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Citation: 2003TCC407
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Date: 20030611
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Docket: 98-2820(IT)I
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BETWEEN:
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PETER ANTON JENSET,
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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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REASONS FOR JUDGMENT
Mogan J.
[1] The taxation years under appeal
are 1992, 1993 and 1994. The Appellant claims that he is
permitted to carry forward and deduct in computing taxable income
for the years under appeal certain non-capital losses from prior
years. Specifically, the Appellant claims that he had an
allowable business investment loss ("ABIL") in each of
the years 1985 and 1986; that he was not able to deduct those
ABILs in 1985 or 1986; and that he did not deduct those ABILs in
any year prior to 1992. The Respondent denies that the Appellant
had an ABIL in 1985 or 1986.
[2] The primary issue in this appeal
is whether the Appellant had a business investment loss
("BIL") in 1985 or 1986. A BIL is described in
paragraph 39(1)(c) of the Act. In commercial
language, it is a capital loss incurred on the disposition of (i)
a share in a small business corporation; or (ii) a debt owing by
a Canadian-controlled private corporation which is a small
business corporation. An ABIL is described in paragraph
38(c) of the Act as a fraction of a BIL. For the
years 1985 and 1986, an ABIL was one-half (½) of the BIL
incurred in the year. The Appellant's claimed BIL and ABIL in
1985 and 1986 are the result of his purchasing shares in and
lending money to Skinner Sports (1976) Limited, an Ontario
corporation. There is no dispute between parties on the question
of whether Skinner Sports (1976) Limited (the
"Company") was a Canadian-controlled private
corporation and a small business corporation at all relevant
times. Therefore, the only issues of fact are whether the
Appellant invested money (by share purchase or loan) in the
Company, and whether the Appellant incurred a loss from such
investment in 1985 or 1986 or in any other year prior to
1992.
[3] Under the Income Tax Act,
if a taxpayer in a particular year has an ABIL which is not
deducted in computing income for that year, the amount of
that ABIL becomes part of the taxpayer's
"non-capital loss" under
paragraph 111(8)(b) of the Act; and that
amount may be deducted in computing taxable income for adjoining
years under paragraph 111(1)(a) of the Act. A
non-capital loss may be carried back three years and
carried forward seven years.
[4] At the commencement of the
hearing, the parties filed amended pleadings. Counsel for the
Appellant filed a "Fresh as Amended Amended Notice of
Appeal" and counsel for the Respondent filed a Reply to that
document. Counsel for the Appellant also entered as Exhibit A-1 a
binder of documents containing 13 tabs. The 13 documents are
accepted as having been proved. In the facts summarized below, I
am, relying on the binder of documents (Exhibit A-1) referred to
by tab number and the oral testimony of the Appellant who
impressed me as a totally credible witness.
Facts
[5] The Company operated a retail
store in Toronto selling hunting and fishing equipment. In
December 1980, the Appellant purchased a 50% shareholder interest
in the Company. Tab 5 shows the stubs of two cheques in the
amounts of $5,000 and $12,500. The Appellant identified the
$5,000 as an amount paid on November 25, 1980 to Bussin &
Bussin (a Toronto law firm) being part of the cost of his 50%
shareholder interest. He identified the $12,500 as an amount paid
on December 15, 1980 to Cassels, Brock (a Toronto law firm) being
a loan to the Company. Each cheque stub bears the note "Re
Skinners". Tab 1 is the Company's Shareholder Register
showing that the Appellant acquired two common shares on December
15, 1980. Donald M. Rogers was the other 50% shareholder owning
two common shares. Tab 4 is a letter from Cassels, Brock dated
June 3, 1981 confirming the Appellant's purchase of 50% of
the common shares and his loan of $12,500 to the Company.
[6] After profitable years in 1981 and
1982, the Company started to lose money in 1983 and 1984. The
Appellant and Donald Rogers made loans to the Company in 1984.
Tab 2 is the Company's financial statements at October 31,
1984 showing that the shareholders advanced $225,737 ($260,567
minus $34,830) in the 12 months preceding October 31, 1984. Tab 3
shows that Donald M. Rogers loaned $167,000 to the Company
from January 1 to October 31, 1984. After deducting the advances
of Donald Rogers ($167,000) from total shareholder advances
($225,737), the Appellant claims that he loaned $58,737 to the
Company during its 1984 fiscal period.
