Bowie J.T.C.C.: - The Appellant William J. McKissock was a roofer for most of his working life. In about 1976 he started the business known as McKissock Roofing Associates Limited (Associates), which is the corporate vehicle by which he now operates as a roofing inspector and consultant. He and his wife are the two employees of that company, and it is a full-time occupation for him. As a consultant he examines and reports to building owners with respect to the state of their roofs, makes evaluations, and draws plans and specifications to be used in the tendering process. In 1986 Mr. McKissock’s son began a business called Water-Shed Industrial Roofing Ltd. (Water-Shed). Its business, as the name implies, was the application of industrial roofing. Two separate transactions involving that company give rise to the present appeal by Mr. McKissock from his income tax assessments for the 1990 and 1993 taxation years.
The Promissory Note
As is often the case with new small businesses, Water-Shed started life thinly capitalized. In 1988 the Appellant and his wife, Joan McKissock, were the owners of a house which they had held debt-free since 1977. The house had been paid for over the years by Mr. McKissock, but was owned by them jointly. To assist their son, they obtained a mortgage loan in the amount of $50,000.00, the proceeds of which they advanced to Water-Shed by way of a loan secured by a promissory note bearing interest at 10% per annum. The Appellant and his wife, being co-owners of the house, were of necessity co-mortgagors of it. They also were both payees on the promissory note issued by Water-Shed. It was Mr. McKissock’s evidence that his wife was not an active participant in the decision to borrow this $50,000.00 and to lend it to Water-Shed. However, it is not in dispute that she signed the mortgage. Water-Shed made an assignment in bankruptcy in 1990, and as of that time the promissory note was of no value. The Appellant takes the position that his allowable business investment loss (A.B.I.L.) should be based upon the full $50,000.00 face value of the promissory note. The Minister of National Revenue (the “Minister”) assessed upon the basis that the Appellant’s A.B.I.L. is to be based upon one-half of the face value of the note, that is to say $25,000.00, as only one-half of the funds advanced belonged to Mr. McKissock.
The Appellant’s position on this issue cannot prevail. I accept the taxpayer’s evidence that he made all the payments on the house; nevertheless, the ownership was joint, and the liability under the mortgage was joint as well. Half the mortgage proceeds belonged to each of them, and this is consistent with the promissory note they took back from Watershed. The Appellant’s evidence was that this was entirely his investment, and that his wife was named a payee in the promissory note as a matter of convenience only. The true nature of the transactions, however, is to be found in the documents by which they are effected. I therefore find that of the $50,000.00 advanced to Water-Shed, only $25,000.00 belonged to the Appellant, and it follows that the Minister has correctly calculated the Appellant’s A.B.I.L.
The Loan Guarantee
The second issue concerns the Appellant’s claim for an A.B.I.L. in the taxation year 1993. This claim arises out of a loan guarantee which Mr. McKissock gave to the Canadian Imperial Bank of Commerce in April 1987 to secure a loan in the amount of $30,000.00 advanced by the bank to Water-Shed. In 1993, after Water-Shed had made its assignment in bankruptcy, the Appellant was called upon by the bank to honour his guarantee, which he did by a payment to the bank of $30,000.00. The Appellant takes the position that he is entitled to an A.B.I.L. as a result of having made this payment to the bank. The Minister’s position is that he is not so entitled because, in the Minister’s view, the loan guarantee was given as a personal favour to Mr. KcKissock’s son, and not for the purpose of gaining or producing income from a business or property.
It is not in dispute that the Appellant made the payment in response to the demand of the bank in the year 1993. Nor is it in dispute that as a result he became subrogated to the right of the bank as against Water-Shed, a right which was worthless as a result of the assignment in bankruptcy made some three years earlier. The only point of dispute is whether or not the Appellant is disentitled to the A.B.I.L. which he claims by reason of the specific provision of subparagraph 40(2)(g)(ii) of the Income Tax Act, (the “Act”) the relevant parts of which read as follows:
(g) a taxpayer’s loss, if any, from the disposition of a property, to the extent that it is
(ii) a loss from the disposition of a debt ... unless the debt ... was acquired by the taxpayer for the purpose of gaining or producing income from a business or property ...
is nil;
The debt is deemed by section 50(1) to have been disposed of by Mr. McKissock in 1993. The only issue is whether or not the guarantee was given by Mr. McKissock “... for the purpose of gaining or producing income from a business or property … ”.
