[OFFICIAL ENGLISH TRANSLATION]
1999-3421(IT)G
BETWEEN:
PAUL-AIMÉ JONCAS,
Appellant,
and
Her Majesty The Queen,
Respondent.
Appeals heard on July 8 and 10, 2002, at Québec, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: René Roy
Marie-Hélène Bétournay
Counsel for the Respondent: Anne-Marie Boutin
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1993, 1994 and 1995 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 28th day of November 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 20021128
Docket: 1999-3421(IT)G
BETWEEN:
PAUL-AIMÉ JONCAS,
Appellant,
and
Her Majesty The Queen,
Respondent.
Reasons For Judgment
Lamarre Proulx, J.T.C.C.
[1] These appeals concern the 1993 to 1995 taxation years.
[2] The point for determination is whether the appellant incurred an amount of $162,325.71 for the purpose of gaining or producing income from a business or property within the meaning of subparagraph 40(2)(g)(ii) of the Income Tax Act (the "Act") and is thus entitled to an allowable business investment loss under paragraph 38(c) of the Act for the 1993 taxation year.
[3] At the outset of the hearing, the parties informed the Court that they had reached agreements on a few points, as follows:
[TRANSLATION]
(a) The amount of the business investment loss is $162,325.27, and the respondent admits that the loss has the characteristics required by paragraph 39(1)(c) of the Act. The remaining issue therefore is the one regarding the requirement of subparagraph 40(2)(g)(ii) of the Act, that the debt or right was acquired for the purpose of gaining or producing income from a business or property.
(b) For the 1993 and 1994 taxation years, the appellant has admitted that he must add the respective amounts of $15,488 and $6,421 as income from his medical profession in computing his income for those years. Those amounts are those referred to in subparagraph 8(e) of the amended Reply to the Notice of Appeal (the "Reply"). The respondent has agreed to delete the penalties in respect of those amounts, which penalties are referred to in subparagraphs 8(f) and (g) of the Reply.
(c) According to subparagraphs 8(h) to (k) of the Reply, the Minister of National Revenue (the "Minister") has added an amount of $8,657.16 to the appellant's income for the 1995 taxation year in respect of a benefit relating to the use of a motor vehicle put at his disposal by 162481 Canada Ltd. The appellant was the principal shareholder of that corporation. That amount must be reduced to $2,992.34, according to the respondent, because the appellant was only in Canada for the last four months of the year. However, the appellant disputes the inclusion of that benefit.
(d) The respondent consents to the write-off of $3,586.19, which was included in computing the appellant's income in respect of a benefit relating to the use of a snowmobile and described in subparagraphs 8(l) to (p) of the Reply.
(e) For the purposes of the bill of costs, the parties agree that the tariff that should apply to these appeals is Tariff B.
[4] With respect to the benefit relating to the use of a motor vehicle, the Minister relied on the following facts:
[TRANSLATION]
(h) During the 1995 taxation year, the appellant was the principal shareholder of 162481 Canada Ltd.;
(i) During the entire 1995 taxation year, 162481 Canada Ltd. put a motor vehicle at the disposal of the appellant and/or a person related to him;
(j) During the 1995 taxation year, 162481 Canada Ltd. was the lessee of the motor vehicle put at the appellant's disposal; the monthly cost of that lease was $721.43;
(k) For the appellant's 1995 taxation year, the Minister of National Revenue added the amount of $8,657.16 ($721.43 x 12 months) to the appellant's income in respect of a benefit relating to the use of a motor vehicle;
[5] The amended Notice of Appeal states the following on this subject:
[TRANSLATION]
. . .
13. In addition, the agents of the respondent have added taxable benefits from the use of a snowmobile and a motor vehicle to the appellant's income for the 1995 taxation year.
. . .
18. The appellant further appeals from the Minister's decision to tax taxable benefits for the 1995 taxation year regarding the use of a snowmobile and a motor vehicle because those assets were never used for his personal purposes during that taxation year.
[6] A tax expert from the accounting firm of Price Waterhouse Coopers sent a letter dated September 22, 1998, stating the following (Exhibit A-15):
[TRANSLATION]
. . .
