Date: 20011026
Docket: 2000-810-IT-I
BETWEEN:
NARGESS GIAHINEJAD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Agent for the Appellant : Peter Khanna
Counsel for the Respondent: James Rhodes
____________________________________________________________________
Reasonsfor Judgment
(Delivered orally from the Bench atToronto, Ontario, on July 30, 2001)
Mogan J.
[1] When the Appellant filed her income tax return for the 1997 taxation year, she claimed a business investment loss in the amount of $53,150 and deducted an allowable business investment loss (as that phrase is defined under section 38 of the Income Tax Act), in the amount of approximately $39,800. The deduction of the allowable business investment loss was disallowed by the Minister of National Revenue, acting through the Canada Customs and Revenue Agency (Revenue Canada), when reassessing the Appellant for the 1997 taxation year. The Appellant has appealed from that reassessment.
[2] A business investment loss is defined in paragraph 39(1)(c) of the Act. Generally speaking, it is a provision which allows a person who invests money in a Canadian-controlled private corporation (carrying on an active business), the benefit of a deduction if the money invested in that corporation is lost, either through the failure of the corporation to repay a loan or through the corporation becoming insolvent and a shareholder unable to recover the capital invested in shares. There are a number of conditions set out in paragraph 39(1)(c) defining business investment loss. One condition is that if money is advanced to a Canadian-controlled private corporation, it must be a small business corporation which generally means that it carries on an active business. There are other conditions which are not relevant to this appeal.
[3] The Appellant's evidence is that her husband became a shareholder in a corporation identified as 1222396 Ontario Inc., operating under the business name of "Mom's Grill House" which apparently maintained an account with the Royal Bank of Canada, 5001 Yonge Street, North York, Ontario. The Appellant stated that her husband was a shareholder in 1222396 Ontario Inc. ("the numbered company") and as the company needed money, her husband would turn to her for what was needed.
[4] The Appellant herself is a licensed real estate agent working in Richmond Hill, a municipality directly north of Toronto. She stated that on eight occasions in 1997, she issued cheques to the numbered company at the request of her husband. Exhibit A-1 is a series of monthly bank statements for the numbered company from the North York branch of the Royal Bank. There are five pages including bank statements for the periods July 31 to August 29; the month of September; September 30 to October 31; the month of November; and November 28 to December 31. These bank statements show many deposits and withdrawals but there are eight significant deposits which someone has circled. These circled deposits add up to $53,150 which is the amount that the Appellant claimed as her business investment loss.
[5] Exhibit A-2 is a series of eight carbon copies of cheques from a cheque book for cheques dated July 9 and 15, August 6, 11 and 25, October 1, December 1 and 28, 1997. These copies of cheques are in precisely the same amounts as the eight deposits circled on Exhibit A-1; and the cheques are dated on the same date as the deposits or one or two days prior to the deposits. The Appellant examined the duplicate cheques carefully and said that they are all in her handwriting and that she in fact signed them. I found the Appellant to be a credible witness and I have no reason to disbelieve her when she stated that those are duplicate copies of cheques she made out at the request of her husband and that she delivered them to him. I am satisfied that she did issue cheques in the aggregate amount of $53,150 payable to Mom's Grill House, the business name of the numbered company.
[6] I am also satisfied from Exhibit A-1 that the Appellant's husband did deposit those cheques in the Royal Bank account of the numbered company. Although the husband did not testify, the linkage between the signing of the cheques by the Appellant and the dates of those cheques and the dates of deposits is just too close to be a coincidence. I am satisfied that the cheques were deposited. If it is just a question of proving that the Appellant advanced or loaned $53,150 to the numbered company, I am satisfied that the Appellant has proven that she did. She advanced the money in eight cheques and they were deposited into the account of the numbered company. However, there are other conditions to be satisfied if the Appellant is to win her appeal.
[7] The Appellant must prove that the numbered company was a Canadian-controlled private corporation which means that more than 50% of the voting shares were owned by persons resident in Canada; and that the company was carrying on an active business in Canada. She also must prove that the company became insolvent in 1997 or that there was no reasonable expectation of her being able to recover her loan in 1997. None of those facts has been proven.
[8] Referring to the Appellant not being able to recover the loans in 1997, on the evidence before me, I could not possibly find that these debts owing to the Appellant by the numbered company were bad debts at any time in 1997. Even on December 1, 1997, the Appellant issued a cheque to the company for $1,830 which cheque was deposited on December 4; and then again on December 28, she issued an even bigger cheque for $2,975, which was deposited on December 29, 1997. She was still investing money in this company in the last month of the year and, indeed, in the last three or four days of the year. I cannot find, therefore, that the company was insolvent or unable to pay her loans when she was still lending money at the end of the year. On that basis alone, the Appellant's appeal cannot succeed.
[9] There is also a deficiency of evidence as to what the company did and whether it was Canadian-controlled. She said that she knew that her husband was a shareholder in the company but she did not know if there were other shareholders and, if so, who they were. If her husband owned less that 50% of the voting shares of the company and if the remaining voting shares were held by persons not resident in Canada, then it would not be a Canadian-controlled private corporation. Also, the Appellant made reference to some kind of bakery business which operated as Focaccia Bakery but she did not indicate whether it was an active business carried on in 1997 and 1998. There was no evidence that this was a Canadian-controlled private corporation carrying on an active business in Canada in 1997. That is a significant defect in this appeal.
[10] Apart from the Appellant's total failure to show that the debt went bad in 1997, I would have required evidence from some witness who had first-hand knowledge as to what the company did, what kind of business it carried on, when it carried on the business, who all the shareholders were, what kind of shares were issued, and what kind of shares they held. There is no evidence to that effect.
[11] I do not have any hesitation in dismissing this appeal on the single ground that there is no evidence that the company was unable to repay these loans in 1997. Accordingly, the appeal is dismissed. I do leave open the question, however, as to whether the Appellant might be entitled to deduct a business investment loss in 1998. She did state that the Royal Bank seized all of the numbered company's assets in September 1998 and then it ceased its operations. I urge the Appellant to pursue this question on her own, having found that she advanced the money to her husband's company and that he owned shares in the company.
[12] The numbered company did not have to go bankrupt in order to satisfy the test for business investment loss. I would point out to the Appellant that, if the loan went bad in September 1998 when the bank seized the assets of this numbered company, then it is still possible for that year to be reassessed by Revenue Canada because she was not required to file her 1998 income tax return until April 1999. She probably was not assessed for 1998 until sometime in the summer of 1999 and that is only two years ago. With a three-year normal reassessment period, that would be open until approximately the late spring or early summer of 2002. Therefore, the Appellant really has another year or the better part of a year in which to persuade Revenue Canada that she not only invested the money, but that the debt went bad in 1998. She may be able to persuade Revenue Canada, particularly if she takes her husband along with her to prove what the company did and who the shareholders were.
[13] It seems to me that if the Appellant goes to Revenue Canada and shows that the money was lost, that the company was a Canadian-controlled private corporation, and that it carried on an active business, Revenue Canada may permit her to re-file her return for 1998 or may reassess her if they are convinced that all the conditions necessary to prove a business investment loss in 1998 are satisfied. I leave that open to the Appellant. The appeal for 1997 cannot succeed but the door may be open for 1998 if the Appellant follows the right path and satisfies the necessary conditions. I am not making a finding that the Appellant is entitled to any relief but with the significant amount of money involved, a taxpayer should take careful steps to try to satisfy Revenue Canada that she has circumstances which cry out for relief.
[14] I make one last comment. The Appellant stated that the bank could not provide her with documents. Banks are required to retain documents, particularly for transactions as recent as 1997 and 1998. They may charge a service fee to photocopy original cheques but, if the Appellant has a possible business investment loss of $39,000, a bank service fee for recovering the relevant cheques may be worthwhile. That is up to the Appellant.
Signed at Ottawa, Canada, this 26th day of October, 2001.
"M.A. Mogan"
J.T.C.C.
COURT FILE NO.: 2000-810(IT)I
STYLE OF CAUSE: Nargess Giahinejad & Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: July 30, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge M.A. Mogan
DATE OF JUDGMENT: August 14, 2001
APPEARANCES:
Agent for the Appellant: Peter Khanna
Counsel for the Respondent: James Rhodes
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada