[OFFICIAL ENGLISH TRANSLATION]
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Date: 20030117 |
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Docket: 2002-637(IT)I |
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BETWEEN: |
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CHAMBLY RADIOS COMMUNICATIONS CELLULAIRES INC., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
______________________________________________________________
Appeals heard on common evidence with the appeals of
Lise Brissette(2002-638(IT)I), on October 24, 2002, at Montréal, Quebec
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Before: Alain Tardif, J.T.C.C. |
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Appearances: |
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Counsel for the Appellant: |
André A. Lévesque |
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Counsel for the Respondent: |
Stéphanie Côté Julie David |
______________________________________________________________
JUDGMENT
The appeals from the assessments under the Income Tax Act for the 1998 and 1999 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment, in that the $7,000 disbursement constituted a business investment loss, in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 17th day of January 2003.
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"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 26th day of February 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
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Docket: 2002-638(IT)I |
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BETWEEN: |
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LISE BRISSETTE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
_______________________________________________________________
Appeals heard on common evidence with the appeals of
Chambly Radios Communications Cellulaires Inc. (2002-637(IT)I)
on October 24, 2002, at Montréal, Quebec, by
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Before: Alain Tardif, J.T.C.C. |
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Appearances: |
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Counsel for the Appellant: |
André A. Lévesque |
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Counsel for the Respondent: |
Stéphanie Côté Julie David |
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AMENDED JUDGMENT
The appeals from the assessments under the Income Tax Act for the 1997 and 1998 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment, in that the appellant did not receive any benefit from the use of a company car, in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 21st day of February 2003.
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Alain Tardif |
J.T.C.C
Translation certified true
on this 26th day of February 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20030117
Docket: 2002-637(IT)I
BETWEEN:
CHAMBLY RADIOS
COMMUNICATIONS CELLULAIRES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2002-638(IT)I
BETWEEN:
LISE BRISSETTE,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] The parties agreed to proceed on common evidence for the two cases. The appeals relate to the 1998 and 1999 taxation years with respect to
Chambly Radios Communications Cellulaires (2002-637(IT)I) and to the 1997 and 1998 taxation years with respect to Lise Brissette (2002-638(IT)I).
[2] The questions at issue are as follows:
Lise Brissette (2002-638(IT)I)
The issue is whether the Minister was justified in adding an amount of $2,941 for 1997 and $8,704 for 1998 as a benefit from the use of a company car.
Chambly Radios Communications Cellulaires Inc. (2002-637(IT)I)
The issue is whether the Minister was correct in refusing the amounts of $7,000 and $50,000 claimed respectively as bad debts and professional fees.
[3] At the commencement of the hearing, the following facts were admitted:
Lise Brissette (2002-638(IT)I)
[TRANSLATION]
(a) The appellant was employed by Chambly Radios Communications Cellulaires Inc. (the "company") during the years at issue;
(b) The company leased a 1998 Audi for the period from August 18, 1997, to August 18, 1999;
(c) Under the leasing contract, the company made an initial payment of $7,042 including GST and QST and monthly payments of $669 including GST and QST;
...
(f) The appellant never filled out a travel log for this car.
Chambly Radios Communications Cellulaires Inc. (2002-637(IT)I)
[TRANSLATION]
(a) The appellant was a subcontractor for Bell Mobility during the years at issue;
(b) All of the appellant's shares were held by Gestion Tecni Plus Inc.;
(c) All of Gestion Tecni Plus Inc.'s shares were held by Lise Brissette;
(d) The appellant claimed a $50,000 expense for prospecting work for the fiscal year ended July 31, 1998;
(e) In October and November 1998, the appellant undertook to acquire a cellular telephone distribution business named Cellulaire Flamand Inc. in the municipality of Sherbrooke;
(f) On November 20, 1998, a new entity was incorporated under the name R.C.C.S. Sherbrooke Inc., of which all of the shares were held by Gestion Tecni Plus Inc.;
(g) Once it was incorporated, the new entity began operating its business in the premises previously occupied by Cellulaire Flamand Inc.;
(h) On November 20, 1998, R.C.C.S. Sherbrooke Inc. invoiced the appellant for an amount of $50,000 for prospecting fees;
(i) On December 9, 1998, Cellulaire Flamand Inc. declared bankruptcy.
