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Docket: 2003-1101(IT)I |
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BETWEEN: |
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MARCO SMILOVICI, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent. |
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Appeal heard on common evidence with the appeal of Hanna Smilovici (2003-1098(IT)I) on October 8, 2003 at Toronto, Ontario
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Before: The Honourable Justice T. O'Connor |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Jeremy Streeter |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2001 taxation year is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 12th day of January 2004.
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"T. O'Connor" |
O'Connor, J.
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Citation: 2004TCC9 |
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Date: 20040112 |
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Docket: 2003-1101(IT)I |
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BETWEEN: |
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MARCO SMILOVICI, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent,
AND 2003-1098(IT)I HANNA SMILOVICI, Appellant, and
HER MAJESTY THE QUEEN, Respondent. |
REASONS FOR JUDGMENT
O'Connor, J.
[1] These appeals were heard on common evidence at Toronto, Ontario, on October 8, 2003. The Notice of Appeal and the Reply to the Notice of Appeal in each of the cases are practically identical. The following are quotations from the Reply to the Notice of Appeal in the appeal of Marco Smilovici:
4. In computing income for the 2001 taxation year, the Appellant, in partnership with his spouse, sought to claim a business investment loss in the amount of $165,128.00, which results in an Allowable Business Investment Loss ("ABIL") of $82,564.00, of which the Appellant's 50% share was $41,282.00.
5. The Minister of National Revenue (the "Minister") initially assessed the Appellant for the 2001 taxation year. The Notice of Assessment was dated July 9, 2002.
6. In so assessing the Appellant for the 2001 taxation year, the Minister denied the deduction of the business investment loss.
7. Subsequently, the Appellant served a Notice of Objection for the 2001 taxation year. After careful consideration and review, the Minister reassessed the Appellant's 2001 income tax return to allow a capital loss in the amount of $75,000.00.
8. In so assessing the Appellant, the Minister made the following assumptions of fact:
(a) the ABIL claimed by the Appellant in the 2001 taxation year allegedly pertained to an investment in Algoma;
(b) on or about June 1, 1994, the Appellant and his spouse advanced the amount of $50,000.00 to Algoma.
(c) on or about June 16, 1994, the Appellant and his spouse entered into a letter of credit in the amount of $70,000.00 with the Canadian Imperial Bank of Commerce (the "CIBC"), the beneficiary of which was Valley Demolition & Excavating Inc.;
(d) in June 1994, the Appellant and his spouse paid an amount of $30,000.00 to Eric Polten, a lawyer acting for the Appellant in the matter of the investment in Algoma;
(e) in June 1995 the CIBC called the letter of credit, and the Appellant and his spouse paid an amount of $70,000.00 to the CIBC;
(f) Algoma has not filed income tax returns, nor has the Minister any record of Algoma;
(g) at no time was the Appellant a shareholder of Algoma;
(h) there was no debt owning to the Appellant by a Canadian controlled private corporation;
(i) the Appellant failed to establish that at the end of the 2001 taxation year, he owned a share of capital stock of a corporation which was insolvent, did not carry on business, the fair market value of shares of which was nil, and could have been reasonably expected to be dissolved or wound up and not carry on business in the future;
(j) the Appellant failed to establish that an amount had been paid by him to a person with whom the Appellant was dealing at arm's length in respect of a debt of a small business corporation under an arrangement under which the Appellant guaranteed the debt;
(k) the Appellant did not incur a business investment loss in the 2001 taxation year.
[2] Exhibit A-1 consists principally of a letter of intent dated May 31, 1994 indicating that the Appellant was to become a partner in a partnership with Frank D'Andrea and Bruno Rosso. The name of the partnership was Algoma Disposal Service Excavation and Demolition. Also forming part of Exhibit A-1 is a further letter dated June 19, 1994 between the said three partners from which it appears that the amount of money to be contributed by the Appellant to the partnership was $150,000. However, the other partners namely Bruno Rosso and Frank D'Andrea apparently contributed no funds to the partnership but they were responsible for carrying out the contracts which the partnership was to enter into. Exhibit A-2 is a document entitled Agreement of Sale and Purchase dated June 20, 1994. It describes certain jobs to be completed by Algoma but apparently also evidences the purchase by Algoma from Valley Demolition and Excavation Inc. of the equipment and as appears from the testimony of the Appellants the money used to purchase that equipment was the $150,000 which Marco (apparently on behalf of himself and his wife) contributed to Algoma.
[3] The documents and the testimony of the Appellants' evidence an intention of the Appellants that their investment be made to a limited corporation. However the lawyer handling the transaction who the Appellants retained principally because he could speak the German language and thus communicate better with the Appellants. However the lawyer apparently did not do all the things he was requested to do including in particular making sure that there was some security on the equipment for the repayment to the Appellants of the $150,000 and moreover to conform with the Appellants intentions and convert Algoma into a limited corporation.
[4] With the assistance of another lawyer the German lawyer was sued by the Appellants but that proceeding has been going on for several years and the Appellants have not advanced their position one bit. All that has happened according to the Appellant is that they have been discovered mainly with respect to their arrival from Germany and the amounts of money they have brought with them and other matters which do not focus on the possible liability of the German lawyer. In other words as of the day of the hearing of these appeals that litigation has produced nothing favourable for the Appellants. It is also clear from the testimony that Algoma has essentially nothing, all of the equipment that was acquired with the $150,000 having disappeared and the other partners in the Algoma partnership having no apparent assets.
Analysis
[5] As can be seen from the Reply the Minister of National Revenue has allowed each of the Appellants a capital loss in 2001 of $75,000 but has denied that that loss can in any way be considered as an allowable business investment loss (ABIL), because principally the Appellants did not become the owners of a share or a debt of a corporation and consequently could not be considered as owning the share or debt of a small business corporation or Canadian controlled private corporation.
[6] Paragraph 39(1)(c) of the Income Tax Act (the "Act") defines a business investment loss to be a capital loss realized on a disposition after 1977 of shares or debt of a small business corporation. A small business corporation is defined in subsection 248(1) of the Act to mean a Canadian-controlled private corporation of which all or substantially all of the fair market value of the assets of which were:
(a) used principally in an active business carried on primarily in Canada by the corporation or a related corporation,
(b) shares or debt of a "connected" small business corporation, or
(c) a combination of (a) and (b).
[7] For the purposes of paragraph 39(1)(c) it is sufficient to qualify for business investment loss status that the company issuing the shares or debt qualified under the active business assets test at any time within the 12 months preceding disposition.
[8] Subsection 50(1) deems a disposition of a debt to take place when the debt becomes a bad debt and deems a disposition of a share to take place when the coproration which issued the share becomes: (1) bankrupt; (2) insolvent (in the case of a corporation referred to under section 6 of the Winding-Up Act); and subject to winding-up order under the Winding-Up Act; or (3) is insolvent at the end of the year and the corporation no longer carries on business and had no fair market value at the end of the year and was reasonably expected to wind up.
[9] I conclude that the position of the Minister is correct. The Appellants were each granted a capital loss of $75,000 but it is clear that the capital loss (and this applies to the actual loss claimed by the Appellants in the total amount of $165,128) cannot be considered an ABIL as it does not meet the conditions of the sections and paragraphs mentioned above, principally because what is involved was not shares or debt of a corporation and therefore clearly not shares or debt of a Canadian - controlled private corporation or of a small business corporation.
[10] Consequently the appeals are dismissed.
Signed at Ottawa, Canada, this 12th day of January 2004.
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"T. O'Connor" |
O'Connor, J.
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CITATION: |
2004TCC9 |
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COURT FILE NO.: |
2003-1101(IT)I and 2003-1098(IT)I |
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STYLE OF CAUSE: |
Marco Smilovici and H.M.Q. and Hanna Smilovici and H.M.Q. |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
October 8, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice T. O'Connor |
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DATE OF JUDGMENT: |
January 12, 2004 |
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APPEARANCES: |
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For the Appellants: |
The Appellants themselves |
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Counsel for the Respondent: |
Jeremy Streeter |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |