Seitz (J.) v. Canada, [1995] 2 CTC 2441

McArthur J.T.C.C.:-These appeals were heard in Winnipeg, Manitoba with respect to the appellant’s 1985, 1986 and 1989 taxation years.

While these appeals were properly heard under the informal procedures of this Court, counsel for the respondent noted that the aggregate federal tax and interest for the three years exceeds $20,000.

Issues

Are certain losses incurred by the appellant fully deductible as business losses for the appellant’s 1985, 1986 and 1989 taxation years or are they only partially deductible as allowable business investment losses ("ABILs").

Facts

The appellant was the only witness and he presented the following evidence accepted by this Court. In February 1985, the appellant, together with Gerhard (George) Glatz, both being members of the Lions club, com- menced efforts towards staging a country music concert to raise money for charitable purposes of the Lions club. Make-a-Miracle Inc. ("M-A-M") was a corporation without share capital incorporated for the purpose of raising funds for the benefit of handicapped people by sponsoring the country music concert to be held at Birds Hill Park, Winnipeg July 26 and 27, 1985. The appellant was on the board of directors of M-A-M.

The appellant, who had been in the life insurance business for over 25 years, immersed himself full-time from February to July 1985 towards arranging the concert. In February or March 1985 the board of directors of M-A-M agreed to pay the appellant and Glatz ten per cent of the net concert proceeds for their services rendered and for indemnification of the losses suffered by their respective businesses because of their four or five month absences. This was their first venture as concert promoters. It was a rather loose arrangement verbally agreed among the Lions club members. Commencing in early May, 1985 M-A-M and the Lions club received negative publicity when media reported that the appellant and Glatz were to profit from the charity concert.

Upon the direction and recommendation of M-A-M and the Lions club, the appellant and Glatz incorporated Starconcert Productions Inc. ("Starconcert"), in mid-June 1985. The appellant and Glatz were the sole shareholders and from that time M-A-M dealt with Starconcert. M-A-M, Glatz, the appellant and Starconcert entered into an agreement dated June 24, 1985 which read in part as follows:

And whereas Glatz and Seitz are on the board of directors and are members of M-A-M and have been assisting M-A-M by contributing their services in arranging performers for the concert and obtaining a location for the concert;

And whereas Glatz and Seitz have incorporated Starconcert for the purposes of providing its services to M-A-M in the production of the concert;

And whereas Glatz and Seitz have assigned to Starconcert their respective entitlements to compensation by way of a fee for the services they have already rendered to M-A-M in respect of the concert;

And whereas M-A-M can only pay Starconcert a fee for its services as producer of the concert and those services already rendered by Glatz and Seitz if the concert is financially successful;

The preamble hereto shall form an integral part hereof.

The parties hereto acknowledge and confirm that Glatz and Seitz have on behalf of M-A-M made all arrangements with the various performers engaged to perform at the concert and have obtained the location for the concert. M-A-M agrees to reimburse Seitz and Glatz and/or their respective corporations for all reasonable expenses incurred by them in this regard upon presentation to M-A-M of invoices pertaining to such expenses.

Starconcert shall devote its full time and effort to the production of the concert and shall be responsible for all phases of the production....

Starconcert shall be entitled to receive a fee for its services as producer of the concert in an amount equal to ten per cent of the net profits of the concert (net profits being the excess of receipts over expenditures), it being understood that Starconcert shall serve M-A-M without compensation by way of a fee other than its share of the net profits of the concert as set forth in this paragraph, and it being further understood that this fee shall in any event be limited to a maximum of $150,000 regardless of the amount of net profits of the concert. Payment of this fee shall be made by M-A-M to Starconcert as soon as reasonably possible following the concert and the preparation by M-A-M and Starconcert of a final accounting of all receipts and expenditures pertaining thereto.

It was duly signed by the appellant and Glatz in their personal capacity and as officers of Starconcert and by an authorized signing officer of M-A-M.

On June 3, 1985, the appellant personally guaranteed the sum of $200,000 that M-A-M intended to borrow from the Royal Bank and on October 18, 1985, he signed a promissory note in the same amount in place of the guarantee. Copies of both documents were filed as evidence. Starconcert did not execute either document.

The appellant advised that he entered into a contract on June 4, 1985 with M-A-M and Kenny Rogers to engage Mr. Rogers’ services. An unexecuted document was filed as evidence. Starconcert was not a party to that agreement. In July 1985, the appellant personally advanced $120,000 to M-A-M which was used as working capital.

Fewer than 5,000 people attended each of the two concerts when in excess of 25,000 people had been expected.

