REASONS FOR JUDGMENT
Lafleur J.
A. overview
[1]
Atlantic Thermal Star Limited (the “Appellant”) had filed a notice of appeal in respect of notices of determination
of loss dated November 14, 2014 issued by the Minister of National
Revenue (the “Minister”) pursuant to
subsection 152(1.1) of the Income Tax Act, R.S.C., 1985, c. 1
(5th supp.), as amended (the “ITA”)
for the Appellant’s fiscal years ending September 30, 2008 (the “2008 taxation year”) and September 30, 2010 (the “2010 taxation year”), which were confirmed on June 29, 2015, disallowing a
bad debt expense in the amount of $14,919 for the 2008 taxation year and
disallowing a cumulative eligible capital deduction in the amount of $4,996 for
the 2010 taxation year.
[2]
The Minister initially assessed the Appellant
for the 2008 taxation year and the 2010 taxation year by notices dated
September 30, 2009 and October 13, 2011, respectively.
B. the facts
[3]
The Minister based on the following facts the determination
of the Appellant’s losses for the 2008 taxation year and the 2010 taxation
year:
i)
The Appellant was a corporation resident in
Canada that operated a heating and cooling products business;
ii)
The principal shareholder of the Appellant was
Michael Backman (“Mr. Backman”);
iii)
The Appellant’s fiscal year end was September 30;
iv)
From 2001 to December 31, 2004, Mr. Backman was involved in a partnership
carrying on the same business as the Appellant’s;
v)
On January 2, 2005, Mr. Backman acquired his partner’s interest
and continued as a sole proprietor;
vi)
On June 29, 2006, Mr. Backman incorporated the Appellant,
transferring the assets of the sole proprietorship to the Appellant, filing
election form T2057 to give notice to the Minister of this transfer (and the
election under the provisions of section 85 of the ITA);
vii)
In election form T2057 filed with the Minister,
a transfer of goodwill in the amount of $103,197 was identified from Mr. Backman to the Appellant, which issued
a note payable to Mr. Backman
in that amount;
viii)
The fair market value of the goodwill
transferred from Mr. Backman
to the Appellant was nil;
ix)
The Appellant did not have a debt in the amount
of $14,919 that became a bad debt in the 2008 taxation year;
x)
The Appellant did not include a debt in the
amount of $14,919 in computing income in the 2008 taxation year or any
preceding taxation years.
[4]
The Appellant was represented by Mr. Doug Rudolph,
a bookkeeper – accountant. At the beginning of the hearing, Mr. Rudolph
informed the Court that Mr. Backman would not testify. Mr. Backman
had no intention to testify, being probably out of the country at this time.
Furthermore, according to Mr. Rudolph, the appeal had been brought by the
Appellant on a question of principle rather than need; since, even if the
appeal is dismissed, the Appellant would not have a resulting tax liability,
having sufficient deductions to shelter any taxes.
[5]
The only witness for the Appellant was
Mr. Rudolph.
[6]
According to Mr. Rudolph, Mr. Backman
made the determination that a debt became a bad debt and thereby acted as a
reasonable person and in good faith. Furthermore, according to
Mr. Rudolph, the value of the goodwill was determined by Deloitte &
Touche (“Deloitte”) on January 1, 2005, when Mr. Backman bought out his
partner’s interest. In addition, the Appellant noted at the hearing that the
transfer of goodwill from Mr. Backman to the Appellant effective was on
September 30, 2006, and not on June 29, 2006.
[7]
Mr. Rudolph filed various exhibits (A–1 to
A–13), on consent, including the following exhibits:
i)
Exhibit A–1 Timeline – it states that, from
the time the Canada Revenue Agency (the “CRA”) sent
a letter to the Appellant advising the Appellant that an audit was undertaken
to the date of the hearing, more than 5 years have elapsed;
ii)
Exhibit A–4 Transaction Detail by Account
and Exhibit A–5 Customer Balance Detail – according to Mr. Rudolph,
these exhibits state that the amount of $14,919 claimed as a bad debt in the
2008 taxation year was included in the income of the Appellant during the 2008
taxation year or a prior year;
iii)
Exhibit A–6 Profit and Loss – it states
that 1.88% of the total sales of the Appellant for the 2008 taxation year
represents bad debt. According to Mr. Rudolph, that amount is reasonable
in that industry. Mr. Rudolph added that 3 to 5% of total sales becoming
bad debt should be acceptable in that industry;
iv)
Exhibit A–7 Letter from Deloitte dated
October 4, 2011 – it states how the calculation of the amount of the
goodwill was made at the time Mr. Backman acquired his partner’s interest
in the partnership; according to that letter, the amount of the goodwill was
$105,864 at that time, namely on January 1, 2005. Then, the letter
contains also the following paragraph: “On September 30, 2006,
Mr. Backman transferred the business to a newly incorporated company on a
tax‑deferred basis pursuant to section 85 of the Income Tax Act.
