Date:
20020731
Docket:
2001-223-IT-I
BETWEEN:
RONALD
ROY,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasonsfor Judgment
Garon,
C.J.T.C.C.
[1]
This is an appeal from a reassessment for the 1997 taxation year.
By his reassessment, the Minister of National Revenue disallowed
the capital gains deduction in the amount of $25,000 and allowed
the Appellant a capital loss of $25,000. In his Notice of
Objection, the Appellant claimed that he had incurred a business
investment loss in the amount of $25,000 from his sale of shares
in Smooth Express International Ltd., hereinafter referred to as
"SEIL".
[2]
At the hearing of this appeal, the Appellant made clear that he
was appealing the assessment for the 1997 taxation year and not
the assessment for the 1995 taxation year as he had mentioned in
the first paragraph of his Notice of Appeal. In this connection,
it is to be noted that the Respondent had filed the Reply to the
Notice of Appeal on the basis that the Appellant was appealing
the 1997 assessment. I proceeded to hear the present appeal on
the same basis.
[3]
The Minister of National Revenue in assessing the Appellant for
the 1997 taxation year relied on the assumptions of fact set out
in paragraph 6 of the Reply to the Notice of Appeal. Paragraph 6
reads as follows:
(a) SEIL was
incorporated under the laws of the Province of Ontario on January
17, 1995;
(b) the sole
shareholder of SEIL in the 1995 and 1996 taxation years was Brad
Adams and in 1997 the shareholders were Brad Adams and Jerry
Doane;
(c) Smooth
Express Ltd. (SEL) is related to SEIL and was incorporated under
the laws of the province of Ontario on March 23, 1993. The
shareholders of SEL in the 1995, 1996 and 1997 taxation years
were Brad Adams, Tim Adams and Kent Truman;
(d) the
Appellant has not provided any documentation to support his
investment in SEIL;
(e) the
Appellant did not provide any documentation with respect to his
alleged sale of SEIL shares to Brad Adams;
(f) in the
1997 taxation year, there was no actual or deemed disposition by
the Appellant of any shares of the capital stock of a corporation
or a debt owing to the Appellant to which subsection 50(1) of the
Income Tax Act, R.S.C. 1985, c.1. (5th Supp.)
as amended (the "Act") applies;
(g) in the
1997 taxation year, the Appellant did not dispose of any property
that was a share of the capital stock of a small business
corporation or debt owing to the Appellant by a Canadian
controlled private corporation giving rise to a capital loss, to
a person with whom the Appellant was dealing at arm's length,
which corporation was:
(A) a
small business corporation;
(B)
a bankrupt (within the meaning assigned by subsection 128(3) of
the Act) that was a small business corporation at the time
it was or became bankrupt; or
(C)
a corporation referred to in section 6 of the Winding Up Act that
is insolvent (within the meaning of the Act) and was a small
business corporation at the time a winding-up order under the Act
was made in respect of the corporation.
(h) the
Appellant did not incur a BIL in the 1997 taxation
year.
[4]
The Appellant admitted subparagraphs (a), (e), (g) and (h) of the
Reply to the Notice of Appeal.
[5]
With respect to subparagraph (b) of paragraph 6, the Appellant
denied that the sole shareholder in 1995 of SEIL was Mr. Brad
Adams. Rather, he asserted that he was the sole shareholder of
SEIL and referred to the incorporation documents in support of
his statement. He agreed however with the second part of
subparagraph (b) according to which the shareholders of SEIL in
1997 were Messrs. Brad Adams and Jerry Doane. In this regard, the
Appellant stated that he ceased to be a shareholder of SEIL
around August or September 1996. He testified that he sold at the
time "the remainder of the company", to adopt his
phrase, for $5,000 to Mr. Brad Adams.
[6]
With respect to subparagraph 6(c) of the Reply to the Notice of
Appeal, the Appellant denied that Smooth Express Ltd.,
hereinafter referred to as "SEL" was related to SEIL.
In connection with this subparagraph, he also indicated that he
did not know if SEL was incorporated under the laws of the
province of Ontario on March 23, 1993, nor did he know who were
the shareholders of SEL in the 1995, 1996 and 1997 taxation
years.
[7]
The Appellant denied subparagraph 6(d) of the Reply to the Notice
of Appeal.
[8]
With respect to subparagraph 6(f) of the Reply to the Notice of
Appeal, the Appellant declared that he disposed of the shares of
the capital stock of SEIL in 1996 but not in 1997 and that he was
given a cheque in the amount of $5,000 by Mr. Adams. Regarding
subparagraph 6(f), the Appellant also stated that SEIL could not
reimburse him in 1996 in respect of advances he had made to the
company in 1995 and 1996.
[9]
The Appellant testified that he "guessed" that the debt
owing to him by SEIL became a bad debt in 1996 but he did not
know the exact amount of the debt. He added that it was
"probably in excess of $30,000". He made clear that he
disposed of his shares in 1996 when he sold his shares for $5,000
to Mr. Adams. The Appellant had paid $1 for his shares in
SEIL.
[10] In
cross-examination, the Appellant confirmed that at the time of
the incorporation of SEIL he owned the totality of the issued 100
shares of the capital stock of that company. Later, the precise
time was not mentioned, the number of shares outstanding was
increased to 200. He also mentioned that he ran the business of
the latter firm in 1995 and during a portion of 1996. According
to him, Mr. Gerald Doane, a U.S. citizen, acquired around
May 1996 about a third of the capital stock of that firm. The
Appellant mentioned that Mr. Doane did not pay anything for the
shares but provided about $20,000 in respect of a line of credit.
It was made clear that Mr. Adams paid $5,000 for 60 shares sold
by the Appellant in July 1996.
[11] The
Appellant's income tax return for 1996 was filed with the
Court. The return shows that the Appellant had claimed a net
capital loss of $5,000 in respect of the sale of shares. The
Appellant's income tax return for 1997 was also tendered in
evidence. On line 254 of the latter return, the Appellant claimed
a capital gains deduction of $25,000.
[12] Mr. Adams,
who was called at the instance of the Respondent, stated that he
acquired 40 shares from the Appellant in July 1996 and about one
month later, he bought an additional 10 shares from the Appellant
for $1. He testified that at some point in 1996, Mr. Jerry
Doane owned 100 shares. After the acquisition by
Mr. Adams of 10 shares from the Appellant during the
summer of 1996, Mr. Adams and Mr. Doane each owned
100 shares of the capital stock of SEIL.
[13] The income
tax returns for SEIL for 1995, 1996 and 1997 filed with the
Minister in October 1999 were entered as exhibits at the hearing
of this appeal. Mr. Adams stated that SEIL did not go bankrupt
but was simply shut down probably in 1999.
Analysis
[14] The
question in issue is whether the Appellant has incurred a
business investment loss in a given year as a result of which he
would be entitled to deduct an amount in respect of an allowable
business investment loss in computing his income or his taxable
income, as the case may be, depending on whether the loss was
incurred in 1997 or in a prior or subsequent year.
[15] The
required ingredients for the existence of a business investment
loss are found in paragraph 39(1)(c) of the Income Tax
Act (the "Act"). The relevant portion of
paragraph 39(1)(c) read thus at the relevant
time:
(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) to a
person with whom the taxpayer was dealing at arm's
length
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 (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.
[16] It is also
worth referring to paragraph 38(c) of the Act,
which determines the portion of a business investment loss that
constitutes an allowable business investment loss for the
purposes of notably sections 3 and 111 of the Act.
Paragraph 38(c) of the Act read as follows in the
year in issue:
For the
purposes of this Act,
[...]
(c) a
taxpayer's allowable business investment loss for a taxation
year from the disposition of any property is 3/4 of the
taxpayer's business investment loss for the year from the
disposition of that property.
[17]
Subparagraph 39(1)(c)(i) makes express reference to
subsection 50(1) of the Act which thus completes the
provisions of paragraph 39(1)(c). Subsection 50(1) is
reproduced below:
(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, or
(b) a
share (other than a share received by a taxpayer as consideration
in respect of the disposition of personal-use property) of the
capital stock of a corporation is owned by the taxpayer at the
end of a taxation year and
(i)
the corporation has during the year become a bankrupt (within the
meaning of subsection 128(3)),
(ii) the
corporation is a corporation referred to in section 6 of the
Winding-up Act that is insolvent (within the meaning of
that Act) and in respect of which a winding-up order under that
Act has been made in the year, or
(iii) at
the end of the year,
(A)
the corporation is insolvent,
(B)
neither the corporation nor a corporation controlled by it
carries on business,
(C)
the fair market value of the share is nil, and
(D)
it is reasonable to expect that the corporation will be dissolved
or wound up and will not commence to carry on business
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.
[18] At the
outset, before commenting on the evidence in this case, I wish to
mention I was impressed by the candour and the forthrightness of
the Appellant. He is a credible witness and I accept his
evidence.
[19] First of
all, I do not have to consider the transactions relating to the
disposition of shares of the capital stock of SEIL by the
Appellant in 1996 because the transactions did not give rise to a
loss since the Appellant in one transaction disposed of
40 shares to Mr. Adams for $5,000, shares that he had
acquired for $1 and in the second transaction with
Mr. Adams, he transferred 10 shares to the latter
without realizing a gain or a profit. The evidence is unclear as
to terms under which the disposition of shares of the capital
stock of SEIL acquired by Mr. Jerry Doane were
made.
[20] The
business investment loss can only arise, having regard to the
facts of the present case, to use the language of paragraph
39(1)(c) of the Act, from the disposition of
property that is a debt owing to the Appellant by
SEIL.
[21] Paragraph
39(1)(c) of the Act contemplates two types of
disposition. One type of disposition is mentioned in subparagraph
39(1)(c)(i) of the Act which in turn refers to
subsection 50(1) of the Act, and the other one is set out
in subparagraph 39(1)(c)(ii). Both dispositions deal with
two classes of property, namely a debt owing to a particular
category of a Canadian-controlled private corporation and a share
of the capital stock of a small business corporation.
[22] I do not
think it is necessary to refer to the second type of disposition
set out in subparagraph 39(1)(c)(ii) of the Act
since an actual disposition of a debt is required and no
disposition of a debt has occurred in the present
case.
[23] I shall
therefore consider the nature of the debt referred to in
subparagraph 39(1)(c)(i) and more particularly defined in
subsection 50(1) of the Act. The latter subsection 50(1)
of the Act provides that the debt owing to a taxpayer at
the end of a taxation year must be established by the taxpayer to
have become a bad debt in the year. In my view, the
Appellant's evidence is very clear that the debt owing to the
Appellant by SEIL in respect of the advances made to it became a
bad debt in 1996. This requirement is therefore met in the
present case. Incidentally, it has not been suggested by the
Respondent that the bracketed portion of paragraph
50(1)(a) regarding a debt owing in respect of the
disposition of personal-use property was applicable
here.
[24] The
question then arises as to what was the amount owing to the
Appellant by SEIL at the end of the 1996 taxation year. I have no
reason to doubt the Appellant's evidence that he did advance
substantial moneys to SEIL in 1995 and 1996 prior to the
disposition of his shares in the capital stock of SEIL. At one
point, he mentioned in his testimony an amount in excess of
$30,000. The Appellant himself recognized that he was not able to
give even an approximate amount of the total of his advances to
SEIL. He could not either produce any documentary evidence in
support of SEIL's indebtedness to him at the relevant time.
The Appellant's evidence is therefore unsatisfactory as to
the quantum of the debt owing by SEIL to the Appellant at the end
of the 1996 taxation year.
[25] After a
thorough review of the evidence, I noted in the liabilities
portion of the balance sheet of SEIL
(Exhibit R-4) as at December 31, 1995 an item entitled
"Advances from shareholders" and the amount opposite
this item was $10,850. I also observed that in the balance sheet
of SEIL as at December 31, 1996 (Exhibit R-5) that the
corresponding item was showing an amount of $22,586 in respect of
"Advances from shareholders".
[26]
Since the evidence is clear that throughout
1995 the Appellant was the sole shareholder of SEIL it would
follow that SEIL was indebted to the Appellant in an amount of
$10,850 as at December 31, 1995. In the course of the year
1996, there were three shareholders, including the Appellant. The
record discloses that the Appellant ceased to be a shareholder of
SEIL at some point during the summer of 1996. The other two
shareholders may have made advances to SEIL during 1996 after
they became shareholders of the latter company. Since the
Appellant could not provide any direct evidence in particular
about his advances to SEIL in 1996, it became apparent to me that
it might be possible to determine the amount of the
Appellant's advances, if any, in 1996 from the testimony of
the other two shareholders, Mr. Brad Adams and Mr. Jerry Doane or
one of these two shareholders, or alternatively from the person
who prepared the financial statements of SEIL for the year
1996.
[27]
Further evidence could therefore be obtained
regarding the advances made by Messrs. Brad Adams and Jerry Doane
to SEIL in 1996. It is to be noted that Mr. Brad Adams who
testified at the first phase of the hearing of this appeal was
not examined on the matter of the quantum of the advances that he
and Mr. Jerry Doane may have made to SEIL in
1996.
[28]
In view of the unsatisfactory state of the
evidence and pursuant to section 138 of the Tax Court of
Canada Rules (General Procedure), (which rules are
often applied to appeals governed by the informal procedure where
matters are not provided for in the Tax Court of Canada
Rules (Informal Procedure)), I decided to reopen the
hearing for further evidence and arguments.
[29]
On the resumption of the hearing,
Mr. Brad Adams testified that he did not put any money in
SEIL during 1996 and added that on January 15, 1997 he
advanced $20,000 to the latter corporation. Mr. Adams also
mentioned that he did not know if the other shareholder,
Mr. Jerry Doane, had made any advances to SEIL in 1996
although at one point in his testimony he stated on the
resumption of the hearing that he was "pretty positive"
that he did not put any money in SEIL.