[4] The appellant began by explaining that she had never used the 1998 Audi leased by Chambly Radios Communications Cellulaires Inc. for personal purposes.
[5] She argued that the car had been used for the sole benefit of the company's commercial activities.
[6] She indicated that she had commuted, without exception, between the place of business and her home by using another company car, which her spouse sometimes used for personal reasons. She indicated that these were long trips, that is, over 1,000 kilometres per week, which were always made with the car used by the appellant's spouse.
[7] The appellant also stated that the 1998 Audi that was the subject of the assessment was left inside the company garage, which was used during business hours for the installation of cellular telephones and other electronic equipment.
[8] Léo-Paul Dumont, the auditor on the case, explained how the calculations leading to the assessments had been made. He based his calculations on the entirely opposite and rather surprising assumption that the car was used totally and exclusively for personal purposes.
[9] With respect to the information concerning this aspect of the case, he referred to discussions with the appellant's accountant. The accountant, Michel Desmarais, categorically denied discussing this subject with the auditor.
[10] Lise Brissette acknowledged that she did not have a descriptive record of the number of kilometres travelled with the Audi, hastening to add that it was used exclusively for business purposes and that she had never made personal use of it.
[11] Although keeping a record is not mandatory, it is very useful in establishing the personal use that a person has made, particularly if the car has two different purposes.
[12] In this case, the question of the record is not relevant since the appellant submitted that she had never used the car for personal reasons even to a small degree. For his part, the auditor argued for unexplained reasons that the car had been used for personal reasons only and even that it had not been used for business at all.
[13] It appears on a balance of probabilities that the appellant's work, beyond the shadow of a doubt, required numerous business trips involving a certain number of kilometres, moreover consistent with the kilometrage taken into consideration by Mr. Dupont.
[14] I must therefore choose between two contradictory versions: that the car was used for essentially private or personal purposes and that it was used exclusively for business purposes.
[15] Although there may be some doubt that the Audi, which is clearly more pleasant, comfortable and luxurious, was never used for personal purposes, I have chosen the appellant's version for the following reasons:
· the respondent collected the data used from the worksheets of the business' accountant;
· the burden of proof is a balance of probabilities and not beyond a reasonable doubt;
· the appellant was responsible for managing and efficiently operating the commercial activities for which the places of business were located in different cities, necessarily requiring regular business travel;
· the appellant provided a plausible explanation for the manner in which her private travel needs were met, that is, by sharing the car her spouse used;
· the personal kilometrage on which the auditor's calculations were based in no way corresponds with the evidence adduced;
· there was no evidence that would support or justify the validity of the information behind the auditor's calculations;
· agreeing with the auditor's contention would mean that the Audi was a very special vehicle used solely for personal reasons when there is absolutely nothing in the evidence that would lead to this conclusion.
[16] In Chambly Radios Communications Cellulaires Inc. (2002-637(IT)I), the issue is whether the Minister was correct in refusing the amounts of $7,000 and $50,000 claimed respectively as bad debts and professional fees.
[17] Lise Brissette, key stakeholder in Chambly Radios Communications Cellulaires Inc., described the field in which the appellant company operated, that is, sales and installation of all of the communications products offered by B.C.E., specifically, in cellular telephones sales.
[18] Informed about a viable opportunity to develop her sales network through the acquisition of a business operating in the same field in Sherbrooke, she initiated contact and entered into agreements with the management of the business in question, Cellulaire Flamand Inc. At that point, Cellulaire Flamand Inc. was experiencing serious financial difficulties to the point that it could not renew its inventory.
[19] The appellant Chambly Radios Communications Cellulaires Inc. agreed to cooperate by providing the necessary merchandise in order to keep the business operating in view of its future acquisition.
[20] Aside from this interest in maintaining the business' operation so that she could later acquire it, the appellant was also interested in stimulating sales, given that she earned recurring rebates or royalties on all new subscriptions sold by Cellulaire Flamand Inc.
[21] Lastly, the experience gave her an opportunity to learn more about this new potential market in which she ultimately wanted to do business.
[22] At one point, Cellulaire Flamand Inc. had all of its bank accounts seized or frozen, completely paralyzing its commercial operations. The appellant was therefore asked to loan $7,000 to pay the employees, which she agreed to do. She wrote a cheque to the order of Martin Gaudette dated November 19, 1998 (Exhibit A-1), which was deposited to pay the employees, and on which was inscribed [TRANSLATION] "for deposit only to the account of Cellulaire Flamand (1994) Inc. 3094-6172 Inc.".
[23] The appellant argued that this was a valid loan made for a specific purpose in that it enabled her to continue a profitable business relationship; it consolidated her plan to invest in the region. Moreover, she obtained direct and immediate benefits from selling equipment and new subscriptions through Cellulaire Flamand Inc.
[24] The respondent argued that the $7,000 was in fact a loan made to Mr. Gaudette personally and that there was nothing to indicate that this amount was lost or could not be recovered. According to the respondent, this was confirmed by the fact that the appellant had not filed a proof of claim in Cellulaire Flamand Inc.'s bankruptcy.
[25] The specific circumstances at the time justify and explain that a cheque was made out to one of the executives of Cellulaire Flamand Inc. to ensure that the proceeds of the cheque would not be used for purposes other than the employees' salaries. I have no reason not to accept the explanations that were given, especially since they are in keeping with practices that, while debatable, are common.
[26] The $7,000 disbursement was made for a specific purpose and with the intention of profit. Not only was the loan expected to generate positive and direct benefits, it did in fact yield profits since the appellant earned recurring rebates on all subscriptions sold by Cellulaire Flamand Inc.
[27] No decisive conclusions can be drawn from the fact that the appellant did not complete a proof of claim in Cellulaire Flamand Inc.'s bankruptcy; in many instances, creditors realize that attempting to recover their debt is a useless exercise.
[28] The respondent forcefully argued that the party that owed the $7,000 debt was not Cellulaire Flamand Inc., which made an assignment of its property, but Martin Gaudette, to whom the cheque was made out. On the basis of that assumption, the respondent concluded that the debt was not unrecoverable.
[29] In support of its position, the respondent stated that the transaction had to be understood in its literal sense and not in light of the intention behind it. I agree with this contention, although I do not believe that it warrants such a rigid interpretation.
[30] The context and all of the circumstances must not be overlooked in assessing the nature of a transaction. An overly conservative and rigid approach could often paralyze the ordinary course of business. It would then be necessary to call on experts in order to draft all administrative documents.
[31] I do not accept the respondent's interpretation, especially since it is not supported by any evidence; however, the appellant's explanation is coherent, plausible and in keeping with a practice that is consistent with the ordinary course of business in the circumstances prevailing at the time. With respect to the restrictive interpretation argued by the respondent, it is contrary to a highly interesting decision in this area. In Byram v. Canada, [1999] F.C.J. No. 92, A-84-94, McDonald J. writes as follows:
16. The language of section 40 is clear. The issue is not the use of the debt, but rather the purpose for which it was acquired. While subparagraph 40(2)(g)(ii) requires a linkage between the taxpayer (i.e. the lender) and the income, there is no need for the income to flow directly to the taxpayer from the loan.
[32] In conclusion, the evidence showed that the appellant, in addition to having an interest in the situation, was and had been benefiting from the situation. The balance of probabilities does not support the respondent's ultra-conservative interpretation. I thus conclude that the $7,000 disbursement was a loan, a debt that was owed to her and that subsequently proved to be unrecoverable as a result of the bankruptcy.
[33] With respect to the last point at issue, the appellant explained that she had spent $50,000 on prospecting and making studies and various analyses. The evidence did in fact reveal that the appellant had shown an interest in the idea of operating another business in her field of expertise in the Sherbrooke area and that a new business had in fact been established there.
[34] Before the new business was created, the appellant participated in an active and dynamic way in Cellulaire Flamand Inc.'s activities before its bankruptcy; she supplied the company with inventory that it could not renew because of its precarious financial situation.
[35] The experience and the ties with Cellulaire Flamand Inc. undoubtedly enabled her to draw some favourable and worthy conclusions since a new business was later established. The creation of the new entity was the subject of an invoice for professional fees in the amount of $15,700.91 billed by Michel Desmarais, an accountant with Multi-services Pierre Lambert Inc. (Exhibit I-1).
[36] Aside from this amount of $15,700.91, the appellant claims to have disbursed $50,000 substantiated by an overall statement of account (Exhibit A-2). The statement for $50,000 issued this time by the new company was broken down as follows:
R.C.C. SHERBROOKE INC.
2700 King Street West
Sherbrooke, Quebec J1L 1C5
...
Prospecting work:
Opening of file
- Market analysis
Study of clientele
Study of target products
Study of human resources
Study of municipal legislation
Study of ratios
Study of inventory
- Analysis of future profitability
- Closing of file
Amount: $50,000
...
[37] The evidence regarding what the $50,000 disbursement represented and why it was made was very brief and superficial. The main argument was that this amount had been posted as expenses for the appellant and as income for the new company.
[38] This argument was not very convincing, especially since it is difficult to imagine that a new company would have earned revenues from prospecting and making studies and analyses before or at the point of being incorporated.
[39] Was this amount spent to generate profits or benefits for the appellant in connection with her economic objective? The evidence indicated that the $50,000 disbursement had no direct or indirect effect on any potential profit but essentially served to reduce her earnings and the resulting tax burden. The expected profits or earnings were in no way intended for her but ultimately for the benefit of the new legal entity.
[40] This was not an expense but rather an advance disguised by vague and imprecise explanations that certainly did not justify such a disbursement. Moreover, the statement in the amount of $15,700.91 (Exhibit A-4) included some fairly similar elements.
[41] The $50,000 disbursement benefited the company that received it; it strengthened and enhanced its financial situation, thereby ensuring its profitability more quickly.
[42] The profitability of the $50,000 disbursement cannot be attributed to the appellant since the amount was nothing more than a cash advance justified by the fact that the two entities concerned had the same shareholders and directors.
[43] In light of the evidence, I conclude that the $50,000 disbursement was simply a cash advance or a transfer of funds that enabled the new company to start off on the right foot. For those reasons, the appellant could not claim an expense associated with her operations.
[44] With respect to the appellant's request concerning the impact of this decision on the operations of the company that benefited from the $50,000 disbursement, I cannot satisfy it, since the appeal concerns the appellant exclusively. It involves the manner in which she handled the expense. Accordingly, I have no jurisdiction with respect to the other taxpayer, that is, the company that received it. As well, this would mean rendering a judgment on assumptions regarding an entity that is not involved in this case.
[45] For all of these reasons, the appeals are allowed in the case of Lise Brissette in that the appellant did not receive any benefit from the use of a company car.
[46] With respect to Chambly Radio Communications Cellulaire Inc., the appeals are allowed in that the $7,000 disbursement constituted a business investment loss, without costs.
Signed at Ottawa, Canada, this 17th day of January 2003.
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"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 26th day of February 2003.
Sophie Debbané, Revisor
COURT FILE NUMBERS: 2002-637(IT)I and 2002-638(IT)I
STYLES OF CAUSE: Chambly Radios Communications Cellulaires Inc.
and Her Majesty the Queen, and
Lise Brissette and Her Majesty the Queen
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: October 24, 2002
REASONS FOR JUDGMENT BY: Judge Alain Tardif
DATE OF JUDGMENT: January 17, 2003
APPEARANCES:
Counsel for the appellants: André A. Lévesque
Counsel for the respondent: Stéphanie Côté
Julie David
COUNSEL OF RECORD:
For the appellants:
Name: André A. Lévesque
Firm: Counsel
City: Bonaventure, QC
For the respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada