Date: 19990122
Docket: 97-1214-IT-G
BETWEEN:
TOULA YIOUROUKIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 11, 1999, at Toronto, Ontario, by the Honourable Judge D.G.H. Bowman
Reasons for judgment
Bowman, J.T.C.C.
[1] These appeals are from assessments for 1989, 1990, 1991, 1992 and 1993.
[2] The sole question is whether the appellant sustained a business investment loss in 1992. The appellant's position is that she sustained a business investment loss in 1992 of $258,099 giving rise to an allowable business investment loss ("ABIL") of ¾ of that amount, or $193,574.25. A portion of this amount was claimed in 1992 and the rest was carried back to 1989, 1990 and 1991, and forward to 1993.
[3] An ABIL can be deducted from other income and is not subject to the restriction usually applicable to other capital losses. A business investment loss arises on the disposition at a loss of the share of a small business corporation or of a debt owing to the taxpayer by a Canadian controlled private corporation under section 50 of the Income Tax Act. Where a debt owing to a taxpayer is established to have become a bad debt in the year it is deemed to have been disposed of at the end of the year for nil proceeds and reacquired at a nil cost.
[4] The appellant's position is that she loaned money to a company, Rockefeller's Restaurant Bar Inc. in 1988, 1989 and 1990 and that the debt became bad in 1992 when the company's restaurant business closed.
[5] The respondent's position is that there was no debt owing to the appellant and alternatively, if there was, it was not acquired for the purpose of gaining or producing income and that accordingly under subparagraph 40(2)(g)(ii) of the Act the appellant's loss from the deemed disposition is nil.
[6] In about 1988 the appellant's fiancé, Basilis ("Bill") Yiouroukis, her brother, John Lovatsis and a friend, Nick Rallis, decided to start a restaurant. They became equal shareholders in Rockefeller's Restaurant Bar Inc.
[7] To finance the business the shareholders were expected to contribute equally and this is in fact what happened, to the extent of about $225,000 each.
[8] A large portion of the funds contributed by Bill Yiouroukis came from his parents.
[9] The following is a list of the contributions made by cheque:
(a) June 23, 1988 $35,000
June 27, 1988 $5,000
July12, 1988 $5,000
These three cheques were signed by Bill Yiouroukis and drawn on his account at the Bank of Montreal, on which he had the sole signing authority.
(b) February 4, 1989 $50,000
February 28, 1989 $59,599
These two cheques were drawn on a bank account in the name of Louis and Dora Yiouroukis. They were signed by Bill Yiouroukis, at that time the appellant's fiancé. He stated that he had signing authority on his parents' account. The appellant and Bill Yiouroukis married on June 18, 1989.
(c) April 13, 1989 $13,500
This cheque was drawn on Bill Yiouroukis' account and according to the appellant represented cash gifts given to the appellant and her fiancé by friends and family in anticipation of their marriage.
(d) June 29, 1989 $10,000
This cheque was drawn on the appellant's bank account and the amount came from her personal funds.
(e) August 23, 1989 $25,000
August 29, 1989 $25,000
These cheques were drawn on Bill Yiouroukis' account and the amounts were originally provided by his parents. Similar amounts had to be provided by the other two shareholders. The purpose was to keep the restaurant going.
(f) May 15, 1990 $30,000
The appellant stated that this amount was drawn by her on her bank account and came from a personal line of credit that she obtained against the security of the home owned jointly with her spouse. I accept that the appellant signed the cheque.
[10] The total of the amounts advanced to the company by the appellant or her spouse was therefore $258,099.
[11] In February of 1989, the appellant and her fiancé purchased jointly their matrimonial house at 659 Highview Road, Pickering, Ontario for $286,000. The purchase was financed in part by a mortgage for $125,000 to Royal Trust Corporation of Canada, dated February 21, 1989 and in part from funds of the appellant's fiancé from the sale of another house that he owned. On the same day, February 21, 1989 the appellant and her fiancé gave a mortgage for $120,000 to Bill Yiouroukis' parents, Louis and Dora Yiouroukis.
[12] On August 30, 1988, Louis and Dora Yiouroukis, Bill's parents, mortgaged their home in Scarborough for $110,000 to the Royal Trust Corporation of Canada. This mortgage is said to have been the source of the funds advanced in February 1989 totalling $109,599. I see no reason to doubt this evidence.
