REASONS
FOR JUDGMENT
Lyons J.
[1]
The Estate of Zoltan Kokai-Kuun (“Zoltan”), the
appellant, appeals the reassessment for the 2008 taxation year made by the
Minister of National Revenue under the Income Tax Act. The Minister
included into income a capital gain in the amount of $235,755.60 (the “Gain”) from
the sale of 40 acres of land situated at 211 Howards Road, Vernon, British
Columbia (the “Land”) and disallowed deductions for interest, carrying charges,
property taxes and levies pertaining to the Land.[1] The Minister also denied that
capital losses were realized in 2006, or any other year, that would be
available for application in 2008.
[2]
The issues are:
1. Whether the Minister correctly calculated the capital gain
on the sale of the Land.
2. Whether capital losses are available for application against
the capital gain in 2008.
[3]
Anthony Thomas Kokai-Kuun (“Anthony”), son of Zoltan,
is the executor and representative of the appellant and testified on its behalf.
Lise Villeneuve, former spouse of Anthony, Magali Lariviиre, spouse of
Anthony, Patrick Kokai‑Kuun (“Patrick”), son of Anthony, and Louis
Plazzer, solicitor for Zoltan, also testified on behalf of the appellant.
I.
Background
[4]
Zoltan emigrated to Canada in 1961, moved to Vancouver in 1967 and worked on various projects including several parking garages for the
Park Royal Shopping Centre in Vancouver. In 1975, he established Zoltan Kuun
Associates, an engineering company. He was involved in ACK Holdings Ltd.
(“ACK”), Vancouver Air Maintenance Ltd (“VAM”) and was involved in various
capacities in 489066 BC Ltd. (“489”), 527443 BC Ltd. (“527”) and North
Vancouver Airlines Ltd (“NVA”). Anthony referred to NVA, 489 and 527 as
related, associated and sister companies (collectively the “Companies”) and
described several investments at the hearing, many of which lost money.
[5]
Zoltan was diagnosed with prostate cancer in
1990 and it subsequently returned. From July 2008 to November 2009, he
underwent a series of treatments. On January 21 2010, he passed away.
[6]
In June 2010, Anthony was appointed the executor
of Zoltan’s Estate.
The Home
[7]
In 1967, Zoltan had purchased a house located at
1095 West 21st Street, Vancouver, for $21,000 which was the family home (the
“home”) until he moved to a condominium. In 1990, he used the equity by re-mortgaging
the home to procure investments. Initially, he did so via Canadian Imperial Bank of Commerce (“CIBC”), his bank for many
years, where he held personal and business accounts including a line of credit.
[8]
In 2004, Zoltan re-mortgaged the home at the
Toronto Dominion Bank (“TD”) by obtaining a (home equity) line of credit “to
get some cash” whilst continuing to maintain his accounts at the CIBC as at
2004 when the letter was sent to Mr. Plazzer.[2]
Anthony described the line of credit as a reverse mortgage. At the time of his
death, $600,000 remained outstanding. Ms. Lariviиre said that she was
aware of the re-mortgaging of the home because she picked up the statement from
CIBC and TD offered a better rate.
[9]
After his father’s death, Anthony was tasked
with removing the debris from the home to sell it; it was sold in May 2011 for
$825,000. The house had two 12-foot rooms and a large attic. The yard, which
had two eight-foot tents, had not been maintained for 10 to 15 years. The house
and tents contained archived documents that had accumulated since the 1980s. The
home was rat‑infested. He spent six to nine months reviewing the document
collection. Some documents were retained, some were recycled. Anything before
2003 was to be shredded because it was wet and moldy; the debris filled four or
five dumpsters.
[10]
Ms. Lariviиre and Patrick indicated that in the last few years Zoltan lived in
the condominium because the home needed a lot of work. They each testified that
when Zoltan passed away, the home was rat-infested, filled with paper (including
the tents and the attic) and there was a lot of “stuff” in the basement.
Patrick described the home as condemned and moldy with the living room stacked
to the ceiling with a “maze” of papers.
The Land - Capital
Gain
[11]
In July 1992, Zoltan purchased the Land for $110,000.