With respect to the goodwill, an amount equal to 4/3 of the CEC balance of
$77,398 was elected as the proceeds of disposition”;
v)
Exhibit A–8 E-Mail from James MacGowan
– it contains, according to Mr. Rudolph, follow-up comments made by
Deloitte and sent to the CRA explaining again the method used to establish the
fair market value of the goodwill as of January 1, 2005; and
vi)
Exhibit A–10 Calculation of Goodwill by
Deloitte and Exhibit A–13 Eligible Capital Property Summary of the
Appellant – these exhibits were prepared by Mr. Rudolph.
[8]
Under cross-examination, Mr. Rudolph
admitted that he was neither the accountant nor the bookkeeper of the Appellant
during the taxation years in issue. Also, he admitted that he was not an expert
in respect of the business carried on by the Appellant, who would be qualified
to testify as to what is a reasonable ratio for bad debt to total sales.
[9]
No one from Deloitte testified at the hearing.
Finally, Mr. Rudolph admitted that he was told that Exhibit A–8 was a
follow-up comment from Deloitte addressed to the CRA and that he was not
involved in the drafting or the sending of that document.
[10]
The Respondent called one witness at the hearing,
Ms. Joanne Caryi, an employee of the CRA who prepared the valuation
report of the goodwill. Her report was filed as Exhibit R–1. According to
that report, the value of the goodwill as of September 30, 2006 was
nil. In her testimony, Ms. Caryi admitted that in order to make that
valuation, she had limited information.
C. the issues
(1)
Is the Appellant entitled to a deduction for bad
debt expenses in the amount of $14,919 for the 2008 taxation year under
paragraph 20(1)(p) of the ITA?
(2)
Is the Appellant entitled to a deduction as
cumulative eligible capital in the amount of $4,996 for the 2010 taxation year
under paragraph 20(1)(b) of the ITA?
(3)
Is the Appellant entitled to costs under
subsection 11.2(1) of the Tax Court of Canada Rules (Informal
Procedure), SOR/90-688b, as amended (the “Rules”)?
D. submissions of the parties
(1)
In respect of the bad debt deduction in the amount
of $14,919 under paragraph 20(1)(p) of the ITA for the 2008 taxation year
[11]
The Appellant is of the view that an amount of
$14,919 may be deducted under paragraph 20(1)(p) of the ITA
as a bad debt for the 2008 taxation year. According to Mr. Rudolph,
Mr. Backman made the determination that a debt became a bad debt and
thereby acted as a reasonable person and in good faith. Furthermore, as stated
in Exhibits A–4 and A–5, the amount of $14,919 was added to the income of
the Appellant for the 2008 taxation year or a previous year. Consequently, all
the requirements of paragraph 20(1)(p) of the ITA are met.
[12]
The Respondent is of the view that the assumptions
of facts relied upon by the Minister in that respect were not demolished by the
Appellant, since Mr. Backman did not testify at the hearing; furthermore,
Mr. Rudolph was not involved with the affairs of the Appellant during the
taxation years in issue. Accordingly, the assumption of facts relied upon by
the Minister, namely that the Appellant did not have a debt in the amount of
$14,919 that became a bad debt in the 2008 taxation year, have not been
demolished by the Appellant. Consequently, the Appellant is not entitled to a
bad debt deduction in the 2008 taxation year.
(2)
In respect of the cumulative eligible capital
deduction in the amount of $4,996 under paragraph 20(1)(b) of the ITA for
the 2010 taxation year
[13]
The Appellant is of the view that the Minister
is statute-barred from challenging the value of the goodwill, since that value
was established in 2005.
[14]
Alternatively, if this Court concludes that the
CRA could challenge the value of the goodwill, the Appellant is of the view
that the fair market value of the goodwill was correctly determined by
Deloitte, an independent, arm’s length party and it is not equal to a nil
amount. Accordingly, the Appellant is entitled to a deduction in the amount of
$4,996 under paragraph 20(1)(b) of the ITA for the 2010
taxation year. The Appellant also submits that the valuation made by the CRA
was not made by an independent party.
[15]
The Respondent is of the view that, as stated in
Exhibit R–1, the fair market value of the goodwill is nil; accordingly,
the Appellant is not entitled to a deduction for cumulative eligible capital in
respect of the goodwill for the 2010 taxation year. Furthermore, the deduction
was claimed in respect of the 2010 taxation year and the Respondent’s challenge
is not statute‑barred.
(3)
In respect of costs
[16]
Mr. Rudolph asks that costs be awarded to
the Appellant for the delays occasioned by the CRA in completing the audit, the
incompetency of CRA auditors, the difficult process of dealing with the CRA,
the stress and deterioration of Mr. Backman’s health caused by this whole
process, and for the CRA failing to respect the rights guaranteed to the
Appellant by the Taxpayer Bill of Rights. Mr. Rudolph submits that
subsection 11.2(1) of the Rules allows me to award costs to the
Appellant.
[17]
Since the Appellant did not prove any
disbursements, the Respondent is of the view that subsection 11.2(1) of
the Rules does not allow me to award costs to the Appellant.
