Isaman v. The Queen

Isaman v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2003-07-30 Neutral citation 2003 TCC 535 File numbers 2000-5125(IT)G Judges and Taxing Officers Alexander A. Sarchuk Subjects Income Tax Act Decision Content Date: 20030730 Docket: 2000-5125(IT)G BETWEEN: JACK L. ISAMAN, Appellant, and HER MAJESTY THE QUEEN, Respondent. _______________________________________________________________ Appeal heard on June 19, 2003, at Calgary, Alberta, By: The Honourable Justice A.A. Sarchuk Appearances: For the Appellant: The Appellant himself Counsel for the Respondent: Margaret McCabe _______________________________________________________________ JUDGMENT The appeal from the assessment of tax made under the Income Tax Act for the 1996 taxation year is dismissed, with costs to the Respondent. Signed at Ottawa, Canada, this 30th day of July, 2003. "A.A. Sarchuk" Citation: 2003TCC535 Date: 20030730 Docket: 2000-5125(IT)G BETWEEN: JACK L. ISAMAN, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Sarchuk J. [1] This is an appeal by Jack L. Isaman with respect to his 1996 taxation year in which he claimed a business investment loss of $250,000 arising from a shareholder loan made to Vantage International (1996) Inc. In reassessing the Appellant for that taxation year, the Minister of National Revenue (the Minister) denied his claim. [2] The Appellant testified that in 1992 individuals representing a company, Failsafe Direct Marketing Inc. (Failsafe), approached him to invest in a board game called "High Five" to be produced by Banta Company, one of the largest game manufacturers in the world. Following negotiations the amount of $150,000 was provided to Failsafe in exchange for a "royalty agreement that would pay me back a percentage of the sales of that game". On or before February 29, 1992, the amount of $25,000 was advanced to Failsafe and subsequently was followed by further advances of $75,000 and $50,000. According to the Appellant an additional amount of $118,000 was subsequently provided by him to permit Failsafe to complete the purchase of the games and that the books of Failsafe show it as having been paid to Banta. He said problems arose and Banta failed to produce the games required and since Failsafe needed to protect its rights which meant filing trademark registrations, cost of legal fees, etc., the Appellant was required to provide additional financing. He further testified that Vantage International Products and Services Inc., a company owned by the inventors of the game with whom Failsafe had a royalty licensing agreement was involved in this endeavour. Since all of the product information made reference to this company name, a decision was taken to change the name Failsafe to Vantage International Incorporated[1] effective February 28, 1994. He referred to the Vantage International Incorporated balance sheet as of February 28, 1995 to demonstrate that as of that point of time a balance of $345,428.59 was due to him.[2] [3] The Appellant testified that further problems developed in 1996, sales were virtually non-existent, Banta had sued to collect the balance owing on the games and additional financing was required to "do a test market". Efforts were made to seek out venture capitalists for this purpose and in the meantime "to keep the rent up, I continued to pay various expenses of keeping the operation going". These problems led to a reorganizational meeting in May 1996 at which a decision was taken to "start new with a restructured company, new shareholders or new shareholding percentages. We did do that and we incorporated a new company in 1996 called Vantage International (1996) Ltd." (Vantage (1996)).[3] According to the Appellant, share structures had changed but "all assets and liabilities were rolled into that and the old company ceased to exist".[4] Further expenses arose and by the end of 1996, the Appellant says that he was unable to put any more money into Vantage (1996) and "it basically died a natural death". As a result of the foregoing the Appellant, in his 1996 income tax return, claimed the business investment losses in issue. The Appellant also maintains that Vantage (1996) is still active today and that "attempts are still being made to try and revive it because the games are there, the product is there, it's a good product, but it would take a $2 million investment to get it off the ground, to get Vantage off the ground and without venture capitalists of some kind, that is never going to happen, and I honestly, since late 1996, believed that that wasn't going to happen and I quit throwing good money after bad". Analysis [4] The cross-examination of the Appellant disclosed a number of inconsistencies in his testimony. First, it became obvious that the initial investment was the result of an arrangement between Failsafe and a syndicate, 520660 Alberta Limited (520660), structured by the Appellant for the purpose of having other people invest in the project and that it was the source of the initial advances of $25,000, $50,000 and $75,000.[5] This fact is confirmed by the agreement entered into by 520660 and Failsafe dated April 24, 1992.[6] The Appellant conceded that this document governed monies provided to Failsafe for the venture capital that he had referred to in the course of his testimony-in-chief, but qualified that by saying it only applied to the amount of $150,000. [5] As previously noted, the Appellant maintained that by 1995, a balance of $345,428.59 was due to him and that by the time he stopped injecting further funds in 1996, his investment amounted to some $470,000. In support, the Appellant provided the Respondent with a number of cheques to assist in the tracing of the monies that went into Failsafe.[7] A list of these documents shows 26 such payments during the period April 29, 1992 to February 6, 1996 totalling $253,227 all of which were made by numbered companies. The Appellant did not dispute that these cheques had been identified by him as forming part of his claim for the $250,000 business investment loss in issue but provided no other documentation to substantiate his position. The first three cheques shown in this list relate to the initial amount of $150,000 provided to Failsafe as venture capital during the formative year 1992 but, no documentary or other evidence exists to support his assertion that he personally invested that amount. With respect to the remaining 23 payments shown in Exhibit R-5, the following exchange took place between the Appellant and counsel for the Respondent: Q. Would you agree, Mr. Isaman, that these cheques that you submitted provide your evidence, as you claim it to be, that you paid monies into Vantage International or Failsafe Direct Marketing at various points? A. Yes, between me and other contributors as I said. HIS