Tax Court of Canada Judgments

Date: 20010418

Docket: 98-1750-IT-G

BETWEEN:

JACQUES ST-ONGE INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Archambault, J.T.C.C.

[1]            Through 3091-5243 Québec Inc. (Salvage), a wholly owned subsidiary, Jacques St-Onge Inc. (Management) invested in a project (salvage project) that turned out badly. In 1994, Management lost at least $186,010 in the project, an amount corresponding to the cost of its shares in Salvage. However, due to exceptional circumstances, Management might be able to eliminate a very large portion of the loss by obtaining tax benefits (double tax benefit) that are much more generous than those the Minister of National Revenue (Minister) is prepared to grant it. If successful in this appeal, Management would be entitled to deduct for 1994 an amount of $139,507.50 (75 percent of a business investment loss (BIL) of $186,010) as an allowable business investment loss (ABIL). As a result of the amalgamation of Management and Salvage on May 15, 1997, it was able to deduct $211,202 from its taxable income as a business loss incurred by Salvage. Management would, in a manner of speaking, be deducting the same loss nearly twice.

[2]            The main issue in these appeals is whether Management incurred a BIL during its 1994 fiscal year on the shares it owned in Salvage. The only reason given by the Minister's auditor for not allowing Management to deduct the ABIL is that it was not reasonable to expect on April 30, 1994, that Salvage would be wound up or dissolved, as required by clause 50(1)(b)(iii)(D) of the Income Tax Act (Act).

[3]            Since it carried over part of the loss to the 1991, 1992, 1993 and 1995 taxation years under section 111 of the Act, Management is challenging the assessments made by the Minister for all of those years. However, the disposition of the case depends entirely on the tax treatment of the loss incurred in 1994. Moreover, at the start of the hearing, Management amended its Notice of Appeal to state that the BIL of $223,031[1] indicated in its 1994 tax return should be reduced to $186,010. Accordingly, the ABIL that Management wishes to deduct is no longer $167,273 (75 percent of $223,031) but rather $139,507. On the other hand, Management is claiming in the computation of its business income a deduction of $36,915 (additional expenses) for expenses it claims to have incurred itself in carrying out the salvage project.

Facts

[4]            Management was incorporated in 1968 for the purpose of holding interests in various corporations. Its head office is in Caplan on the Gaspé Peninsula, and its fiscal year ends on April 30. Jacques St-Onge owns 99 percent of its shares, and his son owns the rest. In 1994, Management owned:

- 51 percent of Pétroles Chaleurs (1987) Inc. (Pétroles) (the other shares were owned by Petro-Canada)

- 84 percent of Toyota Baie des Chaleurs Inc. (the other shares were owned by Jacques St-Onge's brother)

- 81 percent of Bonaventure Nissan (the percentage varied during the relevant period)

- 71 percent of Gaspésie Auto Inc. (the other shares were owned by three other investors)

- 33 1/3 percent of Les Immeubles Landry et St-Onge Inc. (the other shares were owned equally by two other persons)

- 400 preferred shares of Automobiles Caplan (Bonaventure) Inc.[2]

Mr. St-Onge said that he created a new corporation each time he started a new business.

[5]            Mr. St-Onge is the president and chief executive officer of Pétroles, a corporation whose day-to-day management he himself handles. As for the other corporations owned by Management, Mr. St-Onge's role is limited to being on the board of directors. Those other corporations are run by full-time managers.

[6]            Mr. St-Onge testified that, during the 1980s, he or Management had sold a ship to 2754002 Canada Inc. (MTI), a corporation owned by Michel Tadros. Management had had to guarantee the loan (ship loan) obtained to pay the ship's purchase price. The ship was to be used for cod fishing, but MTI had a great deal of difficulty operating it profitably because of the disappearance of cod stocks in the Gulf of St. Lawrence.

[7]            It was Michel Tadros who approached Mr. St-Onge in the spring of 1993 to try to get him interested in the salvage project, which involved salvaging 130 tonnes[3] of nickel from the liner Empress of Ireland, which had sunk on May 29, 1914, off Ste-Luce-sur-mer near Rimouski. The liner was 180 feet underwater. According to Mr. Tadros, the cargo of nickel was worth $1,600,000, while the salvage costs were not supposed to be more than $200,000. Management therefore agreed to get involved in the project.