Anthony indicated that Zoltan used the funds from the re-mortgaged home (CIBC
line of credit) to purchase the Land. In March 2008, Zoltan sold it for
$370,000 but did not report the sale in filing his income tax return. Anthony did
not know why the disposition was not reported and said that Zoltan had many
investments including penny stocks.
[12]
Anthony testified that Zoltan purchased the Land
as an investment but it had not borne fruit and was listed for sale in 2002 and
2003. He was over 80 and there was less revenue in 2002.
[13]
In 2004, Zoltan lost primary access to the Land
and gained access through the neighbour’s property. That neighbor later sold
their property and the new neighbour put a chain up. He had intended to try and
purchase a sliver of land at the bottom of the Land. Ms. Villeneuve indicated
that Zoltan wanted to sell it because of the problems with right-of-way access.
[14]
Using simple interest, Anthony estimated that during
the 16 years that Zoltan held the Land, he had incurred substantial interest and
carrying charges (the “interest/charges”) on the money borrowed from the CIBC and
TD banks under a line of credit. He described the amount totalling $135,732.80
as a conservative amount. Anthony had prepared a “Spreadsheet of costs to hold
land - 4.3 and 4.4” showing that as an estimated amount plus property taxes and
levies (“property taxes”) totalling $14,947.71 with documents substantiating
the latter. At trial, he revised the estimate for interest/charges, based on
compound interest, to $179,391 (collectively the $179,391 and property taxes
comprise “the Amounts”).
[15]
On August 2, 2006, Zoltan had paid a 5% deposit
of the purchase price of $447,195 for a condominium in North Vancouver and had
used $42,000 from the line of credit, $133,000 from the sale of the Land and
$250,000 was paid by Zoltan by a bank draft dated June 9, 2008.
Capital losses
[16]
By the late 1980s or early 1990s, Anthony, an
airline pilot, had five years’ experience in the airline industry
[17]
In 1994, NVA, a family-owned company, was
incorporated as it saw a niche in the market and provided sightseeing tours,
charters and a scheduled service flying between Vancouver Island and Tofino
plus other destinations. It used a Piper aircraft with two crew and
capacity for eight passengers. In 1995, 489 was incorporated and the following
year, 527 was incorporated.
[18]
Ms. Villeneuve was the Chief Financial Officer
and confirmed that Zoltan was her former business partner in the Companies and up to 2002, the shareholders were Zoltan, Anthony and Ms. Villeneuve,
each of whom held separate shareholder loan accounts in each of the Companies.
She did most of the entries and reviewed the numbers and noted that she could
only comment on the inputs and outputs on the
reconstructed “History of Shareholder Loans” spreadsheet (“loans spreadsheet”),
prepared by Anthony for the period from 1994 to 2002.[3]
[19]
The reconstructed loans spreadsheet reflects many
transactions spanning the period from 1994 to 2011. Under each Companies’ name,
there is an add/subtract column and a “Cumulative” total column reflecting
amounts by year allocable to each shareholder. The “Sum for Zoltan” column from
1994 onwards reflects a running total at the end of each year comprised of
contributions of loans made by him and repayments made to him by the Companies
when possible. Anthony and Ms. Villeneuve each explained, in detail, the
historical composition including many transactions in arriving at the sum due
to Zoltan, under the latter column. Several, but not all examples of the
transactions described, are referred to below.
[20]
During his testimony, he described the sum due
to Zoltan in 2006 from 527 as involving transactions in respect of mostly NVA
and 489 before those entities were “wrapped up” in 2004. At that juncture, the total
amount of shareholder loans due to Zoltan and him from NVA and 489 were transferred
to each shareholder loan account in 527. The total sum due to Zoltan that was transferred
was $233,751.79 which was then reduced by a transaction involving the repayment
of $15,000 to Zoltan in 2006, resulting in the sum due to Zoltan of $218,751.79.
Anthony admitted that Zoltan did not report the latter amount as a capital loss
in the 2006 nor any other taxation year. According to the loans spreadsheet,
that amount remains unpaid as at 2011.
