Date: 20031224
Docket: 2001-1849-IT-G
BETWEEN:
MERVYN DEAN SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] The principal facts in this appeal are set forth in the following assumptions set forth in the Respondent's Reply, namely,
11. In so reassessing the Appellant for the 1996 taxation year, the Minister made the following assumptions of fact:
...
b) As of 1996 the Appellant had been employed for over thirteen years as a stockbroker with Yorkton Securities Inc. in Calgary, Alberta. As well as providing professional investment advice to clients, the Appellant traded in securities on his own behalf.
c) The Appellant was a trader or dealer in securities.
d) During the course of his employment, the Appellant had met and developed a business relationship with Mr. Susumu Ikuta, the president and CEO of Edo Japan a franchiser of fast food restaurants.
e) As a result of discussions with Mr. Ikuta, the Appellant decided to open up an Edo of Japan franchise in Phoenix, Arizona. The Appellant intended to sell the franchise at a profit once it became a viable business.
f) The Appellant would not have given up his employment to run the Edo of Japan franchise in Phoenix, Arizona;
g) In order to facilitate the transaction, the Appellant incorporated the following corporations, 539406 Alberta Ltd. and Smith and Chambers Ltd. (a U.S.A. Corporation). The Appellant owned 85% of the shares of 539406 Alberta Ltd. 10% of the shares were owned by his spouse, Myrna Chambers, while 5% were owned by her daughter, Heather Chambers.
h) 539406 Alberta Ltd. was incorporated on August 24, 1992 solely for the purpose of arranging Canadian financing for the Edo of Japan franchise.
i) Smith and Chambers Ltd. was a wholly owned subsidiary of 539406 Alberta Ltd. Smith and Chambers acquired the Edo of Japan franchise in Phoenix, Arizona.
j) After two years of not producing a profit the Appellant sold the Edo of Japan franchise back to Edo of Japan for the amount of the outstanding bank loan taken out to finance the project.
k) At the end of the 1996 taxation year, 539406 Alberta Ltd:
i) Was insolvent;
ii) Did not carry on a business;
iii) The fair market value of the shares was nil; and
iv) Was to be dissolved and would not be commencing to carry on a business.
l) The debt owing to the appellant at the end of the 1996 taxation year was established to be a bad debt in that year
m) 439406 Alberta Ltd. was struck from the Alberta Corporate Registry on October 16, 1998
n) 539406 Alberta Ltd. was not a small business corporation
o) The shares in 539406 Alberta Ltd. were never advertised for sale;
p) The shareholders of 539406 Alberta Ltd. suffered a total loss of $77,196 of which the Appellant's portion was $69,696. The $69, 696 consisted of 100% of shareholder loans of $27,196 and 85% of the $50,000 loss on the sale of the shares.
q) The purpose of the investment was to develop the Edo of Japan franchise into a profitable enterprise
ANALYSIS AND CONCLUSION
[2] Notwithstanding Interpretation Bulletin 497 and notwithstanding that the Appellant was a securities trader I believe that one must look at the individual transaction in question. Although the investment was effected through holding of shares and a loan to a corporation the actual intent of the Appellant was to acquire a franchise, hopefully make it profitable and sell the investment to make a quick profit. Again one must look at the individual transaction.
[3] It may be that the Appellant was wrong in filing for other years on the basis that he had capital gains and capital losses in various years. However, to definitely know this, one would have to examine each of the transactions which gave rise to the gains and losses and evidence on this was lacking.
[4] It might also be that a trader in securities, in many cases when making trades for his own account, will be considered as trading on an income and business loss basis. The fact that the Appellant may have reported some other gains and losses as capital gains and capital losses is not determinative of the nature of the transaction in question. Nor is the fact that he was a trader in securities necessarily determinative.
[5] Again it must be remembered that the loss actually results from the disposition of the franchise and is made up of the loss on the shareholder loan of $27,196 and the loss of $42,500 on the sale of the shares of the corporation. It was not simply a loss on a normal disposition of shares.
[6] As will be seen from Exhibit A-1, Revenue Canada, first by a letter of August 1, 1998, granted the Appellant a business loss and only later did Revenue Canada change its mind and consider the loss as a capital loss. There can be no estoppel against the Crown but there can no doubt that at first glance Revenue Canada agreed with the Appellant on the treatment to be accorded to the loss in question. The Appellant contends that he used the U.S. company for legal reasons as the owner of the franchise and he used 539406 Alberta Ltd. as it was thought that the shares of that company would be easier to sell once the franchise was shown to be profitable.
[7] The Appellant's ownership of the Edo franchise investment was for less than two years. That is a time period consistent with the concept of a quick flip and a business profit or loss as opposed to a capital gain or loss. Moreover, a significant portion of the Edo franchise acquisition was made with bank financing.
[8] In my opinion the facts, elements and motivations involved in the investment in question lead more clearly to a conclusion that this loss on the investment was a business loss. Consequently, the appeal is allowed.
Signed at Ottawa, Canada this 24th day of December, 2002.
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"T. O'Connor" |
J.T.C.C.COURT FILE NO.: 2001-1849(IT)G
STYLE OF CAUSE: Mervyn Dean Smith v. HMTQ
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: November 20, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge T. O'Connor
DATE OF JUDGMENT: December 24, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: R. Scott McDougall
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1849(IT)G
BETWEEN:
MERVYN DEAN SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 20, 2002 at Calgary, Alberta by
the Honourable Judge Terrence O'Connor
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: R. Scott McDougall
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1996 taxation year is allowed, with costs and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant, in the 1996 taxation year, was entitled to a loss of $69,696 consisting of one-hundred per cent of shareholder loans of $27,196 to 539406 Alberta Ltd. and eighty-five per cent of the $50,000 loss on the disposition of the shares of said corporation and that the said total loss was a business loss as
opposed to a capital loss.
Signed at Ottawa, Ontario this 24th day of December, 2002.
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"T. O'Connor" |
J.T.C.C.