Date: 20020731
Docket: 2001-223-IT-I
BETWEEN:
RONALD ROY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Garon, C.J.T.C.C.
[1] This is an appeal from a reassessment for the 1997 taxation year. By his reassessment, the Minister of National Revenue disallowed the capital gains deduction in the amount of $25,000 and allowed the Appellant a capital loss of $25,000. In his Notice of Objection, the Appellant claimed that he had incurred a business investment loss in the amount of $25,000 from his sale of shares in Smooth Express International Ltd., hereinafter referred to as "SEIL".
[2] At the hearing of this appeal, the Appellant made clear that he was appealing the assessment for the 1997 taxation year and not the assessment for the 1995 taxation year as he had mentioned in the first paragraph of his Notice of Appeal. In this connection, it is to be noted that the Respondent had filed the Reply to the Notice of Appeal on the basis that the Appellant was appealing the 1997 assessment. I proceeded to hear the present appeal on the same basis.
[3] The Minister of National Revenue in assessing the Appellant for the 1997 taxation year relied on the assumptions of fact set out in paragraph 6 of the Reply to the Notice of Appeal. Paragraph 6 reads as follows:
(a) SEIL was incorporated under the laws of the Province of Ontario on January 17, 1995;
(b) the sole shareholder of SEIL in the 1995 and 1996 taxation years was Brad Adams and in 1997 the shareholders were Brad Adams and Jerry Doane;
(c) Smooth Express Ltd. (SEL) is related to SEIL and was incorporated under the laws of the province of Ontario on March 23, 1993. The shareholders of SEL in the 1995, 1996 and 1997 taxation years were Brad Adams, Tim Adams and Kent Truman;
(d) the Appellant has not provided any documentation to support his investment in SEIL;
(e) the Appellant did not provide any documentation with respect to his alleged sale of SEIL shares to Brad Adams;
(f) in the 1997 taxation year, there was no actual or deemed disposition by the Appellant of any shares of the capital stock of a corporation or a debt owing to the Appellant to which subsection 50(1) of the Income Tax Act, R.S.C. 1985, c.1. (5th Supp.) as amended (the "Act") applies;
(g) in the 1997 taxation year, the Appellant did not dispose of any property that was a share of the capital stock of a small business corporation or debt owing to the Appellant by a Canadian controlled private corporation giving rise to a capital loss, to a person with whom the Appellant was dealing at arm's length, which corporation was:
(A) a small business corporation;
(B) a bankrupt (within the meaning assigned by subsection 128(3) of the Act) that was a small business corporation at the time it was or became bankrupt; or
(C) a corporation referred to in section 6 of the Winding Up Act that is insolvent (within the meaning of the Act) and was a small business corporation at the time a winding-up order under the Act was made in respect of the corporation.
(h) the Appellant did not incur a BIL in the 1997 taxation year.
[4] The Appellant admitted subparagraphs (a), (e), (g) and (h) of the Reply to the Notice of Appeal.
[5] With respect to subparagraph (b) of paragraph 6, the Appellant denied that the sole shareholder in 1995 of SEIL was Mr. Brad Adams. Rather, he asserted that he was the sole shareholder of SEIL and referred to the incorporation documents in support of his statement. He agreed however with the second part of subparagraph (b) according to which the shareholders of SEIL in 1997 were Messrs. Brad Adams and Jerry Doane. In this regard, the Appellant stated that he ceased to be a shareholder of SEIL around August or September 1996. He testified that he sold at the time "the remainder of the company", to adopt his phrase, for $5,000 to Mr. Brad Adams.
[6] With respect to subparagraph 6(c) of the Reply to the Notice of Appeal, the Appellant denied that Smooth Express Ltd., hereinafter referred to as "SEL" was related to SEIL. In connection with this subparagraph, he also indicated that he did not know if SEL was incorporated under the laws of the province of Ontario on March 23, 1993, nor did he know who were the shareholders of SEL in the 1995, 1996 and 1997 taxation years.
[7] The Appellant denied subparagraph 6(d) of the Reply to the Notice of Appeal.
[8] With respect to subparagraph 6(f) of the Reply to the Notice of Appeal, the Appellant declared that he disposed of the shares of the capital stock of SEIL in 1996 but not in 1997 and that he was given a cheque in the amount of $5,000 by Mr. Adams. Regarding subparagraph 6(f), the Appellant also stated that SEIL could not reimburse him in 1996 in respect of advances he had made to the company in 1995 and 1996.
[9] The Appellant testified that he "guessed" that the debt owing to him by SEIL became a bad debt in 1996 but he did not know the exact amount of the debt. He added that it was "probably in excess of $30,000". He made clear that he disposed of his shares in 1996 when he sold his shares for $5,000 to Mr. Adams. The Appellant had paid $1 for his shares in SEIL.
[10] In cross-examination, the Appellant confirmed that at the time of the incorporation of SEIL he owned the totality of the issued 100 shares of the capital stock of that company. Later, the precise time was not mentioned, the number of shares outstanding was increased to 200. He also mentioned that he ran the business of the latter firm in 1995 and during a portion of 1996. According to him, Mr. Gerald Doane, a U.S. citizen, acquired around May 1996 about a third of the capital stock of that firm. The Appellant mentioned that Mr. Doane did not pay anything for the shares but provided about $20,000 in respect of a line of credit. It was made clear that Mr. Adams paid $5,000 for 60 shares sold by the Appellant in July 1996.
[11] The Appellant's income tax return for 1996 was filed with the Court. The return shows that the Appellant had claimed a net capital loss of $5,000 in respect of the sale of shares. The Appellant's income tax return for 1997 was also tendered in evidence. On line 254 of the latter return, the Appellant claimed a capital gains deduction of $25,000.
[12] Mr. Adams, who was called at the instance of the Respondent, stated that he acquired 40 shares from the Appellant in July 1996 and about one month later, he bought an additional 10 shares from the Appellant for $1. He testified that at some point in 1996, Mr. Jerry Doane owned 100 shares. After the acquisition by Mr. Adams of 10 shares from the Appellant during the summer of 1996, Mr. Adams and Mr. Doane each owned 100 shares of the capital stock of SEIL.
[13] The income tax returns for SEIL for 1995, 1996 and 1997 filed with the Minister in October 1999 were entered as exhibits at the hearing of this appeal. Mr. Adams stated that SEIL did not go bankrupt but was simply shut down probably in 1999.
Analysis
[14] The question in issue is whether the Appellant has incurred a business investment loss in a given year as a result of which he would be entitled to deduct an amount in respect of an allowable business investment loss in computing his income or his taxable income, as the case may be, depending on whether the loss was incurred in 1997 or in a prior or subsequent year.
[15] The required ingredients for the existence of a business investment loss are found in paragraph 39(1)(c) of the Income Tax Act (the "Act"). The relevant portion of paragraph 39(1)(c) read thus at the relevant time:
(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.
[16] It is also worth referring to paragraph 38(c) of the Act, which determines the portion of a business investment loss that constitutes an allowable business investment loss for the purposes of notably sections 3 and 111 of the Act. Paragraph 38(c) of the Act read as follows in the year in issue:
For the purposes of this Act,
[...]
(c) a taxpayer's allowable business investment loss for a taxation year from the disposition of any property is 3/4 of the taxpayer's business investment loss for the year from the disposition of that property.
[17] Subparagraph 39(1)(c)(i) makes express reference to subsection 50(1) of the Act which thus completes the provisions of paragraph 39(1)(c). Subsection 50(1) is reproduced below:
(1) For the purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to the taxpayer in respect of the disposition of personal-use property) is established by the taxpayer to have become a bad debt in the year, or
(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.
[18] At the outset, before commenting on the evidence in this case, I wish to mention I was impressed by the candour and the forthrightness of the Appellant. He is a credible witness and I accept his evidence.
[19] First of all, I do not have to consider the transactions relating to the disposition of shares of the capital stock of SEIL by the Appellant in 1996 because the transactions did not give rise to a loss since the Appellant in one transaction disposed of 40 shares to Mr. Adams for $5,000, shares that he had acquired for $1 and in the second transaction with Mr. Adams, he transferred 10 shares to the latter without realizing a gain or a profit. The evidence is unclear as to terms under which the disposition of shares of the capital stock of SEIL acquired by Mr. Jerry Doane were made.
[20] The business investment loss can only arise, having regard to the facts of the present case, to use the language of paragraph 39(1)(c) of the Act, from the disposition of property that is a debt owing to the Appellant by SEIL.
[21] Paragraph 39(1)(c) of the Act contemplates two types of disposition. One type of disposition is mentioned in subparagraph 39(1)(c)(i) of the Act which in turn refers to subsection 50(1) of the Act, and the other one is set out in subparagraph 39(1)(c)(ii). Both dispositions deal with two classes of property, namely a debt owing to a particular category of a Canadian-controlled private corporation and a share of the capital stock of a small business corporation.
