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Citation: 2003TCC634 |
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Date: 20030926 |
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Docket: 1999-1876(IT)I |
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BETWEEN: |
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KATHELYN M. BLACK, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Agent for the Appellant: Frederick Black
Counsel for the Respondent: Laura Dalloo
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REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Ottawa, Ontario, on June 27, 2003)
McArthur J.
[1] These are appeals from assessments for the Appellant's 1994, 1995 and 1996 taxation years. The Appellant claimed expenses in these years of $14,001, $14,454 and $15,358, respectively. The Respondent's position is that the Appellant had no business and no source of income and is precluded from claiming the expenditures. The Respondent further contends that if it is found that there was a business, any expenses claimed by the Appellant were not substantiated and were not incurred for the purpose of gaining or producing income from a business or property pursuant to paragraph 18(1)(a) of the Income Tax Act, which states:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
The primary issue in these appeals is whether there was a business.
[2] The facts as presented, and as I find them, are as follows. In 1988 and 1989, Mr. Leslie Black loaned or advanced $6,000 and $15,813, respectively, to or for the benefit of NsC Diesel Power Incorporated (the "corporation" or "NsC").[1] Relatives of Leslie Black had an interest in the corporation which was his motivation to advance funds.
[3] On or about December 1991, the corporation declared bankruptcy. The statement of affairs listed that unsecured creditors were owed over $9 million. Leslie Black died in June 1993 and his wife Kathelyn (the Appellant) together with her son Frederick, continued Leslie's interest in the corporation, which was now in bankruptcy. The trustee in bankruptcy continues to hold the assets, which include a technology agreement valued at $4 million. It is this valuable asset which is the centre of attention. I believe it is technology for diesel engines and in particular, marine diesel engines originally anticipated to be used in Canadian icebreakers.
[4] Evidence was adduced on behalf of the Appellant by Paul H. McKechnie, C.A., and by the Appellant and her son Frederick, who also acted as her agent. During the relevant years, the Appellant has advanced, through Frederick, funds to an entity in Halifax in participation in recovering the technology through litigation and other means. Those efforts apparently continue to this day.
[5] There was no explanation why earlier advances to the corporation prior to bankruptcy were referred to as loans and the subsequent ones referred to as partnership advances in an active business. Also, there was no evidence as to who was attempting the recovery and for what purpose. I believe the original party, the corporation, that purchased the technology is now bankrupt. Frederick stated that he and his mother were in partnership in their efforts, with unknown others I believe in Halifax, to obtain the valuable technology.
[6] In the Appellant's 1994 return, the accountant referred to the $14,001 claimed as expenses as: (a) administration $10,897; (b) office expenses $1,512; and (c) professional fees $1,842 which I believe were the accountant's own fees. In her 1995 return, the expenses are titled: (a) office expenses $2,412; (b) legal and accounting $1,900; and (c) administration $10,642. The 1996 expenses are somewhat similarly described. There was no explanation what "administration" was. I am left to guess it included advances to the corporation. There were also no documents provided.
[7] The accountant's testimony was general in nature and of very little assistance. Obviously, it is very difficult for him to remember details going back seven, eight and nine years, particularly with his having been involved with, I am sure, hundreds of clients in the interim. His credibility is without question. He believes he received a list of expenditures each year and perhaps invoices. He could not recall specifically what the expenditures were for, nor did he have any personal knowledge with respect to the nature of the Appellant's activity. Apparently there were receipts for 1995, however, none were included with the evidence. Frederick stated that Canada Customs and Revenue Agency lost receipts for other years. This was not pursued with any vigour.
[8] The accountant added that some of the expenditures claimed might have been with respect to the Appellant's writing business. She is 81 years old and remains a very talented writer. Small amounts of income were included in the years in question. Mr. McKechnie suggested they may have been from her writing, but they were co-mingled with the activity in question.
[9] No relevant documentation was submitted to assist the Appellant's submission that she was carrying on a business of recovery of technology amongst other assets from the trustee in bankruptcy for the corporation. There are no records such as partnership agreements between or amongst anyone. There was no evidence with respect to who received funds and on what basis. It may have been a loan to relatives. The Appellant is intelligent and alert. While she had difficulty walking and uses a wheelchair, she appears quite capable of looking after her own business affairs. Possibly her business relationship with her son can be described as a partnership, but I believe that would be stretching things. Certainly, there was no evidence that there was a business partnership with persons in Nova Scotia with respect to the bankrupt corporation. Also, there was no evidence as to how the recovery of the technology or other assets would earn income for the Appellant.
[10] On February 6, 1997, Mr. McKechnie wrote the following letter of explanation to CCRA. I will comment as I read the letter on some of its comments:
In late 1989 and the early 1990's, Mrs. Black invested heavily in a Nova Scotia business venture.
My comments include that it was in 1988 and 1989 and it was not the Appellant but her husband Leslie. Also, I do not believe it was an investment but rather, it was referred to as a loan.
The company became insolvent.
In fact, the company went into bankruptcy and Mrs. Black has not made a claim for those losses yet.
The company, struggling with its receiver, is still attempting to recover its assets, pay its creditors and overcome its losses.
I do not believe there is a receiver, but there is a trustee-in-bankruptcy and he must be referring to former corporation officers.
Mrs. Black continues to work with two of the executives of the company as the business struggles to recover and carry on. Her invoices ...
As mentioned above, I saw no invoices:
... and her expenses are slow to be recovered or have not been recovered to date. There is a reasonable expectation that success will be encountered in the near future.
On an ongoing basis Mrs. Black assists in the writing, research, administration and operates the service from her home.
We have collected the supporting ...
In that regard, I add that there was no evidence to support that the corporation is attempting to recover its assets and that Mrs. Black continues to work with two executives of the corporation.
We have collected the supporting documentation for her claim for the 1995 year and it is attached hereto.
Even after hearing the evidence, I do not know what he meant by:
On an ongoing basis Mrs. Black assists in the writing, research, administration and operates the service from her home.
The only writing referred to in evidence was her continuing to write books. This activity should have nothing to do with the matter before me.
[11] In a letter of objection dated November 19, 1998 to CCRA, Mr. McKechnie wrote that:
Kathelyn M. Black and Frederick Black have participated in a partnership identified as NsC:
1) The objective is to develop the equipment business started as NsC Diesel and owned by NsC Corp;
2) The asset development of NsC reached in excess of $15 million ...
3) The equipment business is still not fully operational ...
4) The partnership has operated to develop and protect NsC's assets.
5) To that end the partnership has operated since 1992 with K.M. Black participation commencing in 1993.
There was little or no evidence to support these claims, either from Mr. McKechnie, the Appellant or Frederick. In her returns, the Appellant indicates that she was the sole proprietor of the business, yet the Notice of Appeal refers to a partnership with Frederick, as does Mr. McKechnie. The Appellant also submits that there was a partnership between the Appellant herself and a Nova Scotia entity. The Nova Scotia partners were never identified except as relatives. No documentation was presented that would lead me to conclude that there was partnership.
[12] Counsel for the Respondent referred me to Backman v. The Queen[2] in Tab 10 of her Book of Authorities, paragraph 26, which reads:
Courts must be pragmatic in their approach to the three essential ingredients of partnership. Whether a partnership has been established in a particular case will depend on an analysis and weighing of the relevant factors in the context of all the surrounding circumstances. That the alleged partnership must be considered in the totality of the circumstances prevents the mechanical application of a checklist or a test with more precisely defined parameters.
With this in mind, looking at the totality of the evidence leads me to the question dealing with substantiating of expenses. In this regard, the evidence fell far short and no documentation was presented, such as receipts or evidence of payment. I am left with very inadequate evidence with respect to what money was expended and for what purpose, other than the three headings referred to in the returns. There were no receipts of proof of payment submitted. I was left to guess or speculate that some money was advanced to someone in Nova Scotia for the purpose of earning income. That is not sufficient.
[13] The Appellant suggested that her earlier return was treated differently. In this regard, I refer to Tab 9, paragraph 42 of Admiral Investments Ltd. v. Canada,[3] Exchequer Court, where Cattanach J. stated:
It is well settled that while a decision reached by the Minister in one taxation year may be a cogent factor in the determination of a similar point in a following year, the fact that a concession may have been made to a taxpayer in one year, does not, in the absence of any statutory provisions to the contrary, preclude the Minister from taking a different view of the facts in a later year when he has more complete data on the subject matter. There is nothing inconsistent with the Minister altering his decision according to the facts as he finds them from time to time. An assessment is conclusive as between the parties only in relation to the assessment for the year in which it was made.
I agree with the Respondent's position that the Appellant has not established that there was a partnership, a business or a source of income in accordance with sections 3 and 4 of the Income Tax Act.
[14] There is no need to discuss the timeframe of losses or the principles in the Stewart v. Canada[4] case because the Appellant has not established there was a business. The fact that there were 10-plus years of losses is not conclusive that there was a business. While it is not necessary to proceed further, it is obvious, for the reasons set out earlier, that had I found there was a source of income in a business, there is insufficient evidence to conclude that the expenses or losses were incurred to gain income pursuant to paragraph 18(1)(a) of the Act. For these reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 26th day of September, 2003.
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"C.H. McArthur" |
McArthur J.
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CITATION: |
2003TCC634 |
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COURT FILE NO.: |
1999-1876(IT)I |
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STYLE OF CAUSE: |
Kathelyn M. Black and Her Majesty the Queen |
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PLACE OF HEARING: |
Ottawa, Ontario |
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DATE OF HEARING: |
June 26, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice C.H. McArthur |
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DATE OF JUDGMENT: |
August 7, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Frederick Black |
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Counsel for the Respondent: |
Laura Dalloo |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
-- |
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Firm: |
-- |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |