97-1802(IT)I
BETWEEN:
W. JACK GREGORY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 11, 1998, at Toronto,
Ontario, by
the Honourable Judge M.A. Mogan
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Sanjana
Bhatia
JUDGMENT
The
appeal from the assessment of tax made under the Income Tax
Act for the 1995 taxation year is allowed, without costs, and
the assessment is referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that
the Appellant had a business investment loss of $186,000 in the
1992 taxation year, and an allowable business investment loss of
$139,500 in the 1992 taxation year; and a non-capital loss of
$32,122.20 in the 1995 taxation year.
Signed at Ottawa, Canada, this 17th day of September,
1998.
J.T.C.C.
Date: 19980917
Docket: 97-1802(IT)I
BETWEEN:
W. JACK GREGORY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan, J.T.C.C.
[1] In computing taxable income for
the 1995 taxation year, the Appellant deducted a non-capital loss
of $32,122.20 from prior years. When assessing tax for 1995, the
Minister of National Revenue disallowed the deduction on the
assumption that the Appellant did not have a non-capital loss
from any prior year. The broad issue in this appeal is whether
the Appellant had a non-capital loss in a prior year which would
permit the deduction of $32,122.20 in computing taxable income
for 1995. The Appellant has elected the informal procedure.
[2] The Appellant claims that he had
an allowable business investment loss ("ABIL") in 1992 which was
too big to deduct under paragraph 3(d) of the Income
Tax Act in computing his income for 1992. Any portion of an
ABIL which cannot be deducted in the year when it occurs becomes
part of the taxpayer's non-capital loss within the meaning of
subsection 111(8) of the Act and may, with certain time
limits, be deducted in computing taxable income for a subsequent
year. The more precise issue in this appeal is whether the
Appellant had an ABIL in 1992. A business investment loss is
defined in paragraph 39(1)(c) of the Act from which
I will quote only the relevant parts:
39(1) For the purposes of this
Act,
(c) a
taxpayer's business investment loss for a taxation year from the
disposition of any property is the amount, if any, by which the
taxpayer's capital loss for the year from a disposition after
1977
(i) to which
subsection 50(1) applies, or
(ii) ...
of any property that is
(iii) a share of the
capital stock of a small business corporation, or
(iv) a debt owing to the
taxpayer by a Canadian-controlled private corporation ... that
is
(A) a small business
corporation,
(B) ...
exceeds the total of ...
An ABIL is defined in paragraph 38(c) as 3/4 of a
taxpayer's business investment loss. I therefore have to
determine first whether the Appellant had a business investment
loss in 1992. The only witness in this appeal was the Appellant
himself and his uncontradicted evidence is summarized below.
[3] In 1989, the Appellant and William
Crossin decided to go into business together. They caused the
incorporation of The Pewter House Canada Ltd. (referred to herein
as "PHC") in which each owned 50% of the issued shares. The
business of PHC was to import certain products from England for
sale in Canada. PHC was incorporated in October 1989; it
commenced business in May 1990; and its first fiscal operating
year was May 31, 1991. In the summer of 1992, PHC was insolvent
with significant debts to its bank and to its two shareholders,
the Appellant and William Crossin. In August 1992, the Appellant
transferred his half of the shares in PHC to Crossin for no
consideration but the Appellant was obliged to assume $186,000 of
the debt held by PHC. See Exhibit A-3, paragraph 4 of a
letter dated June 30, 1992 from PHC to the Appellant. See also
paragraph 1 of a letter dated August 27, 1992 from PHC to the
Appellant, also part of Exhibit A-3.
