Date: 20000606
Docket: 98-1938-IT-G
BETWEEN:
CHRISTIANE BEAULAC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
(Delivered orally from the bench on March 14, 2000, at Québec, Quebec, and edited at Ottawa, Ontario, on June 6, 2000)
Lamarre Proulx, J.T.C.C.
[1] This is an appeal for the 1996 taxation year.
[2] The day before the hearing, counsel for the respondent informed the Court by letter sent by fax that the respondent admitted that the appellant was entitled to a business investment loss totalling $53,272.29. This loss arose from the first two transactions described in subparagraphs 24(h) to (aa) of the Reply to the Notice of Appeal (the "Reply").
[TRANSLATION]
First transaction: Payment of a sum of $30,000 in response to a call to execute a guarantee
(h) On April 19, 1995, the corporation borrowed $198,999 from the Caisse populaire St-Malo.
(i) By contract dated April 19, 1995, the appellant and her spouse solidarily guaranteed the corporation's loan up to an amount of $49,749.
(j) By this solidary guarantee, the appellant and her spouse waived the benefit of division and discussion.
(k) The appellant's financial undertaking is disproportionate to her interest in the corporation.
(l) On April 19, 1995, when the appellant guaranteed the loan taken out by the corporation, she knew that the corporation was in financial difficulty.
(m) Also on April 19, 1995, the appellant received 205 class B shares of the corporation's capital stock.
(n) On April 19, 1995, the appellant knew that the shares received from the corporation had no value.
(o) Under the guarantee given by the appellant on April 19, 1995, she was called upon to pay the Caisse populaire St-Malo the sum of $30,000.
(p) This amount of $30,000 was paid to the Caisse populaire St-Malo by means of a loan secured by a mortgage on real property, which loan was taken out at that institution on October 9, 1996.
(q) The appellant did not provide the guarantee for the corporation for the purpose of gaining or producing income from a business or property.
(r) The appellant agreed to provide a guarantee for the corporation solely for the purpose of helping her spouse.
(s) The appellant did not acquire the 250 shares in the corporation for the purpose of gaining or producing income from a business or property.
Second transaction: Amounts advanced to the corporation
(t) During the period from May 1995 to June 1996, the appellant advanced amounts totalling $32,838.93 directly to the corporation.
(u) These advances bore no interest.
(v) From September to November 1995, the corporation repaid $9,566.24.
(w) The debt owed to the appellant by the corporation thus amounted to $23,272.29.
(x) On May 1, 1995, the appellant received 300 class B shares from the corporation.
(y) At the time she received the shares, the appellant knew that they had no value.
(z) The appellant advanced the sum of $23,272.29 to the corporation solely for the purpose of helping her spouse.
(aa) The appellant did not advance the sum of $23,272.29 to the corporation for the purpose of gaining or producing income from a business or property.
[3] There remain in issue two loan guarantees with respect to which the question is whether the appellant paid an amount in respect of a debt of a corporation under arrangements under which she guaranteed the debt within the meaning of subsection 39(12) of the Income Tax Act (the "Act").
[4] Those two guarantees, referred to in the Reply as the third transaction and the fourth transaction, are therein described as follows:
[TRANSLATION]
Third transaction: Guarantee of a loan granted to Jean-Yves Parent
(bb) On April 12, 1995, Jean-Yves Parent borrowed $30,000 from the Caisse populaire St-Malo.
(cc) Under an agreement entitled "Pledge of Savings", dated April 12, 1995, the appellant guaranteed the $30,000 personal loan granted to Jean-Yves Parent.
(dd) The pledge of savings of April 12, 1995 concerned a loan granted to Jean-Yves Parent personally, not to the corporation.
(ee) The appellant made this "Pledge of Savings" in order to help her spouse.
(ff) The appellant did not make the "Pledge of Savings" for the purpose of gaining or producing income from a business or property.
(gg) The Caisse populaire St-Malo did not call on the appellant to execute her guarantee with respect to the sum of $30,000.
(hh) The amount borrowed by Jean-Yves Parent, which totalled $30,000, was deposited to his account at the Caisse populaire St-Malo on April 12, 1995.