E. discussion
(1)
Burden of proof
[18]
Under subsection 152(8) of the ITA,
an assessment under the ITA is deemed to be valid and binding
notwithstanding any error, defect of omission in the assessment:
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152(8) Assessment deemed
valid and binding — An assessment shall, subject to
being varied or vacated on an objection or appeal under this Part and subject
to a reassessment, be deemed to be valid and binding notwithstanding any
error, defect or omission in the assessment or in any proceeding under this
Act relating thereto.
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152(8) Présomption de
validité de la cotisation — Sous réserve des
modifications qui peuvent y être apportées ou de son annulation lors d’une
opposition ou d’un appel fait en vertu de la présente partie et sous réserve
d’une nouvelle cotisation, une cotisation est réputée être valide et
exécutoire malgré toute erreur, tout vice de forme ou toute omission dans
cette cotisation ou dans toute procédure s’y rattachant en vertu de la
présente loi.
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[19]
Subsection 152(1.2) of the ITA
provides, inter alia, that Division I of the ITA, which
contains subsection 152(8), applies to a notice of determination of losses
made under subsection 152(1.1) of the ITA.
[20]
As explained by Justice L’Heureux-Dubé in Hickman
Motors Ltd v Canada, [1997] 2 SCR 336 at paras 92–95,
[1997] SCJ No 62 (QL), the initial onus of the taxpayer consists
in demolishing the assumptions relied upon by the Minister to issue the
assessment by making out a prima facie case that said assumptions
are inaccurate. Then, the burden of proof shifts on the Minister, who must
prove the assumptions relied upon. The relevant paragraphs of
L’Heureux-Dubé J’s reasons are as follows:
92 It is
trite law that in taxation the standard of proof is the civil balance of
probabilities: Dobieco Ltd. v. Minister of National Revenue,
[1966] S.C.R. 95, and that within balance of probabilities, there can
be varying degrees of proof required in order to discharge the onus, depending
on the subject matter: Continental Insurance Co. v. Dalton Cartage Co.,
[1982] 1 S.C.R. 164; Pallan v. M.N.R.,
90 D.T.C. 1102 (T.C.C.), at p. 1106. The Minister, in making
assessments, proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R.,
59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on
the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston
v. Minister of National Revenue, [1948] S.C.R. 486; Kennedy v.
M.N.R., 73 D.T.C. 5359 (F.C.A.), at p. 5361). The initial
burden is only to “demolish” the exact assumptions made by the Minister but no
more: First Fund Genesis Corp. v. The Queen,
90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93 This
initial onus of “demolishing” the Minister’s exact assumptions is met where the
appellant makes out at least a prima facie case: Kamin v. M.N.R.,
93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679
(T.R.B.). In the case at bar, the appellant adduced evidence which met not only
a prima facie standard, but also, in my view, even a higher one. In my
view, the appellant “demolished” the following assumptions as follows:
(a) the assumption of “two businesses”, by adducing clear evidence of only
one business; (b) the assumption of “no income”, by adducing clear
evidence of income. The law is settled that unchallenged and uncontradicted
evidence “demolishes” the Minister’s assumptions: see for example MacIsaac
v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink
v. M.N.R., 87 D.T.C. 652 (T.C.C.). As stated above, all of the
appellant’s evidence in the case at bar remained unchallenged and uncontradicted.
Accordingly, in my view, the assumptions of “two businesses” and “no income”
have been “demolished” by the appellant.
94 Where
the Minister’s assumptions have been “demolished” by the appellant, “the
onus . . . shifts to the Minister to rebut the prima
facie case” made out by the appellant and to prove the assumptions: Magilb
Development Corp. v. The Queen, 87 D.T.C. 5012 (F.C.T.D.), at
p. 5018. Hence, in the case at bar, the onus has shifted to the Minister
to prove its assumptions that there are “two businesses” and “no income”.
95 Where
the burden has shifted to the Minister, and the Minister adduces no evidence
whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac,
supra, where the Federal Court of Appeal set aside the judgment of the
Trial Division, on the grounds that (at p. 6381) the “evidence was not
challenged or contradicted and no objection of any kind was taken thereto”.
See also Waxstein v. M.N.R., 80 D.T.C. 1348 (T.R.B.); Roselawn
Investments Ltd. v. M.N.R., 80 D.T.C. 1271 (T.R.B.). Refer also
to Zink, supra, at p. 653, where, even if the evidence
contained “gaps in logic, chronology, and substance”, the taxpayer’s appeal was
allowed as the Minister failed to present any evidence as to the source of
income. I note that, in the case at bar, the evidence contains no such
“gaps”. Therefore, in the case at bar, since the Minister adduced no evidence
whatsoever, and no question of credibility was ever raised by anyone, the
appellant is entitled to succeed.
[Emphasis added]
[21]
The reasons justifying the placing of the
initial onus on the taxpayer to demolish the Minister’s assumptions of facts
are well explained in prior cases decided by the Supreme Court of Canada.