[22] I do not think it is necessary to refer to the second type of disposition set out in subparagraph 39(1)(c)(ii) of the Act since an actual disposition of a debt is required and no disposition of a debt has occurred in the present case.
[23] I shall therefore consider the nature of the debt referred to in subparagraph 39(1)(c)(i) and more particularly defined in subsection 50(1) of the Act. The latter subsection 50(1) of the Act provides that the debt owing to a taxpayer at the end of a taxation year must be established by the taxpayer to have become a bad debt in the year. In my view, the Appellant's evidence is very clear that the debt owing to the Appellant by SEIL in respect of the advances made to it became a bad debt in 1996. This requirement is therefore met in the present case. Incidentally, it has not been suggested by the Respondent that the bracketed portion of paragraph 50(1)(a) regarding a debt owing in respect of the disposition of personal-use property was applicable here.
[24] The question then arises as to what was the amount owing to the Appellant by SEIL at the end of the 1996 taxation year. I have no reason to doubt the Appellant's evidence that he did advance substantial moneys to SEIL in 1995 and 1996 prior to the disposition of his shares in the capital stock of SEIL. At one point, he mentioned in his testimony an amount in excess of $30,000. The Appellant himself recognized that he was not able to give even an approximate amount of the total of his advances to SEIL. He could not either produce any documentary evidence in support of SEIL's indebtedness to him at the relevant time. The Appellant's evidence is therefore unsatisfactory as to the quantum of the debt owing by SEIL to the Appellant at the end of the 1996 taxation year.
[25] After a thorough review of the evidence, I noted in the liabilities portion of the balance sheet of SEIL (Exhibit R-4) as at December 31, 1995 an item entitled "Advances from shareholders" and the amount opposite this item was $10,850. I also observed that in the balance sheet of SEIL as at December 31, 1996 (Exhibit R-5) that the corresponding item was showing an amount of $22,586 in respect of "Advances from shareholders".
[26] Since the evidence is clear that throughout 1995 the Appellant was the sole shareholder of SEIL it would follow that SEIL was indebted to the Appellant in an amount of $10,850 as at December 31, 1995. In the course of the year 1996, there were three shareholders, including the Appellant. The record discloses that the Appellant ceased to be a shareholder of SEIL at some point during the summer of 1996. The other two shareholders may have made advances to SEIL during 1996 after they became shareholders of the latter company. Since the Appellant could not provide any direct evidence in particular about his advances to SEIL in 1996, it became apparent to me that it might be possible to determine the amount of the Appellant's advances, if any, in 1996 from the testimony of the other two shareholders, Mr. Brad Adams and Mr. Jerry Doane or one of these two shareholders, or alternatively from the person who prepared the financial statements of SEIL for the year 1996.
[27] Further evidence could therefore be obtained regarding the advances made by Messrs. Brad Adams and Jerry Doane to SEIL in 1996. It is to be noted that Mr. Brad Adams who testified at the first phase of the hearing of this appeal was not examined on the matter of the quantum of the advances that he and Mr. Jerry Doane may have made to SEIL in 1996.
[28] In view of the unsatisfactory state of the evidence and pursuant to section 138 of the Tax Court of Canada Rules (General Procedure), (which rules are often applied to appeals governed by the informal procedure where matters are not provided for in the Tax Court of Canada Rules (Informal Procedure)), I decided to reopen the hearing for further evidence and arguments.
[29] On the resumption of the hearing, Mr. Brad Adams testified that he did not put any money in SEIL during 1996 and added that on January 15, 1997 he advanced $20,000 to the latter corporation. Mr. Adams also mentioned that he did not know if the other shareholder, Mr. Jerry Doane, had made any advances to SEIL in 1996 although at one point in his testimony he stated on the resumption of the hearing that he was "pretty positive" that he did not put any money in SEIL.
[30] In view of the absence of persuasive evidence regarding the question whether or not Mr. Doane had advanced funds to SEIL in 1996 I am still unable to determine the quantum of the amount owing by SEIL to the Appellant on December 31, 1996. In the result the Appellant has failed to establish the amount of his business investment loss as at December 31, 1996.
[31] There is the further point that the Appellant had not made the required election contemplated by subsection 50(1) of the Act at the time he filed his return of income for 1996. Furthermore the Appellant did not request the Minister to extend the time for making an election, as he could pursuant to subsection 220(3.2) of the Act. If the Appellant had made such an application to the Minister, the latter would have been required to consider it and make a decision. The latter decision, if against the Appellant, could have been the subject matter of a review before the Federal Court - Trial Division.
