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Citation: 2004TCC137
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Date: 20040302
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Court File No.: 2003-1990(IT)I
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BETWEEN:
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ALAIN H. BELZILE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] In a notice of assessment dated
January 7, 2003, pertaining to the 2000 taxation year, the
Minister of National Revenue ("the Minister")
disallowed a deduction in the amount of $32,704 ($65,405 x 50%)
which the appellant had claimed as a business investment loss
("BIL"). Hence, he is appealing the
assessment.
[2] The Minister submits that
9005-3166 Québec Inc. ("9005"), the corporation
to which the appellant lent money, is not a "small business
corporation" (SBC) within the meaning of
subsection 248(1) of the Income Tax Act
("the Act"). The Minister further submits
that the appellant did not advance money to the corporation and
that even if the corporation had been an SBC, he would not be
entitled to deduct the loss in question.
[3] The appellant is a lawyer. In
addition to his professional activities, he and one other person
start up duly incorporated companies for the purpose of
constructing residential buildings. In 1993, he and his associate
incorporated 3087-0075 Québec Inc. for this purpose.
The appellant looked after the financing, and his shareholding
associate was in charge of construction.
[4] In 1994 and 1995, the corporation
in question built two apartment buildings in
Ste-Anne-de-la-Pocatière and sold them immediately. After
the sales, the appellant and the same associate incorporated
9005, the corporation to which the appellant lent money. In
1995-96, 9005 built an eight-apartment building in
the town of Dégelis, Quebec. In 1996, the appellant and
his associate incorporated 9033-4483 Québec Inc., another
corporation, which built 7 six-apartment buildings in
Rivière-du-Loup, Quebec and resold them all
immediately. Each of the aforementioned corporations, including
9055, describes its economic activity as construction.
[5] The appellant explained that 9005
was unable to sell its eight-apartment building before the year
2000. He explained that when the purchase of the land was being
negotiated, he believed the corporation would be entitled to
purchase two adjacent parcels. After undertaking the construction
project, he and his associate learned that other
purchasers - competitors - had bought the
neighbouring parcels. Those purchasers built two apartment
buildings of lesser quality than 9005's building, which
enabled them to charge lower rent. Upon completion of the second
neighbouring building, an industry in Dégelis closed down,
resulting in the loss of 150 jobs. Since Dégelis is a
small village, the real-estate market collapsed. The appellant
and his associate were unable to sell their building immediately.
After nearly four years, they finally managed to sell the
building at a price roughly equal to one-half its value.
Thus, the building was sold during the taxation year in issue and
9005 completely ceased its activities. Consequently, the
appellant was unable to recover his loan, which explains the
claim in issue.
[6] The appellant explained that 9005
ran deficits of $10,000-$12,000 per year. The corporation leased
the apartments to stop losses and the appellant had to lend it
$65,405 ($60,554.58 in 1995, and $4,850.46 between 1996 and
1999). The appellant's supporting exhibits show the
source of these funds and of the appellant's cash injection
into 9005. Suffice it to say Robert Belzile Ltée
reimbursed the appellant for an [TRANSLATION] "amount due to
a shareholder" and that this reimbursement was used to lend
9005 the $60,554. The account statements and financial statements
tendered by the appellant confirm his testimony. As for the
$4,850, a series of cheques from his law firm was issued to pay
expenses, including certain salaries, hydro bills, etc. Each of
these cheques shows an advance of money or an apartment
number.
[7] The evidence as to whether the
appellant lent $65,405 to 9005 is sufficient to enable me to find
that he did make that loan.
[8] The financial statement of 9005 at
August 31, 1999, show that the corporation had rental
revenues of $24,172 in 1998 and $32,234 in 1999. Net losses
were $9,038 and $10,336 for those years, respectively. Under the
heading [TRANSLATION] "assets", there is $473,430 in
inventory, consisting of one completed rental building intended
for resale.
[9] There remains the second issue:
whether 9005 is a small business corporation within the meaning
of the Act, in which case the appellant can claim the business
investment loss.
[10] The following provisions of the Act are
relevant to this case:
38. Taxable capital gain and allowable capital loss.
For the purposes of this Act,
(a)
subject to paragraphs (a.1) and (a.2), a
taxpayer's taxable capital gain for a taxation year from the
disposition of any property is 3/4 of the taxpayer's capital
gain for the year from the disposition of the property;
(a.1) a
taxpayer's taxable capital gain for a taxation year from the
disposition after February 18, 1997 and before 2000 of any
property is 3/8 of the taxpayer's capital gain for the year
from the disposition of the property where:
(i) the
disposition is the making of a gift to a qualified donee (as
defined in subsection 149.1(1)), other than a private foundation,
of a share, debt obligation or right listed on a prescribed stock
exchange, a share of the capital stock of a mutual fund
corporation, a unit of a mutual fund trust, an interest in a
related segregated fund trust (within the meaning assigned by
paragraph 138.1(1)(a)) or a prescribed debt obligation,
or,
(ii) the disposition
is deemed by section 70 to have occurred and the taxpayer is
deemed by subsection 118.1(5) to have made a gift described in
subparagraph (i) of the property;
(b)
a taxpayer's allowable capital loss for a taxation year from
the disposition of any property is ¾ of the taxpayer's
capital loss for the year from the disposition of that
property;
(c)
a taxpayer's allowable business investment loss for a
taxation year from the disposition of any property is ¾ of
the taxpayer's business investment loss for the year from the
disposition of that property.
39(1)(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,
. . .
50.
Debts established to be bad debts and shares of bankrupt
corporation
(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 and
Restructuring 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,
(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.
248. Definitions.
"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;
. . .
"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) or
(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;
125(7) 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;
. . .
"personal services business" carried on by a
corporation in a taxation year means a business of providing
services where
(a) an
individual who performs services on behalf of the corporation (in
this definition and paragraph 18(1)(p) referred to as an
"incorporated employee"), or
(b) any
person related to the incorporated employee
is a specified shareholder of the corporation and the
incorporated employee would reasonably be regarded as an officer
or employee of the person or partnership to whom or to which the
services were provided but for the existence of the corporation,
unless
(c) the
corporation employs in the business throughout the year more than
five full-time employees, or
(d) the
amount paid or payable to the corporation in the year for the
services is received or receivable by it from a corporation with
which it was associated in the year;
"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;
. . .
[11] The business investment loss in the
case at bar results from a bad debt owing to him by 9005. Since I
have found that the loan was made, it must be determined whether
9005 is truly a small business corporation, in which case the
appellant may claim the BIL.
[12] Based on the definitions reproduced
above, a small business corporation must be a Canadian-controlled
private corporation all or substantially all of the fair market
value of the assets of which is attributable, at a given time, to
assets that are, among other alternatives, used principally in an
active business carried on primarily in Canada. The terms
"active business" and "active business carried on
by a corporation" are each defined in the Act, but these
definitions are of little importance here, for, if the business
is determined to be a specified investment business, it is not an
"active business" for the purposes of
subsection 248(1) or an "active business carried on by
a corporation" for the purposes of
paragraph 125(7)(a) of the Act.
[13] In Gill v. Canada, [1998]
T.C.J. No. 765 (QL), Brûlé J.T.C.C.
addressed this question as follows at para. 22 of his
decision, and I agree with his statement.
[22] In the Court's opinion, the fact that subsection
248(1) refers directly to subsection 125(7) of the Act,
suggests that the intent of Parliament was for the definition of
Canadian controlled private corporation in paragraph
125(7)(b) to be controlling for the purposes of the
Act. This is not the case for the term "active
business". Parliament provided two different definitions and
the Court believes that the definition in subsection 248(1)
should be employed with respect to the whole Act, aside from the
sections where a different definition is provided with respect to
a specific section as is the case with the small business
deduction set out in paragraph 125(7)(a) of the Act.
(The same argument applies for the definition of
"specified investment business". Subsection 248(1) of
the Act refers to paragraph 125(7)(e) of the Act.)
[14] The respondent's position in the
case at bar is based on the opinion that 9005, being a
"specified investment business", does not meet the
criteria set out in the "active business" definitions
and therefore does not come within that category. The respondent
submits that 9005 carries on a property rental business the
principal purpose of which is to derive income from property and
which does not employ, throughout the year, more than five
full-time employees.
[15] The appellant adduced no evidence in
the case at bar to establish that 9005 had more than five
employees; rather, it chose merely to state that he and his law
firm staff looked after managing 9005 without actually being
employees. Thus, this is not sufficient to prevent it from coming
within the definition of "specified investment
business."
[16] We must now examine what must be the
principal purpose of the corporation based on the definition of
"specified investment business." In Interpretation
Bulletin IT-73R6 of March 25, 2002, the Canada Customs and
Revenue Agency explains its point of view as follows:
12. "Principal purpose" is not a defined term in the
Act for the purposes of the definition of "specified
investment business" in subsection 125(7), but it is
considered to be the main or chief objective for which the
business is carried on.
. . .
14. The principal purpose of a corporation's business must
be determined annually after all the facts relating to that
business carried on by that corporation in that year have been
considered and analyzed. Included in this evaluation should be
such things as:
(a) the purpose for which the business was originally
commenced;
(b) the history and evolution of its operations, including
changes in its mode of operation and purpose of existence;
and
(c) the manner in which the business is conducted.
[17] As for our Court, it has considered
this question on several occasions, including the recent cases of
Gascoigne v. Canada, [1996] T.C.J. No. 24 (QL),
Lake Superior Investments Ltd. v. Canada, [1993]
T.C.J. No. 234 (QL),
Fautley v. Canada, [2002] T.C.J. No. 215 (QL),
and, of course, Gill, supra.
[18] In the case at bar, the appellant
states that 9005 never intended to derive rental income once it
completed the building in question, and that this fact remained
true throughout the years in which 9005 owned the building,
including the year in issue. There was no change of direction,
since a real estate agent had a mandate to sell the building
throughout these years. In his submission, the rental of the
units was purely incidental and was done to minimize losses
arising from special circumstances established by the evidence
and described above.
[19] The appellant testified in a
straightforward and honest manner and I accept his version of the
facts. This was not his first business of this kind, and it is
clear from 9005's articles that its economic activity was
construction, as it was with the other corporations that the
appellant established earlier. 9005's financial statement for
the fiscal year ending August 31, 1999, states that the
corporation's inventory consisted of a rental building
intended for resale. While 9005's income was from
rentals of property, the corporation experienced only losses. The
income, and the advances made by the appellant, merely served to
keep everything in order until the sale of the building, which
special circumstances made difficult. 9005 never changed
vocations and the intention was always to sell the building.
[20] Consequently, in light of the evidence
adduced, I am of the opinion that 9005 was an "active
business" and an "active business carried on by a
corporation" and was not, during the taxation year in issue,
a "specified investment business." The appeal is
allowed and the appellant's business investment loss
deduction is allowed. The assessment is remitted to the Minister
of National Revenue for reconsideration and reassessment.
Signed at Ottawa, Canada, this 3rd day of March 2004.
Angers J.
Translation certified true
on this 14th day of January 2005.
Jacques Deschênes, Translator
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