Marquis v. R., [1999] 1 CTC 2653

Tardif T.C.J.:

This is an appeal for the 1993 taxation year.

The appellant testified in support of his appeal; he explained that he had guaranteed a $34,000 loan made to Jean-Guy Asselin personally by the Na- tional Bank of Canada on June 12, 1989.

As he knew Jean-Guy Asselin well, the appellant agreed to guarantee it so he could obtain the loan in the aforesaid amount in order to invest in the company 2644-8472 Québec Inc., for which he was working. This was a business which printed documents.

Part of the money from the loan was used to purchase 33 1/3 percent of the company’s capital stock, and the balance was injected into the company in the form of advances as a director.

The appellant said that in order to secure the risks inherent in his guarantee, he insisted that the newly purchased shares obtained as a result of the loan secured by his guarantee be given to him as security. Jean-Guy Asselin accordingly assigned his share certificate to the appellant after endorsing it.

The share certificate, which was certificate No. I and represented 1,000 common shares, was thus assigned to the appellant the same day it was issued. The back of the certificate was filled out accordingly.

Two descriptions of the share certificate were entered in evidence. The evidence never provided any explanation of the various information given on the back of the certificate; I refer in particular to the fact that one indicated that $1,000 had been paid for the shares and another referred to an expenditure of $35,000.

However, the copy of the financial statements for the year ending August 31, 1990 provides the correct answer, indicating that the amount paid for the shares was $1,000. That document indicated that Jean-Guy Asselin held a $24,000 debt described as follows:

The evidence did not indicate what the $8,000 was used for, this being the difference between the amount spent for the shares and the advance made to 2644-8472 Québec Inc., and the amount of the loan, $34,000.

Nearly four years later the lending institution, the National Bank of Can- ada, required the appellant to pay the $31,646 outstanding on the loan made to Asselin on June 12, 1989, as Asselin had clearly not met his obligations.

The following week, on May 11, Jean-Guy Asselin made an assignment of his property. In response to a peremptory demand for payment by the National Bank of Canada, the appellant signed a demand note in favour of that banking institution, as a result of the guarantee he had given.

As he believed he was the owner of the shares issued to Jean-Guy Asse- lin, the appellant asserted his rights to the trustee to recover the amounts he now owed to the National Bank of Canada under the note which he had to sign. These claims proved to be futile and he was unable to recover any- thing whatever. He therefore lost $31,646 because of his guarantee.

Broadly speaking, those are the facts which prompted the appellant to maintain that his loss should be characterized as a business investment loss.

The appellant argued that the character of the loss should be determined as of the period of the bankruptcy, when he himself had become a share- holder. Was he actually a shareholder of the company at the time of the bankruptcy? I doubt this; moreover, the evidence in this regard was defi- cient, as the appellant did not know whether the share transfers were subject to certain limitations; moreover, he never established that he had been in- volved in the company’s affairs before the bankruptcy. There was no oral or documentary evidence to show that the share transfer was authorized and ratified by the company’s board of directors. The company was a private one in which the share transfer undoubtedly was subject to certain restric- tions, or at least certain formalities.

In any case, accepting the appellant’s reasoning would not mean his ap- peal should be allowed, since the weight of the evidence was that the value of the shares he claimed to own was not exactly the amount he estimated; on the contrary, the weight of the evidence was that those shares had no par value and that only $1,000 was spent to acquire them. What was their value at the time of the actual transfer, which took place on the day the bank exercised its rights under the guarantee? In view of the short time lapse between this and the date of the bankruptcy, it must be assumed that the shares had no value at the time of the transfer.

There is no doubt that the guarantee signed by the appellant on June 12, 1989 was not for any purpose relating to economic viability; it was an act prompted and called for by concerns which strictly speaking had nothing to do with any expectation of deriving a profit or benefit. As he knew Jean- Guy Asselin very well, he made this generous gesture. Moreover, the guarantee in no way benefited the company issuing the shares; it was a benefit only to Jean-Guy Asselin in his capacity as a responsible and autonomous individual. He could quite easily have decided to squander the proceeds of the loan, invest them elsewhere, pay debts or buy a car or any other consumer good.

How could it be contended or argued that there was any economic purpose to the guarantee, since if the loan which he had guaranteed had been repaid the appellant would not have received any benefit or profit?

If a shareholder guarantees a loan obtained by the company in which he holds his shares, it seems reasonable to assume that this is a legal act which could improve or enhance the value of the shares held. In other words, the guarantee may produce a profit or lead to a loss.

In the instant case the money obtained went to a third party who invested it in the company. The appreciation or expectation of profit benefited the shareholder, not the appellant who gave the guarantee.

There was no direct connection between the guarantee and the acquisition of shares. If the company issuing the shares had been successful and prosperous the benefits, profits or appreciation would essentially have gone to the holder of the shares, and would in no way have accrued to the person who essentially had physical custody or control of them.

In the appellant’s submission, custody of the shares was transformed into a right of ownership if the borrower did not meet his obligations to the lending institution. That may have been possible, but the transfer of ownership of the shares required that a number of formalities and procedures be completed, and this was not established. Moreover, the appellant admitted he did not know whether the share transfer was subject to restrictions. There was no evidence of the date or time of the transfer, which could not have taken place before the default by the principal borrower on his obligations to the financial institution. Additionally, what was the actual value of the shares? This was not established by the evidence.

To be successful the appellant would have to have shown on a balance of probabilities that at the time he decided to invest as guarantor there was a reasonable expectation of enrichment. Such evidence was impossible as the guarantee resulted in the making of a loan over which the appellant had no direct or indirect control. He could not even influence or direct the use of the money obtained with his guarantee. Further, the fact that only $1,000 was used to purchase the company’s capital stock and the balance went as cash advances to the company speaks volumes about the appellant’s limited power, and even total absence of control, over the investment which re- sulted from the loan.

So far as the hypothetical rights conferred on him by the share certificate are concerned, I believe that actually this essentially showed that the guarantee produced not an expectation of gain or profit but a possibility of loss. In other words, if things had gone well for the borrower the appellant would have received no benefit or profit and would never have been called on to make good the amount; on the other hand, if everything went badly the appellant was automatically a loser. I do not see how he could theoretically have received any benefit from his guarantee, directly or indirectly. In any case, there was no evidence of It.

For these reasons, the appeal is dismissed.

Appeal dismissed.