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Citation: 2004TCC9
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Date: 20040112
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Docket: 2003-1101(IT)I
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BETWEEN:
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MARCO SMILOVICI,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
AND
2003-1098(IT)I
HANNA SMILOVICI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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REASONS FOR JUDGMENT
O'Connor, J.
[1] These appeals were heard on common
evidence at Toronto, Ontario, on October 8, 2003. The Notice of
Appeal and the Reply to the Notice of Appeal in each of the cases
are practically identical. The following are quotations from the
Reply to the Notice of Appeal in the appeal of Marco
Smilovici:
4. In
computing income for the 2001 taxation year, the Appellant, in
partnership with his spouse, sought to claim a business
investment loss in the amount of $165,128.00, which results in an
Allowable Business Investment Loss ("ABIL") of
$82,564.00, of which the Appellant's 50% share was
$41,282.00.
5. The
Minister of National Revenue (the "Minister") initially
assessed the Appellant for the 2001 taxation year. The Notice of
Assessment was dated July 9, 2002.
6. In so
assessing the Appellant for the 2001 taxation year, the Minister
denied the deduction of the business investment loss.
7.
Subsequently, the Appellant served a Notice of Objection for the
2001 taxation year. After careful consideration and review, the
Minister reassessed the Appellant's 2001 income tax return to
allow a capital loss in the amount of $75,000.00.
8. In so
assessing the Appellant, the Minister made the following
assumptions of fact:
(a) the ABIL claimed
by the Appellant in the 2001 taxation year allegedly pertained to
an investment in Algoma;
(b) on or about June
1, 1994, the Appellant and his spouse advanced the amount of
$50,000.00 to Algoma.
(c) on or about June
16, 1994, the Appellant and his spouse entered into a letter of
credit in the amount of $70,000.00 with the Canadian Imperial
Bank of Commerce (the "CIBC"), the beneficiary of which
was Valley Demolition & Excavating Inc.;
(d) in June 1994,
the Appellant and his spouse paid an amount of $30,000.00 to
Eric Polten, a lawyer acting for the Appellant in the matter
of the investment in Algoma;
(e) in June 1995 the
CIBC called the letter of credit, and the Appellant and his
spouse paid an amount of $70,000.00 to the CIBC;
(f) Algoma has
not filed income tax returns, nor has the Minister any record of
Algoma;
(g) at no time was
the Appellant a shareholder of Algoma;
(h) there was no
debt owning to the Appellant by a Canadian controlled private
corporation;
(i) the
Appellant failed to establish that at the end of the 2001
taxation year, he owned a share of capital stock of a corporation
which was insolvent, did not carry on business, the fair market
value of shares of which was nil, and could have been reasonably
expected to be dissolved or wound up and not carry on business in
the future;
(j) the
Appellant failed to establish that an amount had been paid by him
to a person with whom the Appellant was dealing at arm's
length in respect of a debt of a small business corporation under
an arrangement under which the Appellant guaranteed the debt;
(k) the Appellant
did not incur a business investment loss in the 2001 taxation
year.
[2] Exhibit A-1 consists principally
of a letter of intent dated May 31, 1994 indicating that the
Appellant was to become a partner in a partnership with
Frank D'Andrea and Bruno Rosso. The name of the
partnership was Algoma Disposal Service Excavation and
Demolition. Also forming part of Exhibit A-1 is a further letter
dated June 19, 1994 between the said three partners from which it
appears that the amount of money to be contributed by the
Appellant to the partnership was $150,000. However, the other
partners namely Bruno Rosso and Frank D'Andrea apparently
contributed no funds to the partnership but they were responsible
for carrying out the contracts which the partnership was to enter
into. Exhibit A-2 is a document entitled Agreement of Sale and
Purchase dated June 20, 1994. It describes certain jobs to
be completed by Algoma but apparently also evidences the purchase
by Algoma from Valley Demolition and Excavation Inc. of the
equipment and as appears from the testimony of the Appellants the
money used to purchase that equipment was the $150,000 which
Marco (apparently on behalf of himself and his wife) contributed
to Algoma.
[3] The documents and the testimony of
the Appellants' evidence an intention of the Appellants that
their investment be made to a limited corporation. However the
lawyer handling the transaction who the Appellants retained
principally because he could speak the German language and thus
communicate better with the Appellants. However the lawyer
apparently did not do all the things he was requested to do
including in particular making sure that there was some security
on the equipment for the repayment to the Appellants of the
$150,000 and moreover to conform with the Appellants intentions
and convert Algoma into a limited corporation.
[4] With the assistance of another
lawyer the German lawyer was sued by the Appellants but that
proceeding has been going on for several years and the Appellants
have not advanced their position one bit. All that has happened
according to the Appellant is that they have been discovered
mainly with respect to their arrival from Germany and the amounts
of money they have brought with them and other matters which do
not focus on the possible liability of the German lawyer. In
other words as of the day of the hearing of these appeals that
litigation has produced nothing favourable for the Appellants. It
is also clear from the testimony that Algoma has essentially
nothing, all of the equipment that was acquired with the $150,000
having disappeared and the other partners in the Algoma
partnership having no apparent assets.
Analysis
[5] As can be seen from the Reply the
Minister of National Revenue has allowed each of the Appellants a
capital loss in 2001 of $75,000 but has denied that that loss can
in any way be considered as an allowable business investment loss
(ABIL), because principally the Appellants did not become the
owners of a share or a debt of a corporation and consequently
could not be considered as owning the share or debt of a small
business corporation or Canadian controlled private
corporation.
[6] Paragraph 39(1)(c) of the
Income Tax Act (the "Act") defines a
business investment loss to be a capital loss realized on a
disposition after 1977 of shares or debt of a small business
corporation. A small business corporation is defined in
subsection 248(1) of the Act to mean a Canadian-controlled
private corporation of which all or substantially all of the fair
market value of the assets of which were:
(a) used principally in an
active business carried on primarily in Canada by the corporation
or a related corporation,
(b) shares or debt of a
"connected" small business corporation, or
(c) a combination of (a) and (b).
[7] For the purposes of paragraph
39(1)(c) it is sufficient to qualify for business
investment loss status that the company issuing the shares or
debt qualified under the active business assets test at any time
within the 12 months preceding disposition.
[8] Subsection 50(1) deems a
disposition of a debt to take place when the debt becomes a bad
debt and deems a disposition of a share to take place when the
coproration which issued the share becomes: (1) bankrupt;
(2) insolvent (in the case of a corporation referred to under
section 6 of the Winding-Up Act); and subject to
winding-up order under the Winding-Up Act; or (3) is
insolvent at the end of the year and the corporation no longer
carries on business and had no fair market value at the end of
the year and was reasonably expected to wind up.
[9] I conclude that the position of
the Minister is correct. The Appellants were each granted a
capital loss of $75,000 but it is clear that the capital loss
(and this applies to the actual loss claimed by the Appellants in
the total amount of $165,128) cannot be considered an ABIL as it
does not meet the conditions of the sections and paragraphs
mentioned above, principally because what is involved was not
shares or debt of a corporation and therefore clearly not shares
or debt of a Canadian - controlled private corporation or of a
small business corporation.
[10] Consequently the appeals are
dismissed.
Signed at Ottawa, Canada, this 12th day of January 2004.
O'Connor, J.
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