Pritchett v. R., [1998] 2 C.T.C. 3125, 98 D.T.C. 2239

Mogan T.C.J.:

1 The Appellant has appealed from notices of reassessment issued under the Income Tax Act for the taxation years 1985, 1986 and 1987. The Appellant claimed a “business investment loss” of $564,745 for the 1986 taxation year. The Minister of National Revenue accepted a business investment loss of only $434,000 for 1986. The Appellant claims that the business investment loss accepted by the Minister should be increased by the aggregate of two amounts ($35,000 plus $47,260) which are described below. The only issue in these appeals is whether those two amounts should be added to the business investment loss of $434,000 as accepted by the Minister.

2 A business investment loss is defined in paragraph 39(1)(c) of the Income Tax Act. For 1985, a taxpayer's allowable business investment loss (“ABIL”) was defined in paragraph 38(1)(c) as one-half of his business investment loss. A non-capital loss is defined in paragraph 111(8)(b) to include an ABIL. The Appellant used his substantial ABIL in 1986 to establish a non-capital loss which he carried back to 1985 and forward to 1987. The adjoining years of 1985 and 1987 are under appeal only because they are affected by the amount of the Appellant's ABIL in 1986.

3 In the early months of 1984, the Appellant incorporated Stash, O'Neill Enterprises Limited (the “Company”) under the laws of Newfoundland. The Company owned and operated a restaurant known as a “roadhouse” at the Village Mall in St. John's, Newfoundland. In the food concourse area of the Village Mall, the Company also owned and operated a donought shop, a submarine shop and a pizza shop. These food outlets were all operating by the end of 1984. In the spring of 1985, the Company opened a restaurant and bar under the name “Dallas” in downtown St. John's on Duckworth Street.

4 In order to finance the development, opening and operation of these restaurants and food outlets, the Company had borrowed approximately $400,000 from The Toronto-Dominion Bank (“TD Bank”) at its main branch on Water Street in St. John's. The bank held a fixed and floating debenture on all of the Company's assets. A real problem developed immediately after the opening of Dallas because there was a beer strike throughout Newfoundland. Other taverns and restaurants in St. John's either anticipated the strike and brought in supplies or absorbed all of the available supplies right after the strike commenced. Because Dallas was a new tavern with no established supplier, it was out of beer immediately and suffered severely throughout the long strike. The Appellant's unchallenged evidence was that the Dallas operation was loosing approximately $13,000 per month so long as it was operating but that the Company would lose only $7,000 per month to maintain the premises if Dallas were shut down. Accordingly, the Appellant decided to close down the Dallas operation in October 1985 and it remained closed until April 1986.

5 The significant losses in the Dallas operation put a real strain on the financial resources of the Company. The Appellant went back to the TD Bank to obtain additional financing. He estimated that it would require approximately $750,000 to put the Company back on its feet and reopen the Dallas operation. Apparently, the lending limit of the TD Bank in Newfoundland for a single customer was $500,000; and therefore, the Company's loan application had to be referred to the regional manager in Nova Scotia. As a condition to additional financing, the bank required firstly that the Company retain a qualified chartered accountant to monitor the operation of the Company's food outlets and provide the bank with monthly statements; and secondly a moratorium on collection action by the Company's other creditors.

6 The Company retained Raymond Noseworthy, an experienced chartered accountant in St. John's, who testified at the hearing of these appeals. He started in January 1986 and according to his own testimony: “I supervised the operation of the Company for a number of months and in the process of preparing monthly statements and cash flow projections I had a continuous contact with The Toronto-Dominion Bank”. (Transcript - page 10). Mr. Noseworthy described negotiations with the other creditors apart from the bank. Specifically, the suppliers agreed that they would not press for immediate payment of amounts owing, and they would continue to supply on a cash basis. The City of St. John's agreed to withhold collection proceedings with respect to municipal taxes. The provincial retail sales tax authority also agreed to withhold collection proceedings so long as taxes were paid on a current basis. And lastly, Revenue Canada agreed to withhold collection proceedings if the Appellant would personally guarantee the payment of certain “source deductions” for which the Company was in arrears with respect to its payroll. The Appellant personally was entitled at that time to a significant refund in the range of approximately $50,000. Instead of receiving that refund by way of immediate payment, the Appellant agreed that Revenue Canada could hold the refund as security for remittance of the overdue source deductions.

7 The Appellant and Mr. Noseworthy worked diligently in the first months of 1986 to satisfy the bank's conditions for additional financing. They met the conditions concerning a moratorium from the four identified creditors, and Mr. Noseworthy provided monthly statements to the bank showing that the Company was slowly working its way out of its financial difficulties. Having satisfied those conditions, the Appellant stated that he was relatively confident that the bank would provide the necessary financing to get the Company's whole operation going again. The bank had not confirmed its additional financing and so, in April 1986, the Appellant reopened the Dallas tavern in downtown St. John's as a proprietorship of his own, paying rent to the Company for the premises.