[22]
In Anderson Logging Co v The King,
[1925] SCR 45 at 50, [1925] 2 DLR 143, Duff J (as
he then was) wrote:
First, as to the contention on the point of onus. If, on an appeal
to the judge of the Court of Revision, it appears that, on the true facts, the
application of the pertinent enactment is doubtful, it would, on principle,
seem that the Crown must fail. That seems to be necessarily involved in the
principle according to which statutes imposing a burden upon the subject have,
by inveterate practice, been interpreted and administered. But, as concerns
the inquiry into the facts, the appellant is in the same position as any other
appellant. He must shew that the impeached assessment is an assessment which
ought not to have been made; that is to say, he must establish facts upon which
it can be affirmatively asserted that the assessment was not authorized by the
taxing statute, or which bring the matter into such a state of doubt that, on
the principles alluded to, the liability of the appellant must be negatived.
The true facts may be established, of course, by direct evidence or by probable
inference. The appellant may adduce facts constituting a prima facie
case which remains unanswered; but in considering whether this has been done it
is important not to forget, if it be so, that the facts are, in a special
degree if not exclusively, within the appellant's cognizance; although this
last is a consideration which, for obvious reasons, must not be pressed too far.
[Emphasis added]
[23]
In Johnston v Minister of National Revenue,
[1948] SCR 486 at 489–90, [1948] 4 DLR 321,
Justice Rand developed that doctrine in stating that:
Notwithstanding that it is spoken of in section 63 (2) as
an action ready for trial or hearing, the proceeding is an appeal from the taxation;
and since the taxation is on the basis of certain facts and certain provisions
of law either those facts or the application of the law is challenged. Every
such fact found or assumed by the assessor or the Minister must then be
accepted as it was dealt with by these persons unless questioned by the
appellant. If the taxpayer here intended to contest the fact that he
supported his wife within the meaning of the Rules mentioned he should have
raised that issue in his pleading, and the burden would have rested on him
as on any appellant to show that the conclusion below was not warranted. For
that purpose he might bring evidence before the Court notwithstanding that it
had not been placed before the assessor or the Minister, but the onus was his
to demolish the basic fact on which the taxation rested.
. . .
I am consequently unable to accede to the view that the
proceeding takes on a basic change where pleadings are directed. The
allegations necessary to the appeal depend upon the construction of the statute
and its application to the facts and the pleadings are to facilitate the
determination of the issues. It must, of course, be assumed that the Crown, as
is its duty, has fully disclosed to the taxpayer the precise findings of fact
and rulings of law which have given rise to the controversy. But unless the
Crown is to be placed in the position of a plaintiff or appellant,
I cannot see how pleadings shift the burden from what it would be without
them. Since the taxpayer in this case must establish something, it seems to me
that that something is the existence of facts or law showing an error in
relation to the taxation imposed on him.
[Emphasis
added]
[24]
It is also very important to keep in mind that
the shifting of the burden of proof to the Minister cannot be lightly,
capriciously or casually done, since the taxpayer typically has the information
within his reach and under his control. Absent exceptional circumstances where
facts are peculiarly within the Minister’s knowledge, the onus on an assessment
of tax owing should be the result of demolishing the Minister’s assumptions
(see Canada v. Anchor Pointe Energy Ltd, 2007 FCA 188 at
paras 35–36, 283 DLR (4th) 434).
[25]
Furthermore, the burden of proof applicable to
an assessment under the ITA also applies to a notice of determination of
losses (See, for instance, Canada Trust Co v Canada (Minister of National
Revenue – MNR), [1985] TCJ No 3 (QL) at paras 4, 34
(TCC)).
[26]
A prima facie case is one “supported by
evidence which raises such a degree of probability in its favour that it must
be accepted if believed by the Court unless it is rebutted or the contrary is
proved. It may be contrasted with conclusive evidence which excludes the
possibility of the truth of any other conclusion than the one established by
that evidence” (Stewart v Canada (Minister of
National Revenue – MNR), [2000] TCJ No 53 (QL) at
para 23 (TCC). Cited with approval by Trudel JA in Amiante Spec
Inc v Canada, 2009 FCA 139 at para 23,
[2010] G.S.T.C. 26).
[27]
Keeping in mind these principles, I will
now examine the issues raised in this appeal.
(2)
Deduction for bad debt expenses in the amount of
$14,919 for the 2008 taxation year under paragraph 20(1)(p) of the ITA
[28]
Paragraph 20(1)(p) of the ITA
reads as follows:
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20(1) Deductions
permitted in computing income from business or property —
Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h),
in computing a taxpayer’s income for a taxation year from a business or
property, there may be deducted such of the following amounts as are wholly
applicable to that source or such part of the following amounts as may
reasonably be regarded as applicable thereto:
. . .
(p) bad
debts — the total of
(i) all debts owing
to the taxpayer that are established by the taxpayer to have become bad
debts in the year and that have been included in computing the
taxpayer’s income for the year or a preceding taxation year, and
. . .
