Tax Court of Canada Judgments

Docket: 2001-3472(IT)G

BETWEEN:

KEVIN BARRIE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on December 3, 2003, at Toronto, Ontario.

Before: The Honourable Justice Gerald J. Rip
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	James Rhodes

____________________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are dismissed, with costs, if demanded.

Signed at Ottawa, Canada, this 9^th day of January, 2004.

"Gerald J. Rip"

Rip, J.

Citation: 2004TCC37

Date: 20040109

Docket: 2001-3472(IT)G

BETWEEN:

KEVIN BARRIE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Rip, J.

[1]      Kevin Barrie has appealed income tax assessments for 1997, 1998 and 1999 which denied him his claim in each year for an allowable business investment loss ("ABIL") within the meaning of subsection 38(c) of the Income Tax Act[1]("Act"). Mr. Barrie acted without benefit of counsel.

The Sound

[2]      Mr. Barrie loaned funds aggregating $13,600 to 1171615 Ontario Inc. ("117 Inc.") during 1996 and 1997. At trial he submitted eight documents, each entitled "Investment Agreement", which purported to evidence these loans. In each document 117 Inc. agrees to pay a principal amount "plus 10% ..." by a certain date. The eight purported loans were made in cash, according to Mr. Barrie. The following table describes dates the documents were executed,

the borrowed amounts, amounts of repayment and the dates the aggregate amounts of the loan and interest were payable:

Date of Agreement	Amount Advanced	Amount of Repayment	Date Payable
January 4, 1996	$1000	$1100	December 1, 1996
March 8, 1996	$1900	$2090	December 1, 1996
March 28, 1996	$1600	$1760	December 1, 1996
April 29, 1996	$3000	$3300	December 1, 1996
June 7, 1996	$3000	$3300	December 1, 1996
September 23, 1996	$ 500	$ 550	April 1, 1997
October 26, 1996	$1000	$1100	April 1, 1997
April 1, 1997	$1600	$1760	April 1, 1997

[3]      All of the shares of 117 Inc. were owned by Paul Pauzé, who was the sole director and officer of the Corporation. 117 Inc. was incorporated on April 1, 1996, according to a Certificate of Status produced at trial.

[4]      Mr. Barrie was introduced to Mr. Pauzé by the latter's brother. At one time, Mr. Pauzé operated a bar and in 1996 he caused 117 Inc. to apply for a liquor licence in expectation of operating another bar to be known as "The Sound". 117 Inc. was incurring expenses in renovating the bar and for legal fees. Mr. Barrie agreed to advance amounts to 117 Inc. as the bar was renovated. The Liquor Licence Board of Ontario's hearing of Mr. Pauzé's application for a licence was heard on or about November 1, 1996 and the application was denied. Although the bar never operated as such, there was one time when it was used for a special occasion function with a special liquor licence.

[5]      By letter dated June 2, 1997, Mr. Barrie wrote 117 Inc., care of Paul Pauzé, complaining that he was to have been repaid his loan by then and acknowledging that 117 Inc. had "problems with the LLBO". He asked for payment by July 1, 1997. 117 Inc., by letter dated June 22, 1997, signed by Mr. Pauzé, advised Mr. Barrie that:

... To date, I have not been successful and have run out of resources for continuing my fight with [the Liquor Licence Board of Ontario]. The Corporation known as 1171615 Ontario Ltd., is therefore going out of business.[2]

I am truly sorry for any inconvenience that this may cause you.

[6]      On October 10, 2001, Mr. Pauzé, apparently on behalf of 117 Inc., wrote Mr. Barrie confirming a recent telephone call that repayment date in the Investment dated April 1, 1997 "is in April 1, 1998 and further confirms the amount to be repaid at $1760.00".

[7]      Mr. Barrie, in his 1997 income tax return, claimed a business investment loss of the money he advanced to 117 Inc.

[8]      In cross-examination Mr. Barrie stated that he "believed" he signed each Investment Agreement with 117 Inc. on the date indicated on each Agreement. For example, he would "have to say 'yeah'" if asked if he signed the Investment Agreement of January 4, 1996 on January 4.

