Ramiro (Insunza) Figueroa v. Minister of National Revenue, [1987] 2 CTC 2128, 87 DTC 387

Taylor, T.C.J.:—This is an appeal against an income tax assessment, for the year 1980, heard on April 2, 1987, in Toronto, Ontario, in which the Minister of National Revenue had disallowed the capital cost allowance claimed by the taxpayer with respect to a film called “Dilemma”. I would first note that the appellant had listed his name in the documents filed (including his income tax returns) as "Insunza Ramiro", whereas at the hearing this was corrected to "Figueroa Ramiro Insunza". The Court understands the italized name above to be the surname — Figueroa, to be proper, and reference will henceforth be made to Mr. Figueroa. The essence of the appeal was stated in the notice of appeal:

From the notice of appeal:

1. The Assessors and the Minister erred that no expenditures have been incurred in respect of the capital cost of the property of Class 2 of Schedule II of the Income Tax Regulations.

2. The capital cost was not ‘nil’ but was $12,000 (twelve thousand dollars) of which $2,400 (two thousand four hundred) was paid in cash during 1978 and $9,600 (nine thousand six hundred) by promissory note due in 1982.

For the Minister the situation was:

4. In so reassessing tax to the Appellant for the 1980 taxation year, the Minister made the following assumptions and findings of fact:

(a) the Appellant did not pay the amount of $2,400.00 to Norcom in the 1980 taxation year or any taxation year prior thereto as a down payment on an alleged investment of $12,000.00 in a film called "Dilemma";

(b) a promissory note allegedly signed and given to Norcom in 1978 in the amount of $9,600.00 did not constitute part payment of $9,600.00 of an alleged investment of $12,000.00 in the film “Dilemma” and no amount was ever paid in discharge of the said note;

(c) the Appellant did not acquire an interest in the film “Dilemma” in the 1980 taxation year or any taxation year prior thereto;

(d) the Appellant did not incur a cost of $12,000.00 in respect of an investment in the film "Dilemma" in either the 1980 taxation year or any taxation year prior thereto.

6. The Respondent submits that as the Appellant did not incur a cost of $12,000.00 with respect to an alleged investment in the film “Dilemma” in the 1980 or prior taxation years and did not acquire an interest in such film, the Respondent correctly disallowed the amount of $12,000.00 sought to be deducted by the Appellant in computing his income for the 1980 taxation year.

7. The Respondent submits in the alternative, that the Appellant had no source of income within the meaning of paragraph 4(1)(a) from which to deduct any amount pursuant to paragraph 20(1)(a) paid to Norcom in respect of the film “Dilemma”.

8. The Respondent submits, in the alternative, that if the Appellant acquired an interest in the film "Dilemma", it was an indeterminate interest, and any amount of cost incurred with respect thereto is unreasonable and not deductible in computing the Appellant's income for the 1980 taxation year by virtue of section 67 of the Act.

9. The Respondent submits, in the alternative, that if the Appellant paid any amount in respect of an alleged investment in the film "Dilemma", the allowance of such amount as an expense in computing the Appellant's income for the 1980 taxation year would artificially or unduly reduce the Appellant's income in that year.

B.5. The Respondent relied, inter alia, upon paragraph 4(1)(a), subsections 9(2) and 18(1), paragraphs 20(1)(a), section 67 and subsection 245(1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended (the ‘Act’) and subsection 1100(21) and Schedule B, Class 12 of the Income Tax Regulations (the 'Regulations').

At this point reference should be made to a recent judgment of this Court Asin v. M.N.R., [1987] 1 C.T.C. 2431 in which the subject material was also the film "Dilemma". I would quote from that judgment:

The evidence at trial was that principal photography of the film “Dilemma” was completed on October 4, 1978. In order for the appellants to be entitled to any deductions of the capital cost of their investments it must therefore be shown that these investments were acquired no later than October 4, 1979, one year after the principal photography was completed.

The appellants each testified that their down payments were paid in cash and the balance of each investment was payable by promissory note. Written agreements between the appellants and Norcom, the producer of the film, and Norcom's company records were produced as evidence of the dates of these transactions, but the accuracy of these documents, particularly the dates noted thereon, was brought into question by the testimony of two witnesses for the Minister.

Mr. Loyola and Mr. Lopez, who invested in the film but were not parties to this appeal, both testified as to the dates of on their investments and provided documented evidence to support their testimony. The dates on the cancelled cheques and bank records provided by these two men conflict with the dates noted in the company records and their investment agreements. I found the evidence of both these witnesses to be straightforward and honest and find that neither the company records nor the written agreements accurately reflect the true date on which these two men acquired their investments. On the basis of the evidence presented I have concluded that these records prepared at a later date than that asserted by the company's officers.

This brings into question the reliability of the company records and documents as evidence of the date on which each of the appellants entered into the investments that are the central issue of this hearing. None of the appellants was able to provide the Court with any other documentation which could offer proof of the date of their investments. They all apparently paid in cash but none of them had any record of bank withdrawals to substantiate these payments. Some of the appellants testified that although they had originally given Norcom post-dated cheques, they later replaced these cheques with cash. While these appellants may prefer to deal in cash, this does not in any way lessen their burden of proving their case on the balance of probabilities. Given my finding that the dates listed on company documents may not be totally reliable and the fact that the appellants are unable to substantiate the dates on these documents, I find that the appellants have failed to prove their case.

In the instant hearing, no witnesses were provided by the Minister of National Revenue and the "company records" were not introduced. Accordingly this Court is not able to rely on testimony similar to that detailed for Mr. Loyola and Mr. Lopez in Asin (supra). The appellant produced for the Court two documents and it would be useful to include these herein, in their entirety:

Exhibit A-1

NORCOM FILMS COMPANY

394 481 Ontario Limited.

14 Irwin, Toronto, Ontario, Canada M4Y 1K9

CASH INCOME

Date: 28 November 1978

From Mr. (Mrs.) Ramiro Insunza

Norcom Films acknowledges the receipt of Two thousand four hundred dollars as investment in the motion picture DILEMMA.

JIM G. ROSS per

Secretary Treasurer

JAKE LI EM, M.A., C.M.A. 1670 O’CONNOR DR.

TORONTO, ONT. M4A 1W4

Exhibit A-2

SCHEDULE "B"

PROMISSORY NOTE

Amount: $9,600.00

Toronto, Ontario. Dated: December 21, 1978

PAID IN FULL Thank You

I, Ramiro Insunza, unconditionally promise to pay to 394481 ONTARIO LIMITED carrying on business as "Norcom Films" or order the sum of $9,600.00 on the 21st day of December, 1982, together with interest on the principal balance from time to time outstanding at an annual rate of PER CENT plus the prime lending rate set by the head office of [Name of company's bank] in the City of Toronto from time to time for Canadian doallar loans to its most creditworthy customers before and after maturity and before and after default. Interest on the principal balance from time to time outstanding is to be computed at the aforesaid rate from the shall not be in default in any payment of interest on this Note, the maker shall have the privilege of pre-paying at any time or times (other than within a period of fifteen (15) days prior to any Interest Payment Date) all or any part of the principal balance and interest thereon then outstanding without notice or bonus.

day of	1978 and is to be payable semi-annually on the	day of	and
	of each year (the "Interest Payment Dates"). Whenever the maker hereof

Upon default and payment of any instalment of interest and upon such default continuing for fifteen (15) days after notice of default, all amounts of principal and interest owing hereunder shall immediately be due and payable.

Notwithstanding the time or times for payment otherwise herein provided, all amounts owing hereunder shall immediately be due and payable on the death or bankruptcy of the undersigned.

FOR VALUE RECEIVED

In the Presence of:

(signature) (signature)

[Name of Promissor]

“Mr. Ramiro Insunza"

RECEIVED PAYMENT PAID IN FULL

with thanks Thank You

JAKE LIEM, M.A., C.M.A.

1670 O'CONNOR DR.

TORONTO, ONT. M4A 1W4

In cross-examination, counsel for the respondent introduced the appellant's income tax returns for the years 1978, 1979 and 1980, as Exhibits R-1, R-2 and R-3 respectively, and also introduced as Exhibit R-4 — a cancelled cheque dated June 12, 1981 for $2,000 from the appellant to an Edwardo Sanchez; as Exhibit R-5 a "promissory note" dated December 5, 1982 for $9,600 on paper entitled "Tyrolean Village Resorts", again signed by the appellant; and as Exhibit R-6, a hand-written note (admittedly by the appellant) — the reference being to “J.D. Haye" dated October 27, 1982 indicating that (and I quote) ”. . . on the understanding the final version would be completed by June 30, 1981. It is our understanding this deadline has been extended 2 or 3 times and the latest being December 31,1982. There is no evidence the principals were making any effort to comply with this requisite and it appers that certificate 146 will not be validated."

Mr. Figueroa (Insunza) indicated he had “$400 in cash” and had borrowed $2,000 from Edwardo Sanchez to make the down payment of $2,400. It would appear that Edwardo Sanchez's signature also appears as the "witness" to the signature of Mr. Figueroa (then INSUNZA) on Exhibit A-2 above. With regard to the $9,600 promissory note it was Mr. Figueroa's (Insunza) testimony that due to certain business changes (with Norcom Films) about which he was not fully aware, the note was made to "Tyrolean Village Resorts" and he was obligated to pay it before the end of 1987. The second note (Tyrolean) had been sent to the appellant by mail after he had spoken by telephone to Mr. Ross. Mr. Figueroa (Insunza) was unable to recall how or when a "Mrs. Coppy" had witnessed his signature on Exhibit R-5 (Tyrolean note), and he agreed he had not paid any interest on the note. With regard to Exhibit R-6

— the hand-written note — it did represent a conversation Mr. Figueroa (Insunza) had with a Mr. Hayes from the office of the Secretary of State, during a time when he was being pressed to pay the $9,600 note.

In the same cross-examination, counsel for the Minister attempted to show from the income tax returns and Mr. Figueroa's answers that he could not have had available the funds at issue in this appeal in 1978; that he could have deducted the $12,000 at issue in 1978 or 1979 rather than in 1980; and that he could have paid off the “loan” from Edwardo Sanchez earlier than 1982. I do not regard that line of questioning as having produced any useful result.

In argument, Mr. Liem simply relied on Exhibits A-1 and A-2 (above) to show that the deduction claimed should be allowed.

For the Minister, counsel noted that the entire set of circumstances which had been detailed to the Court, with reference to Exhibits A-1 and A-2 above was not clear. I quote certain portions of that argument.

. . .There is no corroborative evidence from Mr. Sanchez as to when that loan was taken and that it was taken. All we have before the Court is a cheque made out to Mr. Sanchez on June 12, 1981 in the amount of $2,000.00

. . .We just have paper with these dates on it and we do not have anyone on the other side of these agreements, someone signing the receipt on the one hand, and in terms of the agreement the signatory on the side of the company receiving the funds, to corroborate the position that these amounts were paid in 1978.

. . .the Court does know . .. . that it is a very odd thing that if this amount was borrowed in 1978 and was not repaid until 1981, that a reason should be offered for that non-payment having to deal with availability of money when that simply was not the case or need not have been the case.

. . .with no sufficient or rational explanation why it was not claimed in the year 1978 or 1979, the explanation consistent with the testimony is that an amount, if paid, was paid sometime in 1980 or possibly early in 1981 prior to April 30, the filing deadline, so it could be filed in the 1980 return.

The note is very fuzzy.

. . .No interest has been paid. The note is witnessed by someone who Mr. Insunza has no recall as to whether in fact she witnessed it.

.. at the end of the day I submit that the Appellant has not established that an amount was paid in 1978 or that an amount was paid before October the 4th, 1979, which would qualify any amount paid for class 12 treatment.

. . .the Appellant simply has not provided to the Court evidence that this amount was paid in the year 1978,. . ."

Analysis

I can understand the perception of the Minister that the circumstances described to the Court allegedly in support of the deduction claimed are indistinct and somewhat confusing. But that is not the point at issue. This appellant states that he did provide to Jim Ross, on November 28, 1978, an amount of $2,400 for investment in the film "Dilemma" — (see Exhibit A-1). He also states that he gave Jim Ross $400 in cash of his own money, and $2,000 he borrowed from Edwardo Sanchez, later repaid according to Exhibit R-4 in 1981. The Minister says that Mr. Figueroa (Insunza) did not do so in 1978, and perhaps not at all. In my view, if the Minister wishes to reject both the documentary evidence (Exhibits A-1 and R-4) and the sworn testimony of Mr. Figueroa, (Insunza) it is for the Minister to provide to the Court some clear, supportable, and more acceptable view of events rather than just allegations and inferences. The same obtains with regard to the $9,600 promissory note (Exhibit A-2) and its substitute (Exhibit R-5). If this is not documentary evidence of the obligation Mr. Figueroa (Insunza) asserts, and swears to in Court, then I do not know what should be acceptable to the Minister. In the end analysis, the Court has no reason to reject the claim of the appellant for a capital cost allowance deduction of $12,000.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.