[4] The Appellant described how his
share of the debt was $186,000. PHC had borrowed $300,000 from
the Royal Bank of Canada and the Appellant agreed to pay one-half
of that loan. PHC had borrowed $50,000 from the Bank of Nova
Scotia and the Appellant agreed to pay one-half of that loan. And
lastly, PHC had borrowed $22,000 from a friend of William Crossin
and the Appellant agreed to pay one-half of that loan:
Royal Bank of
Canada
$150,000
Bank of Nova
Scotia
25,000
Friend of
Crossin
11,000
$186,000
[5] Exhibit A-2 is a copy of the
unaudited financial statements of PHC as at May 31, 1992. The
balance sheet shows bank indebtedness of $299,262; advances from
principals of $187,298; and a deficit (no retained earnings) of
$350,020. Even though Exhibit A-2 is not audited, it provides
some corroboration for the Appellant's evidence about the
business misfortunes of PHC. There is further corroboration in
Exhibit A-1 (a letter of June 4, 1990 from the lawyers for the
Royal Bank to their Bank client describing certain guarantees
obtained from the Appellant's wife), Exhibit A-3 (the two letter
agreements of June 30, 1992 and August 27, 1992 between PHC and
the Appellant referred to above) and Exhibit R-2 which is the
Appellant's 1992 income tax return showing a business investment
loss of $186,000 claimed in that return. Quite apart from the
corroboration referred to above, I found the Appellant to be a
very credible witness. I believe and accept all of his evidence
with respect to his business venture in PHC and his loss of
$186,000.
[6] Counsel for the Respondent argued
that the appeal should be dismissed because the Appellant had not
proven with a precise paper trail that he had paid $186,000 to
PHC or that he was directly obligated to pay $186,000 of PHC's
debts. Counsel is correct in the sense that there is not in
evidence a series of cheques from the Appellant to PHC making a
total of $186,000 or a promissory note from PHC to the Appellant
proving that amount of debt but some credence must be given to
the very believable sworn and uncontradicted evidence of the
Appellant himself plus the corroborating documents. While the
onus of proof is on the Appellant, it is only a civil onus. I am
satisfied that the Appellant discharged the onus on him and
shifted the onus to the Respondent.
[7] Relying on the Appellant's
evidence, I conclude that PHC really was insolvent in August 1992
and that the Appellant was obliged to pay $186,000 to the Royal
Bank with respect to the debts of PHC. The Minister of National
Revenue would know from the income tax returns (if any) of PHC
whether it had survived its financial crisis of August 1992 and
whether it had subsequently prospered in business. If the
Minister had any serious reason to believe that the Appellant did
not suffer a loss of $186,000 in his business venture in PHC, the
Respondent could have called as witnesses, Mr. Crossin, any other
person who now operates PHC or some person from the Royal Bank
familiar with the Appellant's obligation to pay part of the PHC
debt to the Royal Bank. No such witness was called.
[8] According to Exhibit A-2 (the
financial statements of PHC), there were only two shares of PHC
issued for two dollars. Because the shares were initially owned
50/50, one would think that the Appellant could not lose more
than one dollar on the transfer of his one share to Crossin
in August 1992. The evidence, however, is otherwise. Upon the
transfer of the Appellant's share to Crossin in August 1992, the
Appellant was obliged to assume a portion of PHC's debt to the
Royal Bank. The Appellant's portion was $186,000 and Crossin's
was $114,000. According to the Appellant, the debt obligations
were evenly distributed because Crossin agreed to pay the full
amount of the debt to the Bank of Nova Scotia ($50,000) and to
his friend ($22,000). Crossin's debts may be summarized as
follows:
Royal Bank of
Canada
$114,000
Bank of Nova
Scotia
50,000
Friend of
Crossin
22,000
$186,000
[9] The Appellant's share of the debt
is summarized in paragraph 4 above. Notwithstanding that summary,
it appears that the Appellant did not pay any amounts to the Bank
of Nova Scotia or to Crossin's friend but paid $186,000 only to
the Royal Bank. It appears that Crossin made payments to the
three parties in accordance with the summary in paragraph 8
above. The net result is that the Appellant and Crossin each paid
one-half of the PHC aggregate debt of $372,000 ($300,000 plus
$50,000 plus $22,000).
[10] I find that the Appellant suffered a
loss of $186,000 on the disposition of his share in PHC in August
1992. If it were necessary to do so, I would also find that any
debt owing by PHC to the Appellant in August 1992 was a bad debt
at that time within the meaning of subsection 50(1) of the
Income Tax Act. The appeal is allowed on the basis that
the Appellant had a business investment loss of $186,000 in 1992;
an ABIL of $139,500 in 1992; and a non-capital loss of $32,122.20
in 1995.
Signed at Ottawa, Canada, this 17th day of September,
1998.
J.T.C.C.
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