[32] I therefore conclude that the Appellant has not established the required elements for the deduction in 1997 of an amount in respect of an allowable business investment loss that the Appellant alleged he incurred in 1996.
[33] From the above, it also follows that if the required evidence had been adduced with respect to the quantum of the advances made by the Appellant more particularly in 1996 and if an election had been made at the required time, as provided in subsection 50(1) of the Act the debt in question would have constituted a business investment loss at the end of 1996, within the parameters of subsection 50(1) of the Act.
[34] Accordingly, 3/4 of such a business investment loss incurred in 1996 would have been an allowable business investment loss[1]. An allowable business investment loss would have been deductible in the 1996 taxation year, as provided by paragraph 3(d) of the Act. The balance remaining of the allowable business investment loss that could not have been deducted under paragraph 3(d) in the year it was sustained would then have become a non-capital loss which could be carried back three years and forward seven years, as provided in subsection 111(1) of the Act. See also the definition of the phrase "non-capital loss" in subsection 111(8) of the Act, which makes clear that unabsorbed allowable business investment losses incurred in a particular year become non-capital losses for carry-over purposes.
[35] Since I infer from the evidence that the non-capital loss was not deducted in a prior year, that year being 1995, that non-capital loss could have been deducted in the 1997 taxation year, the year under appeal. The fact that no determination of a loss incurred in a particular year has not been made by the Minister does not preclude a Court from ascertaining the correctness of an assessment for another year where one of the constituent elements of an assessment for that other year involves the particular loss for carry-over purposes. In effect, this question has been considered and, in my view, settled by the Associate Chief Judge Bowman in the case of Allcann Wood Suppliers Inc. v. Canada, [1994] 2 C.T.C. 2079. The following passage at pages 2080-2081 is of particular interest:
... In the absence of a binding loss determination under subsection 152(1.1), it is open to a taxpayer to challenge the Minister's calculation of a loss for a particular year in an appeal for another year where the amount of the taxpayer's taxable income is affected by the size of the loss that is available for carryforward under section 111. In challenging the assessment for a year in which tax is payable on the basis that the Minister has incorrectly ascertained the amount of a loss for a prior or subsequent year that is available for deduction under section 111 in the computation of the taxpayer's taxable income for the year under appeal, the taxpayer is requesting the Court to do precisely what the appeal procedures of the Income Tax Act contemplate: to determine the correctness of an assessment of tax by reviewing the correctness of one or more of the constituent elements thereof, in this case the size of a loss available from another year. This does not involve the Court's making a determination of loss under subsection 152(1.1) or entertaining an appeal from a nil assessment. It involves merely the determination of the correctness of the assessment for the year before it.
[36] In view of the above, I am constrained to dismiss the appeal from the Minister's reassessment for the 1997 taxation year.
Signed at Ottawa, Canada, this 31st day of July 2002.
"Alban Garon"
C.J.T.C.C.
COURT FILE NO.: 2001-223(IT)I
STYLE OF CAUSE: Between Ronald Roy and
Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: November 23, 2001
Hearing reopened on January 11, 2002
Conference call held on February 19, 2002
Hearing continued on June 11 and
on July 16, 2002
REASONS FOR JUDGMENT BY: The Honourable Alban Garon
Chief Judge
DATE OF JUDGMENT: July 31, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Sointula Kirkpatrick
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-223(IT)I
BETWEEN:
RONALD ROY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 23, 2001, at Toronto, Ontario,
hearing reopened on January 11, 2002,
conference call held on February 19, 2002, at Ottawa, Ontario, and
hearing continued on June 11 and on July 16, 2002, at Toronto, Ontario, by
the Honourable Alban Garon
Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Sointula Kirkpatrick
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is dismissed.
Signed at Ottawa, Canada, this 31st day of July 2002.
|
"Alban Garon" |
C.J.T.C.C.
[1] The remainder of the business investment loss, being 1/4 of such loss, would have been treated in the usual way as a capital loss, 3/4 of which would have been an allowable capital loss. The resulting amount is part of a taxpayer's allowable capital losses for the year referred to in subparagraph 3(b)(ii) of the Act that must be subtracted from the taxpayer's taxable capital gains and the taxpayer's taxable net gain for the year from the dispositions of the types of property mentioned therein, as provided by paragraph 3(b) of the Act.