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Citation: 2005TCC1
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Date: 20050104
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Docket: 2003-3616(IT)I
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BETWEEN:
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RITA A. ASHLEY,
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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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REASONS FOR JUDGMENT
Sarchuk J.
[1] These are appeals by Rita A.
Ashley from assessments of tax with respect to her 1999 and 2000
taxation years:
(a) In computing income for the
1999 taxation year, the Appellant sought to claim a business
investment loss of $36,677.22, resulting in an allowable business
investment loss (ABIL) in the amount of $27,507.92 pertaining to
a purported investment in AYSH Installation Management Ltd.
(AYSH) in 1991. The Appellant also claimed interest expenses and
bad debts with respect to an alleged investment in a business,
AYSE Installations (AYSE), in the amounts of $3,510.08 and
$6,400.46, respectively. In reassessing for this taxation year,
the Minister of National Revenue denied both the deduction of the
business investment loss and the interest and bad debt expenses
claimed by the Appellant.
(b) In computing income for the 2000
taxation year, the Appellant sought to claim interest expenses,
vehicle expenses and legal fees in the amounts of $2,856.90,
$6,569.42 and $2,000.00, respectively, with respect to the
business AYSE. In reassessing the Appellant for that taxation
year, the Minister disallowed all of the items claimed.
[2] An agreement was reached between
the parties with respect to several of the issues. The remaining
two components relate to (a) the allowable business investment
losses; and (b) the deductibility of legal fees related to a
criminal charge against the Appellant. The Appellant did not
attend and the only testimony before the Court was that of the
Appellant's husband and representative,
Robert Ashley.
[3] In or about 1989, Robert Ashley
began to provide office furniture installation services under the
name AYSE. He initially obtained a $50,000 line of credit from
the Toronto-Dominion Bank (TD). Documents evidencing the line of
credit were produced by Robert Ashley including an assignment of
book debts, a guarantee signed by him and a General Security
Agreement, all of which were dated April 1990. He also entered
into evidence an undated promissory note from him in the amount
of $50,000 in favour of TD.[1] In or about May 1990, "a second collateral
mortgage" was placed on the Ashley home as security for the
line of credit with TD which, he said, was used to acquire
product, maintain receivables and pay salaries including his. At
some point of time, Robert Ashley incorporated AYSH of which he
was the principal shareholder.[2] Although all of the foregoing documents referred
to Robert Ashley carrying on business as AYSE as the debtor, he
stated that at a subsequent point of time the documents were
updated to make specific reference to the successor corporation,
AYSH.
[4] According to Robert Ashley at some
point of time, AYSH was substantially overdrawn on its account
and on February 13, 1992, TD forwarded a letter demanding payment
of the amount of $53,579.79 together with interest, failing which
"action will be taken for payment". Shortly thereafter,
a new first mortgage for an additional $55,000 was placed on the
residence owned by Robert Ashley and the Appellant and the
additional funds were used to pay the outstanding amount demanded
by TD. He maintains that in exchange for his wife's consent
to have the new first mortgage placed on the residence, he
created a debt in her favour secured by the assets of AYSH. He
produced a document dated March 25, 1992 purporting to
acknowledge a debt of $55,000 to the Appellant which he said was
intended to provide her with all of the assets of AYSH as
security.[3] It is
this transaction which, he said, ultimately gave rise to the ABIL
claimed.
[5] Reference was made to statements
of AYSH's profit and loss for the years 1991, 1992 and 1993
which Robert Ashley says he prepared in March 1993. However,
during cross-examination, he conceded that no T2 returns
had been filed for those years. The balance sheets forming part
of these statements disclose that in 1993, there were no longer
any bank liabilities because, as he explained, TD had been paid
off with the new mortgage. When asked why there was no record in
these statements, or in any other documentation, to indicate that
a liability to the Appellant had existed, he responded "No
particular reason, no. It was just a statement of where the
company was and her interest in the company is considered as part
of the company".