TAXATION OF A BENEFIT FOR THE USE OF A MOTOR VEHICLE
During the years in issue, Dr. Joncas owned a truck that was registered in his name until December 1997.
Corporation 162481 Canada Inc. owned a car. When Dr. Joncas left Blanc-Sablon, he and the corporation exchanged vehicles without there being a change of owner. Dr. Joncas continued to pay for the registration and insurance of his truck, and the corporation did the same with respect to its car. Dr. Joncas therefore received the use of the car in exchange for the use of his truck by the corporation. Consequently, he received no benefit through that transaction.
. . .
[7] At paragraph 18, the amended Notice of Appeal reads as follows on the subject:
[TRANSLATION]
18. The appellant further appeals from the Minister's decision to tax taxable benefits for the 1995 taxation year regarding the use of a snowmobile and a motor vehicle because those assets were never used for his personal purposes during that taxation year.
[8] The appellant stated in his testimony that the car had not been leased as was stated in the Reply. The car was the property of the corporation, and the corporation had let him use it in Québec because he had allowed the corporation to use his truck in Blanc-Sablon. That is not what was stated in the amended Notice of Appeal. In a letter dated January 15, 1999, the appellant gave the following explanation to an appeals officer (Exhibit A-16):
[TRANSLATION]
. . .
(b) Taxable benefit for the use of a motor vehicle provided by 162481 Canada Inc.
I admit that that vehicle had been put at my disposal for personal and business purposes for four months of 1995 (i.e., from September to December of that year). During that period, the vehicle was used for business for the various companies related to 162481 Canada Inc. The business and personal use portions for that period were approximately 40 percent for business and 60 percent for personal use.
Under the agreement I had with 162481 Canada Inc., in exchange for my personal use of their vehicle, I lent them my vehicle, a four-wheel-drive Ford F150 truck. They used my Ford truck for strictly business purposes during all of 1995 (i.e., 12 months).
Therefore, for four months I had access to the use of a vehicle provided by 162481 Canada Inc. for personal (60 percent) and business (40 percent) purposes, and, in exchange, 162481 Canada Inc. used my personal vehicle, which was in Blanc-Sablon, for business purposes (100 percent) for 12 months.
For that exchange, in which I am at a financial loss, I have been assessed a taxable benefit of $8,567.
Whereas there was an exchange of vehicles; whereas 162481 Canada Inc. received a financial advantage from that exchange; and whereas I gained nothing financially from that exchange-it was quite the opposite-I ask that this assessment be vacated.
. . .
[9] A motor vehicle insurance policy (Exhibit A-14) was filed as evidence of ownership of the truck in 1995 and of the appellant's use of it for the corporation's business purposes. It states that the effective period of the insurance policy was from March 18, 1996, to March 18, 1997, that the vehicle was to be used for pleasure driving, excluding round trips to work, and that the appellant was the principal driver.
Business Investment Loss
[10] The facts on which the Minister relied in disallowing this loss as an allowable business investment loss are described in subparagraphs 8(q) to (aa) of the Reply:
[TRANSLATION]
(q) For his 1993 taxation year, the appellant claimed a business investment loss of $222,325.77, which he purports to have paid to the Lower North Shore Transportation Integrated Cooperative (hereinafter the "Cooperative"); the appellant thus claimed an amount of $166,744 (75 percent of $222,325.77) as an allowable business investment loss;
(r) The Cooperative was founded on March 26, 1990;
(s) The only document that was provided to the Minister of National Revenue is a financial statement of the Cooperative for the period from April 1 to November 30, 1990;
(t) At November 30, 1990, the 272 members of the Cooperative holding 8,645 shares had invested $86,450;
(u) The appellant provided no documents showing that he in fact lent the Cooperative the amount of $222,325.77;
(v) The appellant provided no documents showing the Cooperative's activities;
(w) The Cooperative did not carry on a business;
(x) The appellant provided no documents on the basis of which it could be concluded that the Cooperative had ceased its activities;
(y) The appellant provided no documents on the basis of which it could be concluded that the Cooperative had assigned its property;
(z) The appellant provided no documents showing that he had a debt of $222,325.77 that had become unrecoverable.
