Date: 20030122
Docket: 2002-1506(IT)I
BETWEEN:
JOE COSENTINO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Toronto, Ontario on September 18, 2002)
Miller J.
[1] Joe Cosentino claimed an allowable business investment loss for his 2000 taxation year of $25,000 on a business investment loss of $37,500. The Minister denied Mr. Cosentino's allowable business investment loss and Mr. Cosentino appeals that assessment.
[2] Mr. Cosentino and his brother and two cousins worked for Cosentino Wholesale Fruit Limited throughout most of the 1990s. Cosentino Fruit was owned by the cousins' respective fathers Joe Cosentino Senior, and Frank Cosentino, each with a 50 per cent interest in the company. In 1991, the family determined the company needed an injection of capital to continue. It turned to the four cousins. They loaned the company $37,500 each for a total of $150,000. Mr. Cosentino had to take out a collateral mortgage against his property to get the funds necessary to invest in the family company. There was no loan agreement for the $150,000, although Mr. Cosentino explained that the interest rate was prime plus two per cent and for several years he received his monthly interest from the company. He duly reported the interest income on his tax returns.
[3] In the late 1990s the family situation was such that Mr. Cosentino left the company. His brother had left prior to this. Mr. Cosentino did not feel he could continue to work with his cousins. As well, another financial crisis was brewing, and Mr. Cosentino decided it was time to get out. This was in March of 1998. His father, however, remained involved with the company as a 50 per cent owner, although matters did not appear to be copacetic amongst the family.
[4] After March 1998, Mr. Cosentino recalls receiving only a couple of months interest. When he raised this matter with his cousins he was told they were restricted by the bank. He indicated that he found it very difficult to deal with his cousins on this.
[5] By 1999, the finances of the company had deteriorated, as had family relations, to the point that Mr. Cosentino and his father sought legal advice. Mr. Cosentino's father had more at stake, according to Mr. Cosentino, as he had provided the bank with personal guarantees. In September 1999, Mr. Cosentino and his father's lawyer attempted to resolve their financial concerns by proposing a settlement which would remove Mr. Cosentino and his father from any further involvement with the company, including payment of half of Mr. Cosentino's $37,500 loan and a release of Mr. Cosentino's father's guarantees. It was clear from the tone of this correspondence that Mr. Cosentino and his father were extremely concerned about the "security of the family assets". They received no favourable response to this proposal. They were rebuffed.
[6] By early 2000, Mr. Cosentino had the impression the company was facing bankruptcy and needed a white knight to salvage the business. The salvation appeared in the form of the Toronto Wholesale Produce Association. That organization was prepared to take over the Royal Bank's position as the company's major creditor, although there were strings attached. The company was to be transferred to Mr. Cosentino's cousins, the Royal Bank was to be paid several hundreds of thousands of dollars, the Royal Bank was to release Mr. Cosentino and his father from any obligations, and Mr. Cosentino was to forego any right to his loan. Unless these conditions were met there would have been no restructuring and salvaging of the business. Mr. Cosentino agreed and signed the appropriate release on April 28, 2000. He believed this was the only way to get his father out from under any ongoing financial burden. Given his cousins' behaviour over the previous eighteen months he knew by the end of 1999 his investment was likely lost in any event. If he had not agreed to this restructuring he believed the company would have gone bankrupt. As well as wanting to ensure his father would not be hurt financially he also retained some pride in the family name attached to a family company, and if the company could restructure to survive he was clear that was his preference. As he says, there was lots of emotion there.
[7] In this case, to claim an allowable business investment loss in accordance with paragraph 39(1)(c) of the Income Tax Act, it is first necessary to review subsection 50(1). I will just read that section:
50(1) For the purposes of this subdivision, where
(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to the taxpayer in respect of the disposition of personal-use property) is established by the taxpayer to have become a bad debt in the year ...
...
and the taxpayer elects in the taxpayer's return of income for the year to have this subsection apply in respect of the debt ... 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 after the end of the year at a cost equal to nil.
So there are two conditions from this provision: there must be a debt, and it must have gone bad. There is no question there was a debt of $37,500. The Respondent's position is, however, that the debt was extinguished in April 2000 at the time that Mr. Cosentino signed the release and therefore the debt did not exist at the end of the year. She further argues that even if there was a debt, the Appellant has not proven it became a bad debt in the year. He had not, according to the Respondent, taken sufficient reasonable businesslike steps to recover his debt. It can, therefore, not be said to have become uncollectible.
[8] The Respondent relied on the principles set out in the Federal Court of Appeal case of Flexi-Coil Ltd. v. Canada[1] where Mr. Justice MacGuigan stated:
...In summary, to decide whether a taxpayer is entitled to a deduction for bad debts, the Court must be satisfied that the taxpayer itself made the determination that the debts had become uncollectible and that in making such determination, it acted reasonably and in a pragmatic business-like manner, applying the proper factors.
In applying this principle I reach a different conclusion from the Respondent. What was Mr. Cosentino facing when he agreed to effectively write off his investment in April 2000? He had received no interest on his loan for the better part of two years. He had attempted to deal with his cousins on this but without success. The company continued to struggle financially. He and his father had sought legal advice in 1999. They had made a proposal but had been rebuffed. By the end of 1999 he believed his investment was lost. The company was facing bankruptcy and could only be saved by complying with the new financier's conditions. His father's guarantee could only be cancelled if he wrote off his investment. He had some lingering family feeling to the ongoing viability of the company.
[9] Looking at all of those factors I believe Mr. Cosentino did indeed act in a reasonable businesslike manner. Businesslike behaviour does not necessarily have to mean acting spitefully or in a way which will bankrupt a company just to prove you have made every effort to collect your own debt. I would like to think that businesslike behaviour could encompass a more humane approach. In this case the writing was clearly on the wall; Mr. Cosentino was not getting his money back. Why force the issue any further when there are sound reasons not to?
[10] I am satisfied Mr. Cosentino's debt of $37,500 has been proven to have become uncollectible in 2000 and indeed what better proof that a debt has become uncollectible than the creditor's preparedness to release any right to the debt for nothing, or in this case for one dollar. That was a formalization of what Mr. Cosentino already realized. The difficulty that the Respondent argues this creates for Mr. Cosentino is that because he disposed of the debt, there was no longer a debt owing at the end of 2000, which the Respondent claims there must be for subsection 50(1) to apply.
[11] There is no doubt Mr. Cosentino invested in a small business corporation. There is no doubt that investment turned sour, as did some family relations. It is my understanding that the purpose of the rules with respect to allowable business investment losses is to encourage investment in small businesses by providing a more favourable tax treatment than ordinary capital losses in the event the investment does not prove successful. Mr. Cosentino is someone to whom these rules should apply, yet they are worded in such a way as to, at first blush, deny him their application because he gave up any right to the debt receivable. He truly wrote it off as bad. This result seems contrary to the very intent of the allowable business investment loss rules. Had he sold his position to Toronto Wholesale for a dollar he would have qualified for an allowable business investment loss pursuant to subparagraph 39(1)(c)(ii). Instead he wrote off the debt by forgiving it for a dollar. If he had claimed his allowable business investment loss in 1999 I find he would have been entitled to it. There was still a debt owing at the end of 1999. Was it bad? Yes. The final nail in the form of Mr. Cosentino's release of the debt in April 2000 did not have to be hammered home to satisfy me there is justification for Mr. Cosentino to treat the debt as bad in 1999.
[12] The correspondence from BDO Dunwoody outlining Toronto Wholesaler's requirements, including a requirement for filing a proposal under the Bankruptcy & Insolvency Act, was dated January 4, 2000. I am satisfied Mr. Cosentino knew by the end of 1999 that any further efforts to collect would be futile, and he was correct. The 1999 taxation year is not before me, but I raise 1999 to alert the Respondent that had this issue been for 1999 I would have allowed Mr. Cosentino an allowable business investment loss as all conditions of paragraph 39(1)(c) and subsection 50(1) would have been met. Should I, Ms. Edinboro, dismiss his appeal, suggest he file an amended 1999 return, suggest the Minister look favourably on the 1999 allowable business investment loss and run the risk that does not unfold as it should and be back here in two years time dealing with the same issue and giving Mr. Cosentino a favourable result at that point? Or can I legitimately reach a practical conclusion in this informal procedure of allowing this appeal for 2000? I believe I can.
[13] In support of this conclusion I refer to the recent decision of Judge McArthur in Gurberg v. The Queen[2] In Gurberg the Appellant similarly forgave a debt in April 1996. Judge McArthur found that as the debt was owed at the end of 1995 the provisions of subsection 50(1) were met and the allowable business investment loss was allowed. I am prepared to follow such an interpretation of the interplay between subsection 50(1) and paragraph 39(1)(c) in this case and likewise find that Mr. Cosentino is entitled to his allowable business investment loss in 2000.
[14] The appeal is allowed and the matter is referred back to the Minister for reassessment and reconsideration on the basis that Mr. Cosentino is entitled to his allowable business investment loss flowing from his $37,500 loss in his investment. I believe the Income Tax Act in force in 2000 would require that the allowable business investment loss is half of the $37,500.
Signed at Ottawa, Canada, this 22nd day of January, 2003.
|
"Campbell J. Miller" |
J.T.C.C.
COURT FILE NO.: 2002-1506(IT)I
STYLE OF CAUSE: Joe Cosentino v. The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: September 17, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Campbell J. Miller
DATE OF REASONS FOR
JUDGMENT: January 22, 2003
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Joel Oliphant and
Lorraine Edinboro (Student-at-law)
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada