Date: 19981203

Docket: 95-1888-IT-G

BETWEEN:

LAWRENCE CORRIVEAU,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

LAMARRE PROULX, J.T.C.C.

[1] These appeals concern the 1985, 1986 and 1987 taxation years.

[2] The first of the two points at issue is whether the debts or other rights the appellant disposed of during the years at issue were acquired by him for the purpose of gaining or producing income from a business or property within the meaning of s. 40(2)(g)(ii) of the Income Tax Act (“the Act”). If they were, on disposing of these debts or rights the appellant would be able to claim a business investment loss. The debts or rights in question were held by the appellant against a corporation of which the sole shareholder was his son.

[3] The second point at issue is to determine for the purposes of s. 15(1) of the Act the amount of the benefit conferred on the appellant as a shareholder in a corporation which bought his private home from him, maintained it and leased it to him.

[4] In making his assessments the Minister of National Revenue (“the Minister”) relied on the facts set out in paragraph 7 of the Reply to the Notice of Appeal (“the Reply”) as follows:

[TRANSLATION]

(a) during the years at issue the appellant was a lawyer practising in the Québec area;

(b) the appellant's bookkeeping with respect to his law practice was inadequate;

(c) in calculating his professional income for the 1985, 1986 and 1987 taxation years the appellant failed to report income amounts of $12,998.46, $45,800 and $8,745 respectively;

(d) the entertainment expenses of $15,811, $12,512 and $16,504 claimed by the appellant in calculating his professional income for the 1985, 1986 and 1987 taxation years respectively were personal or living expenses of the appellant, and those expenses were not made or incurred by him in order to gain or produce income from a business or property;

(e) the appellant failed to report interest income of $20,858 and $17,151 in calculating his income for the 1986 and 1987 taxation years respectively;

(f) throughout the period at issue the appellant was the sole shareholder of Centre d'achats Duberger Inc. (“the company”);

(g) throughout the period at issue the company owned a building used as the appellant’s personal residence;

(h) during the years at issue the company incurred or made expenditures on the building used as the appellant’s personal residence;

(i) during the period at issue benefits were conferred on the appellant as a shareholder of the company as a result of use of the building belonging to the company, which benefits are calculated as follows:

1985 1986 1987

Use of residence $26,250 $24,375 $21,250

Residence expenses paid

by company $18,858 $5,780 $14,232

Rent paid by appellant ($8,400) ($8,400) ($8,400)

Value of benefit $36,708 $21,755 $27,082

(j) in addition to the benefits in subparagraph (i) above, benefits worth $31,943.24 and $20,000 were conferred by the company on the appellant as a shareholder in the 1985 and 1986 taxation years respectively;

(k) throughout the period at issue the appellant, as a shareholder of the company, regularly received loans from it;

(l) during the 1985 taxation year the appellant received a loan in the amount of $22,202 from the company, with no arrangement being made in good faith for the loan to be repaid within a reasonable time;

(m) this loan was repaid as part of a series of loans, repayments and other operations;

(n) the total interest, calculated at the prescribed rate, on the unpaid balance of each of the loans made to the appellant by the company was $5,146, $5,180 and $1,755 for the 1985, 1986 and 1987 taxation years respectively;

(o) in his tax returns for the 1985, 1986 and 1987 taxation years, the appellant claimed business investment losses of $3,100, $5,000 and $6,000 respectively;

(p) these amounts related to money paid by the appellant to his son Paul Corriveau, to companies owned by Paul Corriveau, such as Motosports Paul Corriveau Inc., or to their creditors;

(q) this money was paid to settle the debts of these persons or to honour certain surety bonds the appellant had provided with respect to them;

(r) the losses claimed do not relate to the debts acquired by the appellant in order to gain or produce income from a business or property.

[5] At the start of the hearing the parties informed the Court that several points at issue had previously been settled. They submitted an agreement signed on August 4 and 6. As regards subparagraph 7(c) of the Reply, the parties accepted the respective amounts of $2,498.46, $24,600 and $8,245 instead of those indicated in the said subparagraph. With respect to subparagraph 7(d) of the Reply, the parties agreed to a slight reduction in the amounts indicated therein to $15,249, $12,462 and $14,744. The amounts mentioned in subparagraph 7(j) of the Reply were reduced to $3,000 and $15,000.

[6] The appellant admitted, also at the start of the hearing, subparagraphs 7(e) and (k) to (n) of the Reply.

[7] Subparagraphs 7(f) to (i) and (o) to (r) of the Reply therefore remain at issue. Subparagraphs 7(f) to (i) concern the benefit conferred on the appellant by his use of a house owned by a corporation of which he was the sole shareholder. That is the second point at issue. Subparagraphs 7(o) to (r) of the Reply raise the question of whether the debts were acquired by the appellant for the purpose of gaining or producing income from a business or property. That is the first point at issue. The losses claimed as business investment losses are higher than those indicated in the Reply. These higher amounts were brought forward at the time of the objection.

[8] Paul Corriveau, the appellant, and the accountant Briand Belland all testified on the first point at issue. Jeannette Casavangh Ferron, the appellant and the accountant testified on the second point at issue. Nicole Turcotte, an officer of the Minister, testified with respect to the case as whole. It was the appellant who questioned the witnesses and argued the second point. When the appellant testified, he was questioned by his counsel, who also argued the first point at issue.

[9] Paul Corriveau is the appellant’s son. He was the president of Motosports Paul Corriveau Inc., which was incorporated in November 1977. The letters patent were filed as Exhibit A-1. They indicate that Paul and Richard Corriveau and Jocelyne P. Corriveau each held one share. Paul was described as a merchant, Richard as a student and Jocelyne a housewife. They all had the same street address.

[10] In1977 Paul was 22 years old. He was a student in administration. He explained that from the age of 12 until he was 19 he took part in motorcycle racing. At first it was a pastime, but his involvement later became serious. He travelled a lot and won numerous championships. He was sponsored by large motorcycle companies. His father went nearly everywhere with him. They met a lot of people involved in racing and in motorcycle manufacturing. That was how the matter of there being a market for a Yamaha motorcycle store in Ste-Foy came up. There was a dealer in Beauport but one was needed in Ste-Foy came to be brought up. Yamaha company representatives approached his father about a business opportunity. Since Paul was studying administration, the match was a good one. His father asked him to find suitable premises. He and his father also approached the Harley-Davidson company. The result was that in January 1978 Motosports Paul Corriveau Inc., referred to hereinafter as “Motosports”, opened up dealing in both makes. The corporate name reflected the fact that Paul Corriveau was known locally because of the many championships he had won.

[11] When the business started up the appellant had to endorse everything requiring the provision of sureties, including the credit line and the purchase of inventory. The appellant also made direct investments. Rather than using the company’s credit line, Paul Corriveau went directly to his father. The cheques were made out to the company.

[12] Because of high interest rates, the company’s debt load became too great. Paul Corriveau explained that his father met with the accountants, who advised him to drop the Yamaha line and keep only the Harley-Davidson line in order to reduce inventory. Motosports ceased operating in June 1984. Another company, Moto USA, was formed with a view, the witness said, to protecting the Harley-Davidson dealership. On September 30, 1985 Moto USA was also closed down.

[13] Exhibit A-2 is an agreement between Motosports Paul Corriveau Inc. and Lawrence Corriveau, dated January 23, 1978. It reads as follows:

[TRANSLATION]

This is to confirm that you agree to stand joint and several surety for certain debts and obligations of MOTOSPORTS PAUL CORRIVEAU INC., so as to enable it to start up and/or continue its operations.

In consideration of the sureties to be subscribed by you for the company’s benefit, the company undertakes to pay you annual fees corresponding to 0.25% of the value of the debts guaranteed by you, such fees to be payable as soon as the company has sufficient cash assets.

Finally, this confirms that in the event you are required as surety to pay any of the company’s debts, you shall be entitled to convert the company's debt to you to common or preferred shares in the company’s capital stock, at your option, and in this regard the undersigned undertakes to do everything required, necessary or useful to give effect to this agreement. . . .

[14] Exhibit A-3, which is a corporate document dated August 18, 1978, reads as follows:

[TRANSLATION]

This is to confirm our agreement that on various earlier occasions, and on the date hereof, you have advanced money to the company in order to enable it to continue its activities.

In consideration of these advances the company undertakes to pay you interest at the annual rate of 12% on advances made by you, such interest to be payable as soon as the company has sufficient cash assets.

Such advances may, at your option, be repaid either by payment in full plus accrued interest or by converting your advances to common or preferred shares in the capital stock of the company, and in this regard the undersigned undertakes to do everything required, necessary or useful to give effect to this agreement.

In the event that you retire from your legal practice, common shares in the capital stock of the company shall be issued to you so that you shall hold 40% of the company’s common shares as a result of your investments. . . .

[15] Paul Corriveau explained that it was always understood by the parties to the agreements entered as Exhibits A-2 and A-3 that they had continuing effect and applied to past as well as future advances to both Motosports and Moto USA.

[16] Exhibit I-1 consists of the financial statements to December 31, 1979. The description of liabilities contained therein indicates the following: advances from a director (interest-free, no fixed term) $15,391. The same amount appears for 1978. These were advances to the company by the appellant. According to Paul Corriveau, though not legally such, his father was to all intents and purposes a director.

[17] Exhibit I-2 consists of the financial statements for the year ending December 31, 1981. On page 7 thereof there appears under long-term debt: loan from a director, interest-free with no provision for repayment $50,765. Exhibit I-3 consists of the financial statements for 1982. The loan indicated is in the amount of $71,685.

[18] Exhibit I-4 consists of the financial statements for 1983. Appearing therein is the following: advance from a shareholder, interest-free with no provision for repayment. The amount has risen to $81,285. Also to be found is: loan from an individual (interest payable monthly at the prime rate plus two and a half percent), with no provision for repayment of capital: $30,000. According to Paul Corriveau, his father had borrowed directly for the company because it was no longer possible to increase its credit line.

[19] The appellant testified. He explained that his son Paul began as a junior and went on to the intermediate and then senior levels in motocross racing. He became Canadian champion in both motocross and motorcycle racing on ice. The appellant went everywhere with his son and knew everyone in the sport. He said that as a lawyer he did not want to be a shareholder publicly but would be a silent partner. He also said he could see himself in this kind of business on retirement. He agreed to take on the dealerships so long as it was in his son Paul’s name. However, he would guarantee all loans and would provide the money necessary for the business. He stood surety for the lease, handled negotiations with respect to inventory and stood surety for it. It was he who invested all the funds required and consequently the appellant wanted to obtain an economic benefit from his investment. This explains the documents in Exhibits A-2 and A-3. The appellant kept in touch weekly with what was happening in the company.

[20] Briand Belland, the appellant’s accountant, testified. He had 20 years' experience and had been the appellant's and the company's accountant since 1981. Exhibits A-5 to A-12 were filed through him. It was he who had prepared their presentation. Exhibits A-5 to A-10 relate to 1985. Exhibit A-11 relates to 1986 and Exhibit A-12 concerns 1987.

[21] Exhibit A-5 is a cheque dated July 15, 1985 in the amount of $26,731.96, made out to a bank in final settlement on behalf of Motosports Paul Corriveau Inc. The loss claimed is in the amount of $13,365.98.

[22] Exhibit A-6 consists of four cheques made out to Moto USA in the total amount of $28,787.75, with dates from February 15 to July 23, 1985. The loss claimed is in the amount of $14,393.88.

[23] Exhibit A-7 consists of cheques made out to a law firm in trust, dated August 30 and November 15, 1985 and January 15, 1986, in the total amount of $61,000. These cheques were used to pay the surety for the inventory. The loss claimed is $30,500.

[24] Exhibit A-8 consists of two cheques made out to bailiffs acting for the town of Ste-Foy, dated January 30 and February 12, 1985, in a total amount of $5,460.13. The loss claimed is $2,730.07.

[25] Exhibit A-9 consists of two cheques, one dated November 23, 1984 and made out to Motosports Paul Corriveau Inc. in the amount of $6,200, the other dated September 24, 1985 and made out to Paul Corriveau in the amount of $5,800. According to the accountant, the second cheque was used by Moto USA because it was deposited in that account. The loss claimed is half of each of these amounts.

[26] Exhibit A-10 includes the same documents as Exhibits I-1 to I-4. The accountant indicated that the appellant was entitled to half the amount of $81,285, namely $40,642.50.

[27] Exhibits A-11 and A-12 consisted of a series of cheques made out to the bank in payment on an endorsement given for business purposes. For 1986, their adjusted cost base was $10,000, and for 1987, $11,000. The loss claimed for each of these years is half of each of these amounts.

[28] The appellant had the family home built in 1959 at a cost of some $100,000. He lived in it until 1996. In 1981 he sold it to Centre d'achats Duberger Inc., a company of which he was the sole shareholder, for $250,000. There was a mortgage on the house which the company assumed. The appellant did not recall the amount of the mortgage.

[29] Jeannette Casavangh Ferron holds a real estate broker’s licence. The appellant wished her to testify as to the rental cost of a residence like his. Counsel for the respondent objected on the basis that this was expert testimony and the procedure laid down by s. 145 of the Tax Court of Canada Rules (General Procedure) was not followed. The witness testified nevertheless, subject to this objection. It is not necessary to deal with this testimony at any greater length in view of the conclusion of law I arrive at later on in these reasons.

[30] Nicole Turcotte is an accountant with Revenue Canada. She explained that she had decided against the appellant with respect to the first point at issue because he was not a shareholder of the company to which he had advanced money. The amount of the advances indicated in the objection was much higher than that shown in the assessment. She reviewed these claims but the evidence was not clear as to whether she regarded them as genuine debts owed by the corporation or whether she rejected them primarily on the basis that the appellant was not a shareholder of the corporation. As to the benefit conferred by the corporation of which the appellant was the sole shareholder in purchasing his house from him and providing accommodation for him, Ms. Turcotte relied on the rules stated in Youngman v. The Queen, 90 DTC 6322, in calculating the value of that benefit. She calculated interest on the principal at the rate prescribed by the Act for a loan to a shareholder, in accordance with s. 80.4 of the Act.

Argument

[31] Counsel for the appellant first argued that loans and sureties in favour of a business, even with a view to avoiding bankruptcy, may be regarded as having been given for the purpose of earning income. He referred in this connection to the decision of this Court in Business Art Inc. v. M.N.R., 86 DTC 1842, and in particular to page 1848:

I cannot subscribe to the theory that in such an example the non-interest bearing loans were not incurred for the purpose of earning income from property; if the loans were not advanced the corporation may have become bankrupt and the shares may have become worthless.

[32] He argued that the cases do not require a direct connection between the loan and the income. In this regard he referred to the Federal Court Trial Division judgment in Byram v. The Queen, 95 DTC 5069, at 5073:

As a shareholder, the plaintiff was directly linked to the income producing potential of USCO. Dividends could be declared in a straightforward manner should they have been available. However, can the plaintiff avoid the application of subparagraph 40(2)(g)(ii) for those loans advanced to USCO when the plaintiff was not a shareholder in USCO but rather when ERL was the shareholder in USCO, the plaintiff being another step further removed as a shareholder in ERL. Subparagraph 40(2)(g)(ii) does not require a direct link between the loan and the property or business that produces the income.

[33] Counsel for the appellant admitted that the appellant was not a shareholder in either company to which the loans were made, but he argued that the agreements in Exhibits A-2 and A-3 allowed him to become a shareholder. In this regard counsel cited the decision of Judge Sobier of this Court in Strecker v. The Queen, 95 DTC 3, dealing with a situation in which an individual may become a shareholder or in some other way derive income from a corporation to which that individual has made loans. Counsel referred to the following passage, at page 5:

As stated above, Andrew and the Appellant gave some evidence that there was a vague plan that all the family would be involved. The Appellant stated that he regarded himself as part of the Company and that he saw himself as part of the future and would gain income at a later date. While this may be his evidence now, the facts surrounding the loans and the guarantee are more capable of being interpreted as a father wishing to help his son establish a business. I find no evidence that there was an agreement or understanding that the Appellant would become a shareholder or otherwise derive income from the Company.

[34] Counsel submitted that unlike in the above situation, here there were agreements between the appellant and the president of Motosports, as set out in Exhibits A-2 and A-3. In the first place, the advances made by the appellant were not made gratuitously; moreover, those advances entitled the appellant to become a shareholder in Motosports. The appellant's advances to the companies were truly in the nature of an investment made in order to obtain income.

[35] As to the benefit to a shareholder, the appellant argued that the figure determined as the amount of that benefit was much too high, that it seemed reasonable to him to pay rent of $700 a month and that he would have agreed to $1,000, but, in his submission, anything more than that made no sense.

[36] Counsel for the respondent argued that the agreements contained in Exhibits A-2 and A-3 applied to the sureties given prior to the date of these agreements, not those which came afterwards. As to the possibility of becoming a shareholder in the corporation, he submitted that this was a choice which could be made only in the event that the appellant had to perform the obligation covered by the surety and, in such circumstances, there could be no income from the shares. Counsel for the respondent referred in particular to Strecker, supra.

[37] As to the benefit conferred on the appellant as a shareholder with respect to the use of the residence, counsel for the respondent argued that this benefit should include the cost of the money spent to purchase the residence, and the expenses incurred for the house indicated in subparagraph 7(i) of the Reply, which is set out in paragraph 4 of these reasons. Not just any house is involved here. The house which was purchased by the company of which the appellant was the sole shareholder was that in which the appellant lived, and it was bought by the company in order to place it at his disposal. Counsel referred to the Federal Court of Appeal’s judgment in Youngman, supra,at pages 6325 and 6326.