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Total Shareholder advances
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$225,737
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Advances by D.M. Rogers
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167,000
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Advances by Appellant
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$58,737
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[7] There is no evidence to contradict
the Appellant's statements and documents. Therefore, I find
that up to October 31, 1984, the Appellant had invested not less
than $76,237 in the Company as follows:
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Cost of Shares in 1980
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$5,000
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Loan in 1980
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12,500
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Loans in 1984
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$58,737
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Cost of Shares in 1980
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$76,237
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[8] The Appellant and Donald Rogers
had delivered guarantees to the Royal Bank of Canada with respect
to the indebtedness of the Company to the Bank. On April 1, 1985,
the Bank demanded payment of all amounts outstanding. According
to a letter from Donald Rogers dated April 9, 1985 (Tab 8),
Mr. Rogers had paid the Bank $180,417.73; he had acquired
the Bank's secured position; and he appointed Dunwoody
Limited as receiver and manager of the assets and undertaking of
the Company with power to sell such assets and undertaking.
According to a subsequent letter of May 13, 1985 from Borden
& Elliot, solicitors for Mr. Rogers (Tab 9), the
receiver/manager had realized $80,000 from the assets of the
Company leaving a shortfall of $100,417.73.
[9] The letter from Borden &
Elliot (Tab 9) demanded payment of $50,208.61 from the Appellant
as his 50% contribution to the shortfall. When the Appellant was
not able to pay the $50,208.61, Mr. Rogers attempted to petition
the Appellant into bankruptcy on June 11, 1985 (Tab 7, part A).
The Appellant disputed the petition by document dated November
12, 1985 (Tab 7, part B) but an Ontario Court issued a Receiving
Order on November 20, 1985 (Tab 7, part C) holding the
Appellant to be a bankrupt, and appointing Dunwoody Limited as
the trustee-in-bankruptcy. The Appellant claimed that he was not
insolvent in 1985 because he had an interest in his father's
estate the value of which, in 1985, exceeded the aggregate of his
liabilities.
[10] According to an affidavit sworn by the
Appellant in February 2002 (Tab 7) in support of his application
to have the Receiving Order of November 20, 1985 annulled, the
trustee-in-bankruptcy received $366,808 in settlement of the
Appellant's claim against his father's estate, and
disbursed $315,813 in legal fees and costs (Tab 7, part E). The
affidavit also stated that, after the settlement of the
Appellant's claim against his father's estate in the
summer of 1990, Borden & Elliot issued two cheques to Donald
Rogers as follows (Tab 7, part D):
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July 24, 1990
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$362,689
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December 14, 1990
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264,812
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It is the Appellant's understanding that those cheques
satisfied Rogers' claim against the Appellant's bankrupt
estate. Donald Rogers did not oppose the Appellant's
application to have the Receiving Order annulled. The Ontario
Superior Court of Justice issued an Order on February 28, 2002
(Tab 12) which annulled the Receiving Order dated November 20,
1985.
[11] The Appellant claims that the whole
amount of $50,208.61 which he owed to Donald Rogers as his (the
Appellant's) 50% share of the shortfall owing to the Royal
Bank was, in fact, paid to Mr. Rogers through the
trustee-in-bankruptcy and the amounts paid out by Borden &
Elliot in 1990 following the settlement of the action against the
estate of the Appellant's father. See Tab 7, parts D and E
and the Appellant's affidavit, Tab 7, paragraphs 17, 18, 19
and 20. It appears to me that all claims of the Appellant's
unsecured creditors were paid in full subject to the
Superintendent's Levy. Having regard to the fact that Donald
Rogers and the Company waived their claims against the
Appellant's estate in bankruptcy, I conclude that the amount
of $50,208.61 owing to Donald Rogers was paid in full by the
trustee-in-bankruptcy as agent for the Appellant.
