Ah, it sounds like you painted your character on a layer with visible paper. In ArtRage (like in the real world), paper colour is kept separate from paint. So you can't erase you paper away.
What you can do, though, is change the paper settings to make the paper transparent.
From your layer menu, choose 'Edit paper settings'. Then take the 'Opacity' radial control down to zero %. That will leave your paper entirely transparent.
Then when you resize the contents of the layer, there will be no visible paper at the edges.
This is also useful if you paint a character onto the base layer, then decide you'd like to add background. You can create a new layer, move the base layer above the new layer, then edit the paper opacity of the two layers so the layer you dragged to the bottom has paper colour, and the layer above has transparent paper.
AndyRage's mantra for graphics engine code:
"Sure - how hard can it be?"