Citation: 2011 TCC 304
Date: 20110616
Docket: 2010-626(IT)I
BETWEEN:
RONALD B. GRIST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris J.
[1] These are appeals from
reassessments of the Appellant’s 2001 to 2004 taxation years. The Minister of
National Revenue disallowed the Appellant’s claim for a business investment
loss of $199,999 in his 2004 taxation year, and disallowed the related
non-capital loss carry backs to his 2001, 2002 and 2003 taxation years. The
Appellant claimed the business investment loss on the disposition of 200,000
shares of PSC Financial Services Ltd. (“the Corporation”) on May 20, 2004.
[2] The issues in these
appeals are:
(i) whether
the Appellant paid $200,000 to acquire the shares; and
(ii) whether
the Corporation was a “small business Corporation” as defined in subsection
248(1) of the Income Tax Act in the 12 months preceding the disposition
of the shares. A business investment loss is only available under subparagraph
39(1)(c)(iii) of the Act on the disposition of shares of a “small
business corporation.”
Background
[3] All of the companies to which
I will refer in these reasons were incorporated by Mr. Michael Cote (whose name also appears
in certain places as “Michel Cote”). Except for the Corporation, the evidence did not disclose
who the shareholders of the various companies were.
[4] Mr. Cote is an
accountant. Since at least 1999, he has also operated an accounting firm through
Cote and Associates Professional Corporation (CAPC). He was the Appellant’s
accountant, and represented him at the hearing of these appeals.
[5] The Corporation at issue, PSC
Financial Services Ltd., was created by the amalgamation of PSC Financial
Services Ltd., Cougar Financial Advisors Inc. and Commonwealth Bancorp Ltd. on June 13, 2004.
[6] Previously, on
August 7, 2002, Commonwealth
Bancorp Ltd. was created by the amalgamation of Commonwealth Bancorp Ltd. and Commonwealth Financial Group
Inc. The original Commonwealth Bancorp Ltd. was incorporated in mid-1999.
[7] All of the
companies set up by Mr. Cote including CAPC allegedly operated out of an office
in Fergus, Ontario, but except in the case
of the Corporation and CAPC, the evidence of this is scant. Likewise, there
was little evidence of what activities the companies other than the Corporation
and CAPC carried on.
[8] The Appellant’s
involvement with the Corporation began in 1999, when he was first induced to
invest in Commonwealth by Mr. Cote. Over the next year or two, the Appellant
said he purchased shares in Commonwealth as well as debentures issued by it. He
estimated his total investment at approximately $285,000, of which $200,000 was
for the purchase of 200,000 shares.
[9] The Respondent
submitted that the Appellant had not shown that he had paid the $200,000
consideration for the shares but there was sufficient documentary evidence
combined with credible oral evidence from the Appellant to convince me that he
did pay the amounts in question. In addition to a cheque dated August 17, 2000
for $100,000 payable to Commonwealth, there was evidence that certain Nortel
and BCE shares held by the Appellant’s spouse and mother-in-law were sold to
provide funds to purchase the shares. The Appellant testified Mr. Cote was
given authority to sell these shares on his family’s behalf and that the
proceeds were used to buy shares.
[10] The Appellant also
produced copies of share subscription agreements signed by him dated November
10, 1999, February 9, 2000 and August 17, 2000. Those agreements indicate that
he acquired a total of 200,000 common shares in Commonwealth on those dates at
a cost of $200,000,
[11] The Appellant said
that the business of the Corporation was to earn interest on short-term loans
it made to private businesses that required capital. However, it lost a
significant amount of money and ceased operations in late 2003 or early 2004. The
Ontario Financial Services Commission began an investigation into the
activities the Corporation in 2004, and seized most, if not all, of its
records. The records were returned a few years later. The results of the investigation
were not disclosed to the Court.
[12] After the Corporation
ceased operating, the Appellant disposed of his shares to CAPC for $1 under an
agreement dated May 20, 2004. Although the Appellant had little recollection of
the agreement, he recognized his signature on it. It is apparent that Mr. Cote
orchestrated the sale of the Appellant’s shares to CAPC in order to crystallize
the loss on the shares, and that the Appellant consented to the sale. The
Appellant also presented a receipt signed by him and given to CAPC for the $1
consideration. In light of this evidence, I accept that there was a disposition
of his shares on May 20, 2004 for $1.
[13] In order to have a
business investment loss on the disposition of the shares the Appellant must
show that, within the 12 months preceding the disposition, the Corporation was a
small business corporation as defined in subsection 248(1) of the Act. The
relevant parts of that definition read as follows:
248(1) In this Act,
"small business Corporation", at any particular time, means, … a particular Corporation that is a
Canadian-controlled private Corporation all or
substantially all of the fair market value of
the assets of which at that time is attributable to assets that are
(a) used principally in an active business carried on
primarily in Canada by the particular
Corporation or by a Corporation related to it,
(b) …
(c) assets described in
paragraphs (a) … including, for the purpose of paragraph 39(1)(c),
a Corporation that was
at any time in the 12 months preceding that time a small business Corporation, and, for
the purpose of this definition, the fair market value of a
net income stabilization account
shall be deemed to be nil;
[14] According to
paragraph (c) of this definition, to qualify as a small business corporation,
all or substantially all the Corporation’s assets must have been used
principally in an active business carried on it at some point within the 12
months leading up to May 20, 2004.
