REASONS
FOR JUDGMENT
Boyle J.
[1]
Claudio and Ruben Grubner have claimed allowable
business investment losses (“ABILs”) of $606,000 with respect to amounts that
they paid directly to the Canada Revenue Agency (“CRA”) in respect of the
unremitted GST/HST and source deductions of a corporation of which they had
each been or were a director.
The Evidence
[2]
Claudio and Ruben are brothers and each owned
25% of Bavara Auto Haus Inc. (“Bavara”) which operated an automotive body shop
in the lower mainland of British Columbia. They were each directors since 2007.
They may have resigned as directors in 2011. The other 50% was owned by an
arm’s length person, Sean Dawson, who was described by them as the managing
director and the active shareholder.
[3]
In June 2012, the brothers received letters from
CRA that it was considering assessing them personally as directors for Bavara’s
unremitted GST/HST and source deductions. The brothers testified they were
unaware of the failures to remit and contacted their accountant. The accountant
suggested they pay CRA directly in the circumstances. The Grubners did not call
their accountant to testify so I do not know the reasons for that suggestion.
Claudio says they paid CRA directly because they were unaware of the source of
the company’s financial difficulties and were unsure they could trust
Mr. Dawson.
[4]
Each brother paid one‑half of the
unremitted amounts directly to CRA. It is their position that this was a loan made
to Bavara with advances made to CRA, which would make it a debt owing to them by
Bavara. Claudio said it was recorded as such on Bavara’s 2012 financial
statements. The 2012 financial statements do show an increase in Due to Related
Parties of an amount greater than that advanced by the brothers. The financial
statements do not describe what that increase was made up of. I note that the
August 31, 2012 financial statements are dated October 2013, being a
few months after the objections were filed and within a week or so of the
brothers transferring their shares to Mr. Dawson according to corporate
registers.
[5]
The terms of the indebtedness were not evidenced
in any written agreement or document. Claudio testified that Mr. Dawson
and he intended and acknowledged the payments by the brothers to CRA of the
unremitted withholdings as a loan to Bavara. Mr. Dawson was not called to
testify.
[6]
In a July email Claudio sent to Mr. Dawson,
it is clear that Claudio sought to lend the money directly to Bavara and have
Bavara immediately pay down the unremitted amounts, and to evidence this in
writing as a loan by the brothers to Bavara. For whatever reason, this did not
happen. It may be that Mr. Dawson refused to let Bavara borrow the money,
but the Appellants did not call Mr. Dawson to testify nor even describe
his response to this email from Claudio.
[7]
Bavara did not have an obligation to pay
interest to the brothers on this amount. Claudio testified that their return
was to be by way of recovery of a higher purchase price than $606,000 on a sale
of Bavara (or its business). Claudio described this as his belief and his
intention, and his brother described it as his hope. Claudio described it as an
expectation at one point but resiled somewhat and gave little to support it.
[8]
Claudio described the debt as being repayable on
demand. When the brothers demanded payment in October 2012, Bavara responded in
a November letter signed by Mr. Dawson “as you
know, the company is not in a position to repay those funds to
you . . . that’s the reality”. Claudio’s demand
letter does not describe the amount demanded as an outstanding loan amount but
as “the more than $600,000 that we, as Directors, were made
to pay on behalf of the company”. That language is more consistent with
the company’s obligation being a statutory right in the Income Tax Act (“ITA”)
or the Excise Tax Act or a subrogated indebtedness than a loan to
Bavara. In their tax returns, both brothers described it as “Shareholder Loan-CRA assessed”, which is not factual
in at least one respect.
[9]
There was scant evidence to conclude that the
brothers’ belief, hope and intention, or even possible expectation, to receive
a greater amount on a sale of Bavara or its business was realistic or
reasonable. While Claudio described discussions with a third party, he
testified they did not reach the stage of being written down, and they did not
get beyond discussing what a letter of intent might look like, and they never
established or agreed upon a price.
[10]
The interested third party, Mr. Van Pykstra,
in his email to Claudio of late July 2012 says he would like to sit down with
Claudio and go over an offer he worked on and explain how the offer was arrived
at. They agreed to meet the next day at Mr. Van Pykstra’s office.
Obviously, strategy and plans may have changed, but it is hard to read the
email exchange as being limited to a planned discussion of assets versus
shares. My best interpretation of the testimony, and the lack of other
evidence, is that price or value was discussed, at least in ranges, and the two
parties were far apart.