[8]            For the purposes of the salvage project, MTI was to provide the ship needed to transport personnel and salvage the nickel. Salvage was not responsible for paying the marine insurance costs or the interest expenses on the ship loan (except as a surety). After all the expenses incurred in the salvage project were paid, the profits were to be divided equally between the shipowner, the divers and Salvage.

[9]            On April 29, 1993, to get the project under way, Management advanced $11,400 for the purchase of diesel fuel for the ship from Pétroles. The same day, Management also paid $22,201.12 to the Caisse populaire de Caplan for the arrears owed by MTI on the ship loan. Those amounts were supposed to be repaid to Management after the salvage project was successfully completed. However, MTI has not yet repaid the $22,201.12. Mr. St-Onge said that MTI has had constant financial problems.

[10]          Having noted the risks involved in diving more than 180 feet underwater, Management decided to incorporate Salvage. According to Salvage's 1993 tax return, it was incorporated on May 18, 1993. Its fiscal year ended on December 31. An agreement dated May 25, 1993, between Management and Salvage[4] states that Salvage agreed to [TRANSLATION] "issue 265,000 Class D shares and [sic] its capital stock to [Management]". It also states that Salvage had [TRANSLATION] "received to date $22,201.12 in advances and converted that amount into Class D capital stock". In making his reassessment for 1994, the Minister's auditor assumed that Salvage's capital stock as at December 31, 1993, and December 31, 1994, was made up of 10 class A shares and 186,000 class D shares, for which the total paid-up capital was $186,010. Counsel for Management admitted that fact at the start of the hearing.[5]

[11]          According to a handwritten summary by Mr. St-Onge (Exhibit A-1) indicating the amounts invested by Management in the salvage project, all of Management's outlays, aside from the two referred to above, were made after Salvage was incorporated. Most of the amounts invested by Management were first advanced to Salvage, which then paid its suppliers.

[12]          During his testimony, Michel Bernier, a tax specialist with RCMP, pointed out on a document (Exhibit A-5) the following additional expenses that Management wishes to deduct as its own expenses:

[TRANSLATION]

                                                                                                    $                         

Balance as at April 30, 1993                                                                 22,201.12[6]

Cheque transfer to [MTI]

And/or Michel Tadros in connection with the project

                                B              882                           4,999.00

                                B              902                           5,000.05

                                B              941                           300.00

                                                                                                                10,299.05

Transfer to Denis Boissonneault [sic]

07-10-93 B              976                                                           400.00

Invoices paid by [Management]

20-05-93 Centre Plongée Gaspé Inc.                  800.00

05-06-93 Boutique du Plongeur Ltée                                 3,215.00[7]

                                                                                                                36,915.17

[13]          According to Mr. Bernier, these expenses are allowable in computing Management's business income because they were all paid by Management directly to the suppliers and not to Salvage.

[14]          Fifteen 15 or so people had to be hired for the salvage project, including one team to operate the ship and another to dive. It seems that the diving activities began in June 1993. Unfortunately, a few weeks later the problems started. Salvage's divers were paid a visit by the Sûreté du Québec and the Royal Canadian Mounted Police. Other government agencies such as the CSST also came to investigate. Finally, an interlocutory injunction was obtained by the Société touristique de l'Empress of Ireland, which was disputing Salvage's right to explore the wreck. Salvage had to stop its nickel salvage activities temporarily. The only thing that had been salvaged by that time was some teak, which was seized by the receiver of wrecks.

[15]          Because of all the problems it encountered, and even though it was able to have the interlocutory injunction quashed, Salvage decided to abandon the salvage project for good. Notices of termination were sent to nine employees on September 16, 1993. They included one of the two captains, some divers, a mechanic and a cook. The last day of work for those employees was August 20, 1993. The other captain left voluntarily on September 15, 1993, while the last two employees were let go on September 18 and October 9, 1993, because of a lack of work.

[16]          Mr. St-Onge said that, on April 30, 1994, Salvage had no intention of reviving the salvage project and that Management had given up all hope of recovering its investment in Salvage. The way Mr. St-Onge put it was that Salvage was [TRANSLATION] "dead" after December 31, 1993, and he had no intention of using that corporation for another business. Moreover, no financial statements were drawn up for Salvage during the months that followed the end of the 1993 fiscal year, and no investment in Salvage is shown in Management's financial statements for the fiscal year ending on April 30, 1994, or for the following fiscal years. It was only at the request of the Minister's auditor that financial statements were prepared for 1993 to 1996. However, Salvage regularly filed declarations with the Ministère des Institutions financières to avoid any penalties.

[17]          The only assets shown on Salvage's balance sheet as at December 31, 1993, are cash on hand of $703 and a $2,981 tax claim. It contains no reference to the teak salvaged in 1993 that had been seized by the receiver of wrecks. The teak was finally released from seizure, and Salvage got it back for $500. It is still on a dolly in Mr. St-Onge's back yard. He said that he considers it part of Canada's national heritage and intends to donate it once his challenge to the Minister's assessments has been sorted out.

[18]          Mr. St-Onge stated that he never intended to [TRANSLATION] "wind up or dissolve" Salvage and that there was no question of that corporation going bankrupt. Since he was a well-known businessman in the area, it was important that all of Salvage's creditors be paid, even the government agencies, given his obligation as a director to ensure that the amounts owed were paid.

[19]          Mr. Bernier confirmed that Mr. St-Onge had lost all interest in Salvage and did not want to pay any accounting fees to have its financial statements prepared. He explained that that the company was not wound up or dissolved because of the existence of legal proceedings or threatened legal proceedings that had not yet been settled. Salvage's financial statements as at December 31, 1994, show an account payable of $28,076 on December 31, 1993, and $26,697 on December 31, 1994. It would have been unwise to wind up Salvage in view of certain statutory provisions, including the provisions of the Companies Act and the Civil Code under which Salvage's directors could have been held liable if it had been dissolved while it had outstanding debts.

[20]          Moreover, there was no question in 1994 of amalgamating Salvage and Management. The decision to amalgamate was apparently not made until after the Minister disallowed the deduction of the ABIL. That decision by the Minister was sent in a proposed assessment dated January 30, 1997. Since Management was being denied the ABIL, a way for it to deduct Salvage's business losses was sought. At that point Mr. Bernier indicated that that goal could be achieved either through a winding-up, under section 88 of the Act, or through amalgamation, under section 87. Amalgamation was opted for because it was easier and less costly. When the amalgamation occurred on May 15, 1997, Salvage's negative shareholders' equity amounted to $25,192 because of an accumulated deficit of $211,202.[8] Moreover, Salvage's account payable of $26,697 was still outstanding. It was therefore assumed by Management, and the debt was apparently paid after that.

[21]          During his audit, the Minister's auditor learned that Salvage had signed an agreement on October 14, 1994, promising to pay 165927 Canada Inc. (BLI) $25,000, including a $5,000 deposit, for the nickel salvage rights. Salvage was also supposed to pay BLI 10 percent of the net value of the salvaged nickel. Mr. St-Onge explained that the letter of agreement had been signed following negotiations conducted at his office by him, Mr. Tadros and Bruce Lynch. Mr. Lynch had spent the entire day trying to convince him that it was worthwhile from a business standpoint to resume work on the salvage project. When he got home at the end of the day, and after discussing the matter with his new wife, Mr. St-Onge decided that he had made a mistake by getting involved in such a project again. The next day, he contacted his bank to stop payment on the $5,000 cheque. Neither Management nor Salvage subsequently resumed work on the salvage project. Mr. St-Onge received a letter from Mr. Lynch threatening to sue him for unilaterally cancelling the agreement of October 14, 1993, but no legal proceedings were ever brought.

[22]          According to the Minister's auditor, it was more likely that Salvage would be amalgamated or used to carry on a new business. To reach that conclusion, he relied on his own experience as an auditor and on the fact that there was a substantial tax loss associated with Salvage. The auditor also said that winding-up is more likely than amalgamation only where amalgamation is not possible, such as where an individual directly holds shares in a corporation or the two corporations involved are not governed by the same companies legislation.

Analysis

The BIL with respect to the shares in Salvage

[23]          The provisions that are relevant in disposing of the first issue raised by these appeals are paragraphs 39(1)(c) and 50(1)(b) of the Act, which read as follows:

39 (1) For the purposes of this Act,

. . .

