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Docket: 2002-336(IT)G |
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BETWEEN: |
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DELBERT CURTIS, |
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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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Appeals heard on February 9, 2004 at Kitchener, Ontario.
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Before: The Honourable Justice T. E. Margeson |
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Appearances: |
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Counsel for the Appellant: |
A.E. Robinson |
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Counsel for the Respondent: |
Peter M. Kremer, Q.C. and Nicolas Simard |
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JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1995, 1996 and 1998 taxation years are dismissed, with costs to the Respondent, on the basis of one counsel only.
Signed at Ottawa, Canada, this 16th day of March, 2004.
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"T. E. Margeson" |
Margeson, J.
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Citation: 2004TCC156 |
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Date: 20040316 |
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Docket: 2002-336(IT)G |
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BETWEEN: |
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DELBERT CURTIS, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Margeson, J.
[1] In reassessing the Appellant's 1995, 1996 and 1998 taxation years by concurrent Notices of Reassessment dated July 10, 2000, the Minister of National Revenue ("Minister") denied losses claimed by the Appellant of $3,135, $38,199 and $318 claimed in 1995, 1996 and 1998, respectively, on the basis that no non-capital loss was available to be applied in those years. From these assessments, the Appellant took this appeal.
Evidence
[2] The Appellant, Delbert Lyle Curtis, testified that in the spring of 1994 his son approached him as he needed money to assist in the purchase of an Arby's Restaurant franchise ("Arby's"), in Owen Sound, Ontario. The father agreed to assist him but he told him that he would have to mortgage his house in order to acquire the funds needed.
[3] He obtained the services of a lawyer to prepare the mortgage. The money was borrowed from the Canadian Imperial Bank of Commerce ("CIBC"). The son was to make all of the payments on the mortgage. The Appellant's wife also had to sign the mortgage as the house was in both their names. She had to obtain independent legal advice.
[4] Exhibit A-1 was admitted by consent and at Tab 13 of that Exhibit there was a copy of the mortgage document dated October 6, 1994. This mortgage was in the amount of $131,250 with payments to be made at the rate of $1,285.93 per month. In the application the interest rate was listed at 11.25% per annum but more particularly described in a schedule to be at 8.75%, apparently the prime rate, together with 2.5% per annum. The mortgage was signed by the Appellant and his wife.
[5] The monthly payments were made by the Appellant's son, Dwayne, until such time as he went into bankruptcy.
[6] Exhibit A-1, Tab 19 was a copy of a promissory note signed by Dwayne Lyle Curtis in favour of the Appellant and his wife for $131,250 and interest at the prime rate plus 2¼%.
[7] The Appellant said that there was also a verbal agreement that "after he got on his feet, he would pay us something for travelling".
[8] At Tab 24 was a document entitled "Re: Promissory Note Dated [the] 7th day of October 1994".
[9] This document said as follows:
This is to confirm that all terms and conditions of the above promissory note shall apply since I, Dwayne Lyle Curtis, have become incorporated as:
Dwayne Curtis Restaurants Inc.
Arby's Heritage Place - City of Owen Sound
Dated at Owen Sound, Ontario this 9th day of April 1995.
[10] The witness said that Dwayne Lyle Curtis made the payments out of the Arby's account at the commencement and then after he became incorporated the payments came out of the company account. The company made all of the payments until the bankruptcy took place and then his son made one more payment on his own.
[11] The Appellant took over the payments and he tried to sell his house but it took him three years to do so.
[12] Tab 3 was the T-1 General return of the Appellant for the year 1997. At line 228, he claimed a gross business investment loss of $121,847.73 and an allowable deduction of $91,385.80.
[13] The $121,847.73 represents the balance owing on the mortgage up to the time of the bankruptcy. The Appellant then said that his son made no extra payments to him.
[14] In cross-examination he said that the business was not incorporated when he made the loan. He never was a partner at any time in the business. He never became a shareholder. He never reported any income from the note in 1995, 1996 or 1997. He made no profits from this transaction. The interest rate shown was lower than the mortgage rate. That was an error. There was a one-quarter percent difference in the two rates. They were trying to set the same rate on the mortgage to him and his wife as on the mortgage to the bank. There was never any intention to pay him interest on the note. They did not discuss any details when they made the verbal undertaking. He did not know when they would receive any extra payments. The business had to make more money than what it had to pay out before the Appellant could receive any extra payments.
[15] There was no agreement or understanding as to how much the son could take out of the business by way of salary or profit before he was free to pay something to the father and his step-mother. He received no other fee.
[16] It was suggested to him that he would not have mortgaged his property had it not been his son who was seeking his assistance. He said, "I can't say that. If there was a good offer, I might do it". Then he said, "Probably not".
[17] With respect to the document at Tab 24, he made it up with his son. He said that the original applied. His intention was to have the corporation as a debtor.
[18] In redirect, he referred to Exhibit A-1, Tab 10, the Annual Mortgage Statement for the year ending December 31, 1997. The interest rate was listed at prime (7%) plus 1.5%. This was the rate at the end of that year. He did not know about what the rate was for the balance of the year.
[19] The payment was always the same. When asked when he would receive the extra payment, as earlier referred to, he said: "When Arby's became profitable. I had no agreement if he (the son) would receive a salary before I got anything".
[20] Dwayne Lyle Curtis testified that he was an employee of Honda Canada. He has always paid taxes in Canada. He is the son of Delbert Curtis, the Appellant. In 1994 he was working at Arby's in Owen Sound, Ontario with two other partners. He then became the sole owner and approached his father about assisting him financially. His father and his step-mother backed him financially to the extent of $131,250 or thereabout. In September, 1994 he became the owner and the first payment was made on the mortgage in October.
[21] When asked about the deal he said that it was around $131,000 and he was to be responsible for repaying the debt. There was a promissory note. Once the business was established and monies were coming in the Appellant and his wife could expect "something in return".
[22] The note at Tab 19 dealt only with the amount of money borrowed. It did not deal with what would happen if the store did well. The business paid every payment until the bankruptcy took place and then his father took over the payments.
[23] The document at Tab 14 contained the financial statements for Arby's Heritage Mall as at March 31, 1995. The last page indicated the unpaid balance owing to his father which was standing at $129,049.
[24] The purpose of the document at Tab 24 was to provide that all of the terms of the original note would be carried forward.
[25] Tab 15 was an authorization for the bank payments to be made out of the corporate account. The shareholders of the incorporated body were his ex-wife, Trish, and him.
[26] He was asked what happened in regard to the matter and he said that the business did well until 1996 when the new mall owners prohibited smoking in the mall. Sales dropped off by 30% due to the smoking ban and one of the anchor stores moved out of the mall.
[27] In 1997 he told his father that he was going to have to go into bankruptcy. Tab 15 is a copy of the Bankruptcy Notice. All of his records went to the Trustee and he did not try to get them back.
[28] Tab 22 was a financial statement of the incorporated restaurant dated September 4, 1997. It showed a balance owing to his father on the mortgage of $121,848. One year later he went into personal bankruptcy.
[29] In cross-examination he said that he never made any interest payments to his father. He went to his father for the financing because he did not believe he could get a loan personally from the bank. Any responsibilities that he had under the first note were to be carried on in the second so-called note found at Tab 24. His father prepared it and gave it to him. When he signed the second document he believed that he relieved himself of any personal liability. He made one personal payment after the bankruptcy. He felt a "guilt".
[30] The document never stated that he was relieved personally from the liability. There was no documentation that the corporation was taking over the debt. There was no agreement as to how much he might draw from the business before his father would be paid anything extra.
[31] In redirect, he was asked what his understanding was of when he would make an extra payment to his father. He said there was nothing definite, only when the company was profitable. That meant that when everything else was caught up and all their bills were paid.
[32] Debra Leanne Curtis was the daughter of the Appellant and sister of Dwyane Lyle Curtis. She was aware of the fact that her father had made an investment in Dwayne Lyle Curtis's business. They met and the brother told her about the business. She knew the conditions were that all of the mortgage payments would be made by the son and the father would obtain some return after the business got on its feet. The discussion took place before the mortgage was placed. She was not privy to the details. Her step-mother died in April, 1996.
[33] In cross-examination she said that her father's actions amounted to an investment. Her understanding was that they would have to mortgage their house and give the funds to the brother. She considered it to be an investment in which her father and step-mother could expect money over and above the payments when the business got profitable. When pressed, she said that her father said that he would get some money afterwards. It was an investment and not a loan.
[34] Exhibit A-2 was admitted by consent. This was a certificate of status for the incorporated body.
Argument on Behalf of the Appellant
[35] Counsel for the Appellant said that there is a very narrow issue in this case. That issue can be found under subparagraph 40(2)(g)(ii) of the Income Tax Act, ("Act").
[36] He characterized the question, "was the debt incurred by the taxpayer to produce income?" He answered the question in the positive and said that the son, and later the company, would make the payments plus an extra amount, if possible, and this was the consideration for making the investment. The parties agreed to these terms. The original documents were flawed and the intention was to make the terms of the note signed by the son to be the same as the terms of the mortgage.
[37] The second document was a document showing the assumption of the mortgage by the incorporated body. The son made all of the payments until the incorporation and then the company made the payments. This was consistent with the explanation of the business deal which was given by the Appellant and his son.
[38] The terms of contracts do not have to be in writing, there can be verbal conditions as well. He referred to the case of Grand Trunk Railway Co. of Canada v. Fitzgerald (1881), 5 S.C.R. 204, in support of this proposition. He admitted that the decision in Lowery v. M.N.R., [1986] T.C.J. No. 740 (Q.L.), Court No. 84-1927(IT) created a problem for him. In that case the Court decided that there was no business purpose in the granting of the guarantee. The Court held that the involvement of the taxpayer bore none of the hallmarks of a commercial or business transaction.
[39] Likewise, the case of Ena M. Casselman v. M.N.R., 83 DTC 522, came to the same conclusion. The motivation was the mother's desire to help the son and there was no business purpose. It was not done for the purpose of gaining or producing income.
[40] However, with respect to Lowery, supra, the trial judge had determined that there was no agreement, oral or written, setting out the terms and conditions of the Appellant's participation. That was not the case here.
[41] He relied favourably upon the case of Burns v. Canada, [1994] T.C.J. No. 26 (Q.L.), Action Nos. 91-2290(IT)G, 91-2291(IT)G and 91-2289(IT)G. There, the trial judge concluded that the facts of that particular case did not justify a finding of the sort in Lowery or Casselman, supra, where the loans were made only for the purpose of assisting a family member and were totally without any business component.
[42] He relied upon the case of McKissock v. Canada, [1996] T.C.J. No. 1192, Court File No. 96-593(IT)I. There the Court found in favour of the taxpayer and found the requisite business purpose even though there was no consideration. The business in that case could have provided some income to the father as a consultant even though the father did not know when or how much.
[43] In Corriveau v. Canada, [1998] T.C.J. No. 1068 (Q.L.), Court File No. 95-1888(IT)G, the Court held that there may be more than one "main purpose" that may give the requisite business purpose.
[44] In Aylward Estate v. Canada, [2001] T.C.J. No. 391 (Q.L.), Court File No. 98-2015(IT)G, the Court found that the taxpayer did not personally guarantee the debts and consequently payments to the two creditors may have been a voluntary action. The Court still held that the taxpayer was entitled to the business investment loss. Counsel used this case to demonstrate his position that the Court has some latitude in these matters. In Lowery, supra, there was no agreement to pay any set amount as there was in the case at bar. He again asked the question, "was one of the purposes to obtain a future gain?" Here, one of the purposes was to gain interest. There was some agreement to pay something.
[45] He admitted that there was no documentation with respect to assumption of the debt by the corporation but he said that the action of the shareholders and the action of the company in paying back some of the debt was enough to bind the company.
[46] He submitted that the appeal should be allowed, with costs.
Argument on Behalf of the Respondent
[47] In addition to the cases referred to in the Appellant's Book of Authorities, counsel for the Respondent relied upon the case of Blanco Estate v. R., [1998] CarswellNat 390 and 98 DTC 1678.
[48] In the case at bar there was only an informal understanding as to what the Appellant might get back. There were no details. He relied upon Lowery, supra, in support of this argument and said that the taxpayer and the corporation here had a chance to write in the terms but the document remained silent with respect to profits. If there was an oral agreement, there were no particulars.
[49] He agreed that the real question was whether or not the purpose of the loan was to gain income. However, he did not agree that it was sufficient for the Court to find that the need to gain income need not be the main purpose but one of the purposes. He argued that it has to be the main purpose.
[50] In Blanco Estate, supra, McArthur, T.C.J., concluded that the Act requires that a loan be made for the purpose of earning income. The facts must be examined at the time the loan was made. The Court held that the loan was a family loan and the Appellant's primary concern was to assist her family.
[51] The Appellant had the burden of proving that he granted the loan for the purpose of earning income. He did not meet that burden. The main purpose has to be to gain income.
[52] Counsel opined that if the borrower had not been the son of the lender in the case at bar, he would not have issued the loan and certainly not on those terms.
[53] In Strecker v. R., 95 DTC 3 (T.C.C.), the Court held that it was not sufficient to make a general allegation that the Appellant anticipated some participation in the profits of the company at some unstated time in the future. There has to be some consideration for the guarantee that existed. There was no arrangement as to interest in that case. There was no arrangement relative to repayment in the event of default by the company.
[54] In dealing with the future participation argument the trial judge relied upon the statement of Judge Sarchuk, as he then was, in Lowery, supra, wherein he dismissed the appeal.
[55] The appeal should be dismissed with costs.