[13] The restaurant business never was a success and by 1991 it was obvious that it never would be. Nick Rallis, one of the shareholders, left the company in April 1990, and made certain allegations of financial wrongdoing against the third shareholder, John Lovatsis, the appellant's brother. Mr. Rallis stated that (apart from the $30,000 provided by the appellant in May 1990, after he had left) each shareholder was expected to put up about $225,000 and that there was no discussion of interest and certainly no suggestion that interest at prime plus 2% be paid, as appeared in promissory notes that were subsequently signed. There was an unspoken arrangement that the company would pay Bill Yiouroukis' parents the interest that they had to pay on their mortgage of $110,000 to Royal Trust. The books and records of the company, if any, appear to have been in a state of disarray, and Mr. Rallis was unable to gain access to them.
[14] By 1991, it was clear the financial affairs of the company were critical, if not desperate. The company's accountants advised the appellant to take steps to protect her position. It was obvious that an ABIL would be of no use to the appellant's husband, since he had no income, whereas the appellant had employment income.
[15] Therefore, they advised her to have a series of promissory notes signed in the amounts of the advances set out above, and dated the days of the advances. The appellant prepared promissory notes from a form provided to her by the accountants. They were demand notes and on their face bore interest at prime plus 2%. They were signed by John Lovatsis.
[16] It is clear — indeed it is admitted — that the notes were signed long after the dates they bore — probably some time in 1991. It seems probable that they were all signed at the same time, and certainly at a time when the company was in serious financial straits and could not possibly have satisfied the liability of which the notes purported to be evidence. I am sure neither the appellant nor anyone with the company expected it to do so.
[17] I think the only purpose of the notes was to enable the appellant to claim an ABIL.
[18] In December 1991, she wrote to the company, demanding payment of the notes and the president, John Lovatsis, responded on December 16, 1991 and stated that the company was unable to do so.
[19] The company ceased operations in March 1992. Also, in 1992 the appellant's husband declared bankruptcy.
[20] The appellant now claims an ABIL of 75% of $286,000 on the basis that she had a debt owing to her of $286,000 that became a bad debt in 1992.
[21] I accept that if there were a debt owing to her by the company it became bad in 1992, when the business terminated, and possibly even as early as 1991.
[22] I do not, however, think that it is reasonable to conclude that there was a debt owing to her by the company.
[23] With the exception of $10,000 and $30,000 advanced by her on June 29, 1989 and May 15, 1990, and possibly a portion of the sum of $13,500 that came from wedding gifts, all of the funds came from her fiancé or husband from amounts advanced to him interest free by his parents.
[24] It is true the appellant, commendably, assumed a moral responsibility to repay to the parents the amount of the principal owing to them by her husband, considering that he had no income. This however does not transform the amounts advanced by the husband to the company into a debt owing to her by the company.
[25] There is serious doubt in my mind whether the advances to the company, whoever may have made them, were loans at all. Rather, I think they were more in the nature of advances of capital. No contemporaneous acknowledgement of indebtedness was ever issued by the company and no financial statements showing any indebtedness to the appellant were put in evidence. It seems highly improbable that any were prepared. The promissory notes that were signed, probably in 1991, were simply ex post facto window dressing, not intended to create any genuine legal obligations.
[26] I do not criticise the appellant. What she did was attributable not to dishonesty, but to youth, naïveté and inexperience. She gave her evidence in an open, forethought way, without attempting to dissemble or prevaricate. I found both her and her husband credible. She acted upon the advice of accountants who ought to have known better. Reality is not created retroactively (Waddington v. O'Callaghan, [1931] 16 T.C. 187 at 197-198 per Rowlatt J.).
[27] Finally, even if there was an amount owing to her, I do not think the debts, if that is what the advances were, were acquired for the purpose of gaining or producing income. They bore no interest and the appellant was not a shareholder. Obviously a loan to a company of which the lender is a shareholder need not bear interest for it to be made for the purpose of gaining or producing income. In such circumstances, the income producing purpose of the loan is the enhancement of the corporation's income producing potential and its consequent ability to pay dividends.
[28] Here the appellant was not a shareholder and she charged no interest. She was helping her husband by contributing capital or by assuming the responsibility of paying debts incurred by him to his parents. However commendable her actions may be in supporting her husband and assuming responsibility for his obligations, and however much I may sympathize with her, I do not think she meets the criteria necessary to support an ABIL.
[29] The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 22nd day of January 1999.
"D.G.H. Bowman"
J.T.C.C.