Date: 20011228
Docket: 2001-52-IT-I
BETWEEN:
R. R. ROBERTSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard on November 21, 2001 at Winnipeg, Manitoba.
PRELIMINARY COMMENTS
[2] Before addressing the major issue in these appeals, it will be helpful to quote from a letter of the Department of Justice Canada dated November 14, 2001 and the attached Affidavit of Arthur Tennenhouse sworn to on November 14, 2001.
[3] The Department of Justice Canada letter reads as follows:
Department of Justice
Canada
Winnipeg Regional Office
301 -310 Broadway
Winnipeg, Manitoba
R3C 0S6
Our File:
Notre dossier: 3-70103
Your File:
Votre dossier:
November 14, 2001
FACSIMILE & COURIER
Tax Court of Canada
3rd Flr., 200 Kent Street
Ottawa, Ontario
K1A 0M1
Attention: Registrar
Dear Sir/Madam:
Re: R. R. Robertson v. Her Majesty the Queen
______Court File No.: 2001-52(IT)I___________
I am writing to advise that as a result of pre-trial discussions with the Appellant in the above noted matter, Mr. R. R. Robertson it has become apparent that the Appellant's position is that the appeal before the Court is not only in respect of himself, but also in respect of a distinct taxpayer, Robthor Steel Corporation. It is allegedly paragraph 2 of the Appellant's Notice of Appeal that purports to advance an appeal on behalf of Robthor Steel Corporation.
It also seems to be the Appellant's position that an application for an Order extending the time to file a Notice of Appeal, filed on January 5, 2001, was made on behalf of both himself and Robthor Steel Corporation. However, at the time the application was filed, the Respondent proceeded under the impression that the application was only in respect of R. R. Robertson in his personal capacity. That continues to be the position of the Respondent. Likewise, the Respondent submits that the Tax Court treated this matter as being solely in relation to R. R. Robertson, as an Order was endorsed by the Honourable Judge Sarchuk on April 5, 2001 extending the time within which appeals for R. R. Robertson may be instituted.
The Respondent maintains that the above referenced appeal is only in respect of R. R. Robertson, personally, and that any purported appeal in respect of Robthor Steel Corporation is not properly before the Court for several reasons. Therefore, to deal with this matter, the Respondent intends to bring an oral motion immediately prior to the commencement of the hearing of this matter scheduled for November 21, 2001.
The Respondent will seek an order quashing any references to a purported appeal by Robthor Steel Corporation in the Appellant's Notice of Appeal on the basis that:
1. Robthor Steel Corporation is a distinct and separate taxpayer from the Appellant and two taxpayers cannot be the subject of one appeal;
2. the last T2 Income Tax return filed in respect of Robthor Steel Corporation was for the 1994 taxation year;
3. Robthor Steel Corporation late filed a Notice of Objection to the 1993 and 1994 taxation years on October 28, 1996;
4. Revenue Canada advised Robthor Steel Corporation by correspondence dated November 14, 1996 that the Notices of Objection were late filed;
5. Revenue Canada received correspondence from Robthor Steel Corporation on March 14, 1997 applying for an extension of time in which to file Notices of Objection for the 1993 and 1994 taxation years;
6. Revenue Canada advised Robthor Steel Corporation in writing on March 26, 1997 that his application for an extension of time to file an objection for the taxation years 1993 and 1994 was not granted;
7. subsequent to the refusal of the application for an extension of time, Revenue Canada performed an audit at the request of Robthor Steel Corporation with respect to Robthor Steel Corporation's claim for allowable business investment losses;
8. Robthor Steel Corporation was advised by Revenue Canada of the results of the audit as well as the steps to be taken on April 8, 1999;
9. Robthor Steel Corporation did not take the further steps recommended by Revenue Canada.
Furthermore, the Respondent will seek an Order to amend paragraph 2 of the Respondent's Reply to Notice of Appeal and to add a paragraph 2.1.
The amended paragraph 2 will read as follows:
2. He admits the allegation of facts stated in paragraph 4 of the Notice of Appeal.
The added paragraph 2.1 will read as follows:
2.1 With respect to paragraph 2 of the Notice of Appeal, the Respondent states that this appeal is not in respect of Robthor Steel Corporation and that any appeal by Robthor Steel Corporation is not properly before the Court at this time.
In support of the Respondent's motion please find enclosed the Affidavit of Arthur Tennenhouse.
Please do not hesitate to contact me prior to the hearing if you require further information.
Yours truly,
"signature"
Angela Evans
Counsel, Tax Litigation
Enc.
cc: R. R. Robertson, Appellant (via courier)
cc: D. Gill, CCRA Edmonton TSO
The Affidavit of Arthur Tennehouse reads as follows:
2001-52(IT)I
TAX COURT OF CANADA
("Tax Court stamp")
BETWEEN:
REGINALD R. ROBERTSON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
AFFIDAVIT
I, Arthur Tennenhouse, of the City of Winnipeg, in the Province of Manitoba, Public Servant, MAKE OATH AND SAY AS FOLLOWS:
1. I am employed by her Majesty the Queen in Right of Canada, as a Tax Appeals Officer in the Canada Customs and Revenue Agency (the "Agency") in Winnipeg, Manitoba, and as such have personal knowledge of the matters hereinafter deposed to, save and except what is stated to be on information and belief, and where so stated, I verily believe them to be true.
2. I have examined and searched the files and records of the Agency which pertain to Robthor Steel Corporation ("Robthor") in order to inform myself for the purpose of making this Affidavit.
3. The last T2 Income Tax return filed for Robthor was in respect of the 1994 taxation year. There have been no T2 returns filed for subsequent years.
4. On October 28, 1996, Robthor filed a Notice of Objection to assessments of its 1993 and 1994 taxation years. Attached as Exhibit "A" to this my Affidavit is a true copy of the Notice of Objection.
5. By correspondence dated November 14, 1996, the Chief of Appeals, Appeals Division, Revenue Canada advised Robthor that the Objections for the 1993 and 1994 taxation years were not filed within the requisite 90 days from the date of mailing of the Notices of Assessment, which dates were April 9, 1996 and April 29, 1996, respectively. Attached as Exhibit "B" to this my Affidavit is a true copy of said correspondence.
6. On March 14, 1997, Revenue Canada received an application for an extension of time to file an objection for the taxation years 1993 and 1994 on behalf of Robthor. Attached as Exhibit "C" to this my Affidavit is a true copy of the application.
7. By correspondence dated March 26, 1997, the Chief of Appeals, Appeals Division, Revenue Canada advised Robthor that the application for an extension of time could not be granted. Attached as Exhibit "D" to this my Affidavit is a true copy of said correspondence.
8. Subsequently, at the request of Robthor, Revenue Canada performed an audit with respect to allowable business investment losses ("ABILs") claimed by Robthor for the 1997 taxation year.
9. Further to conducting the audit, on April 8, 1999, E. J. Pratt, of the Audit Division, Revenue Canada, advised Robthor in writing of the final results of the audit. Robthor was informed that the revised amount of ABILs was $120,765.00, with 75% of that amount being $90,574.00, which amount would be applied to the 1997 tax return when filed. Attached as Exhibit "E" to this my Affidavit is a true copy of said correspondence.
10. Robthor has not filed the 1997 tax return and, as such, the revised amount of ABILs has not been applied to that taxation year.
11. On November 8, 2001, myself and Angela Evans, Counsel for the Respondent in the appeal of R.R. Robertson to the Tax Court of Canada, file no. 2001-52(IT)I, met with R.R. Robertson. At said meeting, we advised R.R. Robertson that the position of the Respondent was that his appeal to the Tax Court is solely in respect of him as an individual taxpayer and that an appeal in respect of Robthor was not properly before the court at this time.
12. However, I explained to R.R. Robertson that if he wanted to deal with any ABILs incurred by Robthor that Robthor would have to file a 1997 T2 return claiming the ABILs. If, further to that return being filed, Revenue Canada did not allow all of the ABILs claimed, Robthor could exercise its statutory rights of appeal at that time.
13. I make this Affidavit for no improper purpose.
SWORN BEFORE me at the City of )
Winnipeg, in the Province of Manitoba, )
this 14th day of November, 2001. )
)
)
) "signature"_________
) Arthur Tennenhouse
)
___________"Angela Evans "___________ )
A Commissioner for Oaths in and
for
)
the Province of
Manitoba
)
Solicitor
A Barrister and Solicitor in and for the
Province of Manitoba
[4] At the hearing I verbally granted the motion and held that the appeal in question is simply the appeal of R. R. Robertson and does not constitute an appeal by Robthor Steel Corporation ("Robthor"). However, it should be noted from the comments in the aforesaid documentation that Robthor appears to be entitled in its own right to an ABIL for the 1997 year in an amount of $90,574 and the Appellant, representing Robthor was encouraged to take that matter up with Mr. Tennenhouse.
FACTS IN R. R. ROBERTSON'S APPEAL (APPELLANT)
[5] Although the Notice of the Appeal and the Reply are convoluted and extremely difficult to follow, the main facts may be summarized as follows:
1. Clive Oakley ("Oakley") is the principal shareholder of Neg-Ions Ltd. ("Neg-Ions UK") a United Kingdom corporation. Neg-Ions (North America) Inc. ("NINA") was a Canadian controlled private corporation for the purposes of the Income Tax Act ("Act") and was involved in acquiring dust control technology and marketing rights from Neg-Ions UK. The share ownership of NINA at incorporation or shortly thereafter was 70% Robthor (350,000 Class A shares) and 30% Neg-Ions UK (150,000 Class A shares). In the context of pursuing this business and others the Appellant made certain advances. The Minister has allowed an allowable business investment loss ("ABIL") in the 1997 year for certain advances but has not done so for other advances.
2. More particularly the Minister concedes that the Appellant incurred an allowable business investment loss ("ABIL") of $56,581 in his 1997 taxation year and that the Appellant was entitled to claim an ABIL of $45,527 in his 1997 taxation year and to claim the balance of the ABIL namely $11,054 as a non-capital loss in his 1996 taxation year. The Minister does not agree that the Appellant incurred an ABIL in the amount of $71,250 for his 1997 taxation year and further did not have a non-capital loss balance to apply back to either his 1994 or 1995 taxation years or to carry forward to his 1998 taxation year as he purported to do.
[6] The Minister's position with respect to the $71,250 is that it is made up of a personal loan to Clive Oakley of $50,000 plus interest accrued on that Clive Oakley loan of $21,250 for a total of $71,250. Although the pleadings and testimony are not clear it appears that Neg-Ions UK guaranteed this loan and gave as collateral security its 150,000 shares of NINA. The loan eventually was defaulted upon (save for one repayment of 5,000) but the 150,000 shares of NINA never came into the Appellant's or Robthor's possession after the default.
ISSUE:
[7] The issue is whether the Minister was correct in not permitting an ABIL with respect to the $50,000 personal loan to Oakley and the interest accrued thereon of $21,250. The Appellant, an inventor with some success in the areas of air control and other environmental areas refers to amounts he and Robthor paid to acquire technology and marketing rights and that these monies were lost mainly because of system flaws and fraud on the part of the U.K. connections. These developments certainly left a sour note with the Appellant but unfortunately have no bearing on the issue in this appeal referred to above. Some of these developments may assist Robthor and the Appellant acting for Robthor should explore this with Mr. Tennenhouse, which I believe involves the necessity of Robthor filing a 1997 return claiming whatever ABILs and capital losses to which it is entitled.
ANALYSIS
[8] Legislation
The following are extracts from the relevant provisions of the Act:
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 ¾ of the taxpayer's business investment loss for the year from the disposition of that property.
39. (1) For the purposes of this Act,
...
(b) a taxpayer's capital loss for a taxation year from the disposition of any property is the taxpayer's loss for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read in the manner described in paragraph (a) of the subsection and without reference to the expression "or the taxpayer's allowable business investment loss for the year" in paragraph 3(d), be deductible in computing the taxpayer's income for the year or any other taxation year) from the disposition of any property of the taxpayer other than
...
(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, or
(ii) to a person with whom the taxpayer was dealing at arm's length
of any property that is
(iii) a share of the capital stock of a small business corporation, or
(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,
(B) a bankrupt (within the meaning assigned by subsection 128(3)) that was a small business corporation at the time it last became a bankrupt, or
(C) a corporation referred to in section 6 of the Winding-up Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time a winding-up order under that Act was made in respect of the corporation, ...
...
125. (7) In this section,
...
"Canadian-controlled private corporation" means a private corporation that is a Canadian corporation other than a corporation
[certain corporations are excluded]
...
248. (1) Definitions — In this Act,
"active business", in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business;
...
"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,
(b) shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a "payer corporation" within the meaning of that subsection), or
(c) assets described in paragraphs (a) and (b),
including, for the purpose of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation, and, for the purpose of this definition, the fair market value of a net income stabilization account shall be deemed to be nil;
Arguments of the Parties
[9] The Appellant's contention is that the ABIL claimed in his 1997 income tax return should be allowed to the full extent of $110,093.
[10] The Respondent's position is that the Appellant's ABIL was $56,581 or ¾ of the BIL of $75,441.
[11] The Minister allowed as ABILs the initial advance for the acquisition of the Clean Zone technology ($50,000) and the subsequent loan to NINA ($25,441).
[12] The amounts at issue on this appeal are the Loan to Oakley ($50,000) and the interest accrued with respect to that Loan ($21,250): a total sum of $71,250.
Discussion
[13] An "allowable business investment loss" for a taxation year arising from the disposition of any property is defined by paragraph 38(c) as being ¾ of the taxpayer's "business investment loss" for the year arising from the disposition of that property.
[14] Paragraph 39(1)(c) defines a taxpayer's "business investment loss" for a taxation year to be the taxpayer's "capital loss" (as defined in paragraph 39(1)(b) of the Act) for the year from a disposition after 1977 of shares or debt of a "small business corporation" which is defined in subsection 248(1) cited above. For purposes of paragraph 39(1)(c) the shares or debt must be disposed of to a person with whom the taxpayer was dealing at arm's length.
[15] A taxpayer claiming a business investment loss on a debt must meet the requirements set out in subparagraph 39(1)(c)(iv). For the 1977 and subsequent taxation years, the debt must be owed to the taxpayer by a "Canadian-controlled private corporation"[1] that is a "small business corporation", a "bankrupt" that was a small business corporation at the time it last became a bankrupt, or an insolvent corporation that was a small business corporation at the time a winding-up order was made under the Winding-up Act (now the Winding-up and Restructuring Act).
[16] To qualify under the definition of "business investment loss", the Loan to Oakley must satisfy the requirements in subparagraph 39(1)(c)(iv) of the Act. The debt was not owed to the Appellant by a Canadian-controlled private corporation. Therefore, the loss incurred by the Appellant as a result of Oakley's default on the Loan is not a business investment loss and, thus, could not be deducted as an ABIL.
[17] It will be assumed that there was a collateral promise by Neg Ions UK to answer for the debt of Oakley to Robertson. Therefore, it will be assumed further that there was a valid contract by which the guarantor, Neg-Ions UK, became bound to the creditor, Robertson, to guarantee Oakley's Loan obligation with the 150,000 shares it held in NINA.
[18] The question which arises is whether, upon Oakley's default, the debt which crystallized between the guarantor, Neg-Ions UK, and Robertson would qualify under subparagraph 39(1)(c)(iv) of the Act. Although, the object of the performance under the guarantee was the 150,000 shares of NINA, this debt was owed to the Appellant by either Oakley or Neg-Ions UK, or both. Since neither Oakley nor Neg-Ions UK is a Canadian-controlled private corporation the amount of the loan, $50,000 and the accrued interest, $21,500 do not qualify for ABIL treatment.
[19] Consequently, the appeal is dismissed. There shall be no costs.
Signed at Ottawa, Canada this 28th day of December, 2001.
"T. O'Connor"
J.T.C.C.
COURT FILE NO.: 2001-52(IT)I
STYLE OF CAUSE: R. R. Robertson v. The Queen
PLACE OF HEARING: Winnipeg, Manitoba
DATE OF HEARING: November 21, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge T. O'Connor
DATE OF JUDGMENT: December 28, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Angela Evans
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-52(IT)I
BETWEEN:
R. R. ROBERTSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on November 21, 2001, at Winnipeg, Manitoba, by
the Honourable Judge Terrence O'Connor
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Angela Evans
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1994, 1995, 1996, 1997 and 1998 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 28th day of December, 2001.
|
"T. O'Connor" |
J.T.C.C.
[1] A "Canadian-controlled private corporation" is defined by subsection 248(1) to have the meaning assigned by subsection 125(7).