[11]
Mr. Van Pykstra’s September 2012 email
talks about specific changes to some of the numbers in the letter of intent as
requested by Claudio; the numbers mentioned in this email total a small
fraction of $1,000,000. Claudio continued to deny there was a letter of intent,
saying he only got to look at the other side’s working papers. I was not told
by Claudio or anyone else what was offered by Mr. Van Pykstra, and Claudio
was evasive and deflective when the issue of discussions of price or value with
Mr. Van Pykstra came up in his questioning.
[12]
Claudio says he was hoping to ask for $900,000
to $1,100,000. Claudio’s uncorroborated testimony was that these discussions
started in February 2012 and continued until the summer, that the CRA payments
by the brothers were disclosed, and that Mr. Van Pykstra did not want to
buy shares. Claudio thought discussions were positive and hopeful in the summer
but had turned sour by October. He said they talked numbers but never put
anything on paper. That seems at odds with the earlier email from Mr. Van
Pykstra referring to specific numbers. Claudio did not say what numbers were
discussed between the parties, nor what he proposed to Mr. Van Pykstra or
vice versa. Mr. Van Pykstra was not called by the brothers to testify.
Ruben said that he was only aware that discussions had been held but did not
participate and did not know of any valuations. The discussions appear not to
have gone much further and this may have been because the related party did not
see the value Claudio attributed to Bavara’s business. That appeared to be what
Claudio was referring to when he compared it to a bank’s appraisal on your
house — where you see it large and the bank sees it small.
[13]
There was little evidence that the debt became
uncollectible in 2012 even though the business was still carried on. Frankly,
if it were reasonable to conclude it had become uncollectible by the end of
2012, that would seem to run somewhat contrary to the hope of selling Bavara or
its business for $1,100,000, or even for enough to repay the $606,000 plus some
greater amount as a return thereon. Perhaps if more evidence had been submitted
regarding the value of Bavara after the amount was paid to CRA, or regarding
the uncollectibility of this particular obligation to the brothers, this
apparent paradox could be explained away or be shown to not exist.
[14]
According to the July 2013 objections,
Bavara had operated at a loss since its inception, and the brothers were
already in discussions with Mr. Dawson for an orderly shutdown of the
business. The 2012 loss was significantly greater than the 2011 loss. It was
two and a half times the size.
[15]
Claudio Grubner’s testimony regarding a loan
being made to Bavara, the existence of a letter of intent with Mr. Van
Pykstra, and the numbers proposed and discussed with Mr. Van Pykstra,
appears somewhat inconsistent with some of the written evidence on key points.
[16]
Given the significant limitations to the
evidence I received, all of which came from the two Appellants who have an
interest in the outcome, little of which was corroborated with documents, some
of which appeared inconsistent with the documents or with other testimony, I am
unable to conclude on a balance of probabilities that the debt or other
obligation owed by Bavara to Claudio and Ruben Grubner was acquired by them for
the purpose of earning income.
[17]
It had no interest payable on it and I am unable
to conclude on a balance of probabilities that it was realistic or reasonable
to expect a greater return on a sale of Bavara’s shares or business at the time
they paid CRA these amounts. That is fatal to the possible success of these
appeals given that subparagraph 40(2)(g)(ii) of the ITA deems their loss
to be nil on a disposition of a debt or other right unless it was acquired for
an income earning purpose. This alone is sufficient to dismiss these appeals.
If the loss was nil, there can be no ABIL.
[18]
In order for the Appellants to successfully
claim an ABIL, it would be necessary to have established that their rights
against Bavara were a debt obligation and not some other right, such as one of
statutory entitlement to recovery under the federal GST or income tax legislation
or perhaps a right of subrogation. I am unable to conclude that under
applicable law, which I am prepared to assume would be British Columbia, this
would be characterized as a debt obligation. Paragraph 39(1)(c) of the
ITA requires expressly that an ABIL can only be recognized with respect to a
debt obligation. Further, for there to have been an ABIL, the debt obligation
must have been disposed of in order to recognize that loss. The Appellants are
relying upon a deemed disposition under the bad debt rule in section 50 of the
ITA which also expressly only applies to debts and not to other rights or
obligations. These are also fatal to the possible success of these appeals.
[19]
In conclusion, the Appellants have not provided
the Court with sufficient credible, consistent or corroborated evidence to
establish on a balance of probabilities the facts needed to support their ABIL
claims. In addition, the Appellants have not established that their claims
against Bavara were debts which is required by the deemed disposition rule for
bad debts and by the definition of an ABIL.
[20]
The appeals are dismissed with costs.
Signed at Montreal, Quebec, this 23rd
day of February 2018.
“Patrick Boyle”
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