In order to assess the value of a benefit, for the purposes of paragraph 15(1)(c), it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder. In the present case, the benefit or advantage conferred on the appellant was not merely the right to use or occupy a house for as long as he wished; it was the right to use or occupy for as long as he wished a house that the company, at his request, had built specially for him in accordance with his specifications. How much would the appellant have had to pay for the same advantage if he had not been a shareholder of the company? Certainly more than what the two experts referred to as the free market rental value since, in my view, the company would have then charged a rent sufficient to produce a decent return on its investment.

Conclusions

[38] I refer to Judge Sobier's analysis of two decisions in Strecker, supra, at page 5:

In Casselman v. M.N.R., 83 DTC 522 (T.C.C.), the taxpayer guaranteed loans made by a bank to her son. The Court held that she did not guarantee the loans for the purpose of gaining or producing income, she guaranteed the loans to assist her son. That is the case here. The Appellant’s involvement in the Company did not transform his reasons for giving the guarantee or making the loan from one of helping his son to one of gaining or producing income.

The facts in Lowery v. M.N.R., 86 DTC 1649 (T.C.C.), are somewhat the same as the case at bar. Judge Sarchuk stated at page 1652:

On the evidence adduced I am not satisfied that there was any business purpose in the granting of the guarantee. Respondent’s counsel submitted, and I agree, that it is not sufficient to make a general allegation that the appellant anticipated some participation in the profits of Threads at some unstated time in the future and on that basis to argue that some consideration for the guarantee existed. There was no arrangement as to interest. There was no arrangement relative to repayment in the event of default by Threads. There was no agreement, oral or written, setting out the terms and conditions of the appellant’s participation.

[39] Unlike the situation in Casselman and Lowery, here the appellant’s primary purpose in making the advances and providing sureties was, in my view, a business one. In fact, it was the appellant who first had the idea of a motorcycle business and it was he who handled the negotiations. Those negotiations and the organization of the business were characteristic of a commercial undertaking. When the business started up Paul Corriveau was 22 years old and living with his parents. However, I do not doubt that another purpose, probably just as important as the first, was to set his son up in business, but that does not preclude the existence of the main purpose, namely that the sureties and loans were intended primarily for the success of the business.

[40] As to the interest which Motosports was to pay him on the money advanced, agreements were immediately entered into between the appellant and Motosports in that regard. On reading these agreements, I consider that their effect was not limited to the date of their signature and that they had continuing effect. That was how the president of Motosports and the appellant understood them and I really see no reason to doubt their common intent, especially in a case where their statements can be confirmed by the wording of the agreements.

[41] The appellant’s interest in the management of the companies in question was clearly more than that of a parent providing financial assistance for the project of a son or daughter. The appellant was inadvertently described as a director or a shareholder in the financial statements. This indicates his significant involvement in the affairs of the motorcycle dealerships. They were his projects just as much as his son's, perhaps more so. This involvement notwithstanding, s. 40(2)(g)(ii) of the Act requires that the debt or right for which a loss is claimed must have been acquired by the taxpayer for the purpose of gaining or producing income. Clearly, when a company undertakes to pay interest at an annual rate of 12 percent on advances, which interest is to be payable when it has sufficient cash assets, this interest income is very remote and uncertain. The repayment of these advances of money could be made either by payment of the full amount thereof or in the form of common or preferred shares in the company. However, in the various decisions which have accepted that debts or rights were acquired for the purpose of gaining or producing income, that income was also far from immediate (see Business Art Inc., supra,Byram, supra,and Brown v. The Queen, 96 DTC 6091). It was always subject to the success of the business to which the loans were made, and that success took or might take several years to be achieved, or rather not be achieved, since we are dealing with losses. I therefore conclude that the debts and rights the appellant disposed of, and which are represented by Exhibits A-5 to A-12, come within the ambit of s. 40(2)(g)(ii) of the Act.

[42] As to the calculation of the benefit conferred on the appellant by his company in purchasing the family residence and placing it at his disposal, I am of the opinion that the assessment was correctly made pursuant to the rules in Youngman, supra, cited in paragraph 37 of these reasons. Those rules were reaffirmed by the Federal Court of Appeal in The Queen v. Fingold, 97 DTC 5449.

[43] The appeals are allowed with half the costs and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the debts and rights the appellant disposed of gave rise to a business investment loss, and taking into account the agreements and admissions described in paragraphs [5] and [6] of these reasons. The appellant shall not be entitled to any other relief.

Signed at Ottawa, Canada, this 3rd day of December 1998.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]