Citation: 2009 TCC 214
Date: 20090617
Docket: 2008-1488(IT)I
BETWEEN:
HAROLD CILEVITZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Angers J.
These
Amended Reasons for Judgment is issued in substitution for the Reasons for Judgment
dated May 26, 2009.
[1]
Harold Cilevitz is
appealing his 2004 assessment made under the Income Tax Act (the "Act").
In his 2004 income tax return, he claimed an allowable business investment loss
(ABIL) to which the Minister of National Revenue (the "Minister")
claims he is not entitled as the loss was not one contemplated by paragraph
39(1)(c) of the Act in that the appellant failed to demonstrate
that in the said taxation year he had incurred a capital loss within the
meaning of paragraph 39(1)(b) of the Act.
[2]
The appellant and one
Haygo Demirion met at a jewelry show in 1999. They decided to go into business
together with the intent of importing certain brands of watches for resale in Canada. They incorporated a company (1403762 Ontario Ltd.) and
began operating under the business name and style D.G.I. Each held 50 per cent of
the company’s shares. A bank account was also opened for the company.
[3]
On April 18, 2000, the
appellant made an advance of $25,000 to D.G.I. The advance was made by way of a
cheque payable to D.G.I. A second advance, of $1,000, was made by the appellant
on August 11, 2000, also by cheque payable to D.G.I. The appellant testified
that, in addition, he made cash advances to D.G.I. totalling $6,000, but he informed
the court that he did not seek an ABIL for that amount, thereby reducing his ABIL
claimed to $13,000 (half of his business investment loss of $26,000) for his
2004 taxation year.
[4]
There were no written
loan agreements between the appellant and D.G.I. nor was there any agreement as
to interest. The appellant testified that an oral agreement was reached and
that it was simply that the loan was to be paid back with interest once the
company achieved profitability. Shortly thereafter, the appellant became
uncomfortable with his new partner and he eventually left D.G.I. in 2001, after
nine months, and transferred his shares to Haygo Demirion. At that time,
Mr. Demirion had informed the appellant that his nephew would be joining
D.G.I.
[5]
In the two years
following his departure, the appellant made attempts to recover the advances.
He met Mr. Demirion from time to time and they had discussions about repayment
of the loan, but nothing came of these discussions. The appellant knew that
D.G.I. was not making any money and he was informed that Mr. Demirion had
left Canada for the U.S. in 2002. In his attempts to collect his
money, the appellant spoke with Mr. Demirion's bookkeeper and accountant and
was told that there was no money in D.G.I.'s bank account. He also consulted a
lawyer and was told that the cost of pursuing the matter further would range
between $5,000 and $10,000. Knowing there was no money in D.G.I.'s account, the
appellant did not pursue that avenue. Moreover, the appellant suspected that
D.G.I. never really operated the business, as the brands of watches it intended
to import were not sold in Canada and Mr. Demirion's nephew never did join
D.G.I.
[6]
It was in 2004 that the
appellant determined that his loan would never be repaid and claimed the
business loss. Records at the Canada Revenue Agency indicate that D.G.I. (the
numbered corporation) was incorporated but no T-2 return or financial
statements were ever filed with the Agency.
[7]
A letter dated December
11, 2007 from Mr. Demirion to the Canada Revenue Agency confirmed that no
consideration was paid or would be paid for the transfer of the shares from the
appellant to himself and, in paragraph 2, he said the following with regard to
the appellant's advances to D.G.I.:
2. The shareholder loan of approximately $32,000
was not repaid nor will ever be repaid. This was agreed to by
both parties. When the shareholder loan was given to the company, a verbal
agreement to pay back the shareholder loan with interest was entered into once
the company achieved profitability. When Harold Cilevitz sold, assigned
and transferred his shares to Haygo Demirian, the shareholder loan was discussed
and the outcome was that it was never going to be repaid. This was agreed to by
both parties.
[8]
In order to claim a
business investment loss, the taxpayer must establish on a balance of
probabilities that there was a debt, that it was incurred for the purpose of
gaining or producing income, that D.G.I. was an eligible small business
corporation in 2004 and that the debt became bad in 2004.
[9]
The evidence presented
by the appellant is sufficient to permit me to conclude on a balance of
probabilities that there was an advance made by the appellant to D.G.I. whose
amount was the value of the two cheques totalling $26,000. There was no determined
date as to when the advance was to be repaid nor how it was to be repaid and no
interest rate was agreed to. The appellant did expect that the advances would
be repaid but his former partner indicated that the loan was to be paid back
with interest once D.G.I. achieved profitability, which would definitely make
the time of repayment very uncertain. These uncertainties make it difficult to
conclude that even though advances were made, a debt actually existed when the
advances were made.
[10]
That same difficulty
also rests with the second issue as to whether the advance was made for the
purpose of producing income. No interest rate was agreed to. The only possible
income for the appellant would be his entitlement to dividends.
[11]
The other difficulty
for the appellant lies in his failure to establish on a balance of
probabilities that D.G.I. was a small business corporation as defined in subsection 248(1)
of the Act. The definition reads as follows:
"small business corporation", at
any particular time, means, subject to subsection 110.6(15), 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) shares of the capital stock or indebtedness of one or more
small business corporations that are at that time connected with the particular
corporation (within the meaning of subsection 186(4) on the assumption that the
small business corporation is at that time a "payer corporation"
within the meaning of that subsection), or
(c)
assets described in paragraphs (a) and (b),
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.
[12]
A Canadian-controlled
private corporation and an active business carried on by a corporation are
defined in subsection 125(7) of the Act as follows:
Definitions —
In this section,
“active
business carried on by a corporation” means any business carried on by the
corporation other than a specified investment business or a personal services
business and includes an adventure or concern in the nature of trade;
“Canadian‑controlled
private corporation” means a private corporation that is a Canadian corporation
other than
(a) a corporation controlled, directly or indirectly in
any manner whatever, by one or more non-resident persons, by one or more public
corporations (other than a prescribed venture capital corporation), by one or
more corporations described in paragraph (c), or by any combination of
them,
(b) a corporation that would, if each share of the
capital stock of a corporation that is owned by a non-resident person, by a
public corporation (other than a prescribed venture capital corporation), or by
a corporation described in paragraph (c) were owned by a particular
person, be controlled by the particular person, or
(c) a corporation a class of the shares of the capital
stock of which is listed on a prescribed stock exchange.
[13]
Very little is known
about the numbered corporation. We do know it was incorporated with the intent
to import certain brands of watches for sale in Canada
and that the appellant and Mr. Demirion were equal shareholders. What we do not
know is its business history and evolution and whether or not it actually
operated. The numbered corporation has not filed any tax returns or produced
any financial statements and the evidence seems to show that none of the watches
that were intended to be imported were ever sold in Canada.
There is no evidence indicating that the business was actually active and operating
and controlled by the resident persons.
[14]
These final conclusions
are sufficient to dispose of this appeal. On the issue of whether the appellant
took all reasonable steps in these circumstances to collect his advances, the
evidence discloses that the appellant conducted an investigation into the
corporation's ability to pay, his chance of success in recovering the advances,
and the cost of legal action offering low potential for recovery, and that attempting
to recover would be an exercise in futility. His decision to declare the loan
bad may be reasonable in the circumstances. As for declaring the loan bad in
2004, that is questionable given the statement in Mr. Demirion's letter
that it was understood at the time the shares were transferred in 2001 that the
loan was not going to be paid back.
[15]
The evidence is
insufficient for me to allow an ABIL in these circumstances. The appeal is
therefore dismissed.
Signed at Ottawa, Canada, this 17th day of June 2009.
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