[11] The amended Notice of Appeal states the following on this subject at paragraphs 3 to 10:
[TRANSLATION]
3. The appellant is a doctor, a member of the Corporation professionnelle des médecins du Québec, and also carries on various commercial undertakings, some of which are involved in passenger air transportation.
4. In addition, during the 1993 taxation year, the appellant was a member of a cooperative having the corporate name "Lower North Shore Integrated Transportation Cooperative" (hereinafter the "Cooperative").
5. The Cooperative offered certain administrative services (accounting, bookkeeping, etc.) and operated a transportation business and owned a helicopter for that purpose.
6. The appellant was involved in the management of the Cooperativefor a number of years as chairman of the board of directors.
7. The appellant left the board of directors of the Cooperative in view of the potential conflict of interest between his professional activities as a physician and the operation of the Cooperative's business.
8. Given the financial difficulties facing the Cooperative, the appellant made advances to the Corporative totalling $222,325.00, bearing interest, to enable it, among other things, to replenish the working capital of the business and to repay the amounts owed to the financial institution that had financed the helicopter purchase.
9. The Cooperative ceased operating its business in 1993 and the amounts advanced by the appellant then became a bad debt for him.
10. In his return of income for the 1993 taxation year, the appellant subsequently claimed "a business investment loss" in respect of that amount of $222,325.00.
[12] One must recall the admissions that the parties made and that were referred to at the start of these reasons, that is, that the debt is in the amount of $162,325.27 and that it has the characteristics required by paragraph 39(1)(c) of the Act. The only remaining issue is whether the debt was incurred for the purposes of gaining or producing income from a property or business within the meaning of subparagraph 40(2)(g)(ii) of the Act.
[13] Upon hearing the evidence, I find that the amended Notice of Appeal correctly stated the facts.
[14] James Fequet was the first witness. Mr. Fequet has been a chartered accountant since 1990. He worked at the accounting firm of Samson et Bélair from 1986 to 1990. In 1990, he returned to St-Augustin, where he is originally from.
[15] The articles of incorporation of the Lower North Shore Integrated Transportation Cooperative (the "Cooperative") were filed as Exhibit A-1. The Cooperative's project began to be developed in 1989. The Cooperative was incorporated on March 26, 1990, and its purpose was:
[TRANSLATION]
- To operate a business in order to provide its members with goods and/or services in the field of maritime, land and air transportation;
- To hold and use every transportation permit necessary in order to achieve the purposes of the business;
- To acquire, lease or manage any apparatus, equipment or immovable necessary to the operation of the business; and
- To promote the economic, social and cooperative training of its members in order to promote the economic development of the Lower North Shore.
[16] The appellant's name is the first indicated on the list of the 12 founders (natural persons). The names that follow are those of four merchants, a garage operator, a garage manager, the director of the Caisse populaire, a day labourer, an information officer, a plumber and a middle manager. The list of corporate members includes a number of corporations of which the appellant was the principal shareholder.
[17] Exhibit A-1 also includes the report of the organizational meeting held on May 20, 1990. The appellant is named as chairman and James Fequet as secretary. There were 10 other directors, a number of whom were on the list of the founders.
[18] Mr. Fequet was the director general of the Cooperative until September 25, 1992. He remained secretary of the board of directors until 1995. He and two other persons were the employees of the Cooperative.
[19] Exhibit A-2 is the Master Plan of the Lower North Shore Integrated Transportation Cooperative dated October 1991. That document states that the Cooperative's head office is in St-Augustin and that there is a branch office of the Cooperative on leased premises in Blanc-Sablon. The objectives of the Cooperative were, briefly stated, to operate a business in order to provide its members with goods and/or services in the field of maritime, land and air transportation and to promote the economic interests of the region by promoting the economic interests of its members.
[20] That same document states that there were 177 members and four auxiliary members. Some 102 persons had begun to pay their membership dues of $550. At the time, the Cooperative appeared to have had six employees in addition to Mr. Fequet.
[21] The Cooperative also offered bookkeeping, financial statement preparation and business consultation services. The Cooperative offered the services of Mr. Fequet and two assistant accountants for that purpose.
