2001-3222(IT)I
BETWEEN:
RONALD T.W. SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on November 20, 2002 at Regina, Saskatchewan, by
the Honourable Judge L.M. Little
Appearances
Counsel for the Appellant: Dwayne M. Anderson
Counsel for the Respondent: Lyle Bouvier
Dana Brûlé (Student-at-law)
JUDGMENT
The appeal from the assessment made under the Income Tax Act (the "Act") for the 1996 taxation year is dismissed.
The appeals from the assessments made under the Act for the 1997, 1998 and 1999 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 24th day of January 2003.
|
"L.M. Little |
J.T.C.C.
Date: 20021224
Docket: 2001-3222(IT)I
BETWEEN:
RONALD T.W. SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little, J.
A. FACTS
[1] Alliance Grain Company Inc. ("Alliance") was a company incorporated under the laws of the Province of Saskatchewan.
[2] On the 13th day of July 1995 the Appellant purchased 25,000 shares of Alliance (25% of the issued and outstanding shares) at a price of $23,500.00.
[3] Alliance was a Canadian controlled private corporation within the meaning of the definition contained in the Income Tax Act (the "Act"). All or substantially all of the fair market value of the assets of Alliance were used principally in an active business carried on primarily in Canada.
[4] At all material times Alliance was a small business corporation as defined in the Act.
[5] On the 9th day of August 1995 the Appellant provided a joint and several guarantee to the Royal Bank of Canada (the "Bank") in connection with a loan obtained by Alliance from the Bank (the "First Guarantee"). The Appellant's liability under the First Guarantee was to a maximum of $351,574.73.
[6] On the 9th day of August 1995 the Appellant provided a second joint and several guarantee to the Bank in connection with a further loan obtained by Alliance (the "Second Guarantee"). The Appellant's liability under the Second Guarantee was to a maximum of $12,500.00.
[7] By letter dated the 24th day of June 1997 the solicitors for the Bank wrote to the Appellant demanding that the Appellant pay the Bank the sum of $351,574.73 immediately. This demand for payment was made in connection with the First Guarantee that the Appellant provided to the Bank.
[8] By letter dated the 24th day of June 1997 the solicitors for the Bank wrote to the Appellant demanding that the Appellant pay the Bank the sum of $11,329.35 immediately. This demand for payment was made in connection with the Second Guarantee that the Appellant provided to the Bank.
[9] The Appellant retained the services of a law firm to obtain advice in connection with his liability under the First Guarantee and the Second Guarantee that he provided to the Bank. The Appellant paid legal fees as follows in connection with his legal liabilities under the two guarantees:
1997 - $ 8,000.00
1998 - $15,000.00
1999 - $15,000.00
Total $38,000.00
[10] When the Appellant filed his income tax returns for the 1997, 1998 and 1999 taxation years he deducted the legal fees referred to in paragraph [9] above.
[11] On the 27th day of November 2000 the Minister of National Revenue (the "Minister") reassessed the Appellant's 1996, 1997, 1998 and 1999 taxation years. In the said reassessments the Minister made a number of adjustments including a disallowance of the legal fees that were claimed by the Appellant.
[12] During the hearing of the appeals counsel for the Appellant said that the Appellant reached an agreement with the Bank to pay approximately $155,000.00 on the First Guarantee and Second Guarantee referred to above rather than the amounts of $351,574.13 plus $11,329.35 as demanded by the solicitors for the Bank.
[13] Counsel for the Appellant also stated that the Appellant was allowed to claim an allowable business investment loss ("ABIL") in connection with the amount of $155,000.00 that he paid to the Bank. Counsel for the Appellant said that the ABIL was allowed by the Minister in the Appellant's 2000 taxation year.
B. ISSUE
[14] The issue is whether the Appellant is entitled to deduct the following legal fees in determining his income for the 1997, 1998 and 1999 taxation years.
1997 - $ 8,000.00
1998 - $15,000.00
1999 - $15,000.00
Total $38,000.00
[15] I am satisfied by the evidence submitted that the Appellant paid legal fees of $38,000.00 in total in an attempt to minimize his liability under the First and Second Guarantees that he provided to the Bank. If the Appellant had not disputed the amounts demanded by the Bank he would have paid a total sum of $364,074.73 to the Bank. However, as noted above, by retaining a law firm and disputing the claim by the Bank the Appellant was able to reduce his liability to $155,000.00.
[16] Subsection 39(12) of the Act provides that an ABIL is available if a taxpayer has honoured a guarantee of the debt of a corporation. Certain conditions must be met to come within this provision:
(a) an amount must be paid by a taxpayer in respect of a debt of a corporation;
(b) the amount must be paid to a person with whom the taxpayer was dealing at arm's length;
(c) the corporation owing the debt must be a small business corporation both at the time the debt was incurred and at any time during the 12 months prior to the time that an amount first became payable under the guarantee.
[17] In my opinion the legal fees of $8,000.00, $15,000.00 and $15,000.00 paid by the Appellant in connection with the First and Second Guarantees should be treated as Allowable Business Investment Losses deductible in the years the amounts were paid.
[18] The appeal filed for the 1996 taxation year is dismissed.
[19] The appeals are allowed, without costs, for the 1997, 1998 and 1999 taxation years and the Appellant is entitled to deduct the following amounts in the years indicated:
1997 - $ 8,000.00
1998 - $15,000.00
1999 - $15,000.00
Signed at Vancouver, British Columbia, this 24th day of January 2003.
|
"L.M. Little" |
J.T.C.C.
COURT FILE NO.: 2001-3222(IT)I
STYLE OF CAUSE: Ronald T.W. Smith and
Her Majesty the Queen
PLACE OF HEARING: Regina, Saskatchewan
DATE OF HEARING: November 20, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge L.M. Little
DATE OF JUDGMENT: January 24, 2003
APPEARANCES:
Counsel for the Appellant: Dwayne M. Anderson
Counsel for the Respondent: Lyle Bouvier
Dana Brûlé
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada