2001-3222(IT)I
BETWEEN:
RONALD T.W. SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on November 20, 2002 at Regina,
Saskatchewan, by
the Honourable Judge L.M. Little
Appearances
Counsel for the
Appellant: Dwayne
M. Anderson
Counsel for the Respondent: Lyle
Bouvier
Dana Brûlé (Student-at-law)
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
(the "Act") for the 1996 taxation year is
dismissed.
The
appeals from the assessments made under the Act for the
1997, 1998 and 1999 taxation years are allowed, without costs,
and the assessments are referred back to the Minister of National
Revenue for reconsideration and reassessment in accordance with
the attached Reasons for Judgment.
Signed at Vancouver, British Columbia, this 24th day of
January 2003.
J.T.C.C.
Date: 20021224
Docket: 2001-3222(IT)I
BETWEEN:
RONALD T.W. SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little, J.
A. FACTS
[1] Alliance Grain Company Inc.
("Alliance") was a company incorporated under the laws
of the Province of Saskatchewan.
[2] On the 13th day of July 1995 the
Appellant purchased 25,000 shares of Alliance (25% of the issued
and outstanding shares) at a price of $23,500.00.
[3] Alliance was a Canadian controlled
private corporation within the meaning of the definition
contained in the Income Tax Act (the
"Act"). All or substantially all of the fair
market value of the assets of Alliance were used principally in
an active business carried on primarily in Canada.
[4] At all material times Alliance was
a small business corporation as defined in the Act.
[5] On the 9th day of August 1995 the
Appellant provided a joint and several guarantee to the Royal
Bank of Canada (the "Bank") in connection with a loan
obtained by Alliance from the Bank (the "First
Guarantee"). The Appellant's liability under the First
Guarantee was to a maximum of $351,574.73.
[6] On the 9th day of August 1995 the
Appellant provided a second joint and several guarantee to the
Bank in connection with a further loan obtained by Alliance (the
"Second Guarantee"). The Appellant's liability
under the Second Guarantee was to a maximum of $12,500.00.
[7] By letter dated the 24th day of
June 1997 the solicitors for the Bank wrote to the Appellant
demanding that the Appellant pay the Bank the sum of $351,574.73
immediately. This demand for payment was made in connection with
the First Guarantee that the Appellant provided to the Bank.
[8] By letter dated the 24th day of
June 1997 the solicitors for the Bank wrote to the Appellant
demanding that the Appellant pay the Bank the sum of $11,329.35
immediately. This demand for payment was made in connection with
the Second Guarantee that the Appellant provided to the Bank.
[9] The Appellant retained the
services of a law firm to obtain advice in connection with his
liability under the First Guarantee and the Second Guarantee that
he provided to the Bank. The Appellant paid legal fees as follows
in connection with his legal liabilities under the two
guarantees:
1997 - $ 8,000.00
1998 - $15,000.00
1999 - $15,000.00
Total
$38,000.00
[10] When the Appellant filed his income tax
returns for the 1997, 1998 and 1999 taxation years he deducted
the legal fees referred to in paragraph [9] above.
[11] On the 27th day of November 2000 the
Minister of National Revenue (the "Minister")
reassessed the Appellant's 1996, 1997, 1998 and 1999 taxation
years. In the said reassessments the Minister made a number of
adjustments including a disallowance of the legal fees that were
claimed by the Appellant.
[12] During the hearing of the appeals
counsel for the Appellant said that the Appellant reached an
agreement with the Bank to pay approximately $155,000.00 on the
First Guarantee and Second Guarantee referred to above rather
than the amounts of $351,574.13 plus $11,329.35 as demanded by
the solicitors for the Bank.
[13] Counsel for the Appellant also stated
that the Appellant was allowed to claim an allowable business
investment loss ("ABIL") in connection with the amount
of $155,000.00 that he paid to the Bank. Counsel for the
Appellant said that the ABIL was allowed by the Minister in the
Appellant's 2000 taxation year.
B. ISSUE
[14] The issue is whether the Appellant is
entitled to deduct the following legal fees in determining his
income for the 1997, 1998 and 1999 taxation years.
1997 - $ 8,000.00
1998 - $15,000.00
1999 - $15,000.00
Total
$38,000.00
[15] I am satisfied by the evidence
submitted that the Appellant paid legal fees of $38,000.00 in
total in an attempt to minimize his liability under the First and
Second Guarantees that he provided to the Bank. If the Appellant
had not disputed the amounts demanded by the Bank he would have
paid a total sum of $364,074.73 to the Bank. However, as noted
above, by retaining a law firm and disputing the claim by the
Bank the Appellant was able to reduce his liability to
$155,000.00.
[16] Subsection 39(12) of the Act
provides that an ABIL is available if a taxpayer has honoured a
guarantee of the debt of a corporation. Certain conditions must
be met to come within this provision:
(a) an amount must be paid by a
taxpayer in respect of a debt of a corporation;
(b) the amount must be paid to a
person with whom the taxpayer was dealing at arm's
length;
(c) the corporation owing the debt
must be a small business corporation both at the time the debt
was incurred and at any time during the 12 months prior to the
time that an amount first became payable under the guarantee.
[17] In my opinion the legal fees of
$8,000.00, $15,000.00 and $15,000.00 paid by the Appellant in
connection with the First and Second Guarantees should be treated
as Allowable Business Investment Losses deductible in the years
the amounts were paid.
[18] The appeal filed for the 1996 taxation
year is dismissed.
[19] The appeals are allowed, without costs,
for the 1997, 1998 and 1999 taxation years and the Appellant is
entitled to deduct the following amounts in the years
indicated:
1997 - $ 8,000.00
1998 - $15,000.00
1999 - $15,000.00
Signed at Vancouver, British Columbia, this 24th day of
January 2003.
J.T.C.C.
COURT FILE
NO.:
2001-3222(IT)I
STYLE OF
CAUSE:
Ronald T.W. Smith and
Her Majesty the Queen
PLACE OF
HEARING:
Regina, Saskatchewan
DATE OF
HEARING:
November 20, 2002
REASONS FOR JUDGMENT BY: The Honourable
Judge L.M. Little
DATE OF
JUDGMENT:
January 24, 2003
APPEARANCES:
Counsel for the
Appellant: Dwayne
M. Anderson
Counsel for the Respondent: Lyle
Bouvier
Dana Brûlé
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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