[22] The same report (Exhibit A-2) states that a Bell 206 BII helicopter was bought for $500,000. The purchase was financed by the Laurentian Bank, and the helicopter was operated by Trans-Côte Inc., a corporation of which the appellant was the principal shareholder.
[23] The report also refers to a contract for the supply of services by the Cooperative to Essor Helicopters Inc. at the Chevery Airport in 1990; the purchase and renovation of a building in St-Augustin for the Cooperative's head office; the construction of a helicopter hangar at Chevery Airport; the installation of the aircraft fuel tank; the management of a scallop farm project for the consortium P.A.S. Enr.; the purchase of office equipment; the purchase and resale of a barge and the participation in various files of the departments of Transport and Health and Social Services.
[24] The report (Exhibit A-2) refers to a $1,013,000 financing agreement with various banks. That agreement reads in part as follows:
K. Start-up Financing Agreement with the Federation of Caisses Populaires.
During September 1991 an agreement was reached between the cooperative, Laurentian Bank of Canada, Federation of Caisse Populaire, Caisse Populaire de Lourdes de Blanc Sablon, Caisse Populaire de La Tabatière, Caisse Populaire de Tête à la Baleine and the Société de Développement Industriel (SDI) on a financing deal for the cooperative of $1,013,000 as follows:
Institution Participation
Laurentian Bank of Canada $ 493,000 capital lease
Caisse Populaire de Blanc Sablon *150,000 loan
50,000 credit margin
Caisse Populaire de La Tabatière *150,000 loan
Caisse Populaire de Tête à la
Baleine *85,000 loan
Cooperative members 85,000 common share issue
$1,013,000
The funds from this financing project were used to help finance the achievements mentioned in A to J, plus the cooperative's start-up costs and working capital.
*$190,000 of these loans are guaranteed by the SDI.
[25] The first and last financial statements prepared by an outside auditor are dated November 30, 1990, and were filed as Exhibit A-3. On page 8, in the chapter entitled "Long Term Debt", an amount of $3,000 is indicated respecting a "Note payable from a director, without interest nor terms of repayment". Exhibits A-4 and A-5 are draft financial statements prepared by Mr. Fequet.
[26] Exhibit A-6 is a document written by hand by the appellant and addressed to the two senior directors and to Mr. Fequet. The appellant had ceased to be chairman in 1991, but he had remained an active advisor to the Cooperative. That document is a summary of a meeting held on February 19, 1992. The appellant reviewed the decisions that had been taken and gave additional instructions for the management of the Cooperative's business. The last page of the document is addressed in particular to James [Fequet]. It states very clearly that the amounts lent by the appellant bear interest at the same rate as the rate granted to the Cooperative by the Laurentian Bank.
[27] Exhibit A-7 is a list of advances the appellant made to the Cooperative. That list was apparently typed by Revenue Canada officers. Mr. Fequet said he had typed the list by hand. It states the date and amounts of the cheques written by the appellant to make the instalments payable on the helicopter. The amounts lent were spread over the period from November 19, 1990, to May 25, 1993. Exhibit A-8 is the minutes of a directors' meeting dated March 14, 1992. There were now four directors. The appellant was present but not as a director. The appellant granted the Cooperative a $20,000 loan at 10 percent interest. That amount appears in Exhibit A-7. There were two amounts of $10,000 each.
[28] Mr. Fequet admitted that the Cooperative had wanted to acquire Trans-Côte Inc., a corporation of which the appellant was the principal shareholder. Exhibit I-3, a letter from Mr. Fequet to an official of the Centre de santé de la Basse Côte-Nord, states that the Cooperative had acquired Trans-Côte Inc. but explained that, for some reason, the agreement had never been completed.
[29] The appellant testified. He is a physician and a native of Blanc-Sablon. He and his family own a number of businesses there. Before studying medicine, he had studied engineering.
[30] The appellant stated that another Quebec region had managed to establish an integrated transportation cooperative on a profitable basis and that this was the hope of the members for both their own economic purposes and those of their region. He had made loans to the Cooperative to enable it to start up and get through its growth period.
[31] As Exhibit A-10, the appellant filed a financial lease agreement entered into between the Laurentian Bank and the Cooperative concerning the acquisition of a helicopter for $450,000. That document is dated April 24, 1991. The appellant had signed it as president of the Cooperative. Exhibit A-11 is a demand note dated April 24, 1991, issued by the Cooperative to the bank. Exhibit A-12, dated April 29, 1991, also concerns the acquisition of the helicopter. Exhibit A-13 is a surety dated April 24 that was signed by the appellant for the bank concerning the helicopter acquisition.
[32] The appellant admitted that most of the loans to the Cooperative had been made to help it make the financial lease payments on the helicopter acquired by the Cooperative for the purposes of establishing integrated transportation.
[33] Harold Bouchard testified for the respondent. He had calculated the benefit as being in respect of a leased vehicle. Corporation 162481 Canada Inc. from which he had obtained the computerized statement of advances to the appellant, which he filed as Exhibit I-5, did not explain the true nature of the payments.
[34] He also filed the various requests for information sent to the appellant, requests that apparently went unanswered for a long period of time. The last of the requests is dated January 15, 1997 (Exhibit I-6). One request had been made to Mr. Fequet on October 17, 1996 (Exhibit I-7). However, on February 28, 1997, there is a letter of that date from the appellant to Mr. Fequet, which was filed as Exhibit I-8. That letter requested financial statements and other documents from the Cooperative substantiating the business investment loss and the notice of bankruptcy.
Arguments
[35] Counsel for the appellant argued that the amounts of money lent to the Cooperative were interest-bearing. Furthermore, the purpose of those loans was to enable the Cooperative to retain ownership of the helicopter, as a result of which the appellant's various businesses, which were members of the Cooperative, were able to earn business income.
[36] Counsel referred to the Cooperatives Act, R.S.Q., c. C-67.2, as amended on July 1, 1999, and argued that the rebates provided for by that act were a source of income.
[37] Counsel for the respondent suggested that the appellant's purpose in his investment in the Cooperative was to sell the shares he had held in a corporation called Trans-Côte Inc., not to benefit the businesses of which the appellant was a shareholder.
[38] Counsel stated that payment of interest on the loans was not enforceable. No document clearly states that the Cooperative undertook to pay interest on the loans. Furthermore, the rebates to the members of the Cooperative did not constitute income. She noted, however, that the purpose of the Cooperative was to provide services to its members at lower cost, but she argued that the relationship between loans and income must be more immediate.
[39] With respect to rebates, she referred to the Cooperatives Act, supra, in particular to subsection 4(5) and to the relevant portion of section 143 concerning operating surplus or surplus earnings:
4. The rules of cooperative action are as follows:
. . .
(5) the surplus earnings or operating surplus must be allocated to the reserve or to rebates to members in proportion to the business carried on between each of them and the cooperative, or to other accessory purposes determined by law;
. . .
CHAPTER XX
OPERATING SURPLUS OR SURPLUS EARNINGS
143. . . .
Rebates.
The rebates are allotted to the members and to the auxiliary members, if any, in proportion to the business done by each of them, during that fiscal year, with the cooperative.
. . .
[40] Counsel referred to an article by Professor Roger Durand, Les traits juridiques distinctifs de la coopérative et de la compagnie au Québec, (1987) 17 R.D.U.S. 415, at page 476:
[TRANSLATION]
. . . The allotment of rebates to members of a cooperative adheres to an exclusive rule; rebates are allotted to members in proportion to the business done by each of them with the cooperative, as stipulated by the Commission on Cooperative Principles of the International Cooperative Alliance and as codified in the Quebec legislation. That rule is based on the very nature of the operating surpluses of a cooperative, which, it should be recalled, constitute all overpayments made by members for the goods and services purchased from their cooperative and not profits. . . .
Conclusion
[41] I shall begin by including in the appellant's income a benefit in respect of the personal use of a car, which is the property of a corporation of which he is the principal shareholder. Apart from the appellant's statements that he allowed that corporation to use a truck of which he was the owner and that this constituted an exchange and not a benefit, there is no written evidence to that effect. The only document filed was the appellant's proof of insurance on a truck but that was insurance for a year subsequent to the one in question, and the use stated was pleasure driving. There is no corporate document. The Notice of Appeal does not state the exact facts. Accordingly, the evidence is insufficient to have the taxed benefit written off.
[42] Now let us turn to the allowable business investment loss. I will begin with the first point raised by the respondent-that the appellant lent money to the Cooperative so that it could acquire Trans-Côte Inc., a corporation of which the appellant was the principal shareholder. It is impossible for me to assess the weight and significance I should attach to that statement. That is a point that should have been alleged because evidence is required in order for it to be understood. In fact, no allegation was made on that point and accordingly no evidence was brought to explain or rebut it. I therefore set it aside.
[43] As to the binding force, or lack thereof, of the agreement on interest, I find that the evidence showed that, if the Cooperative had been able to repay the loans, it would have done so with interest.
[44] In my opinion, however, the evidence showed that the appellant's primary purpose in lending the amounts in question to the Cooperative was to enable the Cooperative to have the necessary operating funds and to retain ownership of the helicopter.
[45] It was as a member of the Cooperative that the appellant lent it the amounts in question. A member of a cooperative is not a shareholder. Section 51 of the Act provides that, to be a member of a cooperative, a person or a partnership must have an interest as a user of the cooperative's services.
[46] The meaning that should be given to subparagraph 40(2)(g)(ii) of the Act is explained in the decision of the Federal Court of Appeal in Byram v. Canada, [1999] F.C.J. No. 92 (Q.L.). At issue in that case was a capital loss from an interest-free loan granted to a corporation by a lender who was a shareholder. The Court found that the loan had been granted for the purpose of earning income from dividends.
[47] The passages that I find most informative in helping to determine whether a debt was incurred for the purpose of gaining or producing income from a property or business are quoted:
11 It is not disputed that the Respondent issued interest-free loans to USCO for the purpose of earning income in the form of dividends from the company. The Appellant, the Crown admits that, in a broad sense, the disputed loan was a device for financing the operations of USCO and that the expected return from the loan is through dividend income.
. . .
14 In contrast, subparagraph 40(2)(g)(ii) of the Act provides that any capital loss from the disposition of a debt is deemed to be nil, unless the debt was acquired for the purpose of gaining or producing income from a business or property. The relevant portions of this section read as follows:
40(2)(g) a taxpayer's loss, if any, from the disposition of property, to the extent that it is . . .
(ii) a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length, . . . is nil.
15 Unlike paragraph 20(1)(c) this section only requires a single stage inquiry, namely what was the purpose for acquiring the debt. . . .
16 The language of section 40 is clear. The issue is not the use of the debt, but rather the purpose for which it was acquired. While subparagraph 40(2)(g)(ii) requires a linkage between the taxpayer (i.e. the lender) and the income, there is no need for the income to flow directly to the taxpayer from the loan.
17 Such an approach is also consistent with commercial reality. Frequently, shareholders make such loans on an interest-free basis anticipating dividends to flow from the activities financed by the loan. To adopt the position of the Minister would require that this Court ignore this reality. It would also be contrary to the comments of the Supreme Court of Canada in Stubart Industries Ltd. v. The Queen. Commercial reality is to be considered by the Courts in interpreting tax provisions like subparagraph 40(2)(g)(ii) so long as it is consistent with the text and purpose of the provision.
18 The ultimate purpose of a parent company or a significant shareholder providing a loan to a corporation is, without question, to facilitate the performance of that corporation thereby increasing the potential dividends issued by the company. This purpose is clearly within the scope of both the text and the purpose of subparagraph 40(2)(g)(ii), a section which is directed towards preventing taxpayers from deducting losses that are not incurred for the purpose of earning income from a business or property.
19 There is a growing body of jurisprudence that considers current corporate reality as being sufficient to demonstrate that the expectation of dividend income justifies a capital loss deduction under subparagraph 40(2)(g)(ii). As articulated above, this approach is consistent with current corporate realities and the purpose of subparagraph 40(2)(g)(ii).
