Date: 19980324
Docket: 95-4042-IT-G
BETWEEN:
EVA MAY BLANCO,
EXECUTRIX OF THE ESTATE OF JOHN HENRY BLANCO, DECEASED,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur, J.T.C.C.
[1] The Appellant herein is Eva May Blanco, in her capacity as Executrix of the Estate of John Henry Blanco, her late spouse, who died on January 10, 1995. She seeks to deduct the amount of $71,938 for the 1991 taxation year, as an allowable business investment loss (ABIL), which deduction was disallowed by the Minister of National Revenue.
[2] In 1989, the Appellant loaned $100,000 to a corporation, 50% of which was owned by her daughter and son-in-law. The corporation used the money to acquire the Malibu Bar and Grill, a bar/restaurant business which failed in 1991. The Appellant lost the amount of $100,000 and the issue in this appeal is whether the loan was made for the purpose of gaining income pursuant to subparagraph 40(2)(g)(ii) of the Income Tax Act.
[3] The facts in this appeal are substantially not in dispute and are as follows. Mr. Blanco was mentally incompetent for several years prior to his death, including the period of time giving rise to the transaction which led to this appeal. Mrs. Blanco implemented the relevant transaction on behalf of her spouse by virtue of a Power of Attorney granted to her in September, 1986. Mr. and Mrs. Blanco ran a successful farm for over 30 years. They sold the farm in 1981 when Mr. Blanco appeared to have been in the early stages of Alzeimer's and they moved to Winnipeg.
[4] The Appellant's daughter, Teresa, her husband, Roman Haderer and their three children lived rent-free, from about 1984 until the early 1990's in a home owned by Mr. and Mrs. Blanco. For most of that period, Roman and Teresa were unemployed and not only did they live rent-free but Mrs. Blanco paid, for the most part, the taxes and utilities on the property and advanced money as well for groceries and other necessities to support Teresa and her family.
[5] In August 1989, Roman was introduced to a restaurant business available for sale by his brother, Richard Haderer, who was a real estate agent and Mrs. Blanco was approached to lend the amount of $100,000 to assist in the purchase of the business. Richard was a real estate agent in the Winnipeg area for over ten years and Mrs. Blanco knew him from previous, a business experience with respect to the construction of her home. She trusted him explicitly and on the basis that he would get involved with the restaurant operation, she felt comfortable with the loan. She indicated that she wanted an interest rate of 12% per annum on this loan because she was required to live on the interest. She admitted in evidence that the primary purpose of the loan was to assist Teresa and her family with the expectation that she was creating jobs for Teresa and Roman and she would no longer have to support them.
[6] In 1989, 2483981 Manitoba Ltd. was incorporated by Roman and Teresa Haderer and Philippa Haderer, Richard Haderer's spouse, Roman being the president and Philippa being the secretary. The company acquired the Malibu Bar & Grill in September 1989 and the Appellant advanced the amount of $100,000 from personal cash reserves of her spouse to the company for the purpose of completing the purchase transaction. The uncertainty as to the terms of the loan gives rise to this appeal.
[7] The solicitor for the company prepared a promissory note which was completed in three versions. The Appellant urged me to accept the following Promissory Note:
"Promissory Note
2483981 MANITOBA LTD. promises to pay to Eva Blanco the sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) together with interest at the rate of 12% calculated half-yearly not in advance by equal annual instalments of TWENTY THOUSAND DOLLARS ($20,000.00) each plus accrued interest commencing September 15, 1990 and continuing thereafter annually up to and including the 15th day of September, 1994 when the full amount is due and payable.
DATED the 15 day of September, 1989.
2483981 MANITOBA LTD.
PER: Roman Haderer, pres.
Per: P. Haderer, sec."
This note was never delivered to the Appellant and the solicitor for the company had writtren "inoperative" on the original note. A second version of the promissory note entered as Exhibit A-1 is dated September 1989, does not include a specific day nor an interest rate and is executed by only one officer of the company. The third version entered as Exhibit A-1 is dated September 15, 1989, does not include an interest rate but is executed by Roman and Philippa.
[8] The Appellant received no personal guarantees from the principals of the company, nor did she obtain any legal advice. She advanced the $100,000 to the trust account of the company's lawyer in September 1989 without receiving any documentation, promissory notes or other security. She trusted the parties and she released the funds as she would have done to a chartered bank or trust company for the purchase of a guaranteed investment certificate. She anticipated earning 12% interest which she required for living expenses and she stated the loan was motivated to assist her daughter and family.
[9] The solicitor for the company arranged to have a debenture in favour of the corporation registered in the Personal Property Registry for Manitoba. The debenture at 0% interest was intended to provide security to the Appellant for her capital. Also, the debenture was not executed, nor agreed to, by Mrs. Blanco. The solicitor for the company explained in evidence that an interest rate other than 0% was intended but something lower than 12% was being negotiated with Mrs. Blanco. Also, Richard Haderer stated in evidence that subsequent to the 12% interest rate agreed upon, he and Roman negotiated a 10% interest rate with Mrs. Blanco and the debenture was registered to protect her capital.
[10] At no time did the company make any payments to Mrs. Blanco toward either the principal amount of the loan or the interest thereon. In September 1990, Mrs. Blanco arranged for a solicitor to write a collection letter to the company, demanding payment of the principal, without mention in that letter of interest. In 1991, the company's restaurant business failed and the company became insolvent, making the loan uncollectible. It appears that Roman was incapable of operating the restaurant and at the time the business failed, Roman and Teresa separated.
[11] At the time the funds were advanced, Mrs. Blanco was satisfied that the restaurant would provide work for Roman and she assumed that the business would be supervised by Richard Haderer. Also, she expected to receive monthly or quarterly payments. When no payments were received after the first three months, she spoke to Roman at the restaurant, with no result. Later in 1990, she arranged for a demand letter to be sent to the company, requesting payment of the $100,000 pursuant to the terms of the debenture.
Analysis
[12] There is no dispute that there was an enforceable loan. The question is whether the loan was made for the purpose of gaining or producing income pursuant to subparagraph 40(2)(g)(ii) of the Act, which states that a taxpayer cannot claim any amount unless the loss from the disposition of the debt was acquired for the purpose of gaining or producing income from a business or property.
[13] The Appellant is a kind and giving person who assisted her daughter and family over the years from her investment income. When Roman and Richard approached her in August 1989, Richard presented her with projections of income from the restaurant business demonstrating to her how the restaurant could generate sufficient income to repay her loan together with interest thereon. She relied on this advice and advanced the funds. She trusted the borrowers beyond what they deserved and she cannot be faulted for that, but I cannot escape reality.
[14] The Act requires that a loan be made for the purpose of earning income. I have no difficulty in finding that the Appellant made the loan for the purpose of assisting her daughter and family and her primary consideration was her family. The time at which the Appellant's purpose must be examined is the time the loan was made[1].
[15] This is a very sympathetic case and I have struggled to find in favour of the Appellant, but I cannot. Although she anticipated receiving interest income on her investment, I cannot ignore the fact that this was a family loan and the Appellant's primary concern was to assist her family. Neither Roman nor Theresa testified. The Appellant had the burden of proving that she granted the loan for the purpose of earning income. She has not met that burden.
[16] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 24th day of March 1998.
"C.H. McArthur"
J.T.C.C.