NVA
[21]
Zoltan was the President and a director of NVA until
his resignation in 2000. He also owned 12,000 shares with an initial investment
of $99,830 and a subsequent contribution of $45,314. According to Schedule 50
filed with one of its initial income tax returns, Zoltan was a 60% shareholder;
this later decreased to 50% when he sold 4,000 shares in 2000.[4]
[22]
Ms. Villeneuve was a Director, owned 4,000
shares and invested 45,577. On July 1, 2002, she sold her shares in the
Companies (and in VAM) in equal amounts to Zoltan and Anthony as a result of
her separation from Anthony (they later divorced) pursuant to the Share
Purchase Agreement. Zoltan and Anthony also bought part of her shareholder’s loans that were owed to her by
NVA and 489 in the amount $120,000, which included the payout of shareholder
loans.
[23]
Ms. Lariviиre corroborated that Zoltan was
a partner and investor as he had transferred a share to her because he had
succumbed to illness and needed to settle his affairs; she confirmed that NVA owed
money to Zoltan because she saw a statement of the indebtedness which later
transferred to one of the numbered sister companies and said that NVA ceased
because it was no longer profitable.
[24]
In the first year, NVA leased a Piper. In the
second year, it had two Pipers and realized a small profit. It did not have
enough aircrafts for the work available. According to Exhibit A-1, Zoltan’s
shareholder loan increased by $16,000, $8,000 and $31,000 because of the need
for cash flow for the three aircrafts.
[25]
The fallout from 9/11 brought significant
pressures on the airline industry. Insurance premiums tripled, the value of the
aircrafts went down and banks called loans.
[26]
Another example of one of the transactions was
the repayment by Zoltan of part of a loan from the Royal Bank (which it had
called) in which he issued a $40,000 cheque dated October 1, 2001. Consistent
with the loans spreadsheet, this increased his contribution shareholder loans amount
by that amount from $103,105.91 as confirmed on the Balance Sheet in 2002. A
further transaction is the insurance proceeds payout which enabled NVA to repay
the three shareholder loans.
[27]
In 2004, Zoltan was repaid $30,000 by NVA
because of proceeds of sale of another aircraft which was around the same time
it was winding down.
489
[28]
The sole purpose of 489 was to lease an aircraft
to NVA, for insurance and liability reasons. Zoltan, Anthony and Ms. Villeneuve
invested to reduce the insurance liability. Zoltan made his initial investment
of $32,147 in 1995 as the majority shareholder which she confirmed related to
the first aircraft. This is consistent with the financial statements which show
that amount as part of the cumulative total for shareholder loans.
[29]
Another transaction was a contribution by Zoltan
of $109,805 in 1996 when $500,000 in cash was expended for a Beech aircraft.
According to Ms. Villeneuve, the transactions in 1996 through to 1998
confirm that $147,000 was due to Zoltan (and $91,000 each due to her and
Anthony) consistent with his investments and his 50% shareholding. Page 19 of
the general ledger indicates the cumulative amount for Zoltan’s loan in 1998 is
$148,813.97 with a total for all shareholders, including Zoltan, in the amount
of $331,366. Further, the summary of accounts corroborates those amounts.
[30]
She further testified that the list of entries
is the interest that was compounded and added but she could not recall if the
interest accrued subsequently and stated that it probably did. She then
testified that the difference between the $331,000 and $355,000 is interest and
that the $361,557 is probably correct including repayments and interest. She
then said that she could not guarantee the difference on the shareholders’
loans. In 1998, $22,000 is interest and possibly interest of $6,000 for
previous years. In 1999, the $23,000 is most likely interest. In 2000, $3,000
was received by Anthony and $1,000 by Zoltan. She could not recall if interest
was reduced. This is confirmed on the 1999 statement showing the same amounts
due to shareholders. It is likely that the amounts of $49, $63 and $109 were
likely interest.
[31]
With respect to 527, she said that when looking
after the accounting, the Companies reported the shareholders’ interest on the
loans because of the financial statements. She said that the minute books
should contain agreements on the loans and the amounts of the interest charged
but she could not recall if T5s had been issued.