(ii) This $30,000 sum was transferred from Jean-Yves Parent's account to the corporation's account on April 20 and 21, 1995.
(jj) Jean-Yves Parent was asked to repay the $30,000 to the lending institution on July 25, 1996.
Fourth transaction: Guarantee of a loan granted to Jean-Yves Parent
(kk) Under a "Pledge of Savings" signed on October 16, 1995, the appellant deposited $6,500 at the Caisse populaire St-Malo to guarantee a personal loan granted to Jean-Yves Parent.
(ll) The "Pledge of Savings" referred to in the previous paragraph is related to a loan taken out by the appellant's spouse, not by the corporation.
(mm) The appellant gave this guarantee solely for the purpose of helping her spouse.
(nn) The appellant did not give the guarantee for the purpose of gaining or producing income from a business or property.
(oo) The Caisse populaire St-Malo did not call on the appellant to execute her guarantee provided by the "Pledge of Savings" signed on October 16, 1995.
(pp) On October 16, 1995, the appellant received 65 Class B shares of the corporation's capital stock.
(qq) Jean-Yves Parent was called upon to repay the sum of $6,500 to the Caisse populaire St-Malo on July 25, 1996.
(rr) At the time she received the 65 shares in the corporation, the appellant knew that the shares had no value.
(ss) The appellant did not acquire the 65 shares in the corporation for the purpose of gaining or producing income from a business or property.
(tt) The various transactions which the appellant conducted resulted in an increase in the number of shares she held in the capital stock of the corporation to 866, or 46.43 percent, of a total of 1,865 shares.
[5] One of the two loan guarantees is dated April 12, 1995 and is for $30,000; the second is dated October 16, 1995 and is for $6,500. In both cases, the guarantees were given to the lending institution for loans taken out by Jean-Yves Parent for the purpose of subscribing for capital stock of a corporation.
[6] The witnesses were Jean-Yves Parent, Claude Martel and the appellant. A book of documents containing 25 tabs was filed by the respondent as Exhibit I-1.
[7] Jean-Yves Parent is the appellant's spouse. He explained that, in 1994, he had made an offer to purchase the assets of a corporation that manufactured plastic cases. For this purchase, he had asked for a small business loan (SBL) for a corporation, 9012-7960 Québec Inc., known as Plastic America, of which he was the principal shareholder. The Caisse populaire Desjardins in St-Malo apparently granted Plastic America a $198,000 loan. That loan had to be guaranteed by Mr. Parent and the appellant up to the amount of $49,749. The appellant found herself having to pay the Caisse $30,000 under that guarantee. That amount was the object of the first transaction described in the Reply and was accepted to by the respondent.
[8] One of the loan conditions was that Mr. Parent had to subscribe for $40,000 worth of the corporation's capital stock. He had to borrow that amount. The appellant guaranteed that loan. The guarantee was the object of the third and fourth transactions described in the Reply. Mr. Parent and the appellant contended that they had learned more or less at the last minute that the bank was demanding an investment of $30,000 or $40,000. They also argued that the appellant herself could not subscribe for the shares because the subscription requirement was imposed on the promoter whose name appeared on the SBL loan documents. If that had not been the case, the appellant would have subscribed for the capital stock herself.
[9] However, when Plastic America borrowed the $198,999 from the Caisse populaire St-Malo on April 19, 1995, the appellant and Jean-Yves Parent both signed on behalf of Plastic America (tab 8 of Exhibit I-1). Tab 9 of Exhibit I-1 contains the $49,749 guarantee dated April 19, 1995 with respect to the $198,999 loan. Again, the appellant and her husband both signed this guarantee. The appellant's signature on the loan document and the guarantee casts some doubt on the assertion that the appellant could not herself have subscribed for the capital stock of the corporation.
[10] The testimony of Claude Martel, who was the general manager of the Caisse populaire St-Malo in April 1995, gave no indication as to whether it was impossible for the appellant to subscribe for the $40,000 worth of the capital stock of Plastic America herself.
