated in the income tax
filings with Revenue Canada. It is trite to say that the Appellant was
oblivious to all of this. He merely knew that he had taken out the mortgages to
pay the debts of the Company and that he was unable to recover these funds. He believed
that he was entitled to claim the business loss that is the subject matter of
this appeal.
[45]
Counsel for the
Respondent has addressed all of the requirements of the Act in respect
to the claimed loss and her points are well taken.
[46]
As she argued, the mere
assertion that the Appellant lost money to the Company is insufficient to
establish that a debt was owed to him by the Company in the year that the loss
was claimed.
[47]
The financial records
and the income tax filings do contradict the Appellant’s claim that a debt
was owing in the year that it was claimed. These records clearly indicate that
when the Company reported $82,947 as a shareholders’ advance in 1999, that
advance was eliminated in 2000 and contributed surplus of the same amount was
reported in that year. It is obvious that the Appellant was unaware of that
treatment or was unaware of its effect. However, if the effect was to convert
his investment (the loan) to the Company’s “contributed surplus”, locking it
into the Company’s capital, for all intents and purposes it eliminated the
debt.
[48]
This is the effect of
what the Company did. The legal reality is that the Appellant and the Company
were separate and distinct entities, and even if the Appellant believed that
this action by the Company did not affect the way that he viewed the loan, he
was wrong.
[49]
The Court is satisfied
that there was no debt existing in 2000 as claimed. The Court is further
satisfied that there were no “other transactions”, i.e., loans or advances to
the Company, that were established that could create such a debt as to form the
basis of the Appellant’s claims.
[50]
This finding is
sufficient to dispose of this appeal but the Court will also deal with the
other submissions of counsel for the Respondent regarding the requirements of
paragraph 39(1)(c) of the Act.
[51]
Suffice it to say that
the Court accepts the submission that there was no actual or deemed disposition
of any debt if one existed.
[52]
The Court is prepared
to be more generous with regard to whether or not the debt was
established “to have become” bad in 2000, but that does not assist the
Appellant here.
[53]
The Court is satisfied
that the Company was not “a small business corporation” during the required
time period in light of the evidence given by the Appellant himself in the
pleadings and in the documentation presented.
[54]
Further, the Court must
agree with the argument of counsel for the Respondent that the payments were
not shown to have been made for the purpose of gaining or producing income from
a business or property.
[55]
The Court must dismiss
the appeal, with costs, and confirm the Minister’s assessment.
Signed
at Ottawa, Canada, this 3rd day of June 2010.
“T.E. Margeson”
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