(c) a taxpayer's business investment loss for a taxation year from the disposition of any property is the amount, if any, by which the taxpayer's capital loss for the year from a disposition after 1977

(i) to which subsection 50(1) applies, or

(ii) to a person with whom the taxpayer was dealing at arm's length

of any property that is

(iii) a share of the capital stock of a small business corporation, or

(iv) a debt owing to the taxpayer by a Canadian-controlled private corporation (other than, where the taxpayer is a corporation, a debt owing to it by a corporation with which it does not deal at arm's length) that is

(A) a small business corporation,

(B) a bankrupt (within the meaning assigned by subsection 128(3)) that was a small business corporation at the time it last became a bankrupt, or

(C) a corporation referred to in section 6 of the Winding-up Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time a winding-up order under that Act was made in respect of the corporation,

. . .

50 (1) For the purposes of this subdivision, where

. . .

(b) a share (other than a share received by a taxpayer as consideration in respect of the disposition of personal-use property) of the capital stock of a corporation is owned by the taxpayer at the end of a taxation year and

(i) the corporation has during the year become a bankrupt (within the meaning of subsection 128(3)),

(ii) the corporation is a corporation referred to in section 6 of the Winding-up Act that is insolvent (within the meaning of that Act) and in respect of which a winding-up order under that Act has been made in the year, or

(iii) at the end of the year,

(A) the corporation is insolvent,

(B) neither the corporation nor a corporation controlled by it carries on business,

(C) the fair market value of the share is nil, and

(D) it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business

and the taxpayer elects in the taxpayer's return of income for the year to have this subsection apply in respect of the debt or the share, as the case may be, the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year for proceeds equal to nil and to have reacquired it immediately after the end of the year at a cost equal to nil.

                                                                                                [Emphasis added.]

[24]          The first observation that must be made here is that it is possible to incur a BIL on a share of the capital stock of a small business corporation or with respect to a debt owing by such a corporation. However, subparagraph 39(1)(c)(iv) provides for an exception: a debt owing to a corporation (such as Management) by another corporation (such as Salvage) with which it does not deal at arm's length is not eligible for the beneficial BIL scheme. Since Salvage was a wholly owned subsidiary of Management, a loss on a debt owing to Management by Salvage could not be a BIL. This explains why Management is seeking to deduct an ABIL solely on its shares in Salvage.

[25]          As already mentioned, only the application of clause 50(1)(b)(iii)(D) is problematic here in terms of Management's right to deduct the ABIL on its shares in Salvage. Based on subparagraphs 8(g), (h) and (k) of the Reply to the Notice of Appeal,[9] it seems reasonable to think that the Minister first concluded that it was not reasonable to expect "on April 30, 1994, that [Salvage] would be dissolved" given the activities in October 1994, which suggested that that corporation had not abandoned its salvage project. The onus was on Management to prove that the facts on which the Minister relied in making his assessment were wrong. Management could do so by showing that Salvage had abandoned its salvage project, that it had no intention of reviving the project and that it was reasonable to expect that Salvage would be dissolved or wound up.

[26]          It is important to note that the relevant date for determining such reasonableness is, as stated in subparagraph 50(1)(b)(iii) of the Act, the end of the year, which in this case was April 30, 1994. Moreover, clause 50(1)(b)(iii)(D) does not set any time limit for the corporation to be dissolved or wound up.[10] To satisfy the condition that the expectation of dissolution or winding-up be reasonable, it is therefore not necessary that Salvage could have been wound up or dissolved on April 30, 1994. It is enough for it to have been reasonable to expect that Salvage would be dissolved or wound up at some point.

[27]          Based on the evidence adduced before me, I believe that Management has succeeded in proving what it had to prove. On December 31, 1993, Salvage had given up any intention of continuing the salvage project. Its inactivity between September 1993 and October 14, 1994, obviously supports this conclusion. If Salvage's intent had been to continue carrying on its business, there would certainly have been evidence that it had engaged in some activities in the summer of 1994. The signing of the agreement reached on October 14, 1994, could not really have been foreseen on April 30, 1994. Moreover, that agreement was nothing but an abortive attempt to get the project started again. The day the agreement was signed, Mr. Lynch did everything he could to convince Mr. St-Onge to revive the project. He almost succeeded: at the end of a long day of negotiations, Mr. St-Onge signed a new agreement on behalf of Salvage. However, after thinking about it, Mr. St-Onge realized that it was not in his interest to get involved in such a venture again. He therefore decided the next day to terminate the agreement of October 14 and stop payment on the $5,000 cheque. In my view, the negotiation and signing of the agreement of October 14, 1994, cannot be considered a recommencement of business.

[28]          Even if the salvage project had been abandoned for good, could it be expected on April 30, 1994, that Salvage would be wound up or dissolved and that it would not commence to carry on business again? Counsel for Management argued that a subjective test must be applied in examining this question. He said that Salvage never intended to carry on its salvage business again or to carry on another business. Mr. St-Onge had completely lost interest in Salvage, which he considered a dead corporation with no future. Possible legal proceedings were feared, and it took some time to settle the accounts payable. There were, for example, the legal proceedings that BLI could have brought to enforce the agreement of October 14, 1994. After a certain time, it became clear that that corporation had given up any idea of suing, and that was why Salvage and Management were finally able to be amalgamated. Obviously, the fact that the Minister disallowed the deduction of the ABIL also seems to have prompted Management to carry out the amalgamation.

[29]          Counsel for the respondent argued that the test to be applied is, rather, an objective one. She relied on the decision rendered by my colleague Judge Rip in Bailey v. Canada, [1989] T.C.J. No. 602. Although that case did not concern section 50 of the Act or an analogous provision, Judge Rip did have to determine how to interpret the word "reasonable" in the context of paragraph 152(5)(c) of the Act. The interpretation he adopted was as follows:

What is "reasonable" is not the subjective view of either the respondent or appellant but the view of an objective observer with a knowledge of all the pertinent facts: Canadian Propane Gas & Oil Limited v. M.N.R., 73 DTC 5019 per Cattanach J. at 5028.

[30]          I consider the approach described by Judge Rip to be entirely appropriate for the purposes of section 50 of the Act. In view of all the relevant facts, including certain legal and tax considerations, was it reasonable to expect on April 30, 1994, that Salvage would be dissolved or wound up and would not recommence business?

[31]          In her written submissions of July 7, 2000, counsel for the respondent defended her position as follows:

[TRANSLATION]

The existence of those accounts payable is an important factor in concluding that it was not reasonable for [Salvage] to be wound up, if one considers things from a 1994 perspective.

                It must also be said that, given [Salvage's] accounts payable as well as certain legal proceedings, it was not reasonable to expect that that company would be wound up, but it was reasonable-in view of the conditions to be met-to expect that [Salvage] and the appellant would be amalgamated. Although this last point is not as such the test to be satisfied, it is important to consider the reasonableness of amalgamation in order to determine the reasonableness of winding-up or dissolution. The fact that amalgamation is simpler than winding-up means that it was not reasonable to expect that [Salvage] would be wound up. A reasonable person would not choose a path that is full of pitfalls but would choose the path that is the simplest and most direct way to reach the desired goal and the one that does not involve any obligation to pay the debts.

[32]          I find it very difficult to follow the logic of this statement. How could the existence of accounts payable have been more of an obstacle-or at least a factor unfavourable-to the winding-up of Salvage than to its amalgamation with Management? If the two corporations had amalgamated, the resulting corporation would have become the debtor as regards all the accounts payable of the amalgamating corporations. The amalgamated corporation would also have been subject to any legal proceedings that could have been brought against the amalgamating corporations. It therefore seems to me that the existence of accounts payable and possible legal proceedings was an unfavourable factor in the case of both winding-up and amalgamation.

[33]          Whether it was decided to wind up Salvage or to amalgamate it with Management, it would have first been necessary to determine the extent of any liabilities to which Management and the directors of Salvage may have been subject. On April 30, 1994, I think that it was reasonable to expect that the threats of legal proceedings would not be carried out and that they were not a serious impediment to either winding-up or amalgamation. It was necessary to be cautious and to wait for time to do its work. It would have been possible, if necessary, to negotiate the settlement of the disputable debts. The fact that things ironed themselves out and that it became possible to amalgamate the corporations confirms, after the event, the reasonableness of this assessment. What remains to be determined is whether the best way to proceed was through winding-up or amalgamation.