[6] Robert Ashley testified that AYSH
went out of business in 1995 and alleges that its only
outstanding liability was the purported indebtedness of $55,000
to the Appellant. He conceded that there were assets at that time
which consisted of inventory, some cash, equipment and certain
judgments "that were never collected" and says he
valued these assets based on their "book value" of
$20,000.[4] Some of
these assets were used in another business, carried on under the
name AYSE from 1995 through to the taxation years in issue. He
maintains that his wife had received these assets and as a result
only the balance of $36,677 was claimed by her as a business
investment loss in taxation year 1999.
[7] The primary issue in this appeal
is whether the Appellant sustained a business investment loss in
1995 in the amount of $36,677 giving rise to an ABIL in the
amount of $27,507. An ABIL arises on the disposition at a loss of
the share of a small business corporation or of a debt owing to
the Appellant by a Canadian-controlled private corporation under
section 50 of the Income Tax Act. Where a debt owing to a
taxpayer is established to have become a bad debt in a year, it
is deemed to have been disposed of at the end of the year for nil
proceeds and reacquired at a nil cost. The argument advanced on
behalf of the Appellant is that she had loaned money to AYSH in
1992 and that the debt became bad in 1995 when AYSH closed down
its business. The Respondent's position is that there was no
debt owing to the Appellant and alternatively, if there was, it
was not acquired for the purpose of gaining or producing income
and accordingly under subparagraph 40(2)(g)(ii) of the
Act, the Appellant's loss from the deemed disposition
is nil.
Conclusion
[8] The relevant provisions of the
Act read as follows:
18(1) In computing the income of a taxpayer
from a business or property no deduction shall be made in respect
of
(a) an outlay or
expense except to the extent that it was made or incurred by the
taxpayer for the purpose of gaining or producing income from the
business or property;
(b)
...
39(1) For the purposes of this
Act,
(a)
...
(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)
...
(iv) a debt owing to the
taxpayer by a Canadian-controlled private corporation (other
than, where the taxpayer is a corporation, a debt owing to it by
a corporation with which it does not deal at arm's length)
that is
(A) a small business
corporation,
(B) a bankrupt (within the
meaning assigned by subsection 128(3)) that was a small business
corporation at the time it last became a bankrupt, or
(C) a corporation referred
to in section 6 of the Winding-up Act that was insolvent
(within the meaning of that Act) and was a small business
corporation at the time a winding-up order under that Act was
made in respect of the corporation,
exceeds the total of
(v) ...
40(2) Notwithstanding subsection (1),
(a) ...
(g) a
taxpayer's loss, if any, from the disposition of a property,
to the extent that it is
(i)
...
(ii) a loss from the
disposition of a debt or other right to receive an amount, unless
the debt or right, as the case may be, was acquired by the
taxpayer for the purpose of gaining or producing income from a
business or property (other than exempt income) or as
consideration for the disposition of capital property to a person
with whom the taxpayer was dealing at arm's length,
(iii) ...
[9] In 1992, AYSH was indebted to TD
in the amount of $53,579.79. A demand for payment had been made
and the necessary funds were obtained by way of a new first
mortgage on the family residence of which $55,000 was paid to TD.
This amount was considered by the Appellant's husband as a
loan by the Appellant to AYSH. He relied on the March 25, 1992
letter, the purpose of which he said was "to give her some
comfort" because she was "putting up her equity in the
house to basically pay off the business loans". There is, in
my view, a substantial question as to whether the advance to AYSH
made in this manner constituted a loan. There was nothing in the
contemporaneous financial statements of AYSH showing any such
indebtedness to the Appellant. On balance it appears more in the
nature of an advance of capital. Furthermore, the Appellant was
not a shareholder, and there is no evidence that she could have
earned any interest from this transaction. In all likelihood she
was doing no more than assisting her husband by agreeing to
remortgage their residence, and I emphasize the words "their
residence", by contributing capital to pay off the debts
incurred by AYSH.
