DiQuinzio v. The Queen, docket 1999-3890-IT-I (Informal Procedure)

Date: 20001005

Docket: 1999-3890-IT-I

BETWEEN:

FRANCO DIQUINZIO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Lamarre Proulx, J.T.C.C.

[1]            This is an appeal under the informal procedure concerning the 1994 taxation year.

[2]            The question at issue is whether, in the 1994 taxation year, the appellant made a taxable capital gain of $97,200 that should have been included in the computation of his income within the meaning of section 3 of the Income Tax Act (the "Act"). This taxable capital gain was wholly deductible in computing taxable income under section 110.6 of the Act. It was taken into account in computing the appellant's adjusted income for the year within the meaning of that term in section 122.5 of the Act concerning the goods and services tax credit, hereinafter called the "GSTC". As a result of this increase in income, the appellant was no longer eligible for the GSTC. The increase also affected the benefits which the appellant's wife had obtained from Quebec.

[3]            The facts concerning the reassessment are set out in paragraphs 3, 4 and 5 of the Reply to the Notice of Appeal (the "Reply"):

[TRANSLATION]

3.              By a notice of nil reassessment dated January 30, 1998 for the taxation year in issue, the Minister added to the appellant's income a taxable capital gain of $97,200 ($129,600 X 75%) and granted the appellant a capital gains deduction of $97,200.

4.              By notice of determination dated February 27, 1998 respecting the GSTC, the Minister informed the appellant that he was not eligible for the GSTC for the 1994 taxation year as his family income had exceeded $35,980.

5.              In drawing up the notice of determination of GSTC for the 1994 taxation year, the Minister made, in particular, the following assumptions of fact:

(a)             the appellant reported income of $8,571.53 in his return of income filed for the 1994 taxation year;

(b)            on February 10, 1994, Lacadi Construction Inc. (hereinafter the "corporation") redeemed the 2,610 preferred shares which the appellant held;

(c)             the fair market value of the shares referred to in the previous subparagraph had been established by the parties, that is, the appellant and the corporation, at $10 a share;

(d)            the consideration which the appellant received for the shares referred to in subparagraph (b) above took the form of an interest-bearing demand promissory note;

(e)             the adjusted cost base of the shares referred to in subparagraph (b) above was set at zero;

(f)             similarly, on February 11, 1994, the appellant sold to the corporation his 75 class A common shares of the corporation;

(g)            in consideration, the appellant received 103,500 class D shares valued at $1 a share from the same corporation;

(h)            again on February 11, 1994, the appellant signed a T2057 form attesting to the transaction involving the transfer of his 75 class A common shares in consideration of the 103,500 class D shares;

(i)              the adjusted cost based of the shares referred to in subparagraph (f) above was set at zero;

(j)              the corporation was a management company which controlled Construction Larc Inc.;

(k)             Construction Larc Inc. operated a small business;

(l)              thus, for the 1994 taxation year, the Minister computed a taxable capital gain of $97,200 and granted a capital gains deduction of $97,200, the calculations for which are appended hereto;

(m)            consequently, for the taxation year in issue, the Minister determined that the appellant's adjusted income exceeded $35,980;

(n)            the appellant was thus not eligible for the GSTC for the 1994 taxation year.

[4]            According to Exhibit I-1, which is the notice of reassessment of the goods and services tax credit, the appellant was not entitled to the credit because his net family income was greater than $35,980, and he was required to repay an amount of $503.

[5]            Only the appellant testified. He admitted subparagraphs 5(a) and (j) of the Reply.

[6]            The appellant explained that he was indeed a shareholder of Lacadi Construction Inc. ("Lacadi"). Near the end of 1993, there had been a dispute between him and Lacadi's other two shareholders, brothers Giovanni and Calogero La Rocca. The dispute resulted in the agreements described in subparagraphs 5(b) ff. of the Reply.

[7]            The appellant vigorously disputed that he had ever received the amounts described in subparagraphs 5(c) and (g) of the Reply which were used to arrive at a taxable capital gain of $97,200.

[8]            The share redemption agreement referred to in paragraphs 5(b) to (e) of the Reply was filed as Exhibit I-3. It contains the information on which the allegations in subparagraphs 5(c) and (d) of the Reply are based. By that agreement dated February 10, 1994, the purchaser, Lacadi, redeemed 2,610 preferred shares for a consideration of $26,100 which was to be paid by means of a demand promissory note bearing interest at prime plus one percent.

[9]            The appellant says that he was asked to sign the agreement in order to settle with the government. He claims that he did not receive the promissory note. The note was not filed in evidence. In fact, he said he had even lost the investment he made in 1978. He also said that he did not know the market value of the shares.

[10]          Exhibit I-4 was filed regarding the statements in subparagraphs 5(f) and (g) of the Reply. On this point, the appellant said that he had signed the documents the accountant had presented to him. Exhibit I-4 is an agreement dated February 11, 1994 whereby Lacadi, as purchaser, purchased 75 class A shares for $103,500 which was to be paid by means of 103,500 class D shares of Lacadi.

[11]          Exhibit I-5 was filed in support of the statements in subparagraph 5(h) of the Reply. That document was form T2057, "Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation", on which it is stated that the fair market value was $103,500. The document is signed by the appellant and Giovanni La Rocca and is dated February 11, 1994.