[9]      The loans to 117 Inc. were not guaranteed by Mr. Pauzé. Mr. Barrie said that his remedy for non-payment would be to seize the assets of 117 Inc. Mr. Barrie said he had "no use for lawyers". He made no effort to collect the money advanced to 117 Inc.; he was not going to throw out more money by going to a lawyer. (This was Mr. Barrie's reaction to the loans to the other corporations as well.) He stated that Mr. Pauzé had another partner with 117 Inc. "who continued the business so I didn't bother".

[10]     Mr. Barrie had no idea whether or not Mr. Pauzé invested in 117 Inc. In advancing funds to 117 Inc., Mr. Barrie relied solely on Mr. Pauzé's word. He "got to know" Mr. Pauzé, later in "1998 maybe".

[11]     As far as interest on the loans are concerned, Mr. Barrie said that he was to be paid "ten per cent on an annual basis". As I understood Mr. Barrie's evidence, whether the loan was outstanding six months or twelve months, he believes he was entitled to interest equal to ten per cent of the principal amount of each advance.

[12]     Mr. Pauzé testified as a witness for the appellant. He stated that 117 Inc. used the money borrowed from Mr. Barrie to make renovations and alterations to the bar and to acquire the building in which the proposed bar was to be located.

[13]     According to Mr. Pauzé, he approached Mr. Barrie to invest in 117 Inc. He declared that all the Investment Agreements were signed at different times, that is, at the time of each advance. He told Mr. Barrie that if he obtained a liquor licence, 117 Inc. would repay the loans before their due dates for repayment. Mr. Pauzé would meet with Mr. Barrie at "each of our residences or at the bank" and the Agreements "would have been drawn up when we met" and signed. On each occasion it appears Mr. Pauzé's wife was present since she witnessed the signatures on each of the Investment Agreements. Mr. Pauzé was not sure how the money was advanced, by cash, cheque or bank draft.

[14]     Mr. Pauzé replied that Mr. Barrie was not the only unsuccessful investor in 117 Inc. A Mr. Frank Lee lost $200,000 on the transaction, "some of it" in 117 Inc.

[15]     The interest rate, Mr. Pauzé recollected, was "what I could afford ... I was trying to get the business off the ground". In his view, the interest was 10 per cent per year "but", he said he "was paying ten per cent for all the money at the end of the year even if [it were] less than a year".

[16]     Mr. Pauzé said he could not explain the fact that some of the Investment Agreements were signed and dated before the date of the incorporation of 117 Inc. Neither could Mr. Barrie volunteer an explanation.

Ultimate Golf Accessories

[17]     In 1997 Mr. Pauzé again solicited funds from Mr. Barrie through 1282788 Ontario Ltd. ("128 Ltd."). 128 Ltd. was incorporated on February 23, 1998. Mr. Pauzé, again, was the sole shareholder, director and officer of the corporation. 128 Ltd. was developing a golf accessory to be marketed across Canada. The corporation registered itself to carry on business as "Ultimate Golf Accessories". The accessory was a beverage holder that could always stay vertical, preventing any spillage of the beverage. Mr. Pauzé, Mr. Barrie said, arranged for a company in Barrie, Ontario to develop the holder but there was a problem in development, the mould was faulty, and eventually the Barrie company went out of business. The beverage holder was never marketed.

[18]     Mr. Barrie, a golfer at the time, liked the idea of the beverage holder and by an Investment Agreement dated February 24, 1998 agreed to advance to 128 Ltd. $10,000 with interest at nine per cent. According to the Investment Agreement the "return on investments will be paid quarterly commencing September 1998". According to Mr. Barrie, this meant he would receive nine per cent of the amount of his loan every quarter, that is 36 per cent interest each year. Mr. Barrie produced a copy of a Bank of Nova Scotia "Certification Request" indicating an amount of $10,000 was paid to 128 Ltd. on February 24, 1998.

[19]     By letter dated December 27, 1998, Mr. Pauzé informed Mr. Barrie that 128 Ltd. "has ceased operating ... the company will not be able to meet it's [sic] financial obligations ... We are truly sorry for any inconvenience this may cause you." Based on this letter and conversations with Mr. Pauzé, Mr. Barrie concluded he would not receive any repayment. He stated that the company was "belly up". However, 128 Ltd. still exists.

[20]     Mr. Barrie acknowledged that he "didn't do much research" into 128 Ltd. He simply liked the product and thought it would be successful.

[21]     Mr. Barrie claimed an ABIL in his 1998 income tax return with respect to his investment in 128 Ltd. He said that he never received any money back from 117 Inc. or from Mr. Pauzé personally.

[22]     Mr. Pauzé disagreed with Mr. Barrie concerning the amount of interest; as far as he is concerned the rate was nine per cent per year, or 2 1/4 per cent per quarter, not 36 per cent per year.

Georgian Bay Publishing

[23]     According to Mr. Barrie, Mr. Pauzé had written a book on "Credit Repair", that is, how one may repair or re-establish one's personal credit rating. However, he had no "distribution deal". Mr. Barrie testified that Mr. Pauzé showed him a copy of the book before 1999 as part of his effort to have Mr. Barrie lend 1348903 Ontario Inc. ("134 Inc.") money to be used to increase the number of books already printed and to assist in Mr. Pauzé's "follow up" book. Mr. Barrie produced the purported copy of the book at trial which, he said, Mr. Pauzé gave him at the time.[3] When he advanced the funds, Mr. Barrie did not know how many books had already been published or if they had been sent to the stores. He did believe that a Canadian Tire franchisee had been sent books for sale.

[24]     Mr. Pauzé incorporated 134 Inc. on April 7, 1999. Mr. Barrie claims he advanced $77,000 to 134 Inc. According to an Investment Agreement dated April 20, 1999, Mr. Barrie advanced to 134 Inc. the sum of $40,000; "[t]he rate of interest for this investment is fixed at 9.5%" and the "return on Investments will be paid quarterly, commencing September 1999". On or about June 19, 1999, according to another Investment Agreement of that date, he advanced to 134 Inc. a further $37,000 and "the rate of interest for this investment is fixed at 10 per cent". Also, "returns on Investments" were as in the previous agreement. Mr. Barrie testified that in his view he would receive 10 per cent of $40,000 and $37,000, respectively, each quarter or 40 per cent interest on each loan annually. Mr. Pauzé did not agree with this interpretation.

[25]     Produced at trial was a copy of a Bank of Nova Scotia receipt stub indicating $40,000 was drawn from Mr. Barrie's account in favour of 134 Inc. on April 21, 1999, a copy of the corresponding bank draft, as well as Mr. Barrie's bank account pass book at the Bank of Nova Scotia reflecting the purchase of the draft in the amount of $40,000. A cheque drawn on Mr. Barrie's account at the Bank of Montreal, dated June 17, 1999 in the amount of $37,000 and payable to "G.B.P." was also produced at trial.

[26]     By letter dated July 17, 1999 Mr. Pauzé informed Mr. Barrie that:

... due to lack of sales, the first distribution of funds will not take place in September of 1999 as originally anticipated.

At this point in time, it appears as though a distribution may not be likely until some time in early 2000. I apologize for any inconvenience this may cause.

The head of Mr. Pauzé's letter bore the following description: "GBP, Georgian Bay Publishing, a Division of 1348903 Ontario Inc."

[27]     Mr. Barrie, on discovery, stated he "had no idea" if any proceeds may have been generated from the sale of the book. He "did not know where the money went" nor was he aware of 134 Inc.'s assets. He did not know if 134 Inc. may have invested in GBP Inc.

[28]     Mr. Pauzé explained that he incorporated two corporations, one, Georgian Bay Publications Inc., to handle advertising and to distribute the book and a second, 134 Inc., to write the book, get it published and to own the rights to the books. He stated that, in fact, 134 Inc. manufactured the book and initiated negotiations for distribution of the book. He testified that Mr. Barrie did not invest in GBP Inc. Shortly after the investment, 134 Inc. was no longer in business, Mr. Pauzé testified. In fact, 134 Inc. was dissolved on December 30, 1999 because Mr. Pauzé had failed to pay the incorporation fees. The book became an asset of "a new company", GBP Inc. "which was a shell and not doing anything", according to Mr. Pauzé.

[29]     Except for Mr. Pauzé's evidence that the rights to the book were transferred to GBP Inc., there is no evidence as to how 134 Inc.'s assets, whatever they were, were distributed. There is no evidence Mr. Barrie questioned the transfer of the book rights. Mr. Barrie did not expect any payment of his loans to 134 Inc. and claimed a business investment loss of $77,000 in filing his 1999 income tax return.

[30]     The book was originally published in 1999, according to Mr. Pauzé. Copies of the book were sent for distribution but there were no sales. Mr. Pauzé insisted the book was not available at the time Mr. Barrie advanced money to 134 Inc. It was only during the editing process that he asked Mr. Barrie to invest. He said he probably finished writing the book in late 1998 or early 1999 and then sent it out for editing. The copy of the book Mr. Barrie produced indicated the book was copyright in 1999. Mr. Pauzé said no book had been printed at the time Mr. Barrie made his initial or second loan.

General

[31]     Mr. Barrie testified that he was partially influenced in making his loans to the three companies by Mr. Pauzé's representations that the Canada Customs and Revenue Agency ("CCRA") had informed the latter that a company would qualify as a Canadian controlled private corporation and be eligible for a business investment loss if it carried on a business. Mr. Pauzé stated that he "preached" this to various investors. The availability to obtain a benefit of an allowable business investment loss was a major influence in Mr. Barrie deciding to lend money to Mr. Pauzé's corporation.

[32]     There are no financial records of the three corporations. It appears no income tax returns were filed by any of 117 Inc., 128 Ltd. and 134 Inc. This, coupled with testimony that I can charitably describe as confusing and incomplete, leads to some difficulty in assessing, for example, whether any of the corporations qualified as a small business corporation or carried on an active business within the meaning of subsections 248(1) and 125(7) respectively, of the Act.

[33]     I question whether 117 Inc. was the beneficiary of the loans purportedly made to it. First of all, the first three loans were made before 117 Inc. was incorporated and neither Mr. Barrie nor Mr. Pauzé could explain how that could be. This colours the other five loans, in particular the last loan, which was both made and due on April 1, 1997. The letter of October 10, 2001 from Mr. Pauzé to Mr. Barrie correcting the due date to April 1, 1998 does not impress me; it was written long after the fact and after the reassessments for 1997 was issued. I am not impressed with the testimony of either Mr. Barrie or Mr. Pauzé with respect to these loans. I would not be surprised if all of the Investment Agreements were prepared, signed and witnessed at the same time. Mrs. Pauzé, who witnessed the agreements, did not testify.

[34]     As far as the loan to 128 Ltd. is concerned, there is evidence that money was advanced from Mr. Barrie to that corporation. It appears that Mr. Barrie had his bank certify a cheque on February 24, 1998 for $10,000 payable to 128 Ltd. In the usual course of events, the $10,000 would become an asset of 128 Ltd. This was eight months after another of Mr. Pauzé's corporations, 117 Inc., purported to default on alleged loans of $13,600. Why Mr. Barrie would agree to again advance money to Mr. Pauzé without security, after being burned months earlier, remains unanswered, but is not particularly relevant. What I do find strange is that Mr. Barrie expected an annual return of 36 per cent on this investment.

[35]     As far as the loan to 134 Inc. is concerned, I have no idea if 134 Inc. used the money or if the money was applied to the benefit of GBP Inc. The evidence suggests that GBP Inc., not 134 Inc., may have carried on an active business and had some expectations to earn income from an active business. I have no evidence that the $77,000 loaned to 134 Inc. by Mr. Barrie was an asset of 134 Inc. or used in its business. I doubt Mr. Pauzé's recollection of how the money was applied.

