Date: 20021211
Docket: 2001-3682-IT-I
BETWEEN:
FILIP CACKIROVSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] These appeals pursuant to the Informal Procedure were heard at Toronto, Ontario on November 19, 2002. The Appellant testified and called Ray Sicchia, his former co-director and co-shareholder of 1194463 Ontario Ltd. ("119"), which carried on business as Coco Loco's Sandbar Cafe on Mount Pleasant Road in Toronto from mid-August, 1996 until March 19, 1997.
[2] Paragraphs 5 to 15 inclusive of the Reply to the Notice of Appeal set out the matters in dispute. They read:
5. In computing income for the 1997 taxation year, the Appellant claimed an allowable business investment loss ("ABIL") in the amount of $86,625 with respect to a business investment loss ("BIL") in the amount of $115,500, resulting in a non-capital loss of $86,625 and the Appellant requested that the non-capital loss be carried back to the 1994 and 1995 taxation years and to be applied as a deduction in the amounts of $14,500 and $850, respectively.
6. The Minister of National Revenue (the "Minister") assessed the Appellant for the 1994, 1995 and 1997 taxation years as filed, Notices of Assessment thereof dated June 22, 1995, October 7, 1996 and December 14, 1998, respectively.
7. By concurrent Notices of Reassessment thereof dated December 30, 1998, the Minster reassessed the Appellant for the 1994 and 1995 taxation years to allow the deduction of the non-capital losses carried back from 1997 in the amounts of $14,500 and $850, respectively.
8. By concurrent Notices of Reassessment thereof dated January 18, 1999, the Minister further reassessed the Appellant for the 1994 and 1995 taxation years to allow deductions for ABIL in the amounts of $14,500 and $850, respectively with respect to BIL in the amounts of $19,333 and $1,133, respectively.
9. By Notice of Reassessment thereof dated June 8, 2000, the Minister reassessed the Appellant for the 1997 taxation year to deny the deduction of an ABIL in the amount of $86,625 claimed.
10. By concurrent Notice of Reassessment thereof dated June 8, 2000, the Minister reassessed the Appellant for the 1994 and 1995 taxation years to deny the deductions for the non-capital losses carry-back from 1997 taxation year in the amounts of $14,500 and $850, respectively and to delete ABIL in the amounts of $14,500 and $850, respectively, with respect to BIL in the amounts of $19,333 and $1,133, respectively.
11. The Appellant filed Notices of Objection for the taxation years at issue.
12. The Minister confirmed the Appellant's assessments for the 1994, 1995 and 1997 taxation years with Notification of Confirmation by the Minister thereof dated July 12, 2001.
13. In so assessing and/or reassessing the Appellant, the Minister made the following assumptions of fact:
a) the facts hereinbefore admitted or stated;
b) the claim for the ABIL was in respect to the disposal of shares of 1194463 Ontario Limited that were acquired in 1996 in the amount of $115,500;
c) at all material times, the Appellant and Raymond Sicchia were directors of 1194463 Ontario Limited ("Corporation");
d) the Appellant failed to establish that the Corporation was a Canadian Control Private Corporation ("CCPC") or a small business corporation;
e) there was no debt owing to the Appellant by the Corporation in his 1997 taxation year, which debt was acquired for the purpose of gaining or producing income from a business;
f) there was no deemed disposition by the Appellant of a debt owing to him at the end of the 1997 taxation year by the Corporation that the Appellant has established to have become bad within the meaning of paragraph 50(1)(a) of the Act in that year;
g) there was no deemed disposition by the Appellant at the end of the 1997 taxation year of any share of the capital stock of the Corporation owned by the Appellant, which corporation:
i) has during the year become a bankrupt (with the meaning of subsection 128(2) of the Income Tax Act, R.S.C. 1952, c. 148, (the "Act") as amended;
ii) is a corporation referred to in section 6 of the Winding Up and Restructuring 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 year; or
iii) at the end of the year is insolvent, neither the corporation nor a corporation controlled by it carries on business, the fair market value of the share are nil and it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business;
h) in his 1997 taxation year, the Appellant did not dispose of any shares of the capital stock of a small business corporation giving rise to a capital loss, to a person with whom the Appellant was dealing at arm's length;
i) in his 1997 taxation year, the Appellant did not dispose of a debt owed to the Appellant by the Corporation giving rise to a capital loss, to a person with whom the Appellant was dealing at arm's length, which the corporation was:
i) a small business corporation;
ii) 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 a bankrupt, or;
iii) a corporation referred to in section 6 of the Winding Up and Restructuring Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time of the winding up order;
j) the Appellant did not suffer a business investment loss in the 1997 taxation year;
k) the Corporation was not engaged in active business during 1997;
l) the Appellant had no non-capital losses available from other years to be carried back and claimed in the computation of income for the 1994 and 1995 taxation years.
B. ISSUES TO BE DECIDED
14. The issues are:
a) whether the Appellant incurred a business investment loss in the 1997 taxation year in the amount of $115,500; and
b) whether the Appellant had incurred non-capital loss in the 1997 taxation year that would be deductible in computing taxable income for the 1994 and 1995 taxation years.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
15. He relies on sections 3, 38 and 39, subsections 39(9), 111(8), 125(7), 248(1), 251(2) and 251(6) and paragraphs 39(1)(c), 40(2)(g)(ii), 50(1)(a) and 111(1)(a) of the Act as amended for the 1994, 1995 and 1997 taxation years.
[3] The following are excerpts of the relevant provisions of the Act for the 1997 taxation year:
38 - 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.
39(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 the 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
...
(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,
40(2) Notwithstanding subsection (1),
...
(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 or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was not dealing at arm's length,
...
is nil.
50(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,
...
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.
...
248(1) In this Act,
"small business corporation", at any particular time, means, subject to subsection 110.6(15), a particular corporation that is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
[4] Pursuant to paragraph 38(c) of the Act, a taxpayer's allowable investment loss is 3/4 of the taxpayer's business investment loss. A taxpayer's business investment loss is defined under paragraph 39(1)(c) as a bad debt owing to the taxpayer from a Canadian-controlled private corporation that is a small business corporation. Pursuant to subsection 50(1) of the Act, where the taxpayer elects to have subsection 50(1) apply, there is a deemed disposition and reacquisition of the bad debt.
[5] At the conclusion of evidence, the Appellant had satisfied all matters relating to his claim for an Allowable Business Investment Loss ("ABIL"). He was a two-thirds shareholder of 119 which carried on business in both 1996 and 1997. 119 was engaged in active business in 1996 and 1997. 119 was a Canadian-controlled Private Corporation ("CCPC") and a small business corporation which owed him at least what he claimed as set out in paragraph 5 of the Reply for his 1997 taxation year. 119 was his only source of income while it operated and he was a manager/bartender of its day to day operations. It closed its doors when the landlord seized possession on March 19, 1997. 119 sued the landlord for damages and settled for $30,000 damages in October, 1997.
[6] 119's accountant received 119's records for 1997 from the Appellant. However 119 could not pay the accountant. Therefore the accountant did not do any accounting for 1997 respecting 119 and misplaced, lost or threw out 119's records. As a result, the Appellant had to supply the Court with the few records he had and his own recollections from 1997 respecting 119's finances for 1997. That evidence of the Appellant is accepted as true. It is on that basis that the Court makes the following findings respecting the Appellant's bad debt.
[7] On the basis of the evidence of the Appellant, confirmed by Mr. Sicchia, the Appellant was owed, at the end of 1997, the following by 119:
|
December 31, 1996 |
$163,821.90 |
|
January 28, 1997 (Loan from Canada Trust) |
14,950.00 |
|
Subtotal |
$178,771.90 |
|
|
|
|
Less |
|
|
(1) October 17, 1997 Paid R. Cackirovski from settlement |
$ 8,863.13 |
|
(2) October 29, 1997 Paid Appellant from settlement |
$ 2,026.59 |
|
(3) Late 1997, proceeds of furniture and equipment (gross) |
$ 3,000.00 |
|
|
$13,889.72 13,889.72 |
|
Net |
$164,882.18 |
[8] The Act does not define a bad debt for the purpose of subsection 50(1) of the Act. This Court defined a bad debt in Flexi-Coil Ltd. v. R., [1996] 1 C.T.C. 2941, affirmed by [1996] 3 C.T.C. 57, 96 D.T.C. 6350 (F.C.A.), wherein Archambault, J. stated at paragraphs 21 and 22:
The question of when a debt becomes bad is a question of fact to be determined according to the circumstances of each case. Primarily, a debt is recognized to be bad when it has been proved uncollectible in the year. In Roy v. Minister of National Revenue (1958), 20 Tax A.B.C. 385, 58 D.T.C. 676, Mr. Boisvert of the Tax Appeal Board stated at page 680:
As the Act does not define a bad debt, it is necessary to turn to recognized accounting principles of business practice. A debt is recognized to be bad when it has been proved uncollectible in the year.
The question of when a debt is to be considered uncollectible is a matter of the taxpayer's own judgment as a prudent businessman. In Hogan v. Minister of National Revenue (1956), 15 Tax A.B.C. 1, 56 D.T.C. 183, at page 193, Mr. Fisher described how this determination should be made:
For the purposes of the Income Tax Act, therefore, a bad debt may be designated as the whole or a portion of a debt which the creditor, after having personally considered the relevant factors mentioned above in so far as they are applicable to each particular debt, honestly and reasonably determines to be uncollectable at the end of the fiscal year when the determination is required to be made, notwithstanding that subsequent events may transpire under which the debt, or any portion of it, may in fact, be collected. The person making the determination should be the creditor himself (or his or its employee), who is personally thoroughly conversant with the facts and circumstances surrounding not only each particular debt but also, where possibly, each individual debtor. ...
[Emphasis added in original.]
[9] By the end of 1997, the Appellant's shares in 119 were worthless as evidenced by the fact that 119 was insolvent, 119 had no assets and 119 was out of business forever. The Appellant honestly and reasonably determined that the debt was a bad debt. The Court finds that bad debt to be $164,882.18 as of December 31, 1997.
[10] That debt was acquired by the Appellant for the purpose of gaining or producing income from 119's business. Therefore, subparagraph 40(2)(g)(ii) of the Act does not apply to deem the loss to be nil.
[11] 119 was engaged in active business in 1996 and 1997 and the Appellant suffered a business investment loss in 1997 in the amount of $164,882.18.
[12] The Appellant is permitted to carry back any unused portion of his ABIL as a non-capital loss pursuant to paragraph 111(1)(a) and subsection 111(8) of the Act.
[13] The appeals are allowed pursuant to the restrictions governing the Informal Procedure for 1994, 1995 and 1997. They are referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
[14] Pursuant to the Rules respecting the Informal Procedure, the Appellant is awarded his out-of-pocket disbursements respecting the prosecution of these appeals. They are fixed at $100.00.
Signed at Vancouver, British Columbia, this 11th day of December, 2002.
|
"D. W. Beaubier" |
J.T.C.C.COURT FILE NO.: 2001-3682(IT)I
STYLE OF CAUSE: Filip Cackirovski v. Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: November 19, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge D. W. Beaubier
DATE OF JUDGMENT: December 11, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: A' Amer Ather
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-3682(IT)I
BETWEEN:
FILIP CACKIROVSKI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on November 19, 2002 at Toronto, Ontario, by
the Honourable Judge D. W. Beaubier
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: A' Amer Ather
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1994, 1995 and 1997 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 11th day of December, 2002.
|
"D. W. Beaubier" |
J.T.C.C.