8 Sometime in the latter part of May or the first days of June 1986, the bank informed Mr. Noseworthy and the Appellant that the additional financing would not be available, and the bank made a demand on the Company to pay all of the outstanding loans within five days. This demand was in effect a death knell to the Company because it had no resources with which to pay its outstanding loans. In that five-day period, the bank brought in a receiver from Nova Scotia and seized all of the Company's assets. According to Mr. Noseworthy, the receiver was appointed by the bank not to operate the business but to close it down immediately. Apparently, the receiver closed down the Company's operations around the end of May or early June 1986 and sold off all of the available assets at prices which, according to the Appellant, were only a fraction of the cost and/or value of those assets.

9 The Appellant had personally guaranteed all of the bank's loans to the Company. Therefore, the bank took steps to recover what it could from the Appellant. This brings me to the first amount in dispute which is $35,000. Exhibit A-1 is a passbook issued by the TD Bank for account no. 157-208 at the bank's branch at TD Place on Water Street in St. John's, Newfoundland. The passbook does not contain the name of the bank customer who owned the account and has only one entry showing that on March 29, 1985, there was a deposit of $30,000. That one-line entry shows a balance of $30,000 and there is nothing else in the passbook to show what happened to the $30,000. The Appellant is his oral testimony gave very clear evidence as to the following facts: (i) account no. 157-208 was his personal account; (ii) he deposited the $30,000 into that account on March 29, 1985; (iii) he left the amount on deposit as security for part of the loans which the bank had made to the Company; (iv) that deposit had accumulated interest of approximately $5,000 in the following 12 months to March 1986; and (v) the bank seized $35,000 in the spring of 1986 as part of its attempts to recover the aggregate amount of principal and interest owing by the Company on its very substantial debt to the bank.

10 According to the evidence of Mr. Antle, an employee of Revenue Canada, there had been earlier assessments issued to the Appellant in 1990 and 1991 with respect to the three taxation years under appeal, and those assessments had been objected to. In the ensuing discussions between the Appellant or his representatives and Revenue Canada, there was no documentation provided to Revenue Canada to support the Appellant's claim to the $35,000 loss arising from the bank's seizure of the savings account evidenced by the passbook. The Appellant's evidence in Court was that the passbook was found by his wife only a year before the hearing of these appeals and, therefore, had not been available at any time during prior discussions between the Appellant or his representatives and Revenue Canada.

11 I accept the Appellant's evidence that the passbook had been lost and was found only about a year before the hearing of these appeals. Accepting his evidence on that narrow point does not mean that his claim is confirmed with respect to losing $35,000 on the seizure of the bank account. The finding of the passbook and the failure to act on its discovery raise too many questions concerning the ownership and ultimate use or disposition of the $30,000. For example, there is no evidence as to the ownership of account no. 157-208. There is no name in the passbook. There is no evidence (other than the Appellant's sworn statement) as to the ultimate disposition of the $30,000 balance in the account. There is no evidence that the amount on deposit in this account was pledged to the TD Bank to support any loan to the Company. And lastly, there is no evidence that the amount on deposit was seized by the TD Bank at any time.

12 If this passbook was found about one year before the hearing of these appeals, why did the Appellant not take it to the local branch of the TD Bank in St. John's and simply present the passbook and ask it to be updated? Such a simple procedure would have required the bank to dig into its records (perhaps microfilmed records from 1985) and establish the ownership of the account, and then trace the use of the $30,000 shown as being on deposit as at March 29, 1985. There is no evidence as to why the Appellant did not pursue that simple procedure of presenting the passbook at the bank and asking the bank to verify both the ownership of the account and the ultimate disposition of the $30,000 shown on deposit.

13 In the circumstances of this case, I should not have to rely on the uncorroborated testimony of the Appellant that account no. 157-208 at the TD Bank was his account; that he had a balance of $30,000 or $35,000 on deposit in that account at all relevant times; and that the bank seized his money on deposit. There was better evidence readily available. The best evidence rule has been discarded as a rule for excluding evidence but it is useful in assigning weight. The following comment on the rule appears in “The Law of Evidence in Civil Cases” by Sopinka and Lederman, Butterworth 1974:

Although the rule is still referred to with respect to matters other than the admission of secondary evidence of documents, it is rather by way of a rationale for assigning less weight to the evidence tendered than as a reason for its exclusion.

The rule as it applies to admission of secondary evidence of documents is not as narrow as the judgment of Lord Denning implies. It is doubtful that he intended to make a definitive statement of the rule in its application to documents. A party seeking to adduce secondary evidence must do more than just show that the document is not available in his hands.

That evidence should be the best that the nature of the case will allow is besides being a matter of obvious prudence, a principle with a considerable pedigree. However, any strict interpretation of this principle has long been obsolete, and the rule is now only of importance in regard to the primary evidence of private documents. The logic of requiring the production of an original document where it is available rather than relying on ... the recollection of witnesses, is clear...

29(2)

A copy of an entry in the book or record ... shall not be admitted in evidence under this section unless it is first proved that the book or record was, at the time of the making of the entry, one of the ordinary books or records of the financial institution, ... and such proof may be given by any person employed by the financial institution who has knowledge of the book or record ... and may be given orally or by affidavit sworn before any commissioner or other person authorized to take affidavits.

14 Exhibit A-1 is the TD Bank passbook for account no. 157-208 at the “TD Place” branch in St. John's, Newfoundland. When the Appellant found that passbook about a year before the hearing of his appeals, he had at least two options. He could have presented the passbook at the issuing branch of the bank and asked to have it updated to show the history of the $30,000 deposit. Alternatively, he could have asked a responsible bank employee at that branch to swear an affidavit with respect to the ownership of that account and the disposition of any funds on deposit. Subsections 29(4) and (5) of the Canada Evidence Act provide for the use of such an affidavit in Court. For whatever reason, the Appellant did not pursue either option.

15 I will paraphrase the above quoted passage from Halsbury and simply state that any evidence should be the best that the nature of the case will allow. I put very little weight on the Appellant's sworn testimony because he took no steps to obtain readily available evidence from the bank concerning the ownership of account no. 157-208 and the disposition of any funds on deposit in that account.

16 The Appellant's failure to obtain readily available evidence from the TD Bank with respect to the passbook (Exhibit A-1) may justify an inference that the evidence of the bank would have been unfavourable to the Appellant. See Murray v. Saskatoon (City) (No. 2) (1951), [1952] 2 D.L.R. 499 (Sask. C.A.), at 505-506. The onus of proof is on the Appellant and he has failed to discharge that onus. His appeal with respect to the amount $35,000 is dismissed.

17 The second amount in dispute is $47,260 which is the amount of the refund which the Appellant was personally entitled to in 1985 when he was negotiating a refinancing of the Company with the TD Bank. At that time, the bank required a moratorium on any collection action by four creditors: suppliers, the City of St. John's, the provincial retail sales tax authority and Revenue Canada. In 1985, the Appellant was entitled to a personal refund in the amount of $47,260 owing to him by Revenue Canada. At the same time, however, the Company had failed to remit source deductions in the amount of approximately $50,000 with respect to its payroll. In the course of negotiating the moratorium on collection action by Revenue Canada, it is the Appellant's evidence that Revenue Canada required him to assign his personal refund in the amount of $47,260 to Revenue Canada either as security for the ultimate payment of the shortfall in remittances of source deductions or as a direct transfer of funds which would be credited against the Company's liability for source deductions. Revenue Canada admits that this arrangement was made and, in the Reply to the Notice of Appeal, the following statement appears in paragraph 3(c) as a fact which the Minister relied upon in issuing the assessments under appeal:

• 3(c) throughout 1984, 1985 and 1986, the Appellant paid a total of $47,260 to the Respondent on account of arrears of unremitted source deductions of the Company;

• 3(g) further, the Appellant has not established that the said $47,260, or any part thereof was not included in the calculation of the Appellant's shareholder loan balance which has been already allowed as a business investment loss;

18 In my view, there is an inconsistency between the two facts pleaded by the Respondent in paragraphs 3(c) and 3(g) as set out above. According to paragraph 3(c), the Appellant paid a total of $47,260 “throughout 1984, 1985 and 1986”. This indicates to me that the amount was paid over a three-year period. According to paragraph 3(g), the Appellant has not established that the amount of $47,260 “or any part thereof” was not included in the calculation of the Appellant's shareholder loan balance. According to the evidence of Mr. Antle, the Company's financial statement at November 30, 1985 was the last financial statement available to Revenue Canada. In that financial statement, there was a shareholder loan balance in the Appellant's favour showing that the Company owed to the Appellant approximately $335,000. According to Mr. Antle, there was no analysis of the shareholder loan account and Revenue Canada had no way of determining what the various entries were which made up that total amount of $335,000. In other words, Revenue Canada could not determine whether all or any part of the $47,260 had already been credited to the shareholder loan account as those funds were transferred from the Appellant's personal tax refund account at Revenue Canada to the Company's source deduction account which was in a deficit balance.

