Citation: 2011 TCC 306
Date: 20110713
Docket: 2010-2766(IT)I
BETWEEN:
PETER WOLOSHYN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal from
a loss determination made by the Minister of National Revenue (the
"Minister") for the appellant's 2007 taxation year.
[2]
The appellant and his
wife were shareholders of 781426 Alberta Ltd. (the "business"), which
was sold in 2002. At the time of the sale a dispute existed, and had existed
since 1998, between the business and one Jack Carter, who sold vans to the
business for customizing purposes. The appellant was unable to explain fully and
in detail how Jack Carter obtained a lien on the business's inventory, but
that lien had not been removed at the time of the sale of the business, and the
appellant, through his lawyer, personally settled the claim in 2007 by paying
Jack Carter $30,600. The appellant incurred legal fees of $9,981 with
respect to that matter.
[3]
In 2004, Canada Trust
claimed payment under a personal guarantee given by the appellant in relation
to the business. The claim was settled in 2006 by the appellant’s paying Canada
Trust $3,500. The legal fees he incurred in that regard amounted to $500.
[4]
After these two issues
were settled, a T1 Adjustment Request for the 2002 taxation year was filed
requesting a business investment loss for the payments made under both personal
guarantees, including the legal fees incurred.
[5]
For his 2007 taxation
year, the appellant did not claim an allowable business investment loss (ABIL)
and his return was initially assessed as filed on May 5, 2008. He was
later reassessed by the Minister for his 2007 taxation year as a result of the
T1 Adjustment Request referred to above and was allowed an ABIL of $15,325.
[6]
In response to the same
T1 Adjustment Request, the Minister also reassessed the appellant, on
February 20, 2009, for his 2001, 2002 and 2006 taxation years. The
appellant filed a notice of objection for each of those taxation years. He was
advised by the Minister that the notices of objection were invalid for 2006 and
2007 as the reassessments for both years were nil assessments and that the
notices of objection with respect to the 2001 and 2002 taxation years were also
invalid as they were in respect of discretionary reassessments under the
taxpayer relief legislation. The appellant requested from the Minister a loss
determination for his 2007 taxation year, which determination is the subject of
this appeal.
[7]
The appellant is in
agreement with the Minister that he incurred an ABIL of $15,325, but disagrees
that it was incurred in the 2007 taxation year. He also agrees that the ABIL
was incurred with respect to payments under personal guarantees to Jack Carter
and Canada Trust and that the legal fees ($10,481 in total) were incurred to
determine the amount owing under the said personal guarantees. He therefore
disagrees with the Minister’s assertion that the legal fees were not incurred
to earn income from a business or property.
[8]
The issues to be decided
are whether the ABIL was correctly allowed for the 2007 taxation year, whether
the legal fees of $10,481 should form part of the ABIL allowed for the 2007
taxation year, and whether the appellant has a valid appeal for the 2001, 2002
and 2006 taxation years.
[9]
The appellant's
position is that the ABIL allowed for 2007 should apply to his 2002 taxation
year. He bases his argument on the fact that since a shareholder loan was
increased for the 2002 taxation year by virtue of the settlement, the ABIL on
that settlement should also be allowed for that year.
[10]
Paragraph 38(c)
and subparagraph 39(1)(c)(iv) of the Income Tax Act (the
"Act") indicate that an ABIL is treated as a capital loss and
is deductible in the year in which the disposition of property that caused the
loss occurred. This applies to property that is a debt, as in
Mr. Woloshyn's case. The facts also clearly reveal that the disposition of
the debt did not occur until the year 2007. In McNeill v. The Queen,
2000 DTC 6211, the Federal Court of Appeal held that damages payable
are not deductible until the quantum thereof and the obligation to pay damages
are final and determined.
[11]
In the present fact
situation, although we are dealing with a debt arising out of personal
guarantees, the appellant was not able to deduct the amount of the debt until the
amount was finally determined and the appellant was liable to pay it, which in
this case was in 2007.
Legal Fees
[12]
In order for the
appellant to deduct legal fees incurred in settling the two personal
guarantees, he must show that they were incurred to maintain profits in the
normal course of income‑earning operations. In Thiele Drywall Inc. v. R.,
[1996] 3 C.T.C. 2208, Judge Rip (as he then was) observed
that the courts have allowed the deduction of legal expenses when these were
incurred to preserve the taxpayer's ability to earn income in the normal course
of the taxpayer's business. Justice Linden of the Federal Court of Appeal,
in Tonn et al. v. The Queen, 96 DTC 6001, said at
page 6005:
To be deductible according to paragraph 18(1)(a), an expense
must have incurred with the intention of producing profit. In other words, the
expense must have incurred within a business framework, bearing some relation
to the income earning process.
[13]
We must remember that in
the fact situation here, the appellant sold his business in 2002 and that the settlement
and payment under the personal guarantees occurred long after the business had
been sold. The payment of these debts was not for the purpose of preserving the
ability to earn income in the normal course of operations or continuing to
produce profits for the business. The dispute over the personal guarantees and
the amount owing thereunder was a personal one and, under paragraph 18(1)(h) of the Act, expenses of a personal nature are not deductible. See also Bourget v. The Queen, 2010 TCC 642. The legal fees do
not form part of the ABIL.
[14]
On the last issue of
whether appeals are available to the appellant for his 2001, 2002 and 2006
taxation years, I will simply say that subsection 165(1.2) of the Act
prevents a taxpayer from objecting to an assessment made under
subsection 152(4.2) of the Act, that is, an assessment in a case
where the taxpayer has applied for a reassessment of tax within 10 years
after the end of a particular taxation year. As for the 2006 taxation year,
subsection 169(1) only allows a taxpayer to appeal an assessment. A notice
that no tax is owed, i.e. a nil assessment, cannot be appealed.
[15]
The appeal is therefore
dismissed.
Signed at Montreal, Quebec,
this 13th day of July 2011.
"François Angers"
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