Date: 19990324
Docket: 97-1470-IT-I
BETWEEN:
RICK GREENSTREET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Sarchuk J.T.C.C.
[1] This is an appeal by Rick Greenstreet (the Appellant) from
an assessment of tax with respect to his 1995 taxation year.
[2] In computing his income the Appellant deducted an amount
of $32,159 as an allowable business investment loss (ABIL). The
Minister of National Revenue (the Minister) in assessing the
Appellant disallowed that deduction but allowed a net capital
loss of $5,794 for the 1995 taxation year. In so assessing, the
Minister made the following assumptions of fact:
a) the Appellant incurred business investment losses in the
amounts of $12,441 for 1989 and $31,822 for 1990;
b) the Appellant had previously been allowed a capital gains
deduction in the amount of $24,879 in 1986;
c) to determine the reduction in the Appellant's business
investment loss for each of the years 1989 and 1990, the Minister
was required under subsection 39(9) of the Income Tax Act
(the "Act"), to reduce the amount of the
business investment loss by twice the amount of the capital gains
deduction claimed under section 110.6 of the Act in a
prior taxation year, to the extent that such an amount had not
previously been applied in this manner in respect of other
dispositions;
d) as a result of the application of subsection 39(9) of the
Act, and pursuant to subparagraph 39(1)(c)(viii) of
the Act, the Appellant's business investment losses
incurred in 1989 and 1990 were reduced to NIL, as indicated in
Schedule A attached;
e) as a result of the application of subsection 39(9) of the
Act, the Appellant had no allowable business investment
loss deductible for the 1995 taxation year;
f) as a result of the application of subsection 39(9) of the
Act, the Appellant's net capital loss available to be
carried over to the 1995 taxation year was $32,159;
g) the Appellant reported a taxable capital gain of $5,794 in
the 1995 taxation year;
h) the Appellant was entitled to deduct a net capital loss of
$5,794 in 1995.
[3] Two transactions gave rise to the Appellant's claims.
With respect to the first, it is not disputed that the Appellant
was at all relevant times the majority shareholder of a
Canadian-controlled private corporation, Echo Kinetics Inc.
(Echo), which had carried on a garage business for several years
including 1989 and 1990 and was subsequently sold. On
disposition, approximately $32,190 was recorded in the "due
to shareholder" account in Echo's books. This
unrecovered amount represented the Appellant's unpaid wages
which had been loaned back to the corporation. The Appellant
declared these wages in his yearly income tax returns and paid
tax on these amounts.[1]
[4] With respect to the second transaction, in 1989, the
Appellant invested the amount of $20,000 in a guaranteed mortgage
with Coulter Corporation (Coulter) of Ottawa, a mortgage
investment syndicate. The corporation went bankrupt and the
Appellant sustained a loss in the amount of $12,441.
[5] The Appellant's position is that the losses incurred
in the 1989 and 1990 taxation years, although treated as an ABIL
in his returns of income for those years, were actually
non-capital losses. In his submissions, the Appellant compared
the wages lost which were owed to him by Echo in 1989 to the
income he earned in the 1995 taxation year. He summed up his
position thus: "As my wages earned were taxed full force, I
would choose to treat my wages lost as negative wages earned and
thus offset them against other earned income to gain tax relief
status equal to the tax liability they incurred". His
submissions, as I understood them, were that because the income
from "the joint venture" (i.e. Echo) was treated
as business income for tax purposes, the lost wages owed to him
by Echo should be treated as a non-capital loss rather than
as an ABIL, on the basis that each source of income was
similar.
[6] With respect to the monies invested with Coulter, the
Appellant first sought to establish that this amount was a loan
to an individual. He tendered a copy of a promissory note
indicating that the amount of $10,000 with interest at 14% per
annum was payable to him and testified that he had received a
similar document with respect to the remaining $10,000. In the
course of the hearing, the Court indicated that the evidence fell
far short of establishing that the amount was such a loan.
However, as was observed by Counsel for the Respondent, whether
the amount was a loan or another type of investment is not
determinative since in either case, the resulting loss was a
capital loss. The Appellant then argued that the monies owed to
him by Coulter were not on account of capital, but on account of
business income because it was structured as a loan which paid
interest.
[7] With respect to the 1990 losses (the unpaid wages), the
Act stipulates with respect to employment income that
taxes will be paid on such income when it is received by the
taxpayer in the year.[2] As was observed by Counsel for the Respondent, the
fact that the Appellant paid taxes on his wages indicates that
they were received despite the fact that the payments may have
been purely notional on some occasions. For the purposes of the
Act, the wages were received and then loaned to Echo. The
Appellant's testimony clearly indicated that the amounts in
dispute appeared on the corporation's financial records as an
amount due to the shareholder.
[8] In Easton et al v. The Queen et al,[3] the Court held that:
As a general proposition, it is safe to conclude that an
advance or outlay made by a shareholder to or on behalf of the
corporation will be treated as a loan extended for the purpose of
providing that corporation with working capital. In the event the
loan is not repaid the loss is deemed to be of a capital nature
for one of two reasons. Either the loan was given to generate a
stream of income for the taxpayer, as is characteristic of an
investment, or it was given to enable the corporation to carry on
its business such that the shareholder would secure an enduring
benefit in the form of dividends or an increase in share value.
As the law presumes that shares are acquired for investment
purposes it seems only too reasonable to presume that a loss
arising from an advance or outlay made by a shareholder is also
on capital account. ...
[9] I am satisfied that the Appellant's loan to the
corporation was for the purpose of providing working capital.
Accordingly, it was of a capital nature and the resulting losses
are capital losses.
[10] With respect to the Coulter investment, I am satisfied
that the Appellant's intention in advancing the funds was to
invest in the mortgage corporation as an income-producing
asset. There was no intention to trade and earn a profit and,
therefore, the investment was on account of capital, and the loss
is a capital loss. Generally a loan made by a person who is not
in the business of lending money will be considered to be an
investment. However, in exceptional or unusual circumstances, the
granting of a loan can be characterized as trade. The Appellant
was not in the business of lending money and adduced no evidence
of exceptional circumstances. Furthermore, the facts do not lend
themselves to a consideration of the two recognized exceptions to
the general proposition that loans are on capital account, which
were enunciated in Easton et al v. The Queen et al.[4]Since
I have concluded that the amount advanced to Coulter was on
capital account, the losses incurred as a result of the
bankruptcy are accordingly capital losses.[5]
[11] Allowable business investment losses are certain types of
capital losses which are afforded preferential treatment under
the Act. They may be set off against any income, unlike
capital losses which may only be set off against capital gains,
and as well they receive preferential carry-forward treatment.
The purpose of the rule is to encourage investment in small
business corporations. The Appellant, in my view, has been unable
to come to grips with this distinction as evidenced by his
argument which was essentially premised on the assumption that
allowable business investment losses were non-capital losses.
They are not. Subsection 39(9) of the Act operates to
provide for the reduction in a taxpayer's business investment
loss until he has realized business investment losses equal to
previous years' capital gains which are eligible for the
capital gains exemption under section 110.6. The legislative
intent of these provisions appears to be that where a taxpayer
has already received the benefit of a capital gains exemption,
Parliament saw fit to limit the benefit a taxpayer may then
receive from the ABIL provisions. If an individual has realized a
capital gain and claimed the capital gains exemption, he will not
be able to claim an ABIL until the business investment losses of
the taxpayer are greater than the capital gains exemption that
was claimed.
[12] I am satisfied that the Minister correctly determined
that these losses were on capital account. He then determined
that the losses were allowable business investments losses. The
operation of subsection 39(9) of the Act acts to reduce
the allowable business investment loss to nil as a result of the
capital gains exemption previously claimed by the Appellant. The
result is that the Appellant has a net capital loss which can be
used to reduce capital gains in other years. The Minister's
calculations with respect to this Appellant's entitlement
under subsection 39(9) were set out in Schedule A to the Reply as
follows:
Calculation of Reduction in Business Investment Loss for
1989
The lesser of (A) and (B)
Business Investment for 1989 – 39(9)(a)(i)
$12,441 (A)
Capital gain deduction claimed in 1986 $24,879
Twice the amount of $24,879 – 39(9)(b)(i)
$49,758 (B)
Reduction in Business Investment Loss for
1989 – Lesser of (A) and (B) $12,441
Calculation of Reduction in Business Investment Loss for
1990
The lesser of (A) and (B)
Business Investment for 1990 – 39(9)(a)(i)
$31,822 (A)
Total capital gain deduction claimed in 1986 $24,879
Twice the amount of $24,879 – 39(9)(b)(i)
$49,758
Minus: amount determined under 39(9)(b)(ii)
$12,441
$37,317 (B)
Reduction in Business Investment Loss for
1990 – Lesser of (A) and (B) $31,822
[13] The Appellant did not adduce any evidence to rebut the
Minister's assumption that the Appellant had claimed and was
allowed a capital gains deduction in the amount of $24,879 in the
1986 taxation year. In my view, therefore, the Minister was
correct in applying subsection 39(9) of the Act and
correct in calculating the reduction of the Appellant's
business investment loss down to nil. Although the Appellant is
not entitled to any benefit under the ABIL provisions, he can
still apply the existing capital loss against capital gains in
the year. Indeed, the Minister in assessing did apply a net
capital loss against capital gains in that year and there is no
issue in regard to the Appellant's entitlement thereto.
[14] Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 24th day of March, 1999.
"A.A. Sarchuk"
J.T.C.C.
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