HONOUR: Sorry, between? A. Between me and other contributors, yes. Q. But you will agree with me when we look down the list of whom the cheques are from, not once in there does your name actually appear, correct? A. Not in that list, no. Q. Well, isn't these the cheques that went to the company that you identified as being part of your claim of the $250,000.00 business investment loss? A. That is part of my claim, yes, but if you are to look at all of the information I gave you, you did receive a spread sheet which showed me in there to the tune of 380 plus 90,000,that is 470,000. Q. Isn't it the case though that a lot of the amounts that you've got down as your shareholdings at that date, and we are talking, I think you mentioned this is the reorganizational meeting in May of 1996? A. Yes. Q. Isn't it the case that the amounts that you used to compile that shareholding amount are actually amounts that you claim came out of some of these numbered companies from your shareholding's accounts in those companies. A. Absolutely. Some of them did come from my shareholder's loans in some of these numbered companies, yes. Q. Well, isn't it the case that you haven't actually provided us with any documentation in your own name that went from you as an investor directly into Failsafe Direct Marketing Inc.? A. That's true, I did not provide you with any. Q. Do you have any documentation that you did that? A. No, because if I did, I would have provided it. Q. Am I correct in understanding that when we see this chart where monies are coming out of various companies and going into various other companies or into other named entities, that this is how you claim to have an amount owing to you by, I take it, Vantage International 1996 Incorporated? A. Essentially, that is correct, yes. Q. Well, isn't that what the claim for the business investment loss on your income tax return in 1996 essentially is? A. Yes. Q. So you claim that you invested an amount of $250,000.00 in Vantage International 1996 Incorporated that you claim has become a bad debt? A. Yes, some of it through some of these other companies that I own part of and lost all of. Q. Isn't it the case that in a number of these companies you were not a sole shareholder, is that correct? A. That's correct. Q. And wouldn't it be the case then that if monies were directed from any of these companies in which you were not a sole shareholder to Vantage International Incorporated resolutions would have had to have been passed by the companies for their contributions and it would be the company contributing to Vantage International or to Failsafe Direct Marketing? A. There was no resolutions passed. There were agreements between me and the other shareholder or shareholders. In most cases, all but one, there was no more than one shareholder besides myself. Q. So you are saying that all of these companies, except for one, were sole shareholding companies of your own? A. No, I did not say that. Q. I'm sorry then. A. You're not listening. I said there was no more than one other shareholder in these other companies except for 520660. Conclusion [6] An allowable business investment loss (ABIL) arises pursuant to paragraph 39(1)(c) of the Act where there is a debt owing to a taxpayer by a Canadian controlled private corporation that is a small business corporation. For this Appellant to succeed in his claim it is necessary for him to establish the following: (i) that Vantage (1996) was indebted to him; (ii) that the debt was acquired by him for the purpose of gaining or producing income from a business; (iii) 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 (iv) that accordingly a business investment loss for the purposes of paragraph 39(1)(c) was sustained. Quite simply, the evidence adduced by the Appellant falls short of establishing that he personally advanced the amount in issue to Vantage (1996) which loan became a bad debt. There is no question that funds, some of which undoubtedly were the Appellant's, flowed from various numbered companies in some instances to other numbered companies and on other occasions in payment of certain costs related to Failsafe or to Vantage Products International but there is no evidence from which it would be appropriate to attribute a specific amount to him. Furthermore, what is most damaging to the Appellant's case is the fact that there is no evidence capable of establishing that any amounts whatsoever were advanced by him to Vantage (1996) other than his comment that "I continued to pay some expenses". [7] The failure to adduce adequate evidence with respect to the debt allegedly owed to the Appellant by Vantage (1996) by itself provides a sufficient basis to disallow the appeal. Added to that is the fact that there is no substantive evidence to support the Appellant's contention Vantage (1996) was carrying on an active business during the relevant period of time. Indeed, he stated that no active business was being carried on by it and that by the end of 1996 it "basically died a natural death". He conceded it had no income from business at all since its incorporation and that it did not have any assets that were primarily used in an active business in Canada. [8] A small business corporation is defined in the Act, subsection 248(1), as a Canadian-controlled private corporation which all or substantially all of the fair market value of its assets are used in active business carried on primarily in Canada. The evidence before this Court falls well short of satisfying that requirement. [9] For the foregoing reasons, the appeal is dismissed, with costs to the Respondent. Signed at Ottawa, Canada, this 30th day of July, 2003. "A.A. Sarchuk" CITATION: 2003TCC535 COURT FILE NO.: 2000-5125(IT)G STYLE OF CAUSE: Jack L. Isaman and Her Majesty the Queen PLACE OF HEARING Calgary, Alberta DATE OF HEARING June 19, 2003 REASONS FOR JUDGMENT BY: The Honourable Justice A.A. Sarchuk DATE OF JUDGMENT July 30, 2003 APPEARANCES: For the Appellant: The Appellant himself Counsel for the Respondent: Margaret McCabe COUNSEL OF RECORD: For the Appellant: Name: N/A Firm: N/A For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada [1] It is not entirely clear from the Appellant's testimony whether Vantage International Incorporated was in fact incorporated. [2] Exhibit A-5. [3] It is not disputed that Vantage (1996) was incorporated on May 28 of that year and that Failsafe and Vantage International Products and Services Inc. surrendered their Charters on October 1 and September 1, 1996, respectively. [4] Specifically with respect to Vantage (1996), no documentary evidence has been provided relating to the structure, shareholding, etc. nor are there any of its financial statements before the Court. [5] Exhibits R-1 and R-2. [6] Exhibit R-3 - Loan Agreement. [7] Exhibit R-5.