[15] “Active business” is
defined in subsection 248(1) to exclude, inter alia, a “specified
investment business”:
"active business", in relation to any business carried on by
a taxpayer resident in Canada, means
any business carried on by
the taxpayer other than a specified investment business
or a personal services business;
[16] Subsection 248(1) gives the term “specified investment business”
the meaning assigned by subsection 125(7) of the Act. That
definition reads:
"specified investment business" carried on by a Corporation in a taxation year means a business (other than a
business carried on by
a credit union or a business of leasing property other than
real property) the principal purpose of which is to derive income (including
interest, dividends, rents and royalties) from property but, except where the Corporation was a prescribed labour-sponsored
venture capital Corporation at any time in the year, does not
include a business carried on by
the Corporation in the
year where
(a) the Corporation employs in
the business throughout
the year more than 5 full-time employees, or
(b) any other Corporation associated with the Corporation provides,
in the course of carrying on an active business, managerial,
administrative, financial, maintenance or other similar services to the Corporation in the
year and the Corporation could
reasonably be expected to require more than 5 full-time employees if those
services had not been provided;
[17] The Respondent argued
that the Corporation carried on a “specified investment business” at all
material times because its principal purpose was to earn income from property
and it did not employ more than 5 full-time employees.
[18] According to the
notes to the financial statements of the Corporation for its fiscal periods
ending June 30, 2002 and June 18, 2003, its business was the provision of
merchant banking services for businesses in Ontario. This accords with the Appellant’s
evidence that the Corporation’s business was lending money to private
businesses. It was not shown that the Corporation carried on any other business
at any point in the 12 months leading up to the share disposition.
[19] The Appellant did
not dispute that the principal purpose of the Corporation was to earn income
from property but maintained that the Corporation fell within the exception
listed in paragraph (b) of the definition of “specified investment
business”. He said that other corporations associated with the Corporation provided
it with managerial,
administrative, financial, maintenance or other similar services and that the Corporation
could reasonably have been expected to require more than 5 full-time employees
if those services had not been provided by those associated corporations.
[20] Unfortunately, the
Appellant has presented no evidence to support the position that, in the 12
months before May 20, 2004, or at any other time, the Corporation was
associated with any other company within the meaning of subsection 256(1) of
the Act.
[21] Subsection 256(1)
provides that, for the purposes of the Act, one corporation is
associated with another in a taxation year, if at any time during the year:
(a) one of the corporations
controlled, directly or indirectly in any manner whatever, the other;
(b)
both of the corporations were controlled, directly or indirectly in any
manner whatever, by the same person or group of persons;
(c)
each of the corporations was controlled, directly or indirectly in any
manner whatever, by a person and the person who so
controlled one of the corporations was related to the person who so
controlled the other, and either of those persons owned, in respect of each
corporation, not less than 25% of the issued shares of any class, other than a specified class, of
the capital stock thereof;
(d)
one of the corporations was controlled, directly or indirectly in any
manner whatever, by a person and that person was related to each member
of a group of persons that
so controlled the other corporation, and that person owned, in respect of the
other corporation, not less than 25% of the issued shares of any class, other
than a specified class, of
the capital stock thereof; or
(e) each of the
corporations was controlled, directly or indirectly in any manner whatever, by
a related group and each
of the members of one of the related groups was related to all of the
members of the other related group, and one
or more persons who were members of both related groups, either
alone or together, owned, in respect of each corporation, not less than 25% of
the issued shares of any class, other than a specified class of the
capital stock thereof.
[22] On the evidence that
was presented, I cannot determine whether the conditions set out in any of
paragraphs (a) through (e) of subsection 256(1) were met in this
case with respect to the Corporation and any other company.
[23] Likewise, the
evidence fails to show what services any other company provided to the
Corporation. All I have before me is the Appellant’s testimony that he saw 8 or
9 people working in the Fergus office when he visited it, and that some of them
helped him by witnessing documents he was required to sign at various times. He
also testified that he was under the impression that those employees were “part
and parcel of the whole operation”. Later in his testimony, the Appellant
stated that he believed CAPC did all the work for the Corporation and that the Corporation
was “the investment part”. Given the vagueness of his testimony, I am not
satisfied that the Appellant had any knowledge of how the Corporation or any of
the other companies were operated. If the Fergus office was the office for all
of the companies set up by Mr. Cote, including CAPC and the Corporation, the
presence of employees on those premises would not be necessarily be conclusive that
those employees worked for the Corporation.
[24] Mr. Cote did not
testify at the hearing. In light of his apparently extensive involvement in the
affairs of the Corporation, as well as his involvement in the affairs of CAPC
and all of the other companies, I infer that his testimony would not have been
favourable to the Appellant’s position either regarding the Corporation’s
relationship to the other companies or regarding any services provided to the
Corporation by the other companies.
[25] In any event, it was
not established by the Appellant that the Corporation was associated with any
of these other companies, or that the level of managerial, administrative, financial, maintenance
or other similar services referred to in paragraph (b) of the definition of
“specified investment business” was provided to the Corporation by them.
[26] In conclusion, the
Appellant has not shown that the Corporation was a small business corporation
at the material time. Therefore, the loss from the disposition of the shares does
not qualify as a business investment loss.
[27] For these reasons,
the appeals are dismissed.
Signed at Ottawa, Canada, this day
16th of June, 2011.
“Brent Paris”
Email this Content