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20(1) Déductions
admises dans le calcul du revenu tiré d’une entreprise ou d’un bien —
Malgré les alinéas 18(1)a), b) et h), sont déductibles
dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un
bien pour une année d’imposition celles des sommes suivantes qui se
rapportent entièrement à cette source de revenus ou la partie des sommes
suivantes qu’il est raisonnable de considérer comme s’y rapportant :
[…]
p) Créances
irrécouvrables — le total des montants
suivants :
(i) les créances du
contribuable qu’il a établies comme étant devenues irrécouvrables au cours
de l’année et qui sont incluses dans le calcul de son revenu pour
l’année ou pour une année d’imposition antérieure,
[…]
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[Emphasis
added]
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[Notre
soulignement]
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[29]
In order for a taxpayer to be entitled to a
deduction under paragraph 20(1)(p) of the ITA, two
requirements have to be met: (i) the taxpayer must establish that the
debts have become a bad debt in the year and (ii) the debts have to have
been included in computing the taxpayer’s income for the year or a preceding
taxation year.
[30]
Various factors need to be taken into account as
to the determination of a bad debt.
[31]
In Rich v Canada, 2003 FCA 38,
[2003] 3 FC 493 [Rich], Rothstein JA (as he then
was) summarized factors to be taken into account in the determination of a bad
debt:
12 The
assessment of whether a debt is bad is one based upon the facts at a particular
point in time, i.e. December 31, 1995. The Income Tax Act does
not prescribe factors to be considered in assessing the collectibility of a
debt. However, Tax Appeal Board judgments in Hogan v. The Minister of
National Revenue, 56 D.T.C. 183 and No. 81 v. The
Minister of National Revenue, 53 D.T.C. 98, suggest some of the
factors to be taken into account. After the creditor personally considers the
relevant factors, the question is whether the creditor honestly and reasonably
determined the debt to be bad.
13 I would
summarize factors that I think usually should be taken into account in
determining whether a debt has become bad as:
1. the
history and age of the debt;
2. the
financial position of the debtor, its revenues and expenses, whether it is
earning income or incurring losses, its cash flow and its assets, liabilities
and liquidity;
3. changes
in total sales as compared with prior years;
4. the
debtor's cash, accounts receivable and other current assets at the relevant
time and as compared with prior years;
5. the
debtor's accounts payable and other current liabilities at the relevant time
and as compared with prior years;
6. the
general business conditions in the country, the community of the debtor, and in
the debtor's line of business; and
7. the
past experience of the taxpayer with writing off bad debts.
This list is not
exhaustive and, in different circumstances, one factor or another may be more
important.
14 While
future prospects of the debtor company may be relevant in some cases, the
predominant considerations would normally be past and present. If there is some
evidence of an event that will probably occur in the future that would suggest
that the debt is collectible on the happening of the event, the future event
should be considered. If future considerations are only speculative, they would
not be material in an assessment of whether a past due debt is collectible.
15 Nor is it necessary for a creditor to exhaust all possible
recourses of collection. All that is required is an honest and reasonable
assessment. Indeed, should a bad debt subsequently be collected in whole or in
part, the amount collected is taken into income in the year it is received.
[32]
In the case at bar, Mr. Backman, who is the
director and principal shareholder of the Appellant, did not testify and was
not present at the hearing. Furthermore, Mr. Rudolph was not the
bookkeeper-accountant of the Appellant during the taxation year in issue. In
addition, according to Mr. Rudolph, it was Mr. Backman who decided
which debts had become bad debts and thereby always acted in good faith and as
a reasonable person.
[33]
No evidence was presented to me at the hearing
pertaining to the method followed by Mr. Backman as to the determination
of a bad debt. The Appellant presented insufficient evidence for me to apply
the factors described in Rich. All I was told by Mr. Rudolph
is that Mr. Backman, in making that determination, acted in good faith and
as a reasonable person.
[34]
Because of this lack of evidence, it is clear
that the Appellant did not discharge its initial burden of proof to make out a prima
facie case showing the inaccuracy of the assumption made by the Minister in
that respect. The initial burden was on the Appellant to demolish the
assumption made by the Minister that the debts in the amount of $14,919 were
not bad debts within the meaning of paragraph 20(1)(p) of the ITA.
Consequently, the burden of proof did not shift onto the Minister.
[35]
It is not, therefore, necessary for me to
consider the second requirement pertaining to a deduction under
paragraph 20(1)(p) of the ITA, namely that the amount had to
have been included in the computation of the Appellant’s income in the year or
a preceding taxation year.
[36]
I therefore conclude that the Appellant has
not discharged its burden of proof to show that it is entitled to a deduction
for bad debt expenses in the amount of $14,919 for the 2008 taxation year under
paragraph 20(1)(p) of the ITA.
(3)
Deduction for cumulative eligible capital in the
amount of $4,996 in the 2010 taxation year under paragraph 20(1)(b) of the
ITA
a) Is the Respondent’s challenge pertaining to the 2010 taxation year statute‑barred?
[37]
The Appellant is of the view that the
Respondent’s challenge of the value of the goodwill in issue is statute-barred
since the value was determined on January 1, 2005.
[38]
In my view, there is no basis to oppose either
the Minister or any other party making factual allegations as to a state of
affairs in a previous taxation year if such allegations, if true, would impact
the correctness of the assessment (or in the case at bar, a notice of
determination of losses) in dispute before this Court.
[39]
I note the principle, referred to in
certain cases as the “New St. James principle” (See, for instance, Sherway Centre Limited v The Queen,
2001 DTC 1021, [2001] TCJ No 751 (QL) (TCC)): the
Minister is not prevented from challenging certain factual determinations with
respect to a prior year in coming to a conclusion as to a taxpayer’s position
in a given taxation year. As held by Chief Justice Bowman (as he then
was) in discussing the New St. James principle (Coastal Construction &
Excavating Ltd v R, [1996] 3 CTC 2845 at para 23,
97 DTC 26 (TCC), citing New St. James Ltd v MNR,
[1966] CTC 305, 66 DTC 5241 (Ex. Ct.):
Finally, the
appellant contends that because the Minister, in prior years, had treated the
operation as a “facility” as defined in the RDIA he was not entitled to change
the investment tax credit carry-forward from those admittedly statute‑barred
years to affect the taxable income of a year that was not statute‑barred
to conform to his view that the property was qualified and not certified. This
interpretation would involve a conclusion that a determination of the balance
of a carry-forward of investment tax credits for a statute-barred year was
tantamount to an assessment. I do not read section 152 of the Income
Tax Act as supporting such a conclusion. The Minister is obliged to assess
in accordance with the law. If he assesses a prior year incorrectly and that
year becomes statute-barred this will prevent his reassessing tax for that
year, but it does not prevent his correcting the error in a year that is not
statute-barred, even though it involves adjusting carry-forward balances from
previous years, whether they be loss carry-forwards or balances of investment
tax credits. New St. James Limited. v. M.N.R., 66 D.T.C. 5241;
Allcann Wood Suppliers Inc. v. The Queen, 94 D.T.C. 1475. No
question of estoppel arises: Goldstein v. The Queen,
96 D.T.C. 1029.
[Emphasis
added]
Those comments
were later cited with approval by Létourneau JA in Canada v Papiers
Cascades Cabano Inc, 2006 FCA 419 at para 23,
2008 DTC 6264).
[40]
In my view, the New St. James principle makes it
clear that in the case at bar, the Minister has the power to challenge the
computation of the cumulative eligible capital balance of the Appellant for the
2010 taxation year based on the value of the goodwill at the time of transfer
of the goodwill by Mr. Backman to the Appellant on
September 30, 2006; that challenge is not statute-barred.
[41]
Moreover, the Court has to review the validity
of the notice of determination of losses dated November 14, 2014,
which disallowed a cumulative eligible capital deduction in the amount of
$4,996 for the 2010 taxation year. The notice of determination of losses was
issued by the Minister further to the request of the Appellant made on
May 27, 2014 (see Exhibit A-1). Under subsection 152(1.2)
of the ITA, the provisions of the ITA dealing with the objection
and appeal process apply to a notice of determination of loss. The Appellant
has not pointed to any procedural irregularity regarding the issuance of that
notice of determination or any other issue tending to invalidate it. Throughout
the process whereby the Appellant requested the determination of loss, the
Minister determined such loss, and the Appellant objected to, and then appealed
from, that determination, the requirements of the ITA were respected.
[42]
I therefore conclude that the 2010 taxation
year is not statute-barred; the factual allegations with respect to the value
of the goodwill are not statute‑barred.
b)
Evidence provided to the value of the goodwill
[43]
Paragraph 20(1)(b) of the ITA
provides that a taxpayer is entitled to a 7% deduction in respect of the
cumulative eligible capital in respect of a business of such taxpayer and it
reads as follows:
|
20(1) Deductions
permitted in computing income from business or property —
Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h),
in computing a taxpayer’s income for a taxation year from a business or property,
there may be deducted such of the following amounts as are wholly applicable
to that source or such part of the following amounts as may reasonably be
regarded as applicable thereto:
. . .
