REASONS
FOR JUDGMENT
Favreau J.
[1]
The appellant filed an appeal against a
reassessment made by the Minister of National Revenue (the Minister) under the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.),
as amended (the Act), dated March 8, 2012, in respect of the appellant's 2008
taxation year.
[2]
Pursuant to the assessment dated March 8,
2012, the Minister denied the appellant an allowable business investment loss
(ABIL) in the amount of $41,222.
[3]
The Minister relied on the following assumptions
of fact in determining the appellant's tax liability. These assumptions are
listed in paragraph 6 of the Reply to the Notice of Appeal:
[translation]
(a) according to the Minister's records, the
appellant operates a consultancy firm specializing in office systems management;
(b) according to the enterprise register (CIDREQ
system), the appellant is a shareholder in Quadrisart Canada Inc. (Quadrisart);
(c) Quadrisart was struck off ex officio by
the enterprise registrar on June 4, 2010;
(d) according to the Minister's records, the
latest return filed by Quadrisart was for its year ending November 20,
2006;
(e) Quadrisart did not carry on a business for
the 2007 and 2008 taxation years;
(f) on Quadrisart's balance sheet for 2006, the
amount owing to the shareholder was $39,979, and the capital stock was $10,000,
whereas no amount receivable from Quadrisart is recorded in the appellant's
balance sheet;
(g) Quadrisart
went bankrupt on November 10, 2008;
(h) the
appellant is not a creditor in Quadrisart's bankruptcy;
(i) at the objection stage, the appellant
submitted a list of invoices totalling $82,443.70 and covering the period from
December 19, 1998, to December 23, 2002, several of which are
invoices in Quadrisart's name, which the appellant claims to have paid;
(j) no documentation was filed in support of
these expenses allegedly incurred by Quadrisart and allegedly paid by the
appellant;
(k) there were no debts owed to the appellant
by Quadrisart at the end of the 2008 taxation year;
(l) at the appeal stage, the appellant claimed
(i) that it had a doubtful debt of $82,444 for the 2008
taxation year;
(ii) that it had a bad debt of $82,444 for the 2008 taxation
year;
(m) the appellant did not include a debt in the amount of $82,444
in its income for the 2008 taxation year or for the preceding years.
[4]
Pierre Gougeon, the appellant's agent, testified
at the hearing. Mr. Gougeon is a chartered accountant who keeps the books,
prepares the financial statements and files the tax returns for the appellant
and its wholly owned subsidiary, Quadrisart Canada Ltd. (Quad).
[5]
At the beginning of the hearing,
Mr. Gougeon presented an organizational diagram of his businesses.
According to the chart, Mr. Gougeon is the sole shareholder in Pierre
Gougeon PGL Consultant Inc. (PGL
or the appellant), which in turn is the sole
shareholder in Quad. Mr. Gougeon is the president and a director of PGL,
as well as the chief executive officer and a director of Quad.
[6]
The appellant operated a consultancy firm specializing in office systems management, and it managed Quad by determining its needs and taking care of its
purchasing. Mr. Gougeon did not file the management contract governing the
relationship between PGL and Quad. Quad was a manufacturer and distributor of
frames and laminates.
[7]
PGL's fiscal years ended on March 31 of each
year, while those of Quad ended on November 30 of each year.
[8]
Quad went bankrupt on November 10, 2008.
According to the claims register kept by the trustee in bankruptcy, Quad's
debts to PGL and Pierre Gougeon were not included in the list of claims.
However, the names of certain suppliers did appear in the list of unsecured
creditors. The following suppliers' names were on that list: Artistica, Cadres
Verbec inc., Canadian Art Print, Finest Holding Inc., Fournitures de bureau
Denis, Frameguild Supplies, Omega Moulding Co., Techni Scie DM, Torbram
Electric Supplies, Total Electric Supply Limited and Wizard International. The
unsecured creditors received nothing from Quad's bankruptcy.
[9]
During his testimony, Mr. Gougeon filed an
accounting cash-flow diagram. This diagram shows that Mr. Gougeon advanced
funds to PGL and paid some of Quad's accounts with suppliers, that he assigned
his claims against Quad to PGL and that PGL also paid some of Quad's accounts
with suppliers, such that PGL became a creditor of Quad in its own right.
[10] It appears that this system was in operation from December 19,
1998, to October 22, 2002, since the expenses paid on behalf of Quad are
limited to that period. From 2002 to 2008, it appears that Quad was financially
independent or that it repaid all the expenses paid on its behalf during that
period.
[11] To establish the amount of the expenses payable to PGL by Quad, Mr. Gougeon
filed the following documents:
−
a list of expenses payable by Quad, based on PGL's
general ledger report (Exhibit A-4). This list includes the dates of the
expenses, the names of the suppliers, the amounts of the expenses, the
reference numbers in the general ledger (several of which are missing) and
brief descriptions of the nature of the expenses. Expenses totalled $82,443.70
for the period from December 19, 1998, to October 22, 2002;
−
a list of Quad's suppliers, with the amounts of
the expenses paid by or owed to PGL, which list was also based on PGL's general
ledger report (Exhibit A-5). The total amount of the expenses was $82,443.70
after Quad's repayment of $7,543.03 to PGL;
−
a list of credit cards used to pay Quad's expenses,
and the amounts paid using each of them (Exhibit A-9). Some of these cards
are in PGL's name, while some are in Mr. Gougeon's own name. A sampling of
statements for these credit cards shows that some of the invoices were paid on
Quad's behalf by Mr. Gougeon personally and by PGL, but none of the
statements filed concerned the period from December 19, 1998, to
October 22, 2002. These statements date from after that period.
[12] At the objection stage, Mr. Gougeon submitted another list of
expenses paid on behalf of Quad, which was prepared by Mr. Gougeon on the
basis of PGL's general ledger report for the period from December 19,
1998, to October 23, 2002. In addition to the information in the other
lists, this version included the amounts repaid by Quad and the repayment dates:
[translation]
|
Repayment dates
|
Amounts repaid to PGL
|
|
|
|
|
March 22, 1999
|
$288.10
|
|
|
July 2, 1999
|
$513.90
|
|
|
February 2, 2000
|
$1,416.11
|
|
|
June 26, 2001
|
$6,485.44
|
|
|
July 19, 2001
|
$486.56
|
|
|
|
$9,190.11
|
|
[13] The
total of the repayments does not match the amount of $7,643.27 appearing in Exhibits A-5
and A-9.
[14]
Mr. Gougeon filed as documentary evidence
PGL's balance sheet and statement of income and
retained earnings for the fiscal year ending March 31,
2008, along with figures from the fiscal year ending March 31, 2007, for
comparison. These financial statements are unaudited. On the balance sheet, an
amount of $77,499 appears as a long-term investment in 2007, while an amount of
0 appears under the same heading for 2008. On the income statement, an amount
of 0 appears under the heading [translation]
"Write-off of long-term investment" in 2007, while an amount
of $82,444 appears under this same heading for 2008.
[15] Mr. Gougeon
alleged that Quad was still in business in the 2006, 2007 and 2008 taxation years,
and in support of his allegation, he filed Quad's annual tax returns for the
reporting periods from December 1, 2006, to November 30, 2007.
[16] Mr. Gougeon
explained that the amounts due from Quad were recorded in PGL's books as a
long-term asset because they were not paid within 30 days. As for Quad,
the amounts owing to PGL were recorded in the books as long-term debts. The
respondent filed PGL's balance sheets for the fiscal years from 1999 to 2002,
2006 and 2008, as well as Quad's balance sheets for the fiscal years 1999 2000,
2002, 2003, 2005 and 2006, which had been attached to the tax returns for these
two companies.
[17] PGL's
long-term assets for the fiscal years ending March 31 in the years 1999 to
2002 and 2006 to 2008 were as follows:
|
1999
|
$1,000
|
|
2000
|
$11,000
|
|
2001
|
$65,532
|
|
2002
|
$65,532
|
|
2003
|
—
|
|
2004
|
—
|
|
2005
|
—
|
|
2006
|
$84,210
|
|
2007
|
$77,499
|
|
2008
|
0 (investment written off)
|
[18]
Quad's long-term debt for the fiscal years
ending November 30 in the years 1999, 2000, 2002, 2003, 2005 and 2006 was
as follows:
|
1999
|
$111,425
|
|
2000
|
$98,327
|
|
2001
|
—
|
|
2002
|
$57,893
|
|
2003
|
$65,588
|
|
2004
|
—
|
|
2005
|
$59,983
|
|
2006
|
$56,328
|
|
2007
|
— (no tax return filed)
|
|
2008
|
— (no tax return filed)
|
Analysis
[19]
For a taxpayer to claim a deduction of any sort
for a debt after it has been disposed of or when it has become a doubtful or
bad debt, the taxpayer must first establish the debt's existence as well as the
amount of the debt at the date of its disposition or at the date it became
doubtful or bad.
[20] In my opinion, the appellant has not shown, on a balance of
probabilities, that it had a claim of $82,444 against Quad as at March 31,
2008. Evidence of the claim's existence is clearly insufficient in the
circumstances.
[21] Mr. Gougeon, an accountant by profession, did not submit the
invoices that PGL paid on behalf of or for the benefit of Quad for the period
from December 19, 1998, to March 31, 2008, nor did he file in
evidence the management contract allowing PGL to manage Quad's business. The
only evidence that Mr. Gougeon filed to prove that these invoices exist was
a list of invoices supposedly paid by PGL for the period from December 19,
1998, to July 19, 2002. For the subsequent periods, from July 20,
2002, to March 31, 2008, no invoices or list of invoices was filed as for
the previous period.
[22] The only evidence that Mr. Gougeon filed as proof that PGL paid
the invoices was credit card statements showing that invoices for supplies for
Quad had been paid either by PGL or by him personally. These statements do not
concern the period from December 19, 1998, to October 22, 2002, but simply
establish that PGL continued to pay invoices for supplies for Quad after
October 22, 2002. Mr. Gougeon also failed to provide any evidence
that he assigned any claims to PGL after paying the invoices for supplies for
Quad.
[23] Mr. Gougeon did not provide any documentary evidence showing
that Quad had paid back its debts to PGL. Mr. Gougeon referred to
repayments totalling $7,643.27, whereas in Quad's books, the long-term debt
went from $111,425 as at November 30, 1999, to $56,328 as at
November 30, 2006. These figures show that Quad's repayments were much
bigger than those indicated by Mr. Gougeon, and that he did not clearly
identify the debts that Quad had paid back. Were they debts incurred before
July 20, 2002, or after July 19, 2002?
[24] Since PGL's claim was not included in the list of Quad's debts in
bankruptcy, serious doubts continue to surround the very existence of PGL's
claim as at November 10, 2008.
[25] In the circumstances, it seems reasonable to me to demand more
transparency from the appellant and its shareholder, its accountant, and to
demand better evidence of the existence and amount of PGL's claim. A loss of
the magnitude of this one claimed by the appellant cannot be granted solely on
the strength of mere uncorroborated accounting entries.
[26] In light of the preceding, even though there is no need to determine
whether PGL's claim, if there is one, is capital in nature, or whether there
was a doubtful or bad debt, it should be noted that the appellant has not shown
that
(a) the
invoices for supplies for Quad were paid in the ordinary course of its business
of moneylending;
(b) its claim,
if there is one, against Quad was a bad debt as at March 31, 2008, after
efforts to collect it were unsuccessful;
(c) its
claim, if there is one, against Quad was included in computing its income for
the 2008 taxation year or for a preceding taxation year.
[27] For these reasons, the appeal from the reassessment dated
March 8, 2012, is dismissed.
Signed at Ottawa, Canada, this 30th day of October
2015.
"Réal Favreau"
Translation certified true
on this 22nd day
of December 2015
Michael Palles, Translator
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