[12] There is a third transaction through
which the Appellant claims that he invested indirectly in the
Company. In December 1980, the Estate of E. Fryer purchased 100
preference shares in the Company at a cost of $100,000 but,
because of a conflict of interest between the Appellant and the
Fryer Estate, the Appellant and Donald Rogers were required to
guarantee the redemption of the preference shares. When the
Company was put into receivership in April 1985, and was unable
to redeem the preference shares, the Appellant and
Donald Rogers were called on their guarantees. The
preference shares had to be redeemed as follows:
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July 1, 1985
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$20,000
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January 2, 1986
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30,000
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June 30, 1986
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50,000
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[13] Donald Rogers wrote to the Appellant on
June 28, 1985 (Tab 10) asking him to contribute his $10,000 (50%)
of the amount required to redeem $20,000 of preference shares on
July 1, 1985. The Appellant thinks that he paid his 50% share
($10,000) in 1985 but his own Exhibit A-1 (Tab 11) indicates
otherwise. A letter dated March 3, 1987 from Borden & Elliot
to the trustee-in-bankruptcy (Tab 11) claims $25,609.37 with
respect to the amount which Mr. Rogers paid on June 30, 1986 to
redeem preference shares and also claims $27,559.37 with respect
to amounts paid on July 1, 1985 and January 2, 1986 to redeem
preference shares. It is my understanding from the
Appellant's affidavit and other documents at Tab 7 that those
amounts were paid by the Appellant's trustee-in-bankruptcy
100 cents on the dollar in the last six months of 1990 when all
of Mr. Rogers' claims against the Appellant's
bankrupt estate were paid in full.
[14] Having regard to the facts summarized
above, I have concluded that the Appellant invested the following
amounts in the Company by the purchase of shares, by loans to the
Company and by having the trustee-in-bankruptcy advance money to
Donald Rogers to indemnify him with respect to guarantees which
the Appellant and Mr. Rogers had given to the Royal Bank of
Canada and to the Fryer Estate:
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1980 purchase of common shares
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$5,000
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1980 loan to Company
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12,500
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1984 loan to Company
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58,737
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Royal Bank guarantee
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50,208.61
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Fryer Estate (July 1/85 and January 2/86)
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27,559.37
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Fryer Estate (June 30/86)
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25,609.37
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Analysis
[15] In the above table, the first three
amounts were actually paid by the Appellant in 1980 and 1984.
Therefore, when the Company went into receivership in April 1985,
the Appellant suffered a BIL of $76,237 in 1985 (the total of the
first three amounts). The last three amounts in the above table
were not paid out directly by the Appellant but were paid on his
behalf by the trustee-in-bankruptcy in late 1990 after the
trustee had settled the action commenced against the estate of
the Appellant's father. Although the trustee in law acts on
behalf of the creditors, in the circumstances of this case, it
may be said that the trustee was also acting on behalf of the
Appellant because all of the creditors appear to have been paid
100 cents on the dollar. In my opinion, the Appellant had a BIL
of $103,377 in 1990 (the total of the last three amounts).
[16] Under paragraph 38(c) of the
Act, an ABIL in 1985 was one-half of a taxpayer's BIL
in 1985. And in 1990, an ABIL was three-quarters of a
taxpayer's BIL in 1990. Accordingly, with respect to my
findings in paragraph 15 above, I conclude that the
Appellant had an allowable business investment loss of $38,119 in
1985 (one-half of $76,237) and an allowable business investment
loss of $77,533 in 1990 (three-quarters of $103,377). Although
the Appellant was, in law, bankrupt from November 20, 1985 when
the Receiving Order was made (Tab 7, part C) until February 26,
1988 when he was discharged (Tab 7, part F), I have regarded the
trustee-in-bankruptcy as the agent of the Appellant for the
payment of his debts (i) because of the Appellant's
uncontradicted evidence that his debts to Donald Rogers and the
Company were paid in full; and (ii) because the Receiving Order
was annulled (without opposition from Donald Rogers) in February
2002 (Tab 12).
[17] Counsel for the Respondent stated in
argument that she did not challenge the Appellant's
credibility but she did challenge his memory. She confirmed my
own impression of the Appellant as totally credible. I have tried
not to rely on the Appellant's memory with respect to any
material fact unless it was supported by a contemporaneous
document.
[18] These are informal appeals for the
taxation years 1992, 1993 and 1994. I am satisfied that the
Appellant's ABILs of $38,119 for 1985 and $77,533 for 1990
have not been "used" as non-capital losses under
paragraph 111(1)(a) of the Act in any year prior to
1992. Because these are informal appeals, there are financial
limitations to the relief which the Appellant may obtain in any
one year. Having decided that the Appellant had an ABIL of
$38,119 in 1985 and an ABIL of $77,533 in 1990, I will allow the
appeals but leave it to the parties to work out the amount of
"non-capital loss" which the Appellant may carry
forward and apply in each year under appeal. I understand that a
non-capital loss from 1985 may not be carried forward beyond
1992. The parties may come back to this Court on motion if they
are not able to agree on the application of non-capital
losses.
Signed at Ottawa, Canada, this 11th day of June, 2003.
J.T.C.C.
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