[32]
The assets of NVA and 489 were sold off to pay
creditors, there were no funds to pay shareholder loans (except for Ms. Villeneuve)
and in July 2004, the shareholder loans due to Zoltan and Anthony were
transferred from NVA and 489 and reflected in 527’s shareholder loans accounts.
527
[33]
527 was incorporated for the purpose of
purchasing an aircraft which was needed because of a business need to fly large
loaders. Zoltan had invested $32,147, $109,805 and $5,709.15 in 1995, 1996 and
1998, respectively. By 1998, Zoltan held 14 shares which increased to 24
in 2004. By March 31, 2002, the amount of $5,808.79 was
due to Zoltan.
[34]
Anthony stated that a new partner was needed.
Shawn Cole wanted to fly, provided funds and became the majority shareholder. Subsequently
he resigned, wanted his money and Zoltan bought his shares, thereby increasing
his shareholding. This was corroborated by Ms. Villeneuve who also said that
Zoltan did not have a lot of money after paying out Mr. Cole.
[35]
In 2003, Zoltan was repaid $115,058 because of an
incident with an aircraft and pilot fill reserve; both engines cost $250,000 to
overhaul. The insurance proceeds from the claim were used to repay Zoltan and
other shareholders. Zoltan then reinvested $67,523 in NVA because Ms.
Villeneuve and Anthony had separated and Zoltan and Anthony bought Ms.
Villeneuve out of the company.
[36]
In July 2004, the shareholder loans were
transferred to 527 and the following month, Anthony became the sole director. According
to the loans spreadsheet, by 2005, the outstanding amount due to Zoltan
totalled $233,751.79 and that reduced to $218,751.79 as at 2006 after a $15,000
repayment was made to Zoltan.
[37]
On June 20, 2006, Zoltan sold his 24 shares to
Ms. Lariviиre but retained his shareholder loans.
II.
Analysis
[38]
All statutory references in these reasons are to
the provisions of the Income Tax Act and for the 2008 taxation year
unless otherwise stated.
Capital Gain
[39]
The appellant’s position is that the Act
is meant to be a tax of true economic gains and the Canada Revenue Agency’s
(“CRA”) refusal to allow the additional Amounts to increase the adjusted cost
base (“acb”) of the Land is a perverse result and a fault in the taxation
system. In support of that, the appellant relied on an opinion expressed in
relation to the tax policy.[5]
[40]
The appellant urged the Court to find that the estimated
interest/charges totalling $179,391.43 relates to the funds from the re-mortgaging
of the home, initially via CIBC and later via TD, was to purchase and hold the
Land as an investment. As such, the Amounts should be taken into account as part of the acb, which would reduce
or eliminate the amount of the taxable capital gain.
[41]
The difficulty with the appellant’s stance is
that it runs counter to the criteria in paragraph 20(1)(c) and in subsection
18(2), is inconsistent with the principle established in the decision of The
Queen v Stirling, 85 DTC 5199 (FCA) [Stirling] and is based on an
opinion, not law.
[42]
Paragraph 20(1)(c) and subsection 18(2)
are the relevant provisions. The applicable excerpts read:
20.(1)
Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h),
in computing a taxpayer’s income for a taxation year from a business or
property, there may be deducted such of the following amounts as are wholly
applicable to that source or such part of the following amounts as may
reasonably be regarded as applicable thereto
…
(c) Interest - an amount paid in the year or payable
in respect of the year … pursuant to a legal obligation to pay interest on
(i) borrowed money
used for the purpose of earning income from a business or property …
…
18.(2)
Notwithstanding paragraph 20(1)(c), in computing the taxpayer’s income
for a particular taxation year from a business or property, no amount shall be
deductible in respect of any expense incurred by the taxpayer in the year as,
on account or in lieu of payment of, or in satisfaction of,
(a) interest on debt relating to the acquisition of land, or
(b) property taxes (not including income or profits taxes or
taxes computed by reference to the transfer of property) paid or payable by the
taxpayer in respect of land to a province or to a Canadian municipality,
unless, having
regard to all the circumstances (including the cost to the taxpayer of the land
in relation to the taxpayer’s gross revenue, if any, from the land for the
particular year or any preceding taxation year), the land can reasonably be
considered to have been, in the year,
(c) used in the course of a business carried on in the
particular year by the taxpayer, …
(d) held
primarily for the purpose of gaining or producing income of the taxpayer from
the land for the particular year, …
[43]
Applying the criteria in paragraph 20(1)(c)
that to be deductible the mortgage interest must be paid or payable on borrowed
money used for the purpose of earning income from business (not in issue in
this appeal) or from property. For the reasons that follow, the evidence falls
far short of that.
[44]
The evidence established that the Land was purchased
as an investment to sell it at a higher price because of its proximity to a
golf course. Anthony admitted that during the 16 years that Zoltan owned it, he
did not use it in business nor produce income from it. Rather, Zoltan and
Agnes, his spouse since 1997, visited the Land once or twice per year.[6] Similar to Anthony’s testimony, Ms. Villeneuve, Ms. Lariviиre and Patrick also said that the Land was purchased for investment purposes with the hope that it would
increase in value. Patrick said that Zoltan had described it as a “gold mine.”
[45]
In Stirling, the Federal Court of Appeal
held that interest on money borrowed to acquire property for the purpose of
making a capital gain, rather than an income-earning purpose, is precluded, on
disposition, from forming part of the cost of the property and cannot be added
to the acb.
[46]
I find that the purpose of the money borrowed to
acquire the Land was not to earn income from a business or property and the
appellant fails to meet the criteria under paragraph 20(1)(c) in that
there was no evidence of an income‑earning purpose in order that the
interest/charges could be deducted.
[47]
While that basis alone is suffice, the other
difficulty facing the appellant is that it was not possible to identify from either
line of credit the funds allocable for the borrowing pertaining to purchasing
and holding the Land. Anthony used the best estimate he could, as well as an
estimate of the interest rate, based on what he could piece together on
information that he was able to locate but it was not based on interest
actually paid.[7]
[48]
Zoltan was involved in several business
endeavours and many investments including penny stocks would have required
financing. Some of Zoltan’s business endeavours included cash infusions for NVA
and 489 to refurbish planes, payouts to Ms. Lariviere and Mr. Cole for their
shares, the dispute with Bombardier and the fallout from 9/11 with the
pressures from the banks, skyrocketing insurance premiums and the reduction in
value in the planes. No doubt the various financial pressures culminated in NVA
and 489 ceasing to operate. After Zoltan paid Mr. Cole, Zoltan had little
money left and his letter to Mr. Plazzer in 2004 refers to a need for cash. I
reject Anthony’s evidence that the estimated interest/charges amounts to $179,391.43
as allocable to the Land, which includes the lower amount shown on the costs
spreadsheet as claimed in the Notice of Appeal. I infer as more plausible
that Zoltan used the funds from the remortgaging for multi-purposes, including
possibly amounts allocable to the Land, to deal with the pressures especially
in 2002 at a time when less revenue was available. However, it was impossible
from the evidence to ascertain what amounts of interest, if any, are allocable
to the Land.
[49]
Subsection 18(2) further
restricts mortgage interest and property taxes for undeveloped land used in the
course of business in the particular year by the taxpayer and held primarily
for the purpose of gaining income of the taxpayer from the land. Albeit I
accept that the property taxes appear to have been paid,
this does assist the appellant because the evidence was that Zoltan did not use
the Land in business and no income was produced from it.[8] Although Anthony alluded to an
intent to improve the Land, no improvements were made even though it had been
held for many years and the Land had not been subdivided. I find that the Land cannot reasonably be considered to have been used in the
course of a business nor held primarily for the purpose of gaining or producing
income in the particular year.
[50]
Since the Minister’s assumptions in paragraphs
11 (b) to (d) and (e) of the Reply remain undisturbed, and the Land remained
vacant without any income-earning purpose, the combination of paragraph 20(1)(c)
and subsection 18(2) ultimately precludes the appellant from adding the Amounts
to the acb.
