Bowman J.T.C.C.: — These appeals are from assessments for the 1992, 1993 and 1994 taxation years of the appellant. They concern the deductibility of losses claimed by the appellant beyond the amount allowed to him by the Minister of National Revenue as allowable business investment losses (“ABILs”).
An AB IL arises under paragraph 39(1)(c) of the Income Tax Act where there has been a disposition at a loss of a share of a small business corporation or debt owing to a taxpayer by a Canadian controlled private corporation that is a small business corporation. Such a disposition can occur under section 50 when the debt becomes a bad debt, in which case it is deemed to have been disposed of for nil proceeds. Where a taxpayer guarantees a debt and is called upon to make good under the guarantee, he or she is subrogated to the rights of the original creditor and if the principal debtor defaults and the debt becomes a bad debt, it is deemed to be disposed of under section 50. [1] This position is confirmed by subsection 39(12).
In the years 1987 to 1990, Mr. Wierbicki was the sole shareholder of Schledewitz , Weir & Company Ltd. which carried on business as a florist. It carried on an active business and was a Canadian controlled business corporation. In 1988, the appellant signed a loan guarantee of $54,000.00 with the Royal Bank of Canada on behalf of his company and the guarantee was secured by a mortgage on his personal residence. The company was dissolved in March 1990 and its assets were sold in December 1990.
In 1992, the bank foreclosed on the mortgage and sold the appellant’s house for $40,000.00.
In computing his income for 1992, the appellant deducted as an ABIL $71,939.25 and carried forward to 1993 and 1994 respectively non-capital losses of $18,259.54 and $11,935.53 in respect of that ABIL. Initially the Minister allowed him no deduction in respect of the losses claimed, but on objection he decided that $40,000.00 was a business investment loss, of which 3/4, or $30,000.00, was an ABIL. The $40,000.00 was the amount of the appellant’s loss resulting from the foreclosure of the mortgage on his house, which the bank sold for $40,000.00. There is no evidence that the bank pursued him for any amount beyond the $40,000.00.
The appellant however claims additional losses as ABILs. Specifically he alleges that he borrowed $11,500.00 from his mother- in-law, $6,500.00 from his mother, $2,000.00 from a friend and $5,500.00 from a relative. Moreover, his wife borrowed $10,000 from the Canadian Imperial Bank of Commerce and he guaranteed the loan. All of these amounts, the appellant testified, and more, “went into the business”, that is to say were used to pay expenses of the company’s flower business in the years 1987 to 1990. The business was foundering and these payments were evidently necessary to keep it afloat, but, it would appear, to no avail and the business was sold. One contributing factor was the substantial telephone bills paid to the Manitoba Telephone System in respect of an 800 number that the company had for calls from everywhere in North America.
As stated above, the Minister on reassessment pursuant to objections filed allowed the appellant an ABIL of $30,000.00 of which $16,235.00 was applied against the 1992 income to reduce it to nil [2] and the balance of $13,765.00 was applied against his 1993 income. This left nothing to apply against 1994 and the assessment for that year was confirmed. For the appellant to succeed in his claim to deduct additional amounts non-capital losses in 1993 and 1994 arising from ABILs incurred in those or prior years he would have had to establish the following:
1. that the company was indebted to him;
2. that the debt was acquired by him for the purpose of gaining or producing income from a business of property (subparagraph 40(2)(g)(ii));
3. that the debt became bad in the year giving rise to a deemed disposition for the purposes of subsection 50(1) for proceeds equal to nil; and
4. that accordingly a business investment loss for the purposes of paragraph 39(1)(c) was sustained by him.
These facts must be established on a balance of probabilities. I have no difficulty in accepting that the appellant and his family have lost substantial amounts of money in connection with the ill-fated flower business in which his company engaged. That in itself, does not however necessarily result in a tax write-off. Nor do I doubt that he and his wife borrowed amounts which they “put into the business” of the company. I do not, however, find that it has been established on a balance of probabilities that there was an indebtedness to him by the company that was capable of becoming a bad debt for the purposes of section 50.
For one thing, the $10,000.00 borrowed by his wife from the CIBC presumably went from her to pay corporate expenses. [3] If this could be said to give rise to an indebtedness it would be an indebtedness to her, not to the appellant. Similarly, with respect to the amounts paid by the appellant’s mother-in-law, $1,200.00 went directly to the Manitoba Telephone System and $8,800.00 was paid directly to Mr. Wierbicki. As I recall in the evidence, a further $1,500.00 was paid by her to the Manitoba Telephone System, although no cheque was produced. [4]
I do not think it has been established that the company was, or was perceived to be, indebted to the appellant in any way that could give rise to a bad debt under section 50. Moneys were certainly put into the business to keep it afloat, but I do not think it can be said that this was done with any intention or expectation of creating an indebtedness. No documentary evidence was adduced to this effect. The appellant testified that the corporate and business records were destroyed or at all events made illegible in a flood of their basement. I have no reason to doubt his testimony on this point but the absence of any documentary substantiation renders it extremely difficult to form any factual determination that would support his claim. I must base my decision on the evidence before me.
Such documents that were available are not particularly reliable. The unaudited balance sheet of the company as at September 30, 1987 was prepared by a chartered accountant. It shows private loans payable of $10,364.00, made up of $1,000.00 to Mrs. Shkolny and $9,364.00 to the appellant’s wife, being the balance of the loan she obtained from the CIBC. However, the balance sheets for September 30, 1988 and September 30, 1990, which were prepared by the appellant, apparently without the assis- tance of a chartered accountant, show “private loans” of $22,342.00 and $26,015.00. No notes to these balance sheets were provided and there is no indication whether any portion of these amounts were owing to the appellant.
When the business was sold, the appellant on December 31, 1990 executed a sworn Bulk Sales declaration in which the indebtedness to the bank of $54,000.00 was not shown and no amount was shown as owing to the appellant.
I feel a certain sympathy for the appellant. He has tried unsuccessfully to keep the business from going under and he has certainly lost money. On the basis however of the unsatisfactory, incomplete and contradictory state of the evidence there is no basis upon which I can conclude that he sustained in 1993, 1994 or any earlier year any greater business investment losses than have already been allowed.
The appeals are therefore dismissed.
Appeal dismissed.
’This was discussed at somewhat greater length in Cadillac Fairview Corp. v. R., [1996] 2 C.T.C. 2197.
Technically this resulted in a so-called “nil assessment” from which there is no appeal in any event.
The appellant stated that the payments had to be made directly to the creditors because, if they went to the company’s bank account, the Royal Bank would seize them.
The appellant’s mother-in-law Mrs. Olga Shkolny, appealed to this court and her case was heard by Associate Chief Judge Christie (95-3815(IT)I, July 24, 1996). She contended that she loaned the money to the company, and sought to deduct the amounts as an ABIL. The appellant testified in her case. I cannot of course take into account findings of fact in another case but I note that Christie ACJTCC dismissed her appeal on the basis that it was not established that she was a shareholder.