St. Onge T.C.J.:
1 The appeal of Giuseppe Brumale was heard at Montréal, Quebec, on July 30, 1996. The point for determination was whether the appellant incurred a business investment loss of $9,593 ($7,194 of which was deductible) during the 1991 taxation year.
2 The respondent disallowed the loss on the basis of the following facts:
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2. The appellant filed his return of income for the 1991 taxation year on or around February 12, 1993, claiming a business investment loss (“BIL”) of $39,018 (75 per cent of which was deductible, i.e. $29,263).
3. In a notice of assessment dated July 15, 1993, for the 1991 taxation year, the Minister of National Revenue (the “Minister”) disallowed the appellant's BIL of $39,018 that he had claimed for the 1991 taxation year because he had not answered a letter.
4. On March 11, 1994, in response to additional information submitted by the appellant, the Minister issued a notice of assessment to the appellant for the 1991 taxation year allowing the appellant a portion of the BIL of $29,425 (75 per cent of which was deductible, i.e. $22,069).
5. In order to make the assessment of March 11, 1994, for the 1991 taxation year, the Minister, in disallowing the BIL of $9,593 ($7,194 of which was deductible) made in particular the following assumptions of fact: (a) the BIL of $9,593 represented cheques in the name of a third party, Michelina Petrozza; (b) the appellant did not show that the loss of $9,593 resulted from the disposition of a debt or a right to receive an amount acquired for the purpose of earning income from a business or property; (c) the amounts paid by the appellant to Michelina Petrozza totalling $9,593 were not incurred in order to earn income from a property or business or to generate income from a property or business, but rather constituted personal or living expenses.
3 At the hearing, the appellant admitted paragraphs 2, 3 and 4 and subparagraph 5(a) and denied the other two subparagraphs 5(b) and (c) of the reply to the notice of appeal.
4 The appellant testified that he was sole proprietor of a work clothing manufacturing business.
5 In order to realize a substantial gain of some $120,000 in a short period of time, he formed a partnership with Michelina Petrozza in order to sell a very different kind of clothing from what he usually manufactured.
6 Ms. Petrozza used her car in her efforts to purchase samples of clothing and magazines as well as to obtain orders for the sale of clothing that was to be manufactured by subcontractors known to the appellant.
7 For these efforts, the use of her car and the purchase of samples and magazines, he gave her some 13 cheques for a total amount of $9,593, including one for $2,500.
8 As the appellant was busy with his own company, his partner apparently sold a certain quantity of clothing without paying him any profit.
9 He consulted a lawyer, who advised him not to institute legal proceedings that would have been too costly for the results they would have achieved. He was supposed to share in the profits on a 50-50 basis.
10 The Minister granted a portion of the losses as business investment losses for the expenses paid by the appellant that could be traced to a company by the name of Sexcrime Inc., owned by Ms. Petrozza and her husband, but disallowed those paid by cheque to Ms. Petrozza.
11 A letter from a notary filed by the respondent explains that a company by the name of Vêtements Tampi Moderni Inc. was incorporated whose main purpose was to transfer the goodwill of Sexcrime Inc. to Vêtements Tampi Moderni Inc.
12 The appellant invested money in Sexcrime Inc. to make it possible to produce the line for the winter/spring season before completing the transfer of Sexcrime Inc.'s assets and goodwill to Vêtements Tampi Moderni Inc.
13 As it was too late in the season to start up the new company, the appellant and Ms. Petrozza used the company Sexcrime Inc.
14 The assets were never transferred and the names of the company's founders were those of the appellant and Ms. Petrozza.
15 When approached by the assessor, the appellant told him that the cheques had been paid for salary. At the hearing, he explained that he had expressed himself poorly and that the cheques had been given for expenses incurred by his partner. It is quite clear from the evidence that the appellant advanced funds to the company Sexcrime Inc. and to his partner Ms. Petrozza and that he lost everything.
16 Can this loss be split given the fact that while the expenses can be traced in the case of the company, the assessor could not do so in the case of Ms. Petrozza?
17 Was the loss in respect of salary or of the reimbursement of expenses incurred by Ms. Petrozza? The loss would be deductible in both cases. One thing is clear, however: the loss was one incurred in the course of an adventure in the nature of trade and, in the appellant's mind, the amounts paid to his partner were paid for no other reason than to realize a profit of some $120,000. It is false to contend that this sum of $9,503 was paid to a third party since Ms. Petrozza was the appellant's partner and they were therefore in business together to make a profit. Furthermore, there is nothing in the evidence to show that the said sum was not expended for the purpose of earning income from a commercial business.
18 Consequently, I allow the appeal.
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