(b) cumulative
eligible capital amount — such amount as the
taxpayer claims in respect of a business, not exceeding 7% of the taxpayer’s cumulative
eligible capital in respect of the business at the end of the
year. . .
|
20(1) Déductions
admises dans le calcul du revenu tiré d’une entreprise ou d’un bien —
Malgré les alinéas 18(1)a), b) et h), sont déductibles
dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un
bien pour une année d’imposition celles des sommes suivantes qui se
rapportent entièrement à cette source de revenus ou la partie des sommes
suivantes qu’il est raisonnable de considérer comme s’y rapportant :
[…]
b) Montant
cumulatif des immobilisations admissibles —
la somme qu’un contribuable déduit au titre d’une entreprise, ne dépassant
pas 7 % du montant cumulatif des immobilisations admissibles relatives
à l’entreprise à la fin de l’année; […]
|
|
[Emphasis
added]
|
[Notre
soulignement]
|
[44]
Subsection 14(5) of the ITA defines
the phrase “cumulative
eligible capital” of a taxpayer and that amount
includes, inter alia, a portion of the eligible capital expenditures
(also defined in subsection 14(5) of the ITA) incurred by a
taxpayer. Very briefly, the latter phrase will include outlays and expenses
incurred by the taxpayer to acquire goodwill. That is the reason why the fair
market value of the goodwill as of September 30, 2006 is the key
element to consider in respect of the deduction claimed by the Appellant under
paragraph 20(1)(b) of the ITA.
[45]
As stated above, the Minister has made an
assumption of fact: the value of the goodwill transferred from Mr. Backman
to the Appellant as of September 30, 2006 was nil. Accordingly, if
the Appellant has made out a prima facie case that the value of the
goodwill as of September 30, 2006 was equal to an amount other than a
nil amount as assumed by the Minister, then the burden of proof will shift to
the Minister, who must then prove said assumption.
[46]
In this regard, the Appellant filed
Exhibit A–7 (the “Deloitte Letter”). The
Deloitte letter states the method of calculation of the amount of the goodwill
followed at the time Mr. Backman acquired his partner’s interest in the
partnership; that determination was made on January 1, 2005, and
Deloitte concluded that the amount of the goodwill was $105,864 at that time.
The Deloitte Letter also contains the following paragraph: “On
September 30, 2006, Mr. Backman transferred the business to a
newly incorporated company on a tax-deferred basis pursuant to section 85
of the Income Tax Act. With respect to the goodwill, an amount equal to 4/3 of
the CEC (cumulative eligible capital) balance of $77,398 was elected as the
proceeds of disposition”. Furthermore, as stated
above, no one from Deloitte testified at the hearing as to the fair market
value of the goodwill as of September 30, 2006.
[47]
I am of the view that the Appellant has not
made out a prima facie case with the Deloitte Letter as to the value of
the goodwill as of September 30, 2006 being something other than nil;
the Appellant has not demolished the Minister’s assumption in this regard.
[48]
As stated above, the case law defines a prima
facie case as one “supported by evidence which raises such a degree of
probability in its favour that it must be accepted if believed by the Court
unless it is rebutted or the contrary is proved”.
[49]
The Deloitte Letter does establish the fair
market value of the goodwill as of January 1, 2005; it does not
establish the fair market value of the goodwill as of
September 30, 2006, namely 21 months after the
January 1, 2005 valuation. No evidence was offered to the effect that
the fair market value of the goodwill should be of the same value at the
beginning of 2005 and in September 30, 2006, namely 21 months
after. That is a long period of time in business and many events may have
altered the initial valuation being made. Furthermore, the Appellant did not
claim that Deloitte had provided an evaluation of the fair market value of the
goodwill as of September 30, 2006. Even if I had received
sufficient evidence before me to ascertain with a degree of confidence the
method used by Deloitte to determine the value of the goodwill as of
January 1, 2005, the Appellant simply asks me to infer that the value
of the goodwill had not declined to nil in the 21 months after the
valuation made in the Deloitte Letter. I conclude that the probative value
of the Deloitte Letter is minimal as to the determination of the actual value
of the goodwill at the relevant moment in September 2006. Consequently,
the burden of proof did not shift to the Minister to establish the fair market
value of the goodwill.
[50]
Moreover, I would be compelled to dismiss
the appeal even if I had concluded that with the Deloitte Letter the
Appellant has made out a prima facie case that the value of the goodwill
as of September 30, 2006 was other than a nil amount as assumed by
the Minister.
[51]
I note the limited scope of, and caveats
contained in, Exhibit R–1 (for instance, that it had been prepared without
the contribution of the Appellant’s management), but the fact does remain that
it is the most comprehensive evaluation of the fair market value of the
goodwill at the relevant time. The testimony of Ms. Caryi grappled with
these issues raised by Exhibit R–1, but provided sufficient credible
evidence for me to conclude on whether it was more likely than not that the
goodwill had a fair market value of nil as of September 30, 2006.
I am of the view that the Respondent, on the basis of Exhibit R–1 and
of the testimony of Ms. Caryi, has proven, on a balance of probabilities,
that the fair market value of the goodwill as of September 30, 2006 was
nil. This would be true even if the Appellant had managed to shift the burden
of proof to the Respondent.
[52]
For these reasons, the Appellant is not entitled
to a deduction for cumulative eligible capital in the amount of $4,996 in the
2010 taxation year under paragraph 20(1)(b) of the ITA.
c) Costs under subsection 11.2(1) of the Rules
[53]
Mr. Rudolph requests that costs be awarded
to the Appellant in accordance with subsection 11.2(1) of the Rules
for the delays occasioned by the CRA in completing its audit, the incompetency
of CRA auditors, the difficult process of dealing with the CRA, the stress and
deterioration of Mr. Backman’s health caused by this whole process, and
for the CRA failing to respect the rights guaranteed to the Appellant by the Taxpayer
Bill of Rights.
