Armstrong v. R., [1997] 2 CTC 2615

Hamlyn T.C J .:

The Appellant appeals from an assessment for the 1993 taxation year, initially assessed on June 13, 1994.

In computing income for the 1993 taxation year, the Appellant deducted the amount of $27,034 as a business loss in respect of a boat building business as calculated in Schedule A of the Reply to the Notice of Appeal as follows:

Further, the Appellant deducted an allowable business investment loss (the “ABIL”) in the amount of $14,999 in respect of the disposition of loan to Surf Holdings Ltd., as follows:

This ABIL was in relation to a guarantee given by the Appellant to a third party with respect to a debt of Surf Holdings Ltd.

By Notice of Reassessment dated December 5, 1994 the Minister of National Revenue (the “Minister”) reassessed the Appellant for the 1993 taxation year and disallowed the business loss and the ABIL.

In so reassessing the Appellant, the Minister made the following assumptions of fact:

in respect of the disallowed Business Loss:

(a) Canadian Surf Boat Manufacturing Ltd. (“Canadian Surf”) was duly incorporated under the laws of the Province of British Columbia on or about February 5, 1991, and carried on the business of boat building and repairs (the “Business”);

Admitted by the Appellant.

(b) Canadian Surf was originally incorporated under the name Canadian Surfboat Manufacturing Ltd. and on April 8, 1991, the name was changed to Canadian Surf;

Admitted by the Appellant.

(c) at all material times, Canadian Surf had 200 common shares issued and outstanding of which the Appellant held 100 Class A Common Voting Shares and the Appellant’s spouse, Audrey Armstrong (the “Spouse”) held 100 Class B Common Voting Shares;

Admitted by the Appellant.

(d) at all material times, customer and supplier invoices for the Business were issued in the name of Canadian Surf;

Not admitted by the Appellant.

The Appellant submits he was operating as a proprietorship and not as a limited company.

(e) the Financial statements and the books and records for the Business were maintained in the name of Canadian Surf;

Not admitted by the Appellant.

The Appellant’s response to this assumption was certain records were in the name of the company but most were in the name of the Appellant. The company was a mere nominee for the Appellant.

(f) the Business is registered by the B.C. Social Services for purposes of remitting provincial sales tax in the name of Canadian Surf;

Admitted by the Appellant.

(g) Canadian Surf has a telephone account in its name for use in the Business;

Not wholly admitted by the Appellant.

This assumption in the submission of the Appellant was only partially correct as there are phones also in other names including Surf Marine and a cell phone in the name of the Appellant.

(h) records of Employment issued for unemployment insurance purposes in respect of employees terminated by the Business were issued by Canadian Surf;

Admitted by the Appellant.

(i) Canadian Surf had a bank account at the Canadian Imperial Bank of Commerce in Campbell River, British Columbia into which the Business made its bank deposits and from which it issued cheques to its suppliers;

Admitted by the Appellant.

(j) the Payroll remittance account into which the required withholdings from the wages of employees of the Business have been remitted is in the name of Canadian Surf and the T4 Slips to the employees of the Business are issued by Canadian Surf;

Admitted by the Appellant.

(k) the Worker’s Compensation account for the Business is in the name of Canadian Surf;

Admitted by the Appellant.

(l) Goods and Services Tax registration for the Business is in the name of Canadian Surf;

Admitted by the Appellant.

(m) Canadian Surf made an application for a manufacturer’s identification number for the Business in its name to Transport Canada, Canadian Coast Guard;

This assumption, the Appellant had no knowledge of but suggested it may have been the action of one of the employees.

(n) on or about June 26, 1992, Canadian Surf commenced an action in its name in the Provincial Court of British Columbia (Small Claims Court) against one of customers of the Business;

Initially, the Appellant through his representative denied knowledge of the assumption. However, subsequent evidence indicated the assumption was correct.

(o) Canadian Surf was not the Appellant’s nominee, agent or representative, nor was it acting as a bare trustee;

The Appellant denied the assumption and stated that Canadian Surf was a mere nominee for the Appellant.

(p) the Business Loss was not that of the Appellant, but rather that of Canadian Surf;

The Appellant maintained the business loss was his and not that of Canadian Surf.

in respect of the disallowed ABIL:

(q) Surf Holdings was a corporation incorporated in the Province of British Columbia on or about February 17, 1972 and it carried on the business of boat building and sales;

The Appellant’s evidence was that the company was dormant until the mid 1980’s.

(r) at all material times, Surf Holdings had 4 common shares issued and outstanding and Appellant held three (3) of the shares and the Spouse held one share;

Admitted by the Appellant.

(s) the Appellant has not established that at the end of the 1993 taxation year that Surf Holdings owed him any amount in respect of any alleged loans made by him to Surf Holdings;

Not admitted by the Appellant.

The Appellant maintained the company balance sheet would show the shareholders loans prior to 1993.

The Appellant, at the hearing, did establish there were shareholders loans in his name at the end of 1991 on the books of the company.

(t) the Appellant has not established, that any debt, which he alleges is owing to him by the Surf Holdings, became a bad debt in the 1993 taxation year;

Not admitted by the Appellant.

The Appellant stated he could not collect on the debts and the only relief would be through the taxation system if the ABIL was allowed.

(u) the Appellant deducted a Capital Gain Exemption in the amount of $65,408.42 in calculating his income for the 1991 taxation year;

Admitted by the Appellant.

(v) the ABIL in the amount of $14,999 so disallowed by the Minister was not supported by the financial records kept by the Appellant in respect of his investment in the Surf Holdings for the 1993 taxation year and have not been established by him; and

The Appellant’s position was that bank records would prove the position that payments were made.

(w) the Appellant’s investment in the Surf Holdings was not supported by the corporate and financial records kept by Surf Holdings in respect of the Appellant’s investment in the Surf Holdings prior to and during the 1993 taxation year and have not been established by the Canadian Surf.

Not admitted by the Appellant.

The Appellant maintained the records of the company for 1991 would show shareholders loans of the Appellant in Surf Holdings Ltd.

Issues to be Decided

The issues are:

(a) whether the business loss suffered by the business was a business loss of the Appellant or Canadian Surf; and

(b) whether the Appellant had ABIL in respect of a payment by the Appellant under a guarantee given to a third party lender for a debt of Surf Holdings Ltd.

Analysis

Disallowed Business Investment Loss

Canadian Surfboat Manufacturing Ltd. was incorporated by the Appellant and his wife after unpleasant business experiences with other companies and associates. The Appellant stated the relationship between Canadian Surfboat Manufacturing Ltd. and himself was merely that of nominee and the assumed business of Canadian Surfboat Manufacturing Ltd. was really the business of the Appellant.

In cases where the Appellant asserts the corporate vill must be penetrated to show the true relationship, the Court must look at all the facts, assess the credibility of the evidence, examine the completeness of the alleged transactions and assess the course of conduct as compared with the stated intent.

There are two citations of particular assistance to this analysis.

In R. v. Jennings, (1994), 94 D.T.C. 6507 (Fed. C.A.), at page 6508 Robertson J. in the Federal Court of Appeal stated:

Only in the clearest of cases, and in compelling circumstances and after thorough legal analysis could the “normal rule” be displaced.

The normal rule being the corporation is separate and distinct legal entity from its shareholders.

And in Laframboise c. Ministre du Revenu national, (1992), 92 D.T.C. 2299 (T.C.C.)at page 2305, Dussault J. of this Court opined:

[I]t is worth restating the rule that the existence of a corporation cannot be ignored so as to benefit the taxpayer when he has himself used the structure because it was advantageous to him at the time.

Findings and Conclusion from the Evidence

The Appellant’s exhibits filed A-12 through to A-27 indicate a mix of names that business was purportedly carried on including Canadian Surfboat Manufacturing Inc., Canadian Surf Boat Manufacturing Ltd., Canadian Surfboat Manufacturing Ltd., Canadian Surf Boat Manufacturing, Surf Boats, Surf Marine, Canadian Surf, Canadian Surf Boats, SurfBoat Foam and Fibreglass and Bryon Armstrong.

The “agreement” (exhibit A-14) between Canadian Surfboat Manufacturing Inc. and Bryon Armstrong states that Canadian Surfboat Manufacturing Inc. is a nominee for Armstrong.

The name of the corporation with the disallowed business loss is Canadian Surf Boat Manufacturing Ltd. (exhibit A-13).

It would appear that the corporation kept two sets of books, one internal set showing assets and liabilities including itemized expenses, another set of books showing only a bare corporate shell with no assets or liabilities. The Appellant apparently attempted to pick and choose as the circumstances presented themselves as to whether he was a sole proprietorship or whether the business was that of Canadian Surf Boat Manufacturing Ltd. The Appellant’s letter from his solicitor to Revenue Canada (January 11, 1994) indicated the Appellant personally wished the “protection of a corporate structure” that is why he caused to be incorporated Canadian Surfboat Manufacturing Inc. Further, litigation (exhibit R-3) was conducted in the name of Canadian Surfboat Manufacturing Ltd. And further, proposals for the sales of boat hulls (exhibit R-4) were tendered in the name of Canadian SurfBoat Manufacturing Ltd.

In all three of these matters there was no indication that the corporation was a mere nominee of the Appellant. As admitted from the assumptions, Canadian Surf was registered for the purpose of remitting provincial sales tax in the name of Canadian Surf. Records of employment including records issued for unemployment insurance purposes were issued by Canadian Surf. Canadian Surf had a bank account in which Canadian Surf made deposits and issued cheques. The employees of Canadian Surf had their T4 slips issued by Canadian Surf.

The myriad cloud of operating entities that surrounds the affairs of the Appellant in the face of the foregoing findings does not lead to a conclusion that Canadian Surfboat Manufacturing Ltd. was a nominee of the Appellant.

The Appellant has not met the onus of showing the assessment was wrong.

Disallowed ABIL Payment under a Guarantee

In an allowable business investment loss in the case of payment made by a taxpayer under a guarantee in respect of the corporation liability, the debt does not arise until the payment is made. Under subsection 39(12) of the Act a payment made by a taxpayer under a guarantee of corporation debts is deemed to be a debt owing to the taxpayer by a small business corporation if:

-the payment is made to an arm’s length person; and

-the corporation was a small business corporation both at the time the corporation’s debt in respect of which the payment was made was incurred and at any time in the 12 months before the time any amount first became payable under the guarantee.

A small business corporation is defined in the Act, subsection 248(1), as a Canadian controlled private corporation which all or substantially all of the fair market value of its assets are used in active business carried on primarily in Canada. An active business carried on by the corporation is also defined in the Act under subsection 248(1) as any business carried on by the corporation.

At the time the guarantee was given (it is to be noted the guarantee was not completely dated but did indicate the month of December 1988) the corporation was a small business corporation. The guarantee was given to an arm’s length person (the Bank). The time the payment was made (1993) (by the Appellant through the corporation to the Bank) the corporation was not a small business corporation as it had ceased being an active business in late 1990.

Because the corporation ceased being an active business more than 12 months before any amount first became payable under guarantee, subsection 39(12) does not deem the guarantee payment in 1993 to be a debt owing to the Appellant by the corporation under paragraph 39(l)(c). Therefore, it is not an allowable business investment loss to the Appellant for the taxation year in question.

Decision

For all matters the appeal is dismissed.

Appeal dismissed.