[10] Counsel for the Respondent further
argued that even if there was a debt owing to the Appellant, it
had not been acquired for the purpose of earning or producing
income and that as a result pursuant to subparagraph
40(2)(g)(ii) of the Act the Appellant's loss
from the deemed disposition is nil. This submission is
well-founded. The "comfort letter" even if it
could be taken to establish an indebtedness makes it quite clear
that no "profit" motive was involved since the
purported "interest" referred to therein could only
account for interest indebtedness incurred by the increased
mortgage.
[11] Given the evidence before the Court, I
have concluded that the Minister was correct in disallowing the
Appellant's claim for an ABIL.
Legal fees
[12] The Appellant also seeks to deduct
legal fees as a business expense in relation to the
unincorporated business, AYSE, that was carried on in 2000. This
business included the delivery of newspapers. Robert Ashley
testified that one night a physical altercation occurred between
himself and the Appellant and that the police were called. Both
were arrested and the Appellant was subsequently charged. Bail
was granted and one of the bail conditions was that she was to
have no contact with him which, he observed, "obviously made
it very difficult to jointly sit in the car and do
newspapers". She retained counsel and according to Robert
Ashley, the lawyer "arranged an early court date" and
she was released. According to Robert Ashley, the amount of
$2,000 claimed was as an eligible deduction because it was paid
to a lawyer to represent the Appellant at the hearing. The
rationale advanced with respect to the deduction of this amount
was that when initially granted bail, a condition thereof was
that there be no contact between the parties and that they live
separate. He contended that in order to continue the newspaper
delivery business which involved the active participation of both
parties, it was deemed necessary that the trial be expedited.
This was accomplished, the Appellant appeared in Court, entered a
plea of guilty and was sentenced to three years' probation,
was prohibited from having weapons, and was told to take anger
management counselling. This result enabled her to return to work
with him and establishes that the expense for counsel's
services was deductible to the Appellant.
[13] The Appellant cannot succeed on this
ground. The relevant portions of the Act are as
follows:
8(1) In computing a
taxpayer's income for a taxation year from an office or
employment, 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:
(a)
(Repealed)
(b) amounts
paid by the taxpayer in the year as or on account of legal
expenses incurred by the taxpayer to collect or establish a right
to salary or wages owed to the taxpayer by the employer or former
employer of the taxpayer;
The evidence adduced falls far short of establishing that the
lawyer's fees in issue were amounts paid on account of legal
expenses incurred by her to collect or establish a right to
salary or wages owed to her by an employer or former employer.
Furthermore there is no evidence that these fees were paid in
connection with normal activities, transactions or contracts
incidental or necessary to the earning of income from a business
or property. Counsel for the Respondent also noted that in the
2000 taxation year, the Appellant was employed fulltime by the
Ontario Public Service Employee's Union and also earned
employment income from Homelife Metro Reality Inc. Based on the
evidence, there is no source of income reported from which these
fees might have been deductible.
[14] I turn next to the remaining items.
(a) In the 1999 taxation year,
the Appellant claimed a bad debt expense in the amount of
$6,400.46. Counsel for the Minister conceded that this amount
should be allowed.
(b) In the 2000 taxation year, the
Appellant claimed vehicle expenses in the amount of $6,569.42. In
assessing, the Respondent initially allowed the amount of $3,285.
At trial, counsel conceded that the remaining balance is also no
longer contested by the Minister and should be allowed.
(c) In the 2000 taxation year, the
Appellant also claimed interest expense in the amount of
$2,856.90 with respect to an investment the Appellant claimed to
have made in AYSH. No evidence was adduced in respect of this
amount. Accordingly, this amount is disallowed.
Signed at Ottawa, Canada, this 4th day of January, 2005.
Sarchuk J.
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