19 Mr. Antle took over the Appellant's file in 1993. At that time, one of Mr. Antle's predecessors had already agreed to allow the Appellant the total amount of $335,000 in the shareholder loan account as part of his business investment loss. After taking over the file, Mr. Antle stated that he agreed to allow certain additional amounts to the Appellant as “something else”. In explaining what the something else was, Mr. Antle gave the following description in his testimony:

A. And that something else was in his total claim of 564,000, that's the total business investment loss, two components were those balances, those shareholder's loan balances, one for Mad Gerry's and one for Stash O'Neill's. But there was a lot of other items listed on top of that and what I agreed to allow -- I accepted or it was my understanding at the time that the business ceased on November 30, 1985. So I agreed to allow most of those expenses that were listed on his working paper that were paid after November 30, 1985, recognizing that they would not be in a shareholder's loan account because we had already allowed that balance as of November 30, 1985. And there was several small amounts listed that I agreed to allow that were paid after that date. The only amounts that I didn't allow were there was three items and two of them are at issue today. One is the payments -- payment of the Company's source deductions and the other one is the $35,000 term deposit that was taken. And the reason for not allowing those was that Revenue Canada felt that those -- well, with respect to the 35,000, there was absolutely no documentation to support it and Revenue Canada felt that documentation should have been available in the form of letters from the Bank at the time the note was taken or legal documents. But there was absolutely nothing, at the time, to even show me that the amount existed, the term deposit existed. So there was nothing to support the claim at all. With respect to the source deductions paid by Mr. Pritchett, my understanding is those payments were actually made in 1984, 1985 and 1986. And a lot of those payments were made prior to the Company ceasing operations. So we get into the same issue that they may have already been allowed as part of the shareholder's loan account. We don't know. And the amounts paid after the Company ceased operations, we felt that due to Court cases that they are not allowable.

MR. RUSSELL:

Q. And of the total amount of ABIL claimed, being the 564,000 amount, can you tell the Court approximately what amount was ultimately permitted by Revenue Canada?

A. Revenue Canada allowed 434,000 which amounted to 217,000 being the allowable portion.

Q. And what accounts for the difference between the 434 allowed and the 564 claimed?

A. Well, in the original working paper of the calculation of the allowable business investment loss, Mr. Pritchett or whoever prepared the working paper, estimated the amounts taken by Revenue Canada as 50,000 as opposed to 47. And so -

Q. 47 being the 47,260 shown in the Reply?

A. Yes, sir.

Q. All right.

A. In his calculation of the allowable business investment loss, he just put a round figure of 50,000 in and the 35,000 note. So there you have 85,000 of that right there and there was some payments to Noseworthy, Keating, Howard and Kung of about 15,000 that no documentation was submitted for.

Q. Okay. So the difference is explained by the three elements that you did not allow?

A. Yes.

(Transcript - pages 118 to 122)

20 I recognize that any amounts paid by the Appellant on behalf of the Company prior to November 30, 1985 could have been and should have been credited to his shareholder loan account in the Company's books and records. Having regard to the second amount of $47,260 which comes from the Respondent's own pleadings, that amount was in the possession of Revenue Canada as a refund available to the Appellant personally and Revenue Canada was in a better position to disclose in Court precisely when that amount was transferred from the Appellant's personal refund account to the account of the Company to pay the deficit in the source deduction account. If I accept at face value the fact relied upon by the Minister in paragraph 3(c) of the Reply to the Notice of Appeal, then I have to conclude that the amount of $47,260 was taken from the Appellant's personal account and paid to the Company's source deduction account “throughout 1984, 1985 and 1986”. If a portion of that amount was paid in each of those three years, then it is obvious that the portion paid in 1986 could not form any part of the shareholder loan account as at November 30, 1985 because the amount would not have been transferred for the benefit of the Company by that date. Accordingly, a portion of the $47,260 must have been paid in 1986 and after November 30, 1985; and that portion would not be part of the shareholder loan account which was allowed in total to the Appellant.

21 There is no precise evidence as to what portion of the $47,260 was transferred by Revenue Canada to the Company's source deduction account at any time in the years 1984, 1985 or 1986. Because that information is more in the hands of Revenue Canada than in the hands of the Appellant, I propose to give the Appellant the benefit of the doubt and assume that one-third of that amount was transferred in each of the three years in question. Therefore, I conclude that the amount of $15,753 was transferred from the Appellant's personal account to the Company's source deduction account some time in the early months of 1986 before the Company was put out of business by the receiver around June 1, 1986.

22 I would therefore allow the appeal only for the purpose of increasing the Appellant's 1986 business investment loss by the amount of $15,753 and, if the 50% allocation applied in 1985, there should be a corresponding increase in the Appellant's ABIL in the amount of $7,876. The appeal for 1986 is allowed only for the purpose of granting that relief and any corresponding relief which may flow over into 1985 and 1987. Because the Respondent achieved substantial success in the appeals for the three years, the Respondent is entitled to costs.