Date: 20000925
Docket: 98-2460-IT-G
BETWEEN:
GLENN ADAMS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Toronto, Ontario on September 20, 2000. The Appellant testified and called David Ladd, a software architect, who at all material times controlled General Telephone Company Inc. ("General"), a corporation carrying on business in Ontario, and John Steacy, a consultant, who at all material times was a Vice President and co-owner of 1064199 Ontario Inc. ("106").
[2] At the opening of the hearing it was agreed by counsel that the Appellant, carrying on business as "Glenn's Compulearn", claimed deductions of expenses for 1994 and 1995 of $20,000 each for promotion and advertising and is to be allowed a deduction respecting them of:
1994 $3,500
1995 $3,500
and that the remainder of $16,500 in each year is disallowed. Judgment will issue accordingly.
[3] The second matter which has been appealed is the disallowance of the Appellant's claim for an Allowable Business Investment Loss (an "ABIL") for 1995. Respecting it, the parties filed Statements of Agreed Issues and of Facts, the bodies of which read:
STATEMENT OF AGREED ISSUES
1. Whether the taxpayer is entitled to claim an ABIL in the amount of $45,000 for the 1995 taxation year.
2. Whether the taxpayer is entitled to claim interest in the amount of $5,500 relating to the ABIL expense.
...
STATEMENT OF AGREED FACTS
1. The Appellant initially filed his tax returns for the 1995 taxation year reporting gross business income of $13,010 and claimed various amounts to support a toal (sic) business loss of $89,942 for the year. The total business loss of $89,942 for 1995 included a claim for $60,000 as a "Business Loss".
2. By Notice of Reassessment dated July 4th, 1997, the Minister reassessed the 1995 taxation year to disallow the Business Loss of $60,000. The Appellant objected to the reassessment.
3. By letter dated September 8, 1997, the Appellant revised the net losses claimed in 1995 from $89,942 to $25,442 and claimed an Allowable Business Investment Loss ("ABIL") of $45,000 in 1995 and related interest expense paid to Canada Trust of $5,500.
4. The Appellant elected to have subsection 50(1) apply for the 1995 taxation year.
5. The Minister reassessed the 1995 taxation year to disallow, inter alia, the ABIL of $45,000 and the related interest expense of $5,500.
6. CCRA has no record of any tax returns or information returns filed by Freedom Communications Network.
[4] The assumptions in the Reply to the Notice of Appeal respecting the ABIL read:
11. ...
(f) the Appellant alleged that he paid $60,000 by cheque dated January 22, 1995 to General Telephone and that General Telephone wrote a cheque dated January 23, 1995 payable to Bell Canada;
(g) the Appellant further alleged that for consideration of the $60,000 he paid, he received a promissory note from the Corporation;
(h) the taxpayer did not provide financial statements or other documentation to indicate the financial status of the Corporation;
(i) the Corporation was not a small business corporation within the meaning contained in section 248(1) of the Act;
(j) the Appellant did not invest in the Corporation;
(k) the Appellant alleged that the Corporation was operating as Freedom Communications Network;
(l) the Appellant did not have a bad debt with respect to the Corporation for the taxation years in issue.
[5] 106 was incorporated in Ontario on April 19, 1994 (Exhibit AR-1, Tab 6) by Michael Harris and John Steacy, both of whom were Ontario residents. They were its only shareholders. On July 29, 1994 it registered the business name "Freedom Communications Network" to carry on the business of "Telecommunications Reseller". That is what it did: it bought telephone time from Bell and resold it. Apparently, by January, 1995, it had receivables about $750,000 and owed Bell money which it could not pay. Bell cuts non-payers off of its system, which would mean the end of 106.
[6] 106 was doing some business with General and Mr. Harris asked Mr. Ladd if he knew of anyone who could supply 106 with money. Mr. Ladd contacted Mr. Adams, an airline pilot, who eventually lent $60,000 with interest due at $300 per day. Mr. Ladd drew the documents. The documents were explained by Mr. Ladd as an attempt to secure Mr. Adams. They and his explanations follow:
(1) January 23, 1995 - Cheque from Mr. Adams to General, $60,000, certified. (Exhibit AR-1, Tab 20). (This was because Mr. Ladd was afraid that 106's bank would seize the $60,000 and 106 would be out of business and the $60,000 would be lost).
(2) January 23, 1995 - Cheque from General to Bell Canada (Exhibit A-2). (With this Mr. Ladd felt he could prevent seizure by 106's bank).
(3) Promissory Note (Promissee unnamed) dated 22 January 1995 from 106 with guarantees by Messrs. Steacy and Harris (Exhibit A-3). Mr. Adams saw this, unsigned, before he gave his cheque to Mr. Ladd. (Mr. Ladd drew this and had it executed before he, Harris and Steacy delivered General's cheque to Bell (#2 above)). Bell apparently had some knowledge that General and 106 were doing similar things or were dealing together and for this reason Mr. Ladd felt that General's cheque would be accepted without notice or comment.
(4) Cheque dated November 25, 1995 from 106 to Adams for $78,000 consisting of principal and interest on the promissory note's due date (Exhibit AR-1, Tab 12). This, post-dated, was given by 106 to Mr. Ladd when the note (#3, above) was signed and in turn given to Mr. Adams. The cheque was never presented for payment because by March 25, 1995, 106 was insolvent.
[7] Subsequent to January 23, 1995 Mr. Adams phoned 106 and Mr. Ladd regularly to see how 106 was doing. Things were said to be going well for the first two and one-half months, whereupon 106 developed problems with Unitel which caused it to shut down before March 25, 1995 when The Toronto-Dominion Bank closed it down and seized its assets. A number of dates in evidence followed:
(1) July 19, 1995 - (Exhibit AR-1, Tab 14) 106 failed to file its corporate licence renewal.
(2) April 10, 1996 (Exhibit AR-1, Tab 18) 106 is struck from the Ontario corporate registry.
(3) Mr. Harris appears to be bankrupt as of December 29, 1995 (Exhibit AR-1, Tab 24). Mr. Steacy is believed when he says he cannot pay and the Court further finds that he never could pay.
[8] 106 was a Canadian-controlled private corporation carrying on an active business (with about 11 or 12 employees or sub contractors) in the business of selling telephone time at the time of Mr. Adams' loan of $60,000 to it. All of 106's subsisting business assets were used in the business in Canada. The loan was a bad debt on March 25, 1995 and uncollectible from 106 and from the guarantors. (The interest rate of $300 per day indicates how high-risk it was from the outset). On the basis of the foregoing and the testimony heard, the Court finds that the Appellant loaned the $60,000 to 106 and that the convoluted documents drawn by Mr. Ladd and obtained by him together with the testimony of the witnesses are accepted as satisfactory evidence of that loan.
[9] For these reasons the appeal respecting the allowable business investment loss claimed by the Appellant respecting the loan of $60,000 for 1995 is allowed.
[10] The Appellant is awarded party and party costs.
Signed at Ottawa, Canada this 25th day of September 2000.
"D.W. Beaubier"
J.T.C.C.