REASONS
FOR JUDGMENT
Favreau J.
[1]
This is an appeal under the informal procedure against
a reassessment made under the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.),
as amended, (the Act), dated November 3, 2008, in respect of the appellant’s 2005
taxation year.
[2]
Pursuant to the assessment dated November 3,
2008, the Minister of National Revenue (the Minister) disallowed the
appellant’s claim for an allowable business investment loss (ABIL) of $48,813, that
is, 50% of a capital loss of $97,627.
[3]
In making and confirming the reassessment, the Minister
relied on the following assumptions of fact:
[Translation]
(a) Since March 20, 2002, the appellant is the sole owner of a building
located at 121 Principale Street in St-Sauveur (the immovable);
(b)
the rental income from the immovable declared by
the appellant and assessed by the Minister for the year in issue is as follows:
|
Gross rental income
|
$18,000
|
|
Net rental income
|
$5,613
|
(c) since July 5, 2002, the appellant is the sole shareholder, secretary
and treasurer of 9133-6503 Québec Inc. (hereinafter the company), whose fiscal
year-end is February 28 of each year;
(d) the company’s main activity was the operation of a restaurant located
at 121 Principale Street in St-Sauveur;
(e) the restaurant was operated by the company until August 2003;
(f) as of August 2003, the appellant rented the immovable to 9132-1596
Québec Inc.;
(g) as of August 2003, the company was no longer in operation;
(h) on or about December 20, 2005, the appellant sold the immovable and
gave all of the company’s assets to 9132‑1596 Québec Inc.;
(i)
the capital gain from
the disposition of the immovable declared by the appellant and assessed by the
Minister is as follows:
|
Proceeds of disposition
|
$325,000
|
|
Less: adjusted cost
base and expenditures
|
$233,292
|
|
Capital gain
|
$91,708
|
|
Taxable capital gain
|
$45,854
|
(j) the company was dissolved on December 5, 2006;
(k) in filing her tax return for the 2005 taxation year, the appellant
claimed an ABIL of $48,813 ($97,627 x 50%);
(l) the appellant did not make advances to the company totalling $97,627.
[4]
Ms. D’Amour testified at the hearing and
provided information regarding the nature of the work performed to transform what
used to be a convenience store that had been closed for six years into a four-star
restaurant. She admitted all the assumptions of fact on which the Minister relied,
except the assumptions regarding the proceeds of the disposition of the
immovable located at 121 Principal Street in Saint-Sauveur (the immovable) which, according to her, were supposed to be
$320,000 rather than $325,000 and regarding the advances totalling $97,627 that
she allegedly made to 9133-6503 Québec Inc. (the company), which operated the restaurant. Ms. D’Amour’s spouse
was the restaurant’s head chef.
[5]
Ms. D’Amour acquired the immovable on March 20,
2002. It was an old building with a convenience store adjacent to the house. Access
to the convenience store from inside was through the house’s laundry room.
[6]
On July 5, 2002, Ms. D’Amour incorporated the company
“Restaurant Trattoria D’Amore Saint-Sauveur-Des-Monts Ltée” under Part 1A of Quebec’s Companies Act which, on September
15, 2003, became the company following an amendment to its articles. The
company’s fiscal year-end was February 28 of each year and its main activity
was the operation of the restaurant.
[7]
The renovations were completed over the summer
and the restaurant opened its doors on September 1, 2002. In her testimony, Ms.
D’Amour stated that she paid the costs of the renovations from her personal
bank accounts. Ms. D’Amour adduced in evidence the following documents:
-
excerpts from her bank accounts with notes
explaining what the amounts spent were used for;
-
a list of expenditures incurred in 2002 for the
restaurant including names of suppliers, amounts claimed by each of them, payment
dates and amounts paid, with a copy of underlying invoices attached;
-
the company’s unaudited financial statements
prepared by Marcel Dulude, a chartered accountant, namely, (i) an opening
balance sheet as of September 1, 2002, showing capital totalling $88,203 ($51,422
for furniture and equipment and $36,726 for leasehold improvements) and an
amount of $98,845 owing to the director without interest, or terms of
repayment; (ii) a balance sheet as of September 30, 2002, and (iii) complete
financial statements as of February 28, 2003, showing capital of $85,440 and
an amount of $97,627 owing to the director;
-
the company’s unaudited financial statements as
of February 28, 2005 with comparable figures as of February 28, 2004, prepared
by Les Entreprises Michel Lafond Enr., which indicate capital in the
amount of $86,500 as the sole asset and an amount of $97,038 owing to the
director as the sole liability. These financial statements indicate that the
company has conducted no business over the year and has been inactive since February
28, 2003;
-
the renovation permit dated July 18, 2002, from
the municipality of the Village of Saint-Sauveur-Des-Monts sought by Ms.