[54]
The Respondent argues that since no evidence of
the disbursement incurred has been adduced, I cannot award costs to the
Appellant.
[55]
As noted in Munro v R,
[1998] 4 CTC 89 at paras 12–14,
163 DLR (4th) 541 (FCA), the discretion to award costs is governed
by section 18.26 of the Tax Court of Canada Act, R.S.C., 1985,
c. T-2, (the “TCC Act”) and
the applicable Rules.
[56]
Subsection 18.26(1) of the TCC Act
reads as follows:
|
18.26(1) Costs —
The Court may, subject to the rules, award costs. In particular, the Court
may award costs to the appellant if the judgment reduces the aggregate of all
amounts in issue or the amount of interest in issue, or increases the amount
of loss in issue, as the case may be, by more than one half.
|
18.26(1) Frais et
dépens — La Cour peut, sous réserve de
ses règles, ordonner le paiement des frais et dépens. Elle peut notamment en
allouer à l’appelant si le jugement réduit de plus de la moitié le total de
tous les montants en cause ou des intérêts en cause, ou augmente de plus de la
moitié le montant de la perte en cause.
|
[57]
The relevant portions of the Rules read
as follows:
|
10(1) Costs —
The Court may determine the amount of the costs of all parties involved in
any proceeding, the allocation of those costs and the persons required to pay
them.
. . .
11.2(1) Such
other disbursements may be allowed as were essential for the conduct of the
appeal if it is established that the disbursements were made or that the
party is liable for them.
(2) There
may be allowed all services, sales, use or consumption taxes and other like
taxes paid or payable on any counsel fees and disbursements allowed if it is
established that such taxes have been paid or are payable and are not
otherwise reimbursed or reimbursable in any manner whatever, including,
without restriction, by means of claims for input tax credits in respect of
such taxes.
|
10(1) Frais et
dépens — La Cour peut fixer les frais et
dépens, les répartir et désigner les personnes qui doivent les supporter.
[…]
11.2(1) Les
autres débours essentiels à la tenue de l’appel peuvent être adjugés s’il est
établi qu’ils ont été versés ou que la partie est tenue de les verser.
(2) Peuvent
être adjugées les taxes sur les services, les taxes de vente, les taxes
d’utilisation, les taxes de consommation et autres taxes semblables payées ou
payables sur les honoraires d’avocat et les débours adjugés, s’il est établi
que ces taxes ont été payées ou sont payables et qu’elles ne peuvent faire
l’objet d’aucune autre forme de remboursement, notamment sur présentation, à
l’égard de ces taxes, d’une demande de crédits de taxe sur les intrants.
|
[58]
In an appeal pursuant to the Informal Procedure,
a judge still has discretion to decide whether to award costs in certain
circumstances.
[59]
The general rule is well-settled: costs are not
awarded under the Informal Procedure (For instance, see Cavanagh c R,
[2000] 3 CTC 2354 at para 45,
[1999] TCJ No 465 (QL) (TCC)).
[60]
Furthermore, Justice Dawson in Canada v
Martin, 2015 FCA 95, 2015 DTC 5048, wrote:
18 It is
well-settled law that in exceptional circumstances conduct that occurs prior to
a proceeding may be taken into account if that conduct unduly and unnecessarily
prolongs the proceeding. See, for example: Merchant v. Canada,
2001 FCA 19, 267 N.R. 186, at paragraph 7; Canada
v. Landry, 2010 FCA 135, 404 N.R. 255, at
paragraph 25.
19 Thus, in Merchant
conduct at the audit and objection stages was relevant to the assessment of
costs in the Tax Court because it impacted on the manner in which the trial
proceeded. In the trial Judge’s view, a trial that should have lasted no more
than one day took seven days: Merchant v. Canada,
[1998] T.C.J No. 278, 98 DTC 1734, at
paragraph 59.
[61]
This was a General Procedure case; however,
those comments are relevant as to the exercise of my discretion.
[62]
I do not see any factors in this appeal
that would convince me to exercise my discretion so as to award costs to the
Appellant. Furthermore, I can see no exceptional circumstances in the
conduct of CRA officials prior to the filing of the Notice of Appeal. No
evidence was provided by the Appellant as to any disbursements incurred, the
state of Mr. Backman’s health or any exceptional stress that was
occasioned by the conduct of the CRA. This may be in part because
Mr. Backman did not appear at the hearing.
[63]
Therefore, regardless of the result of the
appeal in this case, I would not have been inclined to award costs to the
Appellant.
F. conclusion
[64]
For all these reasons, the appeal is dismissed,
without costs.
Signed at Ottawa,
Canada, this 31st day of May 2016.
“Dominique Lafleur”
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