Citation: 2008TCC92
Date: 20080222
Docket: 2006-2656(IT)G
BETWEEN:
JEAN-PAUL BOILY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This appeal
pertains to the 2001 taxation year.
[2] The issue is
whether the Minister of National Revenue ("the Minister") was
justified in disallowing part of the appellant's business investment loss claim —
specifically, an amount of $53,000 which he reported for the 2001 taxation year
following the bankruptcy of 9063-6739 Québec Inc.
[3] To explain and
justify the assessment that gave rise to this appeal, the respondent relied on
the following assumptions of fact:
[TRANSLATION]
(a) 9063‑6739
Québec Inc. was incorporated on May 7, 1998, under Part IA of the Quebec Companies
Act, R.S.Q., c. C‑38. (admitted)
(b) 9063‑6739
Québec Inc. was in the business of computer equipment sales. (admitted)
(c) On July 11, 2001,
9063‑6739 Québec Inc. filed a proposal under the Bankruptcy and
Insolvency Act, R.S.C. 1985, c. B‑3. (admitted)
(d) On August 1, 2001, 9063‑6739 Québec Inc. went bankrupt. (admitted)
(e) The president
of 9063‑6739 Québec Inc. was Daniel Boily, the appellant's brother. (admitted)
(f) The sole
shareholder of 9063‑6739 Québec Inc. was the appellant, who was a lawyer.
(admitted)
(g) On his income
tax return for the 2001 taxation year, the appellant reported a $196,746
business investment loss resulting from the bankruptcy of 9063‑6739
Québec Inc. (admitted)
(h) The $196,746
loss reported included $73,646 that the appellant had to pay in 2001 as a
surety for 9063‑6739 Québec Inc. and $70,100 in issued and paid-up
share capital of 9063‑6739 Québec Inc. held by the appellant. (admitted)
(i) The business
investment loss actually incurred by the appellant following the bankruptcy of
9063‑6739 Québec Inc. was $143,746. (admitted)
(j) The reported
loss of $196,746 also included a third amount, $53,000, which, according
to the appellant's explanation, was an advance to 9063‑6739 Québec Inc. (admitted)
(k) The financial
statements of 9063‑6739 Québec Inc. show a [TRANSLATION] "debt to
shareholder" in the amount of $24,892 for the fiscal year ended
April 30, 1999, and a [TRANSLATION] "debt to shareholder" of
nil for the fiscal years ended April 30, 2000, and
April 30, 2001, respectively. (no knowledge)
(l) The appellant
did not show that on August 1, 2001 he had any claim resulting from
advances to 9063‑6739 Québec Inc. (denied)
(m) On August 1,
2001, 9063‑6739 Québec Inc. did not owe any amount with respect to
shareholder advances. (denied)
[4] The appellant has
admitted most of the assumptions of fact. He is essentially claiming no
knowledge of, or denying, the assumptions related to the respondent's refusal
to accept the $53,000 business investment loss for the 2001 taxation year.
[5] The appellant, a
lawyer by profession, testified solely about this aspect of the matter. He
explained and described the circumstances surrounding the creation of the
business, of which he was the sole shareholder and his brother the sole
director.
[6] The business, which
sold computer equipment, experienced phenomenal growth, very rapidly adding several
locations to its sales network after some aggressive investment in advertising.
[7] The appellant
explained that he had no particular expertise in this field; he completely
trusted his brother, who managed the various locations with the help of one
other individual.
[8] The appellant went
there from time to time in order to ensure that everything was running
smoothly; he saw the advertising and witnessed the expansion, and had no doubt
that everything was running well. He said that the requests for injections of
money were not unduly surprising to him because it was a new business and
things seemed promising.
[9] The appellant
invested substantial amounts in different forms — shares, advances, a surety — in a company operating
in a field where competition is fierce and things change quickly; I am
referring, in particular, to the very short life of computer equipment, which
quickly becomes obsolete and is surpassed by new generations of products.
[10] The appellant spoke
of the very short lifespan of the business: it was created in May 1998,
and made an assignment of its property on August 1, 2001, after
submitting a proposal to its creditors. And yet, this business had seemed
promisingly dynamic. Despite his significant injections of money, the appellant
was not a director of the company. The appellant emphasized that the
presence of his brother as a director reassured him that the business was being
run properly; he repeatedly stated that he never had any doubts about his trust
in his brother, who had a solid knowledge in the field of computers. Having
made inquiries and having seen for himself the advertising and how
well-patronized the business was, he sincerely believed that everything was
going well, taking into account the normal growing pains that any new business
will experience.
[11] The appellant said
that there was nothing happening that caused him any concern. He also explained
that he saw the financial statements at the time of the bankruptcy; upon
noticing a discrepancy, he said, he asked the trustee to take the necessary
steps to have the accountant make the appropriate corrections (i.e. by showing
the amounts owing to the shareholder). This the trustee refused to do; however,
he did include the debt in the liabilities of the business.
[12] The timeline of events
(incorporation on May 7, 1998, proposal on July 11, 2001,
and bankruptcy on August 1, 2001) well illustrates how quickly things
did in fact change. This very short period of time between the commencement and
cessation of activities confirms the explanation that the appellant, who
trusted his brother, had no reason to suspect the financial debacle that was
taking place. It was a new business, operating in a difficult field in which it
was not unusual to have to inject funds either to stabilize the business or to
deal with difficult situations as they arose.
[13] The appellant
emphasized that he never benefitted from any advantages or privileges, apart
from being able to purchase two computers at cost. He said that the cheques
constituted prima facie evidence of the advances to the corporation. He also
admitted to being careless, indeed negligent, in managing the advances.
[14] The appellant also
said that he noticed that the amounts advanced were a few thousand dollars
higher than those reported as losses, but he added that, all the same, he did
not wish to alter the amount that gave rise to the appeal.
[15] The cheques on which
the appellant's position is based are as follows:
|
Date of
cheque
|
Amount
|
|
07/010/99
5/6/98
7/02/00
06/07/99
12/06/98
06/10/99
Total
|
$5,000
$3,250
$15,000
$10,000
$9,450
$13,000
$55,700
|
Essentially,
the appellant's evidence consists in asserting that the cheques are a
fundamental aspect of the file. As for why the financial statements of the
business make no reference to them, the appellant explains that three factors account
for this:
-
great confidence in his brother, the sole director;
-
no signs that the business was in trouble; and
-
the very short period between the beginning and end of
commercial activities.
[16] As for the respondent,
she submits primarily that the Canada Customs and Revenue Agency did not have
to take the appellant's advances into account because they were neither valid
nor confirmed by the financial statements. She further argues that the appellant
was involved in litigation in the past involving the same type of issue, and
that this should have caused him to be more careful. She also notes that the aggregate
amount of the cheques, $55,700, does not balance with the $53,000 reported by
the appellant; there is a $2,700 discrepancy.
[17] Certainly, standard
practices are tied neither to time limits nor to the special circumstances of a
case; they are objective, and often inflexible, standards. The cheques are
the basis of the appellant's arguments.
[18] The cheques are
objective elements. Where things seem to be going relatively well, is it
abnormal, having regard to the context (here, a start-up company
operated by the appellant's brother), for an ordinary person to be less
careful, less vigilant, or quite simply a bit more naïve?
[19] For one thing, the appellant
is a lawyer, and for another, the evidence discloses that he had some business
management experience because he was involved directly in business management very
shortly before the facts giving rise to the present appeal occurred.
[20] Are negligence and
carelessness a sufficient basis for completely rejecting the explanations
provided? One's first reaction, with hindsight, might be to conclude that this
question should be answered in the affirmative. However, it is always easier, with
the benefit of hindsight, to see the shortcomings or weaknesses of a case.
[21] I would point out
that the present case is not one in which the decision that I must make turns
essentially on self-serving oral testimony. It is one in which there is
evidence (the cheques) which cannot be ignored and whose purpose does not allow
of multiple explanations.
[22] The cheques are for
several different amounts that were paid on different dates and can easily be
regarded as limited interventions that were needed in the course of business.
This was a new business, which was competing in a sector where competition is
fierce and which clearly expanded too quickly (adding several new locations).
[23] This type of
intervention is neither odd nor unusual. Should the appellant have asked
himself questions, been suspicious, taken precautions and obtained airtight
guarantees? In an ideal world, he should have.
[24] In reality, his
brother's only qualifications for managing such a business were a keen interest
in computers and some knowledge of the computer field.
[25] Being the sole
director of the corporation in which the appellant had invested, the brother
perhaps did not think, or did not feel inclined, to give the appellant an
accurate picture of the situation, because he believed that it would stabilize.
Human nature being what it is, he might even have been tempted to gloss over or
sugar-coat the picture, which, in fact, he did by talking up the hypothetical
benefits of a government program to encourage families to acquire a computer.
[26] Moreover, how can
one conceive of or imagine a situation in which an individual, with a legal background
at that, invests significant sums of money as sole shareholder of a corporation
without being a director of that corporation? At first blush, such a scenario
strikes one as somewhat improbable, unless there is great trust of the kind
that can exist in a relationship between two brothers, as was the case here.
[27] In this regard, the requisite
standard of proof is proof on a balance of probabilities. And in my opinion,
the evidence submitted, which consists mainly of copies of cheques and
explanations concerning the context and circumstances, is sufficient for one to
conclude that the requisite probability exists, especially since the respondent
did not question that the cheques were real. Admittedly, the aggregate amount
of the cheques is greater than the amount of the reported business investment loss,
but that discrepancy was pointed out by the appellant, and is a rather insignificant
amount.
[28] Moreover, the fact
that the appellant's claims are not corroborated either by the financial
statements that were taken into consideration in the business's bankruptcy or by
the description of debts on the list of creditors drawn up for the proposal
that preceded the bankruptcy can be explained by the situation and by the
particular context of the case.
[29] If the amount in
issue had been a single amount that might have been used to purchase computer
equipment, reimburse expenses, or pay for work for which professional fees were
not billed, or if there had been other reasons or grounds for concluding that
there was some ambiguity regarding the purposes of the cheques, this might have
weighed in favour of the respondent's position.
[30] As for the fact that
the evidence submitted by the appellant essentially consisted of copies of
cheques and his own testimony, here again, the circumstances probably made the relationship
with his brother, who was the director of the business, very tense, if they did
not put an end to it altogether, and this diminishes the relevance that his
brother's testimony could have had.
[31] The respondent
sought to undermine the appellant's credibility by citing a similar situation
that occurred a few years earlier. The respondent argued that a similar previous
experience should have made him more careful, more vigilant and wiser. However,
in that instance, he was the director of the business concerned, whereas here
he was essentially the backer of a business that rapidly found itself in
difficulty, to such a degree, in fact, that it went bankrupt and ceased to
exist.
[32] The respondent's
basic argument is essentially based on the fact that the appellant's claims are
neither valid nor confirmed by the financial statements.
[33] If not for the
copies of cheques, the appellant's claims would have had to be rejected on the
basis that they were unreasonable. Yet, in my view, the cheques, the
circumstances, the context and the explanations are amply sufficient for one to
conclude that the preponderance of the evidence favours the appellant's
position.
[34] Admittedly, the way
the appellant went about things was not exemplary, and can perhaps even be
called careless and negligent considering the appellant's professional
qualifications. However, the evidence discloses no basis on which to conclude
that the explanations confirmed by the cheques are not credible, or are so unreasonable
that they must be rejected or disregarded.
[35] For these reasons, I
allow the appeal, with costs to the appellant.
Signed at Ottawa, Canada, this
22nd day of February 2008.
"Alain Tardif"
Translation
certified true
on this 27th day
of June 2008.
Erich Klein, Revisor
Email this Content