. . .
21 It is equally clear that the anticipation of dividend income cannot be too remote. It is trite law that sections 3 and 4 of the Act, in conjunction with the rules set out in subdivisions (a) through (d) of division B, establish that the income of a taxpayer is to be determined on a source by source basis. Furthermore, the availability of certain deductions under the Act, including subparagraph 40(2)(g)(ii), require that some regard be given to the source of income that is relevant to the deduction. Accordingly, a deduction cannot be so far removed from its corresponding income stream as to render its connection to the anticipated income tenuous at best. This does not preclude a deduction for a capital loss incurred by a taxpayer on an interest-free loan given to a related corporation where it had a legitimate expectation of receiving income through increased dividends resulting from the infusion of capital.
23 . . . The determination of whether there is sufficient connection between the taxpayer and the income earning potential of the debtor will be decided on a case by case basis depending on the particular circumstances involved.
[48] According to that decision, the lender taxpayer need not derive income directly from the loan because taxpayers sometimes grant interest-free loans, expecting that the activities financed by those loans will produce income. Commercial realities must be taken into account. The question as to whether there is a sufficient connection between the debt and the taxpayer's income is decided on a case-by-case basis on the facts of each case.
[49] In this instance, the nature of cooperatives must be considered. I refer on this point to the article by Jean-Pierre DesRosiers, supra, at page 39:5:
[TRANSLATION]
The cooperative is a unique form of partnership originating in the spirit of economic development and mutual aid. This mode of operation has managed to meet market needs such that it is now an important part of our economy and has evolved in various forms. Among the features that distinguish the cooperative from other entities is the fact that its customers are its owners and that it therefore acts, above all, in their best interests. . . .
A cooperative is a partnership of members who have common economic and social needs and who, with a view to satisfying those needs, join forces to operate a business in accordance with certain rules of action specific to the cooperative movement, including the following: . . .
[50] As to the nature of rebates, it seems established that they do not constitute a sharing of profits, but rather a remittance of the costs of services rendered by the Cooperative to its members. I refer on this point to a passage from an article in the appellant's book of authorities by Jean-Pierre DesRosiers, CA M. Fisc., entitled La fiscalité des coopératives et de leurs membres, APFF Congrès 1995, at page 39:14:
[TRANSLATION]
. . . A cooperative does not realize a profit or loss, but rather an operating surplus or surplus earnings, or a deficit. . . . Deficits are charged against the reserve, whereas operating surpluses or surplus earnings are allotted as rebates or paid into the reserve in accordance with the members' decision at the annual meeting.
2.5.1 - Rebate Payments
A rebate is a remittance of the overpayment made by members or an adjustment of prices of the goods and services delivered or rendered to the cooperative. Rebates may not be paid from other sources of income such as investments. It is expected that rebates may vary with the nature or quality of the goods and services transacted.
[51] In the appellant's case, the monetary reward for his investment will not be potential dividend income, as in Byram, supra, but a reduction in the cost of services required by his businesses in the course of their affairs. It seems to me that the relationship is just as close as in the case of a shareholder who lends to his corporation.
[52] The purposes for which the appellant made the loans were business purposes. The loans were not made for philanthropic or family purposes. His purpose in making the loans to the Cooperative was to facilitate and promote the commercial activities of his businesses and thus to increase his own income. I therefore conclude that the debt was acquired by the appellant for the purpose of earning income from his businesses within the meaning of subparagraph 40(2)(g)(ii) of the Act.
[53] The appeal is allowed on the following basis: (a) the appellant is entitled to deduct the amount of $162,325.27 in respect of allowable business investment losses; (b) as admitted at the start of the hearing, the appellant shall include in his income for 1993 and 1994 the respective amounts of $15,488 and $6,421 and the penalties assessed in respect of those amounts shall be deleted; (c) the benefit in respect of the personal use of an automobile in the amount of $2,992.34 shall be included in computing the appellant's income, but the benefit in respect of the use of a snowmobile is cancelled.
Signed at Ottawa, Canada, this 28th day of November 2002.
|
"Louise Lamarre Proulx" |
J.T.C.C.