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Citation: 2003TCC730
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Date: 20031009
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Dossier : 2000-1798(IT)I
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BETWEEN:
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ELWIRA SOKOLOWSKI,
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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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AMENDED REASONS FOR JUDGMENT
(These
Reasons for Judgment are issued in substitution for the Reasons for Judgment
signed on January 22, 2002)
Lamarre, J.
[1] These are appeals under the informal
procedure against assessments made by the Minister of National Revenue ("Minister")
under the Income Tax Act ("Act") for the 1995, 1996,
1997, 1998 and 1999 taxation years.
[2] In filing
her 1995 income tax return, the appellant claimed a business investment loss of
$268,897 with respect to investments in eight mortgages held "in trust"
for the appellant and her father Henry Sokolowski by Kiminco Acceptance Co. Ltd. ("Kiminco"), a member of the Glen Coulter group of companies. The eight mortgage investments were made in 1987 and
1988 and are identified as follows in paragraph 13 of the Reply to the Notice
of Appeal:
Account/Mortgage
Number
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Ultimate Borrower
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Gross Amount of the Investment
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6658
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Mid-Canada Construction Ltd.
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$300,000
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7492
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Janre Estate
Development Corp.
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$120,000
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7425
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Armour
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$ 19,000
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7495
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Re/Max
Gateway Realty
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$ 23,000
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7586
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Nesrallah
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$ 53,000
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8338
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G. Capello
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$ 31,000
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6464
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Dumont
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$ 16,000
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8111
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Danilov, Frechette
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$ 20,000
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[3] The losses claimed result from Kiminco's
bankruptcy on July 17, 1989.
[4] By
Notice of Reassessment dated May 6, 1999, the deduction for business investment
losses from the appellant's Kiminco investments was reduced by the Minister
from the $268,897 claimed by the appellant to $13,072 for the 1995 taxation
year. This was done for the reasons set out hereunder.
[5] With
respect to the Mid-Canada Construction Ltd. mortgage investment, the firm Peat Marwick
Thorne Inc. ("Peat Marwick"), the receiver in bankruptcy appointed
for Kiminco, recovered in 1989 $16,143 of the original $300,000 invested so
that the loss appeared as $283,856. In the same year, 1989, the appellant
claimed that loss and the Minister allowed 2/3 of $283,856 (= $189,237) as
a capital loss. The appellant was at that time allowed 50 per cent of
that capital loss as an allowable business investment loss ("ABIL").
The appellant's 50 per cent share of that capital loss was $94,619. The other
50 per cent was allocated to the appellant's father on the basis that
Henry Sokolowski and Elwira Sokolowska jointly invested in the mortgage in
question through Kiminco, as per the documentation provided at that time by the
appellant.
[6] With
respect to the Janre Estate Development Corp. mortgage investment, Peat
Marwick, again acting as receiver, had — also in 1989 — recovered $6,457 of the
amount of $120,000 originally invested, so that the loss appeared as $113,542.
The Minister allowed 2/3 of $113,542 (= $75,695) as a capital loss in 1989. The
appellant was allowed 50 per cent of that loss ($37,847) as an ABIL in that
same year. The other 50 per cent was allowed to Henry Sokolowski, as
per the documentation provided at that time by the appellant and her father.
[7] As
the losses with respect to those two mortgage investments (Mid-Canada
Construction and Janre Estate Development Corp.) had already been allowed to
the appellant and to Henry Sokolowski in 1989, no amount was allowed by the
Minister with respect to those losses in 1995.
[8] No
other loss was allowed in 1989 with respect to the other six mortgage
investments because no information in that regard was provided at the time by
the appellant. However, based on additional documentation provided by the
appellant, the appellant was allowed a business investment loss of $13,072 for
1995 on those six other mortgage investments, as follows (see paragraph 33 of
the Reply to the Notice of Appeal):
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Mortgage
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Investment
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Recovered
by Peat
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Net Loss
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Allowed to Henry
Sokolowski
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Allowed to the
Appellant
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7425
Armour
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$19,000
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$16,429
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$ 2,571
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$1,285
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$ 1,285
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7495
Re/Max
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$23,000
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$21,636
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$ 1,364
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$ 682
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$ 682
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7586
Nesrallah
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$53,000
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$46,137
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$ 6,863
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$3,431
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$ 3,431
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8338
Capello
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$31,000
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$25,768
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$ 5,232
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$2,616
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$ 2,616
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6464
Dumont
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$16,000
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$14,253
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$ 1,747
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$ 0
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$ 1,747
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8111
Danilov/
Frechette
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$20,000
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$16,689
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$ 3,311
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$ 0
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$ 3,311
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Totals
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$21,087
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$8,014
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$13,072
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[9] As
shown in the above chart and in the "Analysis of Allowable Business
Investment Losses" prepared by Tiffany Golding, an appeals officer at the
Canada Customs and Revenue Agency ("Agency") (Exhibit R-1, Tab 1),
100 per cent of the loss on the "6464 Dumont" and
"8111 Danilov, Frechette" investments was allocated to the appellant
for 1995, as these investments were made in the appellant's name alone (Exhibit
R-1, Tabs 14 and 15). The loss on the other investments was allocated 50 per
cent to the appellant and 50 per cent to Henry Sokolowski for 1995, as the
mortgage investment documents show that they were made in the names of both
Elwira Sokolowska and Henry Sokolowski (see Exhibit R-1, Tabs 10 to 13
inclusive). The total capital loss allowed to the appellant as an ABIL for 1995
amounted to $13,072.
[10] Half of the taxable capital gains resulting from recoveries made by
the receiver, Peat Marwick, with respect to the Mid‑Canada Construction
Ltd. mortgage and the Janre Estate Development Corp. mortgage in 1995 were also
allocated to the appellant. That allocation between the appellant and her
father was in the same proportion as for similar taxable capital gains for the
years 1990, 1991 and 1992 (as shown in paragraph 22 of the Reply to the Notice
of Appeal).
[11] Indeed, in a judgment rendered by Judge Bonner of this Court on April
16, 1997, (Sokolowska v. Canada, [1997] T.C.J. No. 321 (Q.L.)) with
respect to the appellant's 1990, 1991 and 1992 taxation years, it was decided
that the appellant's interest in the two mortgage investments referred to in
the preceding paragraph was 50 per cent, with the other 50 per cent
of the beneficial ownership of those mortgage investments belonging to Henry
Sokolowski.
[12] In addition to the assessment for the appellant's 1995 taxation year,
the Minister issued Notices of Reassessment dated May 6, 1999, disallowing non‑capital
losses that were carried forward from previous years and that were applied in
the amounts of $11,215 to the 1996 taxation year, $12,701 to the 1997 taxation
year and $24,586 to the 1998 taxation year.
[13] By letter dated February 19, 2001, counsel for the respondent advised
the appellant and the Court that the Minister would consent to a judgment
allowing the carry-forward to the 1996, 1997 and 1998 taxation years of those
same amounts of ABILs, namely: $11,215 for the 1996 taxation year, $12,701 for
the 1997 taxation year and $24,586 for the 1998 taxation year.
[14] The issue with respect to the 1999 taxation year also concerns the
quantum of ABILs available for application to that year. It is the Minister's
position that the unapplied balance of ABILs, if any, available to the
appellant from the losses on her Kiminco investments reverted to "net
capital loss" prior to her 1999 taxation year.
[15] I understand from the appellant's mother, Maria Sokolowska, who was
the only one to testify at the hearing, that the sole issue is that she does
not accept the 50 per cent share of ABILs allocated to her daughter, the
appellant, with respect to the Janre Estate Development Corp. mortgage (see
Exhibit R-1, Tab 7 and Exhibit A-1). Although she argued before Judge
Bonner, who heard the appeals filed by the appellant for her 1990, 1991 and
1992 taxation years, that Henry Sokolowski was the sole beneficial owner
of that mortgage investment, she now submits that the appellant was the sole
beneficial owner thereof and that she should be allowed 100 per cent of the
loss on the Janre Estate Development Corp. mortgage for the 1995 and following
taxation years.
[16] However, this new submission is in contradiction with the document
dated June 30, 1992, provided by the appellant to the Agency (Exhibit R-1,
Tab 3), which shows a joint investment in the names of Elwira Sokolowska
and Henry Sokolowski in the Janre Estate Development Corp. mortgage.
Furthermore, the document from the receiver, Peat Marwick, also shows a joint
investment by the appellant and her father in the Janre Estate Development
Corp. mortgage (Exhibit R-1, Tab 6). The appellant has not brought to my
attention any document showing that she was the sole beneficial owner of that
mortgage investment.
[17] Furthermore, I agree with counsel for the respondent that there is
issue estoppel on the matter of the respective shares of beneficial ownership
attributable to Henry Sokolowski and Elwira Sokolowska with respect to the two
major mortgage investments made in 1989 (Mid-Canada Construction Ltd. and Janre
Estate Development Corp.). This very question has already been adjudicated in
the decision of Judge Bonner of this Court. It was dealt with there for the
purpose of determining the respective shares of the carrying charges and
capital gain relating to the very same 1989 investments to be allocated for the
1990, 1991 and 1992 taxation years. Judge Bonner determined that the appellant
had a 50 per cent share of the beneficial ownership of those mortgage
investments. The appellant now wants to carry over to 1995 (and subsequent
years) 100 per cent of the loss on the mortgage investments in respect of which
Judge Bonner determined that she had only a 50 per cent interest. That
issue is in my view res judicata between the parties (see Wierbicki
v. The Queen, 2000 DTC 6243 (F.C.A.)) and the appellant is not in a
position to claim more than 50 per cent of the loss carry-over with
respect to the Janre Estate Development Corp. mortgage investment for the 1995
and subsequent taxation years. Furthermore, the unapplied balance of ABILs
available to the appellant from the losses on her Kiminco investments incurred
in 1989 (which amounted to $74,774 on December 31, 1996 as per
Exhibit R‑1, Tab 2) reverted to "net-capital losses"
after December 31, 1996. Therefore, no allowable business investment loss is
available to the appellant from the losses on her Kiminco investments after
1996. Those losses were converted as of that date to the net capital loss
balance and thus became deductible only against capital gains (see
paragraphs 111(1)(a) and (b) and subsection 111(8) of the Act
which is reproduced in part below):
SECTION 111: Losses
deductible.
(1) For the purpose of
computing the taxable income of a taxpayer for a taxation year, there may be
deducted such portion as the taxpayer may claim of the taxpayer's
4111(1)(a)3
(a) Non-capital
losses
– non-capital losses for the 7 taxation years immediately preceding and the 3
taxation years immediately following the year;
4111(1)(b)3
(b) Net capital
losses
– net capital losses for taxation years preceding and the three taxation years
immediately following the year;
4111(8)3
(8) Definitions. In this section,
"net capital
loss" – "net capital loss" of a taxpayer for a taxation
year means the amount determined by the formula
A – B + C – D
where
A is the amount, if
any, determined under subparagraph 3(b)(ii) in respect of the taxpayer
for the year,
B is the lesser of
the total determined under subparagraph 3(b)(i) in respect of the
taxpayer for the year and the amount determined for A in respect of the
taxpayer for the year,
C is
the least of
(a) the amount of
the allowable business investment losses of the taxpayer for the taxpayer's
seventh preceding taxation year,
(b) the amount,
if any, by which the amount of the non-capital loss of the taxpayer for the
taxpayer's seventh preceding taxation year exceeds the total of all amounts in
respect of that non-capital loss deducted in computing the taxpayer's taxable
income or claimed by the taxpayer under paragraph 186(1)(c) or (d)
for the year or for any preceding taxation year, and . . .
"non-capital loss"
– "non-capital loss" of a taxpayer for a taxation year means the
amount determined by the formula
(A + B) – (D + D.1 + D.2)
where
A is the amount
determined by the formula
E – F
where
E is the total of
all amounts each of which is the taxpayer's loss for the year from an office,
employment, business or property, the taxpayer's allowable business investment
loss for the year, an amount deducted under paragraph (1)(b) or section
110.6 in computing the taxpayer's taxable income for the year or an amount that
may be deducted under paragraph 110(1)(d), (d.1), (d.2), (d.3),
(f), (j) or (k), section 112 or subsection 113(1) or
138(6) in computing the taxpayer's taxable income for the year
F is the amount
determined under paragraph 3(c) in respect of the taxpayer for the year.
[18] Finally, I understand from the respondent's submissions and from
paragraphs 47 and 49 of the Reply to the Notice of Appeal that the respondent
acknowledges that the appellant had sufficient unexpired ABILs available to
permit her to claim the amounts of $11,215 for 1996, $12,701 for 1997 and
$24,586 for 1998. I understand that the appellant had no ABILs available for
application to her 1999 taxation year. While no explanations were given at the
hearing regarding these additional amounts of ABILs allowed, it is my
understanding that allowing them was not done to the detriment of the appellant
but to her benefit. It is my belief that the appellant does not dispute this.
[19] Consequently, the appeals with respect to the 1995 and 1999 taxation
years are dismissed and the appeals with respect to the 1996, 1997 and 1998
taxation years are allowed and the assessments are referred back to the
Minister for reconsideration and reassessment on the basis that the appellant
may carry forward allowable business investment losses from previous years in
the amounts of $11,215, $12,701 and $24,586 for the 1996, 1997 and 1998
taxation years respectively.
Signed at Ottawa, Canada, this 9th day of
October 2003.
Lamarre,
J..
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