[OFFICIAL ENGLISH TRANSLATION]
Date: 20030117
Docket: 2002-637(IT)I
BETWEEN:
CHAMBLY RADIOS
COMMUNICATIONS CELLULAIRES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2002-638(IT)I
BETWEEN:
LISE BRISSETTE,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] The parties agreed to proceed on
common evidence for the two cases. The appeals relate to the 1998
and 1999 taxation years with respect to
Chambly Radios Communications Cellulaires
(2002-637(IT)I) and to the 1997 and 1998 taxation years
with respect to
Lise Brissette (2002-638(IT)I).
[2] The questions at issue are as
follows:
Lise Brissette (2002-638(IT)I)
The issue is whether the Minister was justified in adding an
amount of $2,941 for 1997 and $8,704 for 1998 as a benefit from
the use of a company car.
Chambly Radios Communications Cellulaires Inc.
(2002-637(IT)I)
The issue is whether the Minister was correct in refusing the
amounts of $7,000 and $50,000 claimed respectively as bad debts
and professional fees.
[3] At the commencement of the
hearing, the following facts were admitted:
Lise Brissette (2002-638(IT)I)
[TRANSLATION]
(a) The appellant
was employed by Chambly Radios
Communications Cellulaires Inc. (the "company")
during the years at issue;
(b) The company
leased a 1998 Audi for the period from August 18, 1997, to August
18, 1999;
(c) Under the
leasing contract, the company made an initial payment of $7,042
including GST and QST and monthly payments of $669 including GST
and QST;
...
(f) The
appellant never filled out a travel log for this car.
Chambly Radios Communications Cellulaires Inc.
(2002-637(IT)I)
[TRANSLATION]
(a) The appellant
was a subcontractor for Bell Mobility during the years at
issue;
(b) All of the
appellant's shares were held by Gestion Tecni Plus Inc.;
(c) All of Gestion
Tecni Plus Inc.'s shares were held by Lise
Brissette;
(d) The appellant
claimed a $50,000 expense for prospecting work for the fiscal
year ended July 31, 1998;
(e)
In October and November 1998, the appellant undertook to acquire
a cellular telephone distribution business named
Cellulaire Flamand Inc. in the municipality of
Sherbrooke;
(f) On
November 20, 1998, a new entity was incorporated under the name
R.C.C.S. Sherbrooke Inc., of which all of the shares were held by
Gestion Tecni Plus Inc.;
(g) Once it was
incorporated, the new entity began operating its business in the
premises previously occupied by Cellulaire Flamand Inc.;
(h) On November 20,
1998, R.C.C.S. Sherbrooke Inc. invoiced the appellant for an
amount of $50,000 for prospecting fees;
(i) On
December 9, 1998, Cellulaire Flamand Inc. declared
bankruptcy.
[4] The appellant began by explaining
that she had never used the 1998 Audi leased by Chambly Radios
Communications Cellulaires Inc. for personal
purposes.
[5] She argued that the car had been
used for the sole benefit of the company's commercial
activities.
[6] She indicated that she had
commuted, without exception, between the place of business and
her home by using another company car, which her spouse sometimes
used for personal reasons. She indicated that these were long
trips, that is, over 1,000 kilometres per week, which were always
made with the car used by the appellant's spouse.
[7] The appellant also stated that the
1998 Audi that was the subject of the assessment was left inside
the company garage, which was used during business hours for the
installation of cellular telephones and other electronic
equipment.
[8] Léo-Paul Dumont, the
auditor on the case, explained how the calculations leading to
the assessments had been made. He based his calculations on the
entirely opposite and rather surprising assumption that the car
was used totally and exclusively for personal purposes.
[9] With respect to the information
concerning this aspect of the case, he referred to discussions
with the appellant's accountant. The accountant,
Michel Desmarais, categorically denied discussing this
subject with the auditor.
[10] Lise Brissette acknowledged that
she did not have a descriptive record of the number of
kilometres travelled with the Audi, hastening to add that it was
used exclusively for business purposes and that she had never
made personal use of it.
[11] Although keeping a record is not
mandatory, it is very useful in establishing the personal use
that a person has made, particularly if the car has two different
purposes.
[12] In this case, the question of the
record is not relevant since the appellant submitted that she had
never used the car for personal reasons even to a small degree.
For his part, the auditor argued for unexplained reasons that the
car had been used for personal reasons only and even that it had
not been used for business at all.
[13] It appears on a balance of
probabilities that the appellant's work, beyond the shadow of a
doubt, required numerous business trips involving a certain
number of kilometres, moreover consistent with the kilometrage
taken into consideration by Mr. Dupont.
[14] I must therefore choose between two
contradictory versions: that the car was used for
essentially private or personal purposes and that it was used
exclusively for business purposes.
[15] Although there may be some doubt that
the Audi, which is clearly more pleasant, comfortable and
luxurious, was never used for personal purposes, I have chosen
the appellant's version for the following reasons:
· the
respondent collected the data used from the worksheets of the
business' accountant;
· the burden
of proof is a balance of probabilities and not beyond a
reasonable doubt;
· the
appellant was responsible for managing and efficiently operating
the commercial activities for which the places of business were
located in different cities, necessarily requiring regular
business travel;
· the
appellant provided a plausible explanation for the manner in
which her private travel needs were met, that is, by sharing the
car her spouse used;
· the
personal kilometrage on which the auditor's calculations were
based in no way corresponds with the evidence adduced;
· there was
no evidence that would support or justify the validity of the
information behind the auditor's calculations;
· agreeing
with the auditor's contention would mean that the Audi was a very
special vehicle used solely for personal reasons when there is
absolutely nothing in the evidence that would lead to this
conclusion.
[16] In Chambly Radios Communications
Cellulaires Inc. (2002-637(IT)I), the issue is
whether the Minister was correct in refusing the amounts of
$7,000 and $50,000 claimed respectively as bad debts and
professional fees.
[17] Lise Brissette, key stakeholder in
Chambly Radios Communications Cellulaires Inc., described
the field in which the appellant company operated, that is, sales
and installation of all of the communications products offered by
B.C.E., specifically, in cellular telephones sales.
[18] Informed about a viable opportunity to
develop her sales network through the acquisition of a business
operating in the same field in Sherbrooke, she initiated contact
and entered into agreements with the management of the business
in question, Cellulaire Flamand Inc. At that point,
Cellulaire Flamand Inc. was experiencing serious
financial difficulties to the point that it could not renew its
inventory.
[19] The appellant
Chambly Radios Communications Cellulaires
Inc. agreed to cooperate by providing the necessary
merchandise in order to keep the business operating in view of
its future acquisition.
[20] Aside from this interest in maintaining
the business' operation so that she could later acquire it,
the appellant was also interested in stimulating sales, given
that she earned recurring rebates or royalties on all new
subscriptions sold by Cellulaire Flamand Inc.
[21] Lastly, the experience gave her an
opportunity to learn more about this new potential market in
which she ultimately wanted to do business.
[22] At one point,
Cellulaire Flamand Inc. had all of its bank accounts
seized or frozen, completely paralyzing its commercial
operations. The appellant was therefore asked to loan $7,000 to
pay the employees, which she agreed to do. She wrote a cheque to
the order of Martin Gaudette dated November 19, 1998
(Exhibit A-1), which was deposited to pay the employees, and on
which was inscribed [TRANSLATION] "for deposit only to the
account of Cellulaire Flamand
(1994) Inc. 3094-6172 Inc.".
[23] The appellant argued that this was a
valid loan made for a specific purpose in that it enabled her to
continue a profitable business relationship; it consolidated her
plan to invest in the region. Moreover, she obtained direct and
immediate benefits from selling equipment and new subscriptions
through Cellulaire Flamand Inc.
[24] The respondent argued that the $7,000
was in fact a loan made to Mr. Gaudette personally and
that there was nothing to indicate that this amount was lost or
could not be recovered. According to the respondent, this was
confirmed by the fact that the appellant had not filed a proof of
claim in Cellulaire Flamand Inc.'s bankruptcy.
[25] The specific circumstances at the time
justify and explain that a cheque was made out to one of the
executives of Cellulaire Flamand Inc. to ensure that the proceeds
of the cheque would not be used for purposes other than the
employees' salaries. I have no reason not to accept the
explanations that were given, especially since they are in
keeping with practices that, while debatable, are common.
[26] The $7,000 disbursement was made for a
specific purpose and with the intention of profit. Not only was
the loan expected to generate positive and direct benefits, it
did in fact yield profits since the appellant earned recurring
rebates on all subscriptions sold by
Cellulaire Flamand Inc.
[27] No decisive conclusions can be drawn
from the fact that the appellant did not complete a proof of
claim in Cellulaire Flamand Inc.'s bankruptcy; in many
instances, creditors realize that attempting to recover their
debt is a useless exercise.
[28] The respondent forcefully argued that
the party that owed the $7,000 debt was not
Cellulaire Flamand Inc., which made an assignment of
its property, but Martin Gaudette, to whom the cheque was made
out. On the basis of that assumption, the respondent concluded
that the debt was not unrecoverable.
[29] In support of its position, the
respondent stated that the transaction had to be understood in
its literal sense and not in light of the intention behind it. I
agree with this contention, although I do not believe that it
warrants such a rigid interpretation.
[30] The context and all of the
circumstances must not be overlooked in assessing the nature of a
transaction. An overly conservative and rigid approach could
often paralyze the ordinary course of business. It would then be
necessary to call on experts in order to draft all administrative
documents.
[31] I do not accept the respondent's
interpretation, especially since it is not supported by any
evidence; however, the appellant's explanation is coherent,
plausible and in keeping with a practice that is consistent with
the ordinary course of business in the circumstances prevailing
at the time. With respect to the restrictive interpretation
argued by the respondent, it is contrary to a highly interesting
decision in this area. In Byram v. Canada, [1999] F.C.J.
No. 92, A-84-94, McDonald J. writes as follows:
16. The language of
section 40 is clear. The issue is not the use of the debt, but
rather the purpose for which it was acquired. While subparagraph
40(2)(g)(ii) requires a linkage between the taxpayer (i.e. the
lender) and the income, there is no need for the income to flow
directly to the taxpayer from the loan.
[32] In conclusion, the evidence showed that
the appellant, in addition to having an interest in the
situation, was and had been benefiting from the situation. The
balance of probabilities does not support the respondent's
ultra-conservative interpretation. I thus conclude that the
$7,000 disbursement was a loan, a debt that was owed to her and
that subsequently proved to be unrecoverable as a result of the
bankruptcy.
[33] With respect to the last point at
issue, the appellant explained that she had spent $50,000 on
prospecting and making studies and various analyses. The evidence
did in fact reveal that the appellant had shown an interest in
the idea of operating another business in her field of expertise
in the Sherbrooke area and that a new business had in fact been
established there.
[34] Before the new business was created,
the appellant participated in an active and dynamic way in
Cellulaire Flamand Inc.'s activities before its bankruptcy;
she supplied the company with inventory that it could not renew
because of its precarious financial situation.
[35] The experience and the ties with
Cellulaire Flamand Inc. undoubtedly enabled her to draw some
favourable and worthy conclusions since a new business was later
established. The creation of the new entity was the subject of an
invoice for professional fees in the amount of $15,700.91 billed
by Michel Desmarais, an accountant with Multi-services
Pierre Lambert Inc. (Exhibit I-1).
[36] Aside from this amount of $15,700.91,
the appellant claims to have disbursed $50,000 substantiated
by an overall statement of account (Exhibit A-2). The
statement for $50,000 issued this time by the new company was
broken down as follows:
R.C.C. SHERBROOKE INC.
2700 King Street West
Sherbrooke, Quebec J1L 1C5
...
Prospecting work:
Opening of file
- Market analysis
Study of clientele
Study of target products
Study of human resources
Study of municipal legislation
Study of ratios
Study of inventory
- Analysis of future profitability
- Closing of file
Amount: $50,000
...
[37] The evidence regarding what the $50,000
disbursement represented and why it was made was very brief and
superficial. The main argument was that this amount had been
posted as expenses for the appellant and as income for the new
company.
[38] This argument was not very convincing,
especially since it is difficult to imagine that a new company
would have earned revenues from prospecting and making studies
and analyses before or at the point of being incorporated.
[39] Was this amount spent to generate
profits or benefits for the appellant in connection with her
economic objective? The evidence indicated that the $50,000
disbursement had no direct or indirect effect on any potential
profit but essentially served to reduce her earnings and the
resulting tax burden. The expected profits or earnings were in no
way intended for her but ultimately for the benefit of the new
legal entity.
[40] This was not an expense but rather an
advance disguised by vague and imprecise explanations that
certainly did not justify such a disbursement. Moreover, the
statement in the amount of $15,700.91 (Exhibit A-4) included some
fairly similar elements.
[41] The $50,000 disbursement benefited the
company that received it; it strengthened and enhanced its
financial situation, thereby ensuring its profitability more
quickly.
[42] The profitability of the $50,000
disbursement cannot be attributed to the appellant since the
amount was nothing more than a cash advance justified by the fact
that the two entities concerned had the same shareholders and
directors.
[43] In light of the evidence, I conclude
that the $50,000 disbursement was simply a cash advance or a
transfer of funds that enabled the new company to start off on
the right foot. For those reasons, the appellant could not claim
an expense associated with her operations.
[44] With respect to the appellant's request
concerning the impact of this decision on the operations of the
company that benefited from the $50,000 disbursement, I cannot
satisfy it, since the appeal concerns the appellant exclusively.
It involves the manner in which she handled the expense.
Accordingly, I have no jurisdiction with respect to the other
taxpayer, that is, the company that received it. As well, this
would mean rendering a judgment on assumptions regarding an
entity that is not involved in this case.
[45] For all of these reasons, the appeals
are allowed in the case of Lise Brissette in that the
appellant did not receive any benefit from the use of a company
car.
[46] With respect to Chambly Radio
Communications Cellulaire Inc., the appeals are allowed
in that the $7,000 disbursement constituted a business investment
loss, without costs.
Signed at Ottawa, Canada, this 17th day of January
2003.
J.T.C.C.
Translation certified true
on this 26th day of February 2003.
Sophie Debbané, Revisor
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