REASONS
FOR JUDGMENT
Boyle J.
[1]
The Appellant, Louis-Fred Martin, had a lengthy
and successful career as a financial advisor during the period 1986 through
June 2010. Given the consolidations in the financial institutions sector, he
worked with a number of brokerage firms during this period. Throughout this
time, he built up a significant and loyal clientele. Whenever he changed firms,
invariably his clients followed him. M. Martin regarded his clientele as a
valuable asset, capable of generating revenues for him throughout the remainder
of his career and potentially upon his retirement.
[2]
M. Martin’s appeal involves his 2010 tax year.
In June 2010, he stopped working for his then employer brokerage firm, Peak,
which had recently acquired the financial advisory line of business of
Promutuel where M. Martin had worked for a number of years. After June 2010,
during the continued fallout of the 2008 economic crisis which hit the
financial institutions sector hard, M. Martin was unable to find employment with
another brokerage firm. He was also unable to obtain the requisite approval
from the provincial regulator to be an independent financial advisor or to
establish his own firm. The result of his inability to work as a financial
advisor was that his clients were not able to follow him and, according to M.
Martin, they continued to do business with Peak. M. Martin describes this as a
theft by Peak of his clientele.
[3]
It is M. Martin’s position that the resulting
loss of his anticipated revenues from these clients for the period from June to
December 2010, as well as for the following years, was an income loss which
should be deductible as such for tax purposes.
[4]
It is his further position that his loss of his
clientele by virtue of his clients continuing with Peak and his continuing
inability to work as a financial advisor was a loss of valuable property which
gave rise to a capital loss for tax purposes, reflecting the difference between
the value of his clientele, calculated as a function of the revenues it was
capable of generating, and the fact that he received nothing from Peak for it
after he no longer worked for Peak. It is M. Martin’s position that his capital
loss is increased by his disposition costs which should reflect the value of
all of his personal property, including his home and other property, later
seized or lost as a consequence of his resulting insolvency.
[5]
M. Martin was the only witness in his appeal. It
does not appear that the list of M. Martin’s clients or their files belonged to
him and not his brokerage firm employer. However, it does appear reasonable
that M. Martin’s clients could be expected to continue to follow him to a new
brokerage firm, had he resumed working at one or established his own, just as
they had in the past.
[6]
The amount M. Martin claimed as an income loss
in 2010 was $14,000. He arrived at this number by estimating the amount of net
income his clientele would have generated for him $2,000 per month. He
multiplied this monthly number by seven to reflect the lost revenues from June
to December 2010. This is his estimate of revenue that he reasonably could have
expected to earn from these clients, but did not earn, had he continued to work
as a financial advisor after he was no longer working for Peak. Consistent with
this, M. Martin believes he should also be entitled to a $24,000 annual income
loss for the years after 2010, although such years are not under appeal to this
Court.
[7]
In computing his capital loss, to reflect his
loss of his valuable clientele, M. Martin estimated his adjusted cost base to
be $800,000. Using a 3% assumed annual return on investment, an $800,000 pool
would have been needed to generate his $24,000 anticipated but lost revenues.
Since he had received nothing from Peak or anyone else for his clientele, M.
Martin claimed an $800,000 capital loss in his 2010 tax return. It is his
position that his capital loss should be repaid to him and not simply available
to reduce future capital gains.
[8]
After filing his 2010 tax return, M. Martin
sought to claim $14,000,000 of disposition costs for his former clientele and
increase his capital loss by a like amount – from $800,000 to $14,800,000. M.
Martin arrived at his $14,000,000 disposition costs number as follows. He
estimated that $2,000,000 was the value of his property seized or lost as a
result of the loss of his clientele and the revenue generated thereby. This
included the value of his home, his country property, his collection of
vehicles, his library, and all of his other collections and belongings. As
mentioned, these properties were seized as a consequence of his resulting
financial difficulties. M. Martin then multiplied the $2,000,000 value of his
lost property by seven, relying upon the proverbial exhortation to thieves to
pay back sevenfold what they stole.
[9]
The Court must dismiss M. Martin’s appeal with
respect to his claimed $14,000 income loss in 2010. The loss realized by M.
Martin is not a fiscal loss recognized for the purposes of the Income Tax
Act (the “Act”). An income loss generally arises for tax purposes
when the expenses actually incurred by a taxpayer earning income from a source
in a year exceed the revenues actually generated from that source for that
year. As the Act does not tax revenue before it is earned, even if it is
reasonably anticipated, the Act does not recognize anticipated but unearned
income as an offsetting loss. This is evident from paragraph 18(1)(a) of
the Act, which provides that a business expense must be made or
incurred to be deductible in computing income from a business.
[10]
The Court must also dismiss M. Martin’s appeal with
respect to his claimed $14,800,000 capital loss for 2010. There are several
reasons for that. A taxpayer’s capital loss generally reflects an economic
investment loss actually realized by the taxpayer upon disposing of property
owned by the taxpayer. In this case, it is not at all clear that the client
list was property owned by M. Martin and which he could sell. It appears that
he was only free to solicit future business from his clients if and when he
changed firms as it appears that he successfully did throughout his pre-2010
career.
[11]
The adjusted cost base of a capital property
disposed of generally reflects the costs or after-tax amounts actually paid by
a taxpayer for the property and to improve it. That is clear from the language
of sections 53 and 54 of the Act. There is no basis to use the fair
market value of a capital property as its cost – indeed such an approach would
remove the possibility of capital gains being realized for tax purposes. It
appears from the evidence that M. Martin built up his clientele over the years.
He did not ever buy a list of clients. It appears that all of his expenses of
building up his clientele were claimed and allowed as business expenses in the
years in which they were incurred. Even if M. Martin’s clientele did constitute
property of his which he disposed for no proceeds as a result of what he claims
was a theft, there is no evidence that such property had an adjusted cost base
greater than nil.
[12]
It is similarly clear from the wording of subsection
40(1) dealing with disposition costs that, in order to qualify and be
recognized, expenses must actually have been made or incurred for the purpose
of making the disposition. For this reason, CRA was correct to not recognize
any of the requested $14,000,000 of disposition costs as an increase to M.
Martin’s claimed capital loss in 2010. This amount was not an outlay or expense
actually made or incurred for the purpose of making the disposition. It was M.
Martin’s estimate of his other losses resulting from the loss of his clientele
and the revenue it could generate.
[13]
The concepts of income loss and capital loss in
the Act do not exist to reimburse or « dédommager » a person for their loss or « dommages-intérêts » from a breach of contract or a theft. However, that appears to be
the substance of M. Martin’s appeal. The tax system does not serve as an
insurer of property, nor does the Tax Court of Canada have jurisdiction over
claims for damages or restitution.
[14]
For these reasons, the taxpayer’s appeal can not
succeed. The taxpayer’s appeal is dismissed, with costs throughout.
Signed at Toronto, Ontario, this 19th day of June 2014.
“Patrick Boyle”
Translation certified true
on this 24h
day of September 2014
François Brunet,
Revisor
Email this Content