Analysis and Decision
[56] The Court is satisfied that in order for the advance in this case to be deductible under subparagraph 40(2)(g)(ii) of the Act, it must be satisfied that the Appellant has established on a balance of probability, on the facts, that the borrowing of the money from the CIBC and payment of the interest thereon were "for the purpose of gaining and producing income". The Court is satisfied that the appropriate time to consider this "purpose" is the time that the loan was made.
[57] In some of the cases, and in this case, counsel used certain modifying words before the word "purpose". Some of the words that have been used are main purpose, primary purpose and principle purpose. However no such modifying words are found in the legislation.
[58] The Court is satisfied that in the cases that use some of those terms, they are not intended to be a modifier but were merely used for the purpose of generally describing what the parties intended. The Court is not satisfied that any particular assistance can come from defining the word "purpose" this way.
[59] In that regard, it is interesting to note that at no time was any question asked of any witness with respect to primary, secondary, main or multiple purposes. Even if the question had been asked and if some evidence had been given that one of these terms was used by the parties, it might not necessarily be conclusive in any event. What is most important is the action of the parties and the documents that they used for the loan.
[60] The only purpose that could be gleaned from any of the documents was that the purpose of the loan was to enable the taxpayer's son to go into business. None of the documents provide anything more than the bare statement that the father would be repaid on the basis of the mortgage made in favour of the CIBC. This particular document provided a set rate of interest and a set payment. There was no documentation to support the Appellant's position that he could be expected to earn additional interest. Indeed, there would appear to be no likelihood that he could since the amount of interest charged to the debtor was not greater that the amount of interest to be paid to the bank. Again, no income was earned on the loan in that regard.
[61] The only evidence of any nature which would even suggest that the Appellant entered into this arrangement on the basis of a commercial or business transaction, was the viva voce evidence of the Appellant, his son and daughter. That was to the extent that if the company were to profit, then the Appellant at some time in the future, if and when profits were made, might receive something. There was no specificity as to how much this might be, how it might be paid or when it might be paid. This amounted to nothing more than a wish or hope as far as the Court is concerned and obviously could not have been a primary concern to the taxpayer when he entered into the loan.
[62] The Court is satisfied that a taxpayer might very well have several purposes in mind in making or guaranteeing a loan. But one of those purposes must be for the purpose of gaining or producing income.
[63] The Court is satisfied that it is not sufficient merely to state, as a matter of fact, in some general way that the taxpayer was to receive something in the event that the company made money. As in Lowery, supra, the manner in which the taxpayer participated in the securing of the loan in favour of the bank ensured that that institution would gain upon its investment.
[64] It was the taxpayer's duty to show that this was his purpose at the time of the granting of the loan. There was a large amount of money involved in this matter. In light of the knowledge of the Appellant and the son with respect to how the bank intended to secure its position, this dictated that if the taxpayer entered into the loan for the purposes of gaining or producing income, he should have found some means of expressing the intention in some more meaningful way than an after the fact statement that he hoped to receive something from it in the event that the company prospered.
[65] The best case scenario for the Appellant, of course, is Blanco, supra. Even there, as sympathetic as the trial judge was, struggling to find in favour of the Appellant, he could not do so. Just like McArthur, J., this Court cannot ignore the fact that this was a family loan and the intention of the Appellant was to assist his son. Had there been any documentary evidence in the way of schedules, statements or timetables which purported to show any possible income which might accrue to the Appellant, the result may have been different.
[66] The Court is satisfied that all of the witnesses were straightforward in their evidence and attempted to tell it as it was. At the end of the day, looking at all of the facts, and drawing any reasonable inferences that the Court is entitled to do, the Court cannot help but find that in essence, this was a family loan advanced for the purposes of assisting the son. The father did not have any intention, at the time of the making of the loan, of obtaining income from it, at least to the extent that one could have considered it to have been commercial in nature.
[67] As in Blanco, supra, the Court has great sympathy for the taxpayer but cannot ignore the facts or disregard the failure of the Appellant, in establishing on a balance of probabilities, that the purpose of the loan was to gain or produce income.
[68] Regretfully, the appeals will have to be dismissed, with costs to the Respondent, on the basis of one counsel only. The assessment is confirmed.
Signed at Ottawa, Canada, this 16th day of March, 2004.
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"T. E. Margeson" |
Margeson, J.
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CITATION: |
2004TCC156 |
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COURT FILE NO.: |
2002-336(IT)G |
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STYLE OF CAUSE: |
Delbert Curtis and Her Majesty the Queen |
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PLACE OF HEARING: |
Kitchener, Ontario |
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DATE OF HEARING: |
February 9, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice T.E. Margeson |
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DATE OF JUDGMENT: |
March 16, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
A.E. Robinson |
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Counsel for the Respondent: |
Peter M. Kremer, Q.C. and Nicolas Simard |
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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 |