Capital Loss
[51]
The appellant’s position is that the Minister’s
assumptions have been demolished and it is entitled to claim the capital loss
in the amount of $218,751.79, based on the testimony
and Exhibits A-3 to A-8 (the general ledger, financial statements and other
documentation), relating to investments by Zoltan in
the Companies and the shareholder loans owed to him became uncollectible in
2006.[9] While Zoltan
could and should have claimed the capital loss in 2006, he should not be
penalized. Consequently, the appellant is entitled to
claim the capital loss in the 2008 taxation year pursuant to paragraph 38(b)
and section 39 with respect to that amount which became uncollectible.[10]
[52]
Based on the voluminous amount of documentary
evidence, supported by the witness testimony, I agree with the appellant and
find that the Minister’s assumption that Zoltan was not a shareholder has been
demolished.
[53]
A fundamental difficulty facing the appellant is
that before the capital loss provisions in sections 38
and 39 can operate, it must satisfy the conditions in the governing paragraph
50(1)(a), as contended by the respondent, which deals with debts
established to have become bad. Paragraph 50(1)(a)
reads:
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 or the share, as the case may be, the taxpayer
shall be deemed to have disposed of the debt or the share, as the case may be,
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.
[54]
Under paragraph 50(1)(a), the conditions
that must be satisfied, relating to the debt, before losses can be claimed
are:
1. it must be owing to a taxpayer at year-end;
2. it was
established that it became bad during the year; and
3. the
taxpayer elects in his return of income for the year to have the subsection
apply.
[55]
In Harris v The Queen, 2005 TCC 501, 2005
DTC 1179, Sheridan J. found that the failure by Ms. Harris to file an election
in her return was fatal to her eligibility to be able to claim $15,000 invested in a business as well as another loan in respect of
shares. At paragraph 3, the Court stated “To be eligible to claim either of the
amounts as a deduction, Mrs. Harris must have complied with subsection 50(1) of
the Income Tax Act.”[11]
[56]
In the present case, a letter dated July 1,
2006, was sent to Zoltan by 489, signed by Anthony, stating that all of the
assets of 489 had been “liquified,” the proceeds were used to pay its debts and
those of VAM and NVA. Therefore, 489 was not in a position financially to repay
his shareholder loan in the amount of $162,372.80.
[57]
It is undisputed that in the 2006 taxation year
Zoltan did not claim capital losses of any investments in the Companies in his
income tax return nor was there evidence he had claimed such losses in any
other taxation year. Anthony was unsure why he did not
claim the losses and said that he had invested in ACK and lost money on other
investments. In 2006, Zoltan was repaid $15,210
resulting in shareholder’s loans owed to him in the amount of $218,757 which
continued to remain outstanding when he died. Anthony indicated that the
remaining debt and shareholder’s loans were placed into 527 and are still
active at the time of the hearing.
[58]
Given the appellant failed to make an election
in 2006, or any other year, as required under paragraph 50(1)(a), the
appellant cannot succeed as it is imperative to claim that a capital loss is
available for application in 2008.[12]
[59]
While I accept Anthony’s and Ms. Villeneuve’s
testimony that Zoltan had invested some funds and received repayments over the
course of his involvement with the Companies, I do not accept, despite
Anthony’s valiant efforts, that the amount of $218,751.79
was due to Zoltan on the loans spreadsheet in 2006 because it is based on the
best reconstructed information that he could put together from the evidence he
could locate. I accept the testimony of Anthony, Ms. Lariviиre and
Patrick that the home was full of moldy paperwork and that there was an infestation
problem. Anthony said that the documentation had already been destroyed when
the CRA had asked for it, thus finding bank statements and cheques was not
possible and an unrealistic request from the CRA especially when Zoltan was
deceased.
[60]
Whilst some numbers on the reconstructed loans
spreadsheet reconciled with some information, such as the general ledger that
was available for only some years, some explanations placed into question the accuracy
and reliability of the amounts on the loans spreadsheets. For example, Anthony
testified that Zoltan had received $30,000 from a bank in 2003, but then
wondered if it was an error, queried if it was another amount and questioned which
account it belonged to.[13]
There was also some confusion relating to interest and whether the amounts reflected
on the loans spreadsheet were due to Zoltan. There was testimony that Zoltan
assisted family and friends but did not charge NVA interest because of the
burden on NVA which at times needed cash infusions as did 489. However, Ms. Villeneuve
said that interest amounts were blended in and repayments were recycled and
thus reflected on the loans spreadsheet but she seemed at times hesitant and went
back and forth on some aspects. Absent other evidence such as bank statements
and cheques, I do not accept the loans spreadsheet as having shown a flow of
funds to establish the amount owed to Zoltan.
[61]
I find that the appellant’s failure to satisfy
the condition to make an election in 2006, or any other year, as required under
paragraph 50(1)(a) is fatal to its claim to avail itself of a capital
loss for application in 2008 and it cannot succeed.
Fairness
Relief
[62]
Since the appellant failed to elect in the
return to claim the capital loss, its remedy is to file an application to the
Minister under section 220 of the Income Tax Act which allows the
Minister discretion to extend the time for a taxpayer to apply for a late-filed
election (and other matters dealing with penalties and interest are also
available on a discretionary basis).
[63]
The appellant described his dealings with Ms.
Tran, a CRA official, as difficult and frustrating. In his view, refiling was
not an option because the CRA would not accept the evidence as sufficient. He
said that in July 2011, he became aware that the CRA was planning to reassess
the appellant for capital gains. He summarized his communications with the CRA
officials between that date and up to November 2012 and expressed consternation
at the CRA’s requests for documentation including cancelled cheques and bank
statements and said that inadequate time extensions had been granted to him but
records were unavailable because he had thrown away Zoltan’s belongings.[14]
[64]
According to the evidence, by letter dated
November 23, 2011, the CRA notified the appellant that its request to apply a
capital loss was disallowed because Zoltan had not reported any capital losses
in his returns in 2008, nor any other year and inadequate documentation had
been provided to establish that capital losses had been realized. Further, “An
amended return may be filed for that year along with a request of a late
election as per subsection 220(3.2) of the Income Tax Act.”
[65]
On December 5, 2011, the Minister reassessed. The
appellant objected and the Minister issued a Notice of Confirmation.
[66]
In response, by letter dated August 27, 2012, Anthony
informed the CRA that:
8. Capital Losses from previous years of $162,372.80. My accountant
and I will file a Form T1 Adjustment Request for my Father’s 2006 taxation tax
year along with form RC4288 (Request for Taxpayer Relief, re: Section 220(3.2))
in order to have this loss accounted for. We will apply under subsection
220(3.2) for the extension for making an election under subsection 50(1). If
you could please provide information to assist us with this process that would
be much appreciated. In order to do this we will also require a copy of his
2006 return since to date I have not been able to find a copy in his archives.
[67]
Despite this, no application was made by the
appellant to the Minister under the fairness relief provisions. This Court has
no jurisdiction with respect to those provisions.
[68]
No doubt Zoltan was a man of exemplary character
and a visionary with an entrepreneurial spirit as described by Anthony. There
is also no doubt that Anthony had a daunting task and made a concerted effort,
as best he could, under very challenging circumstances in organizing a
voluminous amount of information and is to be commended. Despite those efforts, the appellant failed to meet the statutory
requirements.
III.
Conclusion
[69]
For the foregoing reasons, I conclude that the
Amounts cannot be added to the acb of the Land and the Minister correctly
included a capital gain of $235,755.60 pursuant to paragraph 39(1)(a),
resulting in a taxable capital gain of $117,877.80 pursuant to paragraph 38(a)
of the Act . Further, having failed to make an election, the appellant did
not realize capital losses with respect to investments in the Companies in the
2006 taxation year, or any other taxation year, pursuant to paragraph 39(1)(c)
of the Act (nor net capital losses pursuant to section 111) available to
be applied to the 2008 taxation year.
[70]
The appeal is dismissed.
[71]
The appellant spent a significant amount of time
and effort providing that Zoltan was a shareholder of each of the Companies. It
was clear from the documentation that he was. It could have been conceded by
the respondent in advance of the hearing. As such, there will be no order as to
costs.
Signed at Edmonton, Alberta, this 31st
day of August 2015.
“K. Lyons”
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