[11] Tab 17 of Exhibit I-1 contains the pledge of savings in the amount of $30,000, dated April 12, 1995, which is mentioned in subparagraph 24(cc) of the Reply. The guarantee is in respect of the borrower Jean-Yves Parent. It involves the deposit of the sum of $30,000 in the form of a term deposit guaranteeing Jean-Yves Parent's loan. Tab 13 contains Exhibit A-1 which is the offer to provide a pledge of savings, dated April 12, 1995. That document was signed by the appellant in the interests of the corporation and it states that shares of Plastic America would be issued to her if she was ever required to pay under the guarantee.
[12] The agreement respecting the $30,000 loan appears at tab 15 of Exhibit I-1. The parties are the Caisse populaire St-Malo and Jean-Yves Parent. The document is dated April 12, 1995.
[13] Tab 21 of Exhibit I-1 contains the appellant's pledge of savings in the amount of $6,500 in favour of the Caisse populaire St-Malo on behalf of Jean-Yves Parent, the borrower. That guarantee is dated October 16, 1995. The appellant deposited the sum of $6,500 with the lending institution in the form of a term deposit guaranteeing Jean-Yves Parent's loan.
[14] The agreement with respect to the $16,500 loan taken out by Jean-Yves Parent appears at tab 20 of Exhibit I-1. It is dated October 17, 1995.
[15] Tab 16 of Exhibit I-1 contains the payments of $30,000 and $6,500 made by the appellant to the lending institution on the guarantees given for the loans. Contrary to what the description of the third and fourth transactions given in the Reply might suggest, the respondent does not dispute the fact that the appellant had to make those payments.
Parties' positions
[16] Both the notice of appeal and notice of objection (tab 4 of Exhibit I-1) state that the acquisition cost of the shares obtained in consideration of the guarantees is the amount of the guarantees. This argument, which applies paragraph 39(1)(c) of the Act, was not put forward at the hearing, and counsel for the appellant relied solely on subsection 39(12) of the Act. It must be said on the one hand that the evidence respecting the issuing of the shares is not conclusive, if one considers the financial statements to March 31, 1996, which appear at tab 23 of Exhibit I-1. The statements are addressed to the sole shareholder. No mention is made of the appellant as a shareholder. On the other hand, it is not clear whether the shares were acquired on the day the guarantees were given or the day the guarantees were honoured. The acquisition cost of the shares is thus not determined (Exhibit I-2 or tab 14 of Exhibit I-1 in the case of the $30,000 guarantee and tab 19 of Exhibit I-1 in the case of the $6,500 guarantee). In any case, there was no evidence on this point.
[17] As things stand, counsel for the appellant relies entirely on subsection 39(12) of the Act and argues that, by paying Jean-Yves Parent's loans, the appellant was paying a debt of the corporation because the loans taken out by Mr. Parent were invested in the corporation. Counsel points out that the appellant would herself have invested personally in the capital stock of the corporation if she had been permitted to do so. It was with respect to the subscription for shares by her husband that she provided a guarantee for him.
[18] Relying on many important decisions by the Supreme Court of Canada and the Federal Court of Appeal, counsel for the respondent argues that the courts must consider what a taxpayer actually did, not what he might have done. She refers in particular to the following decisions:
Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, at pages 54 and 55:
Before concluding, I wish to address one final argument raised by counsel for the Trust. It was submitted—and the Crown generously conceded—that the Trust would have obtained an interest deduction if it had sold assets to make the capital allocation and borrowed to replace them. Accordingly, it is argued, the Trust ought not to be precluded from an interest deduction merely because it achieved the same effect without the formalities of a sale and repurchase of assets. It would be a sufficient answer to this submission to point to the principle that the courts must deal with what the taxpayer actually did, and not what he might have done: Matheson v. The Queen, 74 D.T.C. 6176 (F.C.T.D.), per Mahoney J., at p. 6179. . . .
Friedberg v. Canada, [1991] F.C.J. No. 1255 (F.C.A.), at pages 2 and 3:
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil 91 D.T.C. 5106, per Mahoney J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to 'correct' documents which clearly point in a particular direction.
Livingston International Inc. v. The Queen (1992), 140 N.R. 317 (F.C.A.):
. . . The court must deal with what the taxpayer has in fact done, not what it could have done.
The Queen v. Kieboom, [1992] 3 F.C. 488 (F.C.A.):
The express language in the section does not permit this conclusion. In order to receive the benefit of subsection 73(5) the property being transferred should be "immediately before the transfer, a share of the capital stock of a small business corporation". The fact that there is here a transfer of property which was later turned into shares is not enough in the face of the express language of the provision. This may appear to some to be inconsistent, but that was clearly the intention of Parliament. The taxpayer could easily have chosen to transfer shares to his children and to obtain the tax benefit in subsection 73(5), but instead he chose to attempt to secure other tax benefits for himself by using different methods of transferring his property. The Court must deal with what the taxpayer did, not what he could have done. (See Mahoney J. in Matheson, JA v The Queen, [1974] CTC 186 (F.C.T.D.), at page 189; approved Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, at page 55 per Dickson C.J.). For an even more restrictive example of a rollover provision as to farmers, see subsection 73(3) requiring the children to have used the farm in the business of farming.
Antoine Guertin Ltée v. Canada, [1988] 2 F.C. 67 (F.C.A.), at pages 73-74:
I have taken the time to examine the question of whether temporary insurance could more adequately meet the conditions for application of subparagraphs. 11(1)(cb)(ii) and 20(1)(e)(ii) of the Act than permanent insurance because it was the focus of the parties' concerns and the basis of their arguments. I think nevertheless that strictly speaking, in the circumstances of the case at bar, it is not necessary for the Court to adopt a final position on the point as, even assuming that a difference in treatment between permanent and temporary insurance is warranted, there is still the response of the Deputy Attorney General that, in any case, here the company obtained not temporary but permanent insurance, and I think this response is conclusive. Quite recently, once again, in Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, the Supreme Court restated the rule that in a tax matter what must be considered is what was done, not what might have been done. The following is an extract from the reasons of the Chief Justice, speaking for the Court, at pages 54 and 55:
. . .
[19] Counsel for the respondent thus argues that the situation must be taken as it is, not as it might have been. She therefore submits that what the appellant paid to the financial institution was in respect of a debt of an individual, not of a corporation operating a small business, and consequently is not in accordance with the terms of subsection 39(12) of the Act.
Conclusion
[20] The relevant portion of subsection 39(12) of the Act reads as follows:
(12) For the purpose of paragraph (1)(c), where
(a) an amount was paid by a taxpayer in respect of a debt of a corporation under an arrangement under which the taxpayer guaranteed the debt,
(b) the amount was paid to a person with whom the taxpayer was dealing at arm's length, and
(c) the corporation was a small business corporation
(i) at the time the debt was incurred, and
(ii) at any time in the 12 months before the time an amount first became payable by the taxpayer under the arrangement in respect of a debt of the corporation,
that part of the amount that is owing to the taxpayer by the corporation shall be deemed to be a debt owing to the taxpayer by a small business corporation.
(My emphasis.)
[21] The appellant did indeed pay an amount to a person with whom she was dealing at arm's length under an arrangement under which she guaranteed a debt. But was that amount paid in respect of a debt of a corporation?
[22] In my view, it is quite clear in the instant case that the payment made by the appellant under the guarantee was not in respect of a debt of a corporation.
[23] It must be understood that not all capital losses entitle one to claim business investment losses, even if the money involved in the capital loss was used either directly or indirectly for business purposes. The capital loss must fall within the parameters described in paragraph 39(1)(c), subsection 39(12) or subparagraph 40(2)(g)(ii) of the Act. In this instance, it is subsection 39(12) which may apply. However, this subsection requires that the amount paid under a guarantee be so paid in respect of a debt of a corporation operating a small business, not in respect of a debt of an individual.
[24] All the documents and testimony clearly show that the guarantees were given not in respect of a loan to a corporation, but rather in respect to a loan to an individual. The Court must consider what the taxpayer did, not what he might have done.
[25] The Minister of National Revenue therefore acted in accordance with the Act in disallowing the appellant's claim of a business investment loss in respect of the two guarantee payments in issue.
[26] The appellant's appeal is allowed with respect to that portion with which the respondent agreed and which is described at the beginning of these reasons. The appellant is entitled to no other relief. Costs in this appeal are awarded to the respondent.
Signed at Ottawa, Canada, this 6th day of June 2000.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]