[30] In view of
the absence of persuasive evidence regarding the question whether
or not Mr. Doane had advanced funds to SEIL in 1996 I am
still unable to determine the quantum of the amount owing by SEIL
to the Appellant on December 31, 1996. In the result the
Appellant has failed to establish the amount of his business
investment loss as at December 31, 1996.
[31] There is
the further point that the Appellant had not made the required
election contemplated by subsection 50(1) of the Act
at the time he filed his return of income for 1996. Furthermore
the Appellant did not request the Minister to extend the time for
making an election, as he could pursuant to
subsection 220(3.2) of the Act. If the Appellant had
made such an application to the Minister, the latter would have
been required to consider it and make a decision. The latter
decision, if against the Appellant, could have been the subject
matter of a review before the Federal Court - Trial
Division.
[32] I therefore
conclude that the Appellant has not established the required
elements for the deduction in 1997 of an amount in respect of an
allowable business investment loss that the Appellant alleged he
incurred in 1996.
[33] From the
above, it also follows that if the required evidence had been
adduced with respect to the quantum of the advances made by the
Appellant more particularly in 1996 and if an election had been
made at the required time, as provided in subsection 50(1)
of the Act the debt in question would have constituted a
business investment loss at the end of 1996, within the
parameters of subsection 50(1) of the Act.
[34]
Accordingly, 3/4 of such a business investment loss incurred in
1996 would have been an allowable business investment loss. An
allowable business investment loss would have been deductible in
the 1996 taxation year, as provided by paragraph 3(d)
of the Act. The balance remaining of the allowable
business investment loss that could not have been deducted under
paragraph 3(d) in the year it was sustained would then
have become a non-capital loss which could be carried back three
years and forward seven years, as provided in subsection 111(1)
of the Act. See also the definition of the phrase
"non-capital loss" in subsection 111(8) of the
Act, which makes clear that unabsorbed allowable business
investment losses incurred in a particular year become
non-capital losses for carry-over purposes.
[35] Since I
infer from the evidence that the non-capital loss was not
deducted in a prior year, that year being 1995, that non-capital
loss could have been deducted in the 1997 taxation year, the year
under appeal. The fact that no determination of a loss incurred
in a particular year has not been made by the Minister does not
preclude a Court from ascertaining the correctness of an
assessment for another year where one of the constituent elements
of an assessment for that other year involves the particular loss
for carry-over purposes. In effect, this question has been
considered and, in my view, settled by the Associate Chief Judge
Bowman in the case of Allcann Wood Suppliers Inc. v.
Canada, [1994] 2 C.T.C. 2079. The following passage at
pages 2080-2081 is of particular interest:
... In the
absence of a binding loss determination under subsection
152(1.1), it is open to a taxpayer to challenge the
Minister's calculation of a loss for a particular year in an
appeal for another year where the amount of the taxpayer's
taxable income is affected by the size of the loss that is
available for carryforward under section 111. In challenging the
assessment for a year in which tax is payable on the basis that
the Minister has incorrectly ascertained the amount of a loss for
a prior or subsequent year that is available for deduction under
section 111 in the computation of the taxpayer's taxable
income for the year under appeal, the taxpayer is requesting the
Court to do precisely what the appeal procedures of the Income
Tax Act contemplate: to determine the correctness of an
assessment of tax by reviewing the correctness of one or more of
the constituent elements thereof, in this case the size of a loss
available from another year. This does not involve the
Court's making a determination of loss under subsection
152(1.1) or entertaining an appeal from a nil assessment. It
involves merely the determination of the correctness of the
assessment for the year before it.
[36] In view of
the above, I am constrained to dismiss the appeal from the
Minister's reassessment for the 1997 taxation
year.
Signed at
Ottawa, Canada, this 31st day of July 2002.
"Alban Garon"
C.J.T.C.C.
COURT FILE
NO.:
2001-223(IT)I
STYLE OF
CAUSE:
Between Ronald Roy and
Her Majesty The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
November 23, 2001
Hearing reopened on January 11, 2002
Conference call held on February 19, 2002
Hearing continued on June 11 and
on July 16,
2002
REASONS FOR
JUDGMENT BY: The Honourable Alban
Garon
Chief Judge
DATE OF
JUDGMENT:
July 31, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
Sointula Kirkpatrick
COUNSEL OF
RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-223(IT)I
BETWEEN:
RONALD ROY,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Appeal heard on
November 23, 2001, at Toronto, Ontario,
hearing reopened on
January 11, 2002,
conference call held on
February 19, 2002, at Ottawa, Ontario, and
hearing continued on
June 11 and on July 16, 2002, at Toronto, Ontario,
by
the Honourable Alban
Garon
Chief Judge
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent: Sointula
Kirkpatrick
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1997 taxation year is dismissed.
Signed at Ottawa, Canada,
this 31st day of July 2002.
C.J.T.C.C.
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