Bertrand c. La Reine, 2004 TCC 435 (Informal Procedure)

[OFFICIAL ENGLISH TRANSLATION]

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Appeal heard on June 9, 2004, and judgment delivered orally from the bench on

June 10, 2004, at Montréal, Quebec.

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JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is dismissed.

Signed at Ottawa, Canada, this 15^th day of June 2004.

Lamarre J.

Certified true translation

Colette Dupuis-Beaulne

[OFFICIAL ENGLISH TRANSLATION]

REASONS FOR JUDGMENT

Lamarre J.

[1]      This is an appeal under the informal procedure from an assessment made by the Minister of National Revenue (the "Minister") for the 1999 taxation year in which the Minister disallowed the Appellant's claim for a deductible business investment loss in the amount of $59,719 (75 percent of $79,625).

[2]      The $79,625 loss claimed by the Appellant is related to advances he claims to have made to two corporations-Beaudry, St-Jean Inc. and 9038-1625 Québec Inc.-both wholly owned by Ms. Renée Beaudry, the person with whom the Appellant has been in a conjugal relationship since 2000.

[3]      The Minister disallowed the loss because these advances were not made by the Appellant for the purpose of earning income from a business or property; consequently, the loss is deemed to be nil within the meaning of sub-paragraph 40(2)(g)(ii) of the Income Tax Act (the "Act").

[4]      The evidence shows that Ms. Beaudry wanted to give her accounting consultation business a new dimension by investing in a "Paget" franchise, which was to accelerate the release of the services offered by her business. The Appellant, who had previously provided consultation services to the Appellant's business, suggested that he advance the amounts required himself, because Ms. Beaudry did not have the credit necessary.

[5]      The amounts advanced by the Appellant came from personal lines of credit with two financial institutions. One of these lines of credit, with the Toronto-Dominion Bank, was extended to "Louis Bertrand c/o Paget Service Aux Entreprises" and shows the business address of Société 9038-1625 Québec Inc. (Exhibit A-5). The evidence also shows that the two corporations at issue directly repaid the interest payable on the Appellant's lines of credit, at least partially.

[6]      On February 2, 1998, the Paget project was not developing as planned, Ms. Beaudry signed an acknowledgement of personal debt to the Appellant in which she acknowledged being indebted to the Appellant for the amount of $80,000 which he loaned to her. This document indicates that the amount loaned is interest-free and that Ms. Beaudry gave an immovable property that belonged to her personally in security (Exhibit A-4). The Appellant cleared this security in May of 1998 to enable Ms. Beaudry to obtain additional financing.

[7]      At the time he advanced the funds, a verbal agreement was made whereby Ms. Beaudry gave the Appellant the exclusive option to purchase shares in the two companies; this option could be exercised as soon as the Appellant began working for these companies. In fact, the Appellant was working on a full-time basis as a consultant for the Business Development Bank of Canada ("BDC"). The two companies declared bankruptcy in October 1999, and the Appellant had not exercised his option, because he had not worked for the companies before their bankruptcy.

[8]      The Appellant did not report any interest income from the advances he made to the two companies in his income tax returns. Neither the companies nor Ms. Beaudry reimbursed the Appellant for these advances.

[9]      The Respondent maintains that the Appellant is not entitled to deduct the advances he made that were never repaid to him, because he could not show that he acquired the debt for the purpose of earning an income. These advances were interest-free and the Appellant could not expect a return on his investment, as he was not a shareholder in the companies.

[10]     The Appellant maintains that he received interest income indirectly because the companies repaid the interest on his lines of credit. He contends that by receiving the option to purchase stock, he could expect a return on his investment at the time he exercised his option, either through dividends or through consultation income from these companies.

[11]     It is my opinion that the Appellant's arguments are not legally justified. On one hand, nothing shows that the two companies were legally indebted to the Appellant. Some documents appear to indicate that the companies were repaying, at least partially, the interest on the Appellant's personal lines of credit directly. However, this does not seem to follow from a legal obligation to do so, because the only official, notarized document filed in evidence shows that Ms. Beaudry is personally indebted to the Appellant for the amount of $80,000 (Exhibit A-4). This document also indicates that the debt is interest-free. Moreover, the Appellant did not report any interest income from this debt in his income tax return. It is, therefore, difficult for the Appellant to argue that he acquired the debt for the purpose of earning interest income.

[12]     The Appellant claims that he expected to earn an income from these advances indirectly by obtaining an option to purchase stock. It is my opinion that such a consideration is capital in nature. The fact of securing a loan with an option to purchase stock does not indicate that the loan was made for the purpose of earning interest income, but rather for the possible purpose of acquiring a source of income, property that is capital in nature. More importantly, it is my opinion that the fact of earning an income from dividends or from consultation on the assumption that he Appellant would exercise his option is too remote to argue that the debt was acquired for the purpose of earning income. As long as the option was not exercised, the Appellant had no interest in the companies, and he could not legally expect to receive income from dividends or otherwise, generated by an injection of capital. As expressed by the Federal Court of Appeal in Byram v. Canada, [1999] F.C.J. No. 92 (Q.L.), at paragraph 23, evidence of a sufficient link between the taxpayer and the potential gains of the debtor company is much more difficult to produce where the taxpayer is not a shareholder of this company. In this case, the Appellant worked full-time for the BDC, and he anticipated exercising the option only once he began working for the companies. He could not exercise the option as long as he did not work for the companies. At the time the advances were made, he could not exercise the option, and, consequently, he could not expect any possible gains from the two companies.

[13]     Consequently, even if it was deemed that the companies were indebted to the Appellant (which is not legally the case, according to the evidence), the Appellant did not show that he had acquired the debt for the purpose of earning an income from a business or property.

[14]     Consequently, the loss on the disposition of the debt is nil within the meaning of subparagraph 40(2)(g)(ii) of the Act.

[15]     The appeal, therefore, is dismissed.

Signed at Ottawa, Canada, this 15^th day of June 2004.

Lamarre J.

Certified true translation

Colette Dupuis-Beaulne