Date: 19990107
Docket: 97-373-IT-I
BETWEEN:
GEORGE HORVATH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 20, 1998 at Winnipeg, Manitoba, by the Honourable Judge R.D. Bell
Reasons for judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue is whether the Appellant had non-capital losses from activities conducted in 1991 and 1992 which in whole or in part could be carried forward to be deducted from income in his 1994 taxation year.
GENERAL:
[2] Reference to section numbers relate to the Income Tax Act.
FACTS:
[3] The Appellant's uncontradicted testimony was that he undertook business adventures in 1991 and 1992, same being carried on in the U.S.A. He said that he was not aware that expenses incurred outside Canada could be deducted from Canadian income. He said further that because he did not believe these to be deductible he disposed of all records in connection with the activities. He testified that he reconstructed his activities and expenses. His detail was impressive and I accept the fact that these sums were incurred. In this regard, counsel for the Respondent said that she accepted his evidence and that it seemed reasonable.
[4] He outlined his activities as including attendance at trade shows, vehicle expenses and hotel and food expenses, all in the U.S.A. He described business expenses incurred in Las Vegas while attending trade shows and advertising and business trips to Fargo and Minneapolis and St. Paul. He also said that he spent funds on newspaper ads, that he had telephone expenses, that he had a materials booth at trade shows, that he rented equipment, produced brochures and other printed matter and used projectors and screen slides to promote his products. His evidence in respect of these expenses was that for the numerous trips and expenditures in 1991 the total was $3,629.85 Canadian and for 1992 was $2,515.59 Canadian. He was dealing with nutritional and weight loss products and anticipated the company opening in Canada where he had intended to conduct business. Because, according to him, of its unusual expansion in the United States it did not open in Canada as soon as he had expected and he was unable to survive economically in the U.S. operation. He said he had no income from the U.S.A. and no income from Canada in this period.
[5] The Appellant, in computing income for his 1992 taxation year in Canada recorded a total, net and taxable income of nil. No information was given as to his filing for 1991.
ANALYSIS AND CONCLUSION:
[6] Respondent's counsel's submission was simply that the Appellant had no losses in 1991 and 1992, that he had filed no claim for losses for those years and had filed no valid Notice of Objection. She referred to subsection 152(8) of the Income Tax Act ("Act") and asserted that the Appellant had filed returns for 1991 and 1992 and they the assessments were valid and binding. It reads as follows:
An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission therein or in any proceeding under this Act relating thereto.
[7] In not agreeing with Respondent's counsel, I rely, inter alia, upon the following cases, none of which were presented by her. .
[8] In Aallcann Wood Suppliers Inc. v. The Queen, 94 DTC 1475, Bowman, J.said:
The Minister's position in the original reply to the notice of appeal that the Minister's ascertainment of a loss for a particular taxation year is immutable unless a loss determination is made under subsection 152(1.1) is, however, wrong. ... 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 carry-forward under section 111. In challenging the assessment for a year in which tax is payable on the basis that the Minster 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.
This follows the logic set forth in New St. James v. M.N.R., 66 DTC 5241 and is followed, with approval, in Samson et Fréres Ltée v. The Queen, 97 DTC 642. In this case Dussault, J. at 647 and 648 said:
...it is clear that, for the purpose of the assessment in respect of a taxation year, the Minister may determine the amount of the non-capital loss that a taxpayer is entitled to deduct for the purposes of computing his taxable income. Similarly, in his appeal from such an assessment, the taxpayer may dispute the amount thus assessed, even if the year in which the loss was incurred is time-barred and may have been the subject of a "nil" assessment.
[9] Paragraph 111(1)(a) states that:
For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as the taxpayer may claim of the taxpayer's...
(a) non-capital losses for the 7 taxation years immediately preceding and the 3 taxation years immediately following the year;
[10] The term "non-capital loss" is defined in subsection 111(8) of the Act.
[11] The limitation on the deductibility of loss is set forth in section 111(3) which states:
(3) For the purposes of subsection (1),
(a) an amount in respect of a non-capital loss ... for a taxation year is deductible ... in computing the taxable income of a taxpayer for a particular taxation year only to the extent that it exceeds the total of
(i) amounts deducted under this section in respect of that non-capital loss ... in computing taxable income for taxation years preceding the particular taxation year,
..., and
(b) no amount is deductible in respect of a non-capital loss ...for a taxation year until
(i) in the case of a non-capital loss, the deductible non-capital losses, ...
for preceding taxation years have been deducted.[1]
[12] This is the authority for the deduction by the Appellant of his non-capital losses from 1991 and 1992 by applying same to his 1994 taxation year. Those non-capital losses are constituent elements of the assessment of tax for the 1994 taxation year.
[13] Accordingly, the expense amount of $2,515.59 in the 1992 taxation year and the portion of the expense amount of $3,629.85 in the 1991 taxation year not previously deducted constitute non-capital losses which can be carried forward in accordance with the provisions of section 111.
[14] The appeal is allowed to that extent.
Signed at Ottawa, Canada this 7th day of January, 1999.
"R.D. Bell"
J.T.C.C.
[1] A limitation referring to "amounts previously deductible in respect to the loss" was removed from the Act by an amendment for the 1983 and subsequent taxation years. The amendment which replaced "deductible" with "deducted" permitted a taxpayer to choose when to use the deduction within the time frame permitted for the carry over of non-capital loss.