In 1985 the appellant incurred the following losses:

On June 24, 1985, at a meeting of the board of directors of M-A-M reference was made inter alia to: (a) the media controversy, (b) an earlier arrangement to pay a ten per cent fee, (c) the need to protect the good name of the Lions club, (d) that a company Starconcert be incorporated by the appellant and Glatz, (e) that the appellant and Glatz be paid ’’ten per cent net to a maximum of $150,000," and (f) that M-A-M pay Starconcert 3 per cent over prime for upfront financing. An unsigned copy of these minutes was filed as Exhibit R-1.

Position of the appellant

The losses are fully deductible by him as they resulted from his personal active participation in a business venture and therefore constituted business losses.

The appellant testified that his objective in guaranteeing the $200,000 loan and advancing in excess of $120,000 was primarily to ensure that the concert was successful in benefiting the designated charities and in recovering lost income due to his absence from his life insurance business.

Position of the respondent

It was Starconcert and not the appellant that was to earn business income from M-A-M and the appellant’s bad debts were ABILs and did not occur in the ordinary course of the business carried on by the appellant. In the alternative, if the losses are business losses and not capital losses, the appeal for the 1989 taxation year is invalid as the appellant failed to comply with a statutory condition precedent required by subsection 169(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in that he did not serve the Minister with a valid notice of objection to the reassessment for that year.

Analysis

The appellant paid, from his personal assets, in excess of $146,000 to the Royal Bank pursuant to his guarantee of the loan from the Royal Bank to M-A-M. There is considerable jurisprudence to the effect that where a taxpayer has sustained losses on loans or guarantees the losses are capital losses unless they were made by the taxpayer for the purpose of gaining or producing income related to the taxpayer’s business. In the case of Lachapelle v. M.N.R., [1990] 2 C.T.C. 2396, 90 D.T.C. 1876 (T.C.C.), the taxpayer gave a guarantee to assist a corporation in obtaining a bank loan. At page 1879, Brulé J.T.C.C. refers to the judgment of M.N.R. v. Steer, [1967] S.C.R. 34, [1966] C.T.C. 731, 66 D.T.C. 5481, and says:

In Steer, as in the present case, the taxpayer guaranteed the indebtedness of a company in which he held an equity interest. Due to financial difficulties encountered by the company, the taxpayer was called upon to honour the guarantee. He subsequently deducted the entire amount as a business loss. In dismissing the taxpayer’s appeal, the Court held that losses of such a character in the hands of the individual taxpayer were clearly losses on account of capital.

Further, he says:

The reasoning in Steer and Stewart & Morrison has been confirmed in a series of more recent cases. For example, in Meisels, Isaac, Investments Ltd. v. The Queen, [1985] 1 C.T.C. 9, 85 D.T.C. 5029, the Federal Court-Trial Division, denied a business loss to a corporate taxpayer which loaned money to a subsidiary. In dismissing the taxpayer’s appeal, Rouleau J. held that where, in substance, a loan is made for the purpose of providing working capital to a corporation, any loss which may result, is a capital loss.

In the present instance the appellant guaranteed the indebtedness of M-A-M and provided working capital to M-A-M. The agreement dated June 24, 1985 provided that the appellant assign to Starconcert his entitlement to fees for services rendered and that M-A-M pay Starconcert for arranging the concert. The appellant was to benefit, presumably, as a 50 per cent shareholder of Starconcert. It was Starconcert and not the appellant that was to earn business income from M-A-M and the appellant’s bad debts were properly treated as ABILs. The appellant was not in the business of lending or guaranteeing money, nor was he in the concert promotions business. This was a single adventure. The appellant presented that Starconcert was incorporated for appearance only, to alleviate the stigma raised by the press that members of the Lions club were personally benefiting from the concert which was held out as being a Lions club charitable venture. The Court is not prepared to "lift the corporate veil" and conclude that Starconcert was a bare trustee for its two shareholders, the appellant and Glatz. There is no documentation to support this position. The existence and contents of the June 24, 1985 agreement are not in dispute. In that document the appellant acknowledges that he had assigned to Starconcert his entitlement to compensation for services rendered to M-A-M. The contract states clearly that Starconcert and not the appellant was to earn income from M-A-M. This document cannot be simply ignored.

The Minister was correct in arguing that the Court must treat the Starconcert corporation as an entity which is separate and distinct from its shareholders. Therefore, the bad debts consisting of advances to M-A-M, expenses incurred on behalf of M-A-M which were not reimbursed and payments made pursuant to the guarantee in respect of M-A-M’s loan were correctly treated by the respondent as capital losses that, the Minister agrees, qualify as ABILs and the Minister’s reassessments are correct.

Having made this finding it is not necessary to decide the issue with respect to subsection 169( 1 ) of the Act.

For these reasons the appeals are dismissed.

Appeals dismissed.