[36]     Respondent's counsel argued that none of the loans, if made, to 117 Inc., 128 Ltd. and 134 Inc. was established by Mr. Barrie to have become a bad debt in the year he claimed the loss on the particular loan nor was Mr. Barrie deemed to have disposed of any of the debts in accordance with subsection 50(1) of the Act. He referred to Flexi-Coil Ltd. v. The Queen[4]. In Flexi-Coil, the Federal Court of Appeal agreed with the trial judge's conclusions that amounts claimed by Flexi-Coil as bad debts were too high as the amounts it determined to be bad debts did not fulfil the criteria for bad debts in all cases. The uncollectable bad debts were as determined by the Minister. The Minister's position at trial was that Flexi-Coil could not claim deductions for certain portions of bad debts because it had not established that the disallowed portions had become uncollectable.

[37]     In the appeals at bar, it is quite clear that Mr. Barrie relied solely on Mr. Pauzé. He appears to have relied on Mr. Pauzé's letter of July 1, 1997 that the corporation was "going out of business", although the corporation's partner in the business continued to operate the business. He did not inquire what assets the corporation may have had or how the assets, if any, were distributed. I agree that Mr. Barrie did not reasonably determine, if at all, that the debts to 117 Inc. had become uncollectable in 1997. Not one of the factors summarized by Rothstein, J.A. in Rich v.Canada[5], was seriously considered by Mr. Barrie.

[38]     Mr. Barrie did no more to determine whether the debts from 128 Ltd. and 134 Inc. had become bad in 1998 and 1999, respectively, than he did in determining whether the debts to 117 Inc. were bad. He relied strictly on the letters of December 27, 1998 and July 17, 1999 from Mr. Pauzé and concluded the debts from 128 Ltd. and 134 Inc, respectively, became bad in 1998 and 1999 respectively. The letter of December 27, 1998 informed Mr. Barrie that 128 Ltd. "will not be able to meet it's [sic] financial obligations" but he did not query what its obligations, other than to him, were and whether there were any assets available for the creditors to share, among other investigations. The letter of July 17, 1999 was not hopeless: Mr. Pauzé advised him that a "distribution may not be likely until some time in 2000". Clearly, this is not the establishment of a bad debt in 1999 and there is no evidence of further information received by Mr. Barrie later in 1999 to indicate any debt became bad in that year.

[39]     Mr. Barrie, it appears to me, was anxious to establish the debts as bad as soon as possible so as to claim an ABIL in as early a taxation year as possible. The losses were all written off within a year of their creation and they were made without regard to the financial condition of the borrowers. Even after a purported or initial loss to 117 Inc., Mr. Barrie made a loan to one and then, after another loss, to another corporation wholly owned by Mr. Pauzé without any security or investigation of the lenders' financial wherewithal. He did not make the determinations that the debts were bad in a reasonable and in a pragmatic business-like manner. With respect to loans to 128 Ltd. and 134 Inc., I doubt whether he considered the realistic chances of earning interest on the loans. Indeed, for what it is worth, the whole episode of loans to Mr. Pauzé's corporations were not made in a reasonable and in a business-like manner.

[40]     Even if all the loans Mr. Barrie claims he had to the three corporations were valid loans, I cannot conclude one way or the other whether any of 117 Inc., 128 Ltd. and 134 Inc. could qualify as a small business corporation; I do not know if substantially all of the fair market value of any corporation's assets were used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it.

[41]     The appeals are dismissed, with costs, if demanded.

Signed at Ottawa, Canada, this 9^th day of January, 2004.

"Gerald J. Rip"

Rip, J.

CITATION:

2004TCC37

COURT FILE NO.:

2001-3472(IT)G

STYLE OF CAUSE:

Kevin Barrie v. The Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

December 3, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice Gerald J. Rip

DATE OF JUDGMENT:

January 9, 2004

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

James Rhodes

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

---