Date: 20000621
Docket: 1999-2756-IT-I
BETWEEN:
ROBERT BABONAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The appellant, Robert Babonau, appeals from assessments of tax for 1994, 1995 and 1996 taxation years under the informal procedure. The appellant deducted expenses in computing income from a business on his understanding that he was carrying on a business; the Minister of National Revenue ("Minister") denied the deductions on the basis that the expenses were not related to a business carried on by the appellant.
[2] As will be seen, the subject assessments could have been avoided if a corporation and its shareholder had properly transferred assets from the former to the latter.
[3] In June 1992, Mr. Babonau incorporated Centennial Hockey League Ltd. ("Corporation") to carry on the business of renting ice to hockey teams in the Calgary area. Mr. Babonau was the Corporation's sole shareholder, director and officer. The Corporation rented ice in arenas from the City of Calgary and private operators. Mr. Babonau stated that the Corporation carried liability insurance as well as dental insurance for players, benefits the Corporation's competitors did not offer.
[4] A year after incorporation Mr. Babonau's accountant suggested that since the business was losing money the Corporation transfer the business to Mr. Baboneau personally. In this way Mr. Babonau would be able to write off the losses from his other income. Mr. Babonau testified that he believed that in July 1993, the Corporation transferred the ice rental business to him.
[5] Mr. Babonau stated he gave his accountant all the "papers" he had to assist in the transfer of the business. The accountant was to inform government authorities, including tax authorities, of the transfer. Apparently the accountant did not do what is necessary to effect a bona fide transfer of the business. The accountant, Mr. Kevin Neil, testified that at time of trial he was a "Junior Accountant" studying for designation as a Certified General Accountant. (I assume that during the years in appeal he was also a "Junior Accountant".) He confirmed that at all relevant times, but not at time of trial, he was the accountant for Mr. Babonau and the Corporation. Mr. Neil had discussed the proposed transfer of the business with Mr. Babonau and the latter instructed him to "set up a proprietorship" to own and operate Centennial Hockey League, as the proprietorship would be known.
[6] The corporate assets were sold to Mr. Babonau, Mr. Neil said. The parties do not appear to have discussed any payment or consideration for the transfer. No documents were prepared. Mr. Neil did prepare an invoice for the transfer of office equipment from the Corporation to Mr. Babonau, apparently for the purposes of the Goods and Services Tax ("GST") provisions of the Excise Tax Act. A claim was made for input tax credits and the account was closed, he said. Then, Mr. Neil testified, he "set up a GST account for the proprietorship".
[7] Appellant's counsel produced a copy of a GST return for registrants in the name of Centennial Hockey League Ltd. It is for the reporting period of July 1, 1993 to June 30, 1994. Mr. Neil crossed out the word "Ltd." on the form and added "not Limited, acting as Sole Proprietor", this appears to be how Mr. Neil "set up the GST account". Mr. Neil calculated that the "Centennial Hockey League" owed GST of $986.28. By notice dated February 15, 1995 Revenue Canada sent a statement of arrears for the period of July 1, 1993 to June 30, 1994 to Mr. Babonau. It is not clear from the evidence when Mr. Neil returned the original GST return for registrants and payment to Revenue Canada, although he thought it was around January 1995, before the statement of arrears was received.
[8] The change to the GST form was the only change Mr. Neil made to any of the books and records of either the Corporation or Mr. Babonau. Everything else – the bank account and insurance, for example – was not changed because Mr. Neil "felt I didn't need to . . . [and] didn't see why I had to". All these items remained in the name of the Corporation. The name Centennial Hockey League continued to be used. Mr. Neil stated that there was "no need to go to a lawyer". He "thought" he could arrange the transfer of business himself.
[9] During the years in appeal Mr. Babonau personally paid all debts that the Corporation could not pay. If money was necessary to "top off" the ice rentals, Mr. Babonau would write a cheque or use his Visa card. Sometimes he would be reimbursed by the Corporation. The business losses aggregated $32,614, $38,126 and $41,825 in 1994, 1995 and 1996 respectively; these are the amounts Mr. Babonau deducted in computing his income for the years in appeal.
[10] The Minister treated the expenses paid by Mr. Babonau as advances by shareholder.
[11] Mr. Babonau did not inform the insurance company of any change in the ownership of the business or that he and not the Corporation owned and operated the Centennial Hockey League. As late as September 16, 1996 the insurance broker who arranged the insurance for the business wrote to the Corporation advising it had placed an insurance policy in the name of the Corporation as the insured. Further, in an action commenced in June 1998 before the Court of Queen's Bench of Alberta by a person who was employed to referee hockey games and was allegedly assaulted by a hockey player, both the hockey player and the Corporation were described as defendants. No Statement of Defence was filed but Mr. Babonau's lawyers advised him, he testified, that he would "not be personally involved".
[12] Counsel for Mr. Babonau stated that there were two issues before me, (a) if the expenses were incurred for the business of the Centennial Hockey League and (b) if the Corporation was agent of Mr. Babonau and incurred the expenses on his behalf.
[13] Despite counsel's Herculean efforts on behalf of the appellant, I cannot agree that the Corporation was either the agent or trustee of the appellant and that the expenses were incurred on behalf of Mr. Babonau. No doubt the business operated at a loss and that Mr. Babonau was making good for the losses. However, as I appreciate the evidence, Mr. Babonau was advancing funds to the Corporation. He was not incurring expenses with respect to a business carried on by him.
[14] I cannot find any evidence that the Corporation was the agent for Mr. Babonau or was his trustee. He dealt with the insurance broker, for example, and did nothing to correct any impression the broker had that the Corporation owned the business. The bank account was also in the name of the Corporation. When the Corporation was sued there does not appear to have been any efforts made by Mr. Babonau or the Corporation to have the Corporation struck as defendant and put Mr. Babonau's name in its place. Indeed, Mr. Babonau indicated that his solicitor told him that he personally would have no involvement in the litigation.
[15] Unfortunately, there is no evidence that there was a transfer of assets from the Corporation to Mr. Babonau. During the years in appeal Mr. Babonau continued to represent to various persons, including the insurer and the bank, that the Corporation was the owner of the business. Mr. Babonau relied on an inexperienced accountant to do what the accountant had neither the knowledge or the expertise to accomplish. I do not know what representations Mr. Neil made to Mr. Babonau but, based on Mr. Neil's evidence, he appears to have taken the position that he could perform the work that was best left to a lawyer and not a "Junior Accountant".
[16] In the circumstances the appeals are dismissed.
Signed at Ottawa, Canada, this 21st day of June 2000.
"Gerald J. Rip"
J.T.C.C