Date: 20001003
Docket: 1999-1745-IT-G
BETWEEN:
ROBIN MARK CAMPBELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal with respect to the 1994 and 1995 taxation years.
[2] In filing his return of income for the 1994 taxation year, the Appellant claimed an allowable business investment loss ("ABIL") in the amount of $28,722.00 with respect to an alleged business investment loss of $38,296.00.
[3] In assessing the Appellant for the 1994 taxation year by Notice of Assessment dated January 7, 1997, the Minister of National Revenue ("Minister") denied the Appellant's claim for the ABIL in the amount of $28,722.00.
[4] In reassessing the Appellant for the 1994 and 1995 taxation years by concurrent Notices of Assessment dated December 3, 1998, the Minister allowed the Appellant's claim for the ABIL in the amounts of $5,168.00 and $2,247.00 respectively.
AGREED FACTS FROM THE PLEADINGS
[5] At issue is the Appellant's claim of an ABIL in the amount of $28,722.00 for the 1994 taxation year.
[6] The Appellant is the holder of 101 Class "A" shares of 873665 Ontario Inc. ("the company"). The articles of incorporation of the company authorize no other class of shares other than Class "A" shares. The Appellant is also the vice-president and director of the company. There are three other shareholders of the company. The company operated under the name of Maple City Contracting and was in the business of building-framing.
[7] On December 19, 1991 the Appellant obtained a loan in the amount of $33,000.00. Legal fees and other disbursements related to obtaining this loan were $2,816.55. As such, the Appellant's net proceeds from the loan were $30,183.45 ($33,000.00 - $2,816.55).
[8] On December 20, 1991 the Appellant made a shareholder loan to the company in the amount of $30,183.45.
[9] During the 1994 and 1995 taxation years, the Appellant paid the Minister source deductions owed by the company in the amount of $5,296.00.
[10] On his 1994 income tax return, the Appellant claimed an ABIL in the amount of $28,722, based on the business investment loss calculated at $38,296.00 ($33,000.00 + $5,296.00).
FACTS FROM THE EVIDENCE
[11] The company's financial statement dated November 30, 1992 reports a balance owing to the Appellant in the amount of $4,591.00. The Appellant contests the legitimacy of this financial statement.
[12] The company has not prepared any financial statements subsequent to November 30, 1992.
[13] The company has not filed any corporate income tax returns for any year subsequent to the November 30, 1992 fiscal year.
[14] The company did not file T4 slips for the 1991, 1992 and 1993 taxation years.
[15] The Appellant has not provided the Minister with books and records of the company.
ISSUE
[16] The issue is whether the Appellant may claim an ABIL in the amount of $28,722.00 based on a business investment loss calculated at $38,296.00 for the 1994 taxation year.
ANALYSIS
[17] The Appellant was a builder-framer who had a grade 10 education and who worked for the company. He became a shareholder and a director. His knowledge of corporate structures and share holding was very limited and his knowledge of being and acting as a director was limited to weekly meetings on the job to discuss the ongoing work of the company.
[18] One of the other three shareholders, Chris Molengraaf, was responsible for the bookkeeping including keeping the books and records of the company and filing tax returns on behalf of the company. The company became insolvent in October 1993 and Chris Molengraaf left Ontario with the assets and books and records of the company. The Appellant has not been paid any interest or principal amount on the loan.
[19] The only evidence contrary to the Appellant's position is Exhibit R-2, a balance sheet (November 30) for Maple City Contracting. This balance sheet shows the company only owed the Appellant $4,591.00 as of November 30, 1992. The Appellant also had no knowledge of the document other than that he maintained the alleged facts in relation to the indebtedness to himself were wrong. The Appellant's accountant maintained the balance sheet by his own after the fact investigation was found to be wrong on one other ground of declared liability, a debt known as Chatham Kent Small Business Loan.
[20] The definition of an ABIL is not at issue in this case. The Minister is not disputing the fact that the company is a Canadian-controlled private corporation under subsection 125(7) of the Income Tax Act ("the Act") or that it is a small business corporation under subsection 248(1) of the Act. As such, the Court assumes that the Appellant is eligible to claim a business investment loss and ABIL for bad debts owed to him by the company. The Minister is not disputing the fact that in the 1991 taxation year, the Appellant made a loan to the company in the amount of $30,183.45, plus $2,816.55 in legal fees and other disbursements related to the loan, which came to a total of $33,000.00. Further, the Minister is not disputing the fact that in the 1994 taxation year, the Appellant paid the Minister source deductions in the amount of $5,296.00 on behalf of the company.
[21] The prime issue turns on the finding of credibility of the Appellant in relation to the matters before the Court.
[22] As previously reviewed, the Appellant is a builder-framer who had little or no administrative business sophistication. His lack of documentation was indeed an impediment. However, his evidence was forthright, credible and compelling. It was clearly established with the Appellant's own bank and mortgage records that the Appellant borrowed the money to loan to the company and the Appellant did loan the money to the company. The company received the money, and I conclude the Appellant was still owed the money as of October 1993, the time of the company's insolvency. The Appellant shortly thereafter, in 1994, ascertained, claimed and declared the debt to be a bad debt.
[23] The Minister has also argued, in the event an allowable business investment loss is warranted, that it ought only to be allowed in the year the loss was incurred.
[24] Subsection 50(1) stipulates that:
(1) For the purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a taxation year [...] is established by the taxpayer to have become a bad debt in the year, [...] the taxpayer shall be deemed to have disposed of the debt [...] at the end of the year for proceeds equal to nil and to have reacquired it immediately thereafter at a cost equal to nil.
[25] Paragraph 39(1)(c) of the Act, found in the same subdivision, stipulates that:
(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 ...
[26] Subsection 50(1) of the Act deems the disposition of a bad debt and the loss pertaining to that debt to have been incurred in the year during which the debt became bad. Paragraph 30(1)(c) would then deem such loss to be a business investment loss for the same year.
[27] A debt is usually considered to have become a bad debt when the taxpayer has exhausted all legal means of collection. The question of when a debt is to be considered uncollectible is a matter of the taxpayer's own judgment as a prudent, pragmatic businessman. However, the Court must be satisfied that the taxpayer acted in a pragmatic, business like manner in making the determination of uncollectibility. (See Berreti v. M.N.R., 86 DTC 1719 at p. 1723.) I find the Appellant made this determination in the appropriate manner in 1994.
CONCLUSION
[28] I find that the shareholder loan owing to the Appellant as claimed by the Appellant has been established and not repaid and the Appellant, in a prudent, expeditious and business like manner, found the debt to be a bad debt in 1994.
DECISION
[29] The appeal is allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the business investment loss of $38,296.00 claimed in the 1994 taxation year has been established and the Appellant is therefore entitled to an allowable business investment loss. The Appellant is entitled to his costs.
Signed at Ottawa, Canada, this 3rd day of October 2000.
"D. Hamlyn"
J.T.C.C.