[34]          It seems that Management could have hoped to obtain the double tax benefit by winding up Salvage. One way to be able to deduct the ABIL provided for in section 39 of the Act was to meet all the conditions set out in subparagraph 50(1)(b)(iii). One of those conditions was that it had to be reasonable to expect that the corporation would be wound up or dissolved. A taxpayer that had been given good advice would certainly have concluded that it was more advantageous to wind up or dissolve Salvage than to amalgamate it with Management, even if doing so could have been a little more costly. By winding up or dissolving Salvage, Management could have hoped to have the best of both worlds, that is, to be able to deduct the ABIL incurred with respect to the shares it owned in Salvage and then to be able to deduct the business losses incurred by Salvage itself.

[35]          This conclusion is not changed by the fact that Mr. St-Onge said he did not intend to wind up Salvage or the fact that amalgamation is what subsequently occurred. It must be recalled that what is being applied here is an objective test, not a subjective one. Moreover, Mr. St-Onge seems to have wrongly believed that winding up or dissolving a corporation meant evading the payment of its debts. He also seemed to be more inclined to want to forget the setback he had suffered. It must be remembered as well that it was not until after the Minister disallowed the deduction of the ABIL that the amalgamation of Salvage and Management was contemplated, on the advice of Management's tax specialist.

[36]          Given the double tax benefit that could be hoped for and the likelihood that the disputable debts owing by Salvage could be settled in a satisfactory manner, it was reasonable to expect on April 30, 1994, that Salvage would end up being dissolved or wound up. In my opinion, the condition set out in clause 50(1)(b)(iii)(D) of the Act has been met here.

[37]          Before finishing, I would like to comment on two aspects of the Minister's assessments that, in my view, have been sidestepped. First of all, certain pieces of evidence lead me to doubt that Salvage actually issued all of its shares. According to Salvage's financial statements as at December 31, 1993, its issued and paid-up capital was $186,010. However, an analysis of the account showing the advances made to Salvage[11] by Management reveals that the balance as at April 30, 1994, was $196,809.05. Two entries (probably amounts paid to Salvage's suppliers) were added to that amount by hand, resulting in a new balance of $200,824.05. Beside that figure is the following handwritten annotation, which may have been added later: [TRANSLATION] "advances on shares to be issued". Those shares were thus apparently issued, if they were in fact issued, not only after Salvage abandoned its salvage project in September 1993 but also after April 30, 1994.[12] It is therefore likely that, on April 30, 1994, Management claimed a deduction for an ABIL on shares that, in whole or in part, had not been issued.[13] However, since the Minister assessed Management on the basis that 186,010 shares had been issued as at December 31, 1993, for consideration of $186,010, I cannot blame Management for not adducing evidence that the shares were in fact issued. Accordingly, the shares must be considered to have been issued.

[38]          Second, I am by no means certain that Management has met the condition set out in clause 50(1)(b)(iii)(A), namely that Salvage had to be an insolvent corporation on April 30, 1994. Indeed, even though that corporation was running a deficit at that time, Mr. St-Onge and Management, who both controlled Salvage, always intended to ensure that it paid all its creditors. Management's intention was to finance all of Salvage's financial requirements. The agreement of May 25, 1993, states that Salvage had agreed to issue 265,000 class D shares. According to Salvage's financial statements, only 180,000 shares of that class were issued and the negative shareholders' equity was only $25,192. It is therefore reasonable to think that Management's intention was to provide the funds needed to pay all of Salvage's creditors by subscribing for shares. It can even be seen that it would not even have been necessary to issue all of the 265,000 class D shares to pay the last of Salvage's debts.

[39]          To this must be added the circumstances surrounding the financing of Salvage. Management generally provided Salvage with the funds it needed to pay its suppliers. If one is to go by the agreement of May 25, 1993, the money was first advanced as a loan and later converted into shares. That agreement also indicates that Salvage had agreed to issue 265,000 class D shares. It would have been interesting to determine whether Management had formally undertaken to subscribe for them. In any event, Salvage's situation could perhaps have been more appropriately described as being that of a corporation in a deficit position or lacking adequate financing rather than that of an insolvent corporation. Determining whether a person is insolvent is a question of mixed fact and law, and the determination could have been made using an approach similar to the one I adopted in Flexi-Coil Ltd. v. Canada, [1995] T.C.J. No. 1558 ([1996] 1 C.T.C. 2941) (affirmed by the Federal Court of Appeal, [1996] F.C.J. No. 811 ([1996] 3 C.T.C. 57, 96 DTC 6350)).

[40]          However, this question was never raised either in the respondent's pleadings or at the hearing. The facts set out in the Reply to the Notice of Appeal, which the Minister relied on in making his assessment, make no reference to Salvage's solvency status. No application was made to amend the Reply to the Notice of Appeal. The argument related only to the issue of whether it was reasonable to expect on April 30, 1994, that Salvage would be dissolved or wound up. According to the case law concerning the burden of proof, what a taxpayer must do is demolish the facts on which the Minister relied in making his assessment.[14] If the Minister did not state a relevant fact in his Reply to the Notice of Appeal, it is difficult to criticize the taxpayer for not having demolished it. It would therefore be totally inappropriate to dismiss Management's appeal on the basis of its solvency.

Management's additional expenses

[41]          As regards the $36,915.17 in additional expenses that Management is seeking to deduct in computing its own business income, I conclude that Management has failed to discharge its burden of showing that they were expenses it incurred for the purpose of earning such income. First of all, I do not think that Management ever undertook the salvage project. It must be recalled that Mr. St-Onge said that he used a new corporation every time he started a new business. Salvage was incorporated on May 18, 1993, scarcely more than a few days after the first outlays made on April 29, 1993.

[42]          Moreover, the additional expenses are all expenses that were incurred after Salvage's incorporation, with the exception of the $22,201.12 that appears in Exhibit A-5 as the "balance as at April 30, 1993". Since that amount corresponds to the penny to the amount paid to the Caisse populaire for interest on the ship loan, and since there are not really any other expenses that were incurred before May 18, 1993, aside from the $11,400 paid for the diesel fuel, it must be concluded that the $22,201.12 represents interest on the ship loan. Still, Management was not the borrower but merely the surety. It was therefore entitled to repayment of that amount.

[43]          Furthermore, Management apparently later considered that $22,201.12 to be an advance to Salvage. Note 8 to Management's balance sheet as at April 30, 1993, states that $22,201 was advanced to Salvage. Adjusting entries found in Exhibit A-6 also confirm that accounting treatment of an amount of $22,201.12. We must recognize the obvious, namely that Management viewed the interest expense of $22,201.12 not as one of its expenses but rather as an advance to Salvage-just like the other advances made to Salvage-and as one of Salvage's expenses. According to the agreement of May 25, 1993, that advance was even converted into class D shares. The amount is therefore part of the BIL of $186,010. It follows, therefore, that Management's argument with respect to that amount is clearly unfounded. It cannot be treated as an expense incurred by Management to earn business income.

[44]          The other additional expenses were all incurred after Salvage was incorporated. Even if those amounts were paid directly by Management to Salvage's suppliers, they cannot be considered to have been incurred by Management for the purpose of gaining or producing income from a business since, at the same time, the salvage business was being carried on by Salvage. Rather, they must be viewed as amounts paid by Management on Salvage's behalf and, accordingly, as advances to Salvage, just like the other amounts paid directly to that corporation. When the advances became uncollectible, Management incurred a capital loss. However, that loss does not allow it to benefit from the application of the more advantageous BIL scheme.

[45]          For these reasons, Management's appeals are allowed with costs and the assessments for the 1992, 1993, 1994 and 1995 taxation years are referred back to the Minister for reconsideration and reassessment on the basis that Management incurred a BIL of $186,010 in 1994.

Signed at Ottawa, Canada, this 18th day of April 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 18th day of November 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

98-1750(IT)G

BETWEEN:

JACQUES ST-ONGE INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on June 21, 2000, at New Carlisle, Quebec, by

the Honourable Judge Pierre Archambault

Appearances

Counsel for the Appellant:                  William Assels

                                                                                                André Lévesque

Counsel for the Respondent:                              Valérie Tardif

JUDGMENT

                The appeals from the assessments made under the Income Tax Act for the 1992, 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 on the basis that the appellant incurred a business investment loss of $186,010 in 1994.

Signed at Ottawa, Canada, this 18th day of April 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 18th day of November 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]