D’Amour for the authorization of work estimated at $100,000 and to be
undertaken from July 22, 2002, to August 15, 2002.
[8]
Unfortunately for the appellant, her spouse
became ill and the restaurant was closed in August 2003. The company ceased
operation and the appellant leased the immovable by notarial lease to 9132-1596
Québec Inc., a company owned by Luc Mannella. Said company continued to operate
the restaurant. The lease in question was registered on September 11, 2003, but
was not filed in evidence.
[9]
Exasperated by numerous requests from the
company lessee of the immovable and its shareholder to carry out repairs to the
immovable, the appellant finally decided to sell the immovable on or about December
20, 2005, to the company “Gestion immobilière desma inc.,” a company apparently affiliated with 9132-1596 Québec Inc. and
controlled by Luc Mannella, and to transfer to it all of the company’s
assets. The notarial deed of sale dated December 20, 2005, was not entered into
evidence but the sale price indicated in the land register is $325,000.
[10] Ms. D’Amour submits that the proceeds of disposition of the
immovable were $320,000 rather than $325,000 because a few days
before the sale the company and 9132-1596 Québec Inc. entered into a transaction
within the meaning of the Civil Code of Québec, confirmed by the Court of
Québec, under which the parties agreed to settle the dispute out of court. The
substance of the dispute arose out of a promise between the parties to purchase
the immovable for the amount of $325,000 subject to a structural inspection of the
immovable commissioned by Luc Mannella. He asked for a $5,000 reduction in the
selling price because support beams had to be cut to get a refrigerator into
the basement.
[11] Pursuant to the transaction, 9132-1596 Québec Inc. agreed, inter
alia, to pay $320,000 in trust to a notary to be applied against the
purchase price of the immovable, and the money could not be released until the deed
of sale was published and filed in the land register without prejudicial entry.
[12] Despite the fact that said transaction occurred on December 16,
2005, the notarial deed of sale appears to have specified that the selling
price of the immovable was $325,000 based on the entry in the land register
entered into evidence by the respondent.
[13] The appellant filed her income tax return for the 2005 taxation year
reporting the following:
(a) Gross rental income of $18,000 and net rental
income of $5,613;
(b) a capital gain from the disposition of the
immovable in the amount of $91,708, namely, proceeds of disposition of $325,000 less
an adjusted cost base and selling expenses totalling $233,292;
(c) a business investment loss in the amount of
$48,803, that is, 50% of the advances made to the company totalling $97,627.
[14] On
December 5, 2006, the company was dissolved. The appellant confirmed in her
testimony that the company’s income tax returns for the 2002 to 2005 taxation
years were not were not filed with the Canada Revenue Agency (the CRA).
Relevant Statutory Provisions
[15] The
relevant provisions of the Act for determining entitlement to an ABIL are as
follows:
Subdivision c – Taxable Capital Gains and
Allowable Capital Losses
SECTION 38: Taxable capital gain and
allowable capital loss
For
the purposes of this Act:
.
. .
(c) a taxpayer’s
allowable business investment loss for a taxation year from the disposition of
any property is 1/2 of the taxpayer’s business investment loss for the year
from the disposition of that property.
SECTION
39: Meaning of capital gain and capital loss
(1)
For the purposes of this Act:
.
. .
(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,
(B) a bankrupt (within the meaning assigned by subsection 128(3)) that
was a small business corporation at the time it last became a bankrupt, or,
(C) a corporation referred to in section 6 of the Winding-up Act
that was insolvent (within the meaning of that Act) and was a small business
corporation at the time a winding-up order under that Act was made in respect
of the corporation,
.
. .
SECTION
40: General rules
(2)
Limitations
Notwithstanding
subsection 40(1),
.
. .
(g)
a taxpayer’s loss, if any, from the disposition of
a property . . . to the extent that it is
.
. .
(ii)
a loss from the disposition of a debt or other right to receive an amount,
unless the debt or right, as the case may be, was acquired by the taxpayer for
the purpose of gaining or producing income from a business or property (other
than exempt income) or as consideration for the disposition of capital property
to a person with whom the taxpayer was dealing at arm’s length,
is nil.
SECTION
50: Debts established to be bad debts and shares of
bankrupt corporation
50.
(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,
(ii)