[12]          The appellant contends that the actual agreement is the one he filed as Exhibit A-2. It is a handwritten agreement dated December 13, 1994 which both the appellant and Calogero La Rocca had signed in their personal capacity. The agreement was for a total amount of $100,000. Forty thousand dollars was to be paid on December 18, 1994. The balance of $60,000 was payable within five years, with interest at five percent, as follows: $10,000 in each of the first four years and $20,000 in the last year. According to the agreement, its purpose was the division of property.

[13]          As Exhibit A-1, the appellant filed a draft agreement which was apparently further to the handwritten agreement. Unsigned, it concerned the 103,500 class D shares referred to in subparagraph 5(g) of the Reply. It concerned as well 15 class B shares and all the shares held in Larc Inc. The selling price was $40,000. The document was a draft. While the day is not mentioned, the year is given as 1995.

[14]          Exhibit A-3 is an agreement signed on June 7, 1995 between the appellant and Construction Lacadi Inc. The appellant sold for $1 all the shares, both preferred and common, which he held in Lacadi and Construction Larc Inc. It would appear from this document that the sale resulted in a capital loss. However, nothing was said on this matter at the hearing.

[15]          Exhibit I-7 is a capital gains deduction claim for 1994. The appellant explained that he had filed the claim at the request of Revenue Canada officers, but said that that does not mean he actually made a capital gain in that year.

Conclusion

[16]          The definition of "adjusted income" in section 122.5 of the Act reads as follows:

                "adjusted income" of an individual for a taxation year means the total of all amounts each of which is the income for the year of

                (a)            the individual, or

                (b)            the individual's qualified relation for the year;

[17]          This definition indicates that income, not taxable income, is considered for the purposes of the goods and services tax credit.

[18]          Section 3 of the Act, which defines the concept of income, reads as follows:

3.              The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer's income for the year determined by the following rules:

(a)            determine the total of all amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer's income for the year from each office, employment, business and property,

(b)            determine the amount, if any, by which

(i)             the total of

(A)           all of the taxpayer's taxable capital gains for the year from dispositions of property other than listed personal property, and

                (B)            the taxpayer's taxable net gain for the year from dispositions of listed personal property,

exceeds

(ii)            the amount, if any, by which the taxpayer's allowable capital losses for the year from dispositions of property other than listed personal property exceed the taxpayer's allowable business investment losses for the year,

(c)            determine the amount, if any, by which the total determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the total of the deductions permitted by subdivision e in computing the taxpayer's income for the year (except to the extent that those deductions, if any, have been taken into account in determining the total referred to in paragraph (a)), and

(d)            determine the amount, if any, by which the amount determined under paragraph (c) exceeds the total of all amounts each of which is the taxpayer's loss for the year from an office, employment, business or property or the taxpayer's allowable business investment loss for the year,

and for the purposes for this Part,

(e)            where an amount is determined under paragraph (d) for the year in respect of the taxpayer, the taxpayer's income for the year is the amount so determined, and

(f)             in any other case, the taxpayer shall be deemed to have income for the year in an amount equal to zero.

[19]          As may be seen from clause 3(b)(i)(A) above, income includes taxable capital gains. The capital gains deduction is taken into account in computing taxable income in the circumstances described in section 110.6 of the Act.

[20]          In 1995, as stated in paragraph 14 of these reasons, there appears to have been a capital loss since the appellant's shares were sold for $1. This possible capital loss in 1995 was not mentioned at the hearing, but if it was incurred, as Exhibit A-3 tends to show, capital losses can be carried back to previous years only in respect of taxable income, as provided by section 111 of the Act. There would thus be no effect on the calculation of income for 1994.

[21]          The appellant's claims that he had no capital gains in 1994 contradict the documents which he himself signed. For me to be able to consider those documents as not representing the truth, it would have had to have been stated in the notice of appeal that they did not. Such allegations should be expressed prior to the hearing so that the respondent can get prepared and present the legal argument required. The notice of objection was not filed in evidence. I looked at the notice of appeal. That notice does not state that the documents on which the Minister relied are contrary to the truth or that they were obtained without the appellant's informed consent. The notice of appeal in fact gives no reason explaining why the assessment should be varied or vacated.

[22]          The grounds raised by the appellant are very serious legal grounds which should preferably have been stated in the notice of objection, but definitely in the notice of appeal. Furthermore, evidence of agreements contrary to the truth or evidence of absence of consent requires much more than a mere statement by one of the signatories. In view of the absence of evidence that these documents do not represent the truth or that they should be considered as null and void because they were obtained through some irregularity rendering them invalid, I must consider them to be valid agreements.

[23]          The appeal is dismissed on the basis that the taxable capital gain must be included in computing the appellant's income for 1994 and that the agreements on which the Minister relied must be considered valid.

Signed at Ottawa, Canada, this 5th day of October 2000.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

[OFFICIAL ENGLISH TRANSLATION]

1999-3890(IT)I

BETWEEN:

FRANCO DIQUINZIO,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on June 15, 2000, at Montréal, Quebec, by

the Honourable Judge Louise Lamarre Proulx

Appearances

For the Appellant:                                The Appellant himself

Counsel for the Respondent:                Mounes Ayadi

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1994 taxation year is dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 5th day of October 2000.

"Louise Lamarre Proulx"

J.T.C.C.