The evidence as to the business relationship that existed between Associates and Water-Shed was vague in the extreme. It did, however, establish that between January 1987 and June 1989 Associates billed Water-Shed for amounts totalling $82,043.57, and that these invoices were paid by Water-Shed. Most of this was billed in amounts of $1,500.00, $2,500.00 and later $3,000.00 per month. The invoices state variously that they are for inspecting, estimating, or consulting services. In his evidence Mr. McKissock explained that he provided consulting services of various kinds to his son’s company in relation to jobs that it was doing, or was bidding on, and in connection with facilitating its acquisition of material and supplies. He also testified that these monthly payments were in part consideration for his personal guarantee of the loan. This latter part of his evidence is at odds with the face of the invoices, and, in the absence of corroboration by the Appellant’s son, I do not accept it. I find that the payments made by Water-Shed to Associates were entirely for consulting services and were not related to the loan guarantee, and that the Minister’s assumption that no consideration flowed from Water-Shed to the Appellant in return for his guarantee of the loan is correct.
That does not end the matter, however. I accept that part of Mr. McKissock’s evidence in which he stated that his purpose in giving this loan guarantee was to assist Water-Shed through its financial difficulties and help it to stay in business, and thereby protect what was his major source of income, namely the consulting fees paid to him, through Associates, by Water-Shed. It is well established that the business purpose test which subparagraph 40(2)(g)(ii) imposes may be satisfied by something less direct than consideration for the loan or guarantee involved.
In Business Art Inc. v. Minister of National Revenue, [1987] 1 C.T.C. 2001, 86 D.T.C. 1842 (T.C.C.), at page 2009 (D.T.C. 1848), Rip J. pointed out that “... an interest free loan may nevertheless be made for the purpose of gaining or producing income from a business or property”. In that case he held that an interest free loan made by the Appellant to an affiliated corporation was not caught by the provisions of subparagraph 40(2)(g)(ii), because the loan was made to enable the affiliated corporation to carry on its business, earn profits, and be in a position to pay dividends. Those dividends would, in the hands of the lender, be income from property.
The cases show a clear distinction between those in which the taxpayer enters into a transaction to assist another family member, and those in which the purpose of the transaction is to produce financial gain or reward for the taxpayer himself. This dichotomy is well described by Garon J., following his consideration of two earlier decisions of this Court, [1] in the following passage from his judgment in O’Blenes v. Minister of National Revenue, [1990] 1 C.T.C. 2171, 90 D.T.C. 1068 (T.C.C.), at page 2176 (D.T.C. 1072):
On the whole of the evidence, I therefore come to the conclusion that the Appellant has not established that when she undertook to grant the guarantee to the Bank and to pledge her term deposits she was motivated by the prospect of a financial gain or reward for herself. Her motives, however commendable they are, are of a personal or private nature.
In that case Garon J. found that the Appellant’s purpose, which was to procure a direct financial benefit for her husband, was too remote to satisfy the requirements of subparagraph 40(2)(g)(ii). In the present case I have found that the Appellant’s purpose in entering into the loan guarantee was to support the continued existence of Water-Shed, and thereby protect a very significant source of regular and substantial earnings of Associates. That company is wholly owned by the Appellant, is in fact his alter ego, and according to his evidence was his only source of income. Is that purpose too remote to satisfy the subparagraph? I think not.
In À. v. F.H. Jones Tobacco Sales Co., [1973] C.T.C. 784, 73 D.T.C. 5577 (F.C.A.), Noël A.C.J. held that an amount paid by the Respondent company in satisfaction of its guarantee of a bank loan given for the purpose of obtaining and keeping business of a customer, to the exclusion of other suppliers, satisfied the requirement for deductibility found in what is now paragraph 18(l)(a) of the Act. The payment was “... incurred by the taxpayer for the purpose of gaining or producing income from ... a business of the taxpayer”. Prior to the taxpayer entering into the guarantee, its customer had purchased 80% of its tobacco elsewhere; thereafter it purchased all of its requirement from the taxpayer. The “business purpose” was to obtain and secure the balance of its customer’s business. Similarly, in Cline Associates London Ltd. v. Minister of National Revenue, [1992] 2 C.T.C. 2581, 92 D.T.C. 2209 (T.C.C.), Taylor J.T.C.C. of this Court held that the requirements of paragraph 18( 1 )(a) were satisfied in circumstances where the Appellant made voluntary payments on behalf of a customer in order to ensure the continued existence of that customer, and thereby continued to profit from sales made to it. Although those cases were decided in the context of paragraph 18(l)(a) of the Act, the principle is equally applicable to the case at bar. I find that the business purpose requirement of subparagraph 40(2)(g)(ii) is satisfied here, and that the Appellant is entitled to an A.B.I.L. in respect of the payment he was required to make to the Bank on his guarantee of the indebtedness of Water-Shed.
The result therefore, the appeal is allowed, so far as it relates to 1993 taxation year, and the reassessment for that year is referred back to the Minister for reconsideration and reassessment in accordance with these Reasons for Judgment.
Appeal allowed in part.
Casselman v. Minister of National Revenue, [1983] C.T.C. 2584, 83 D.T.C. 523 (T.C.C.) and Lowery v. Minister of National Revenue, [1986] 2 C.T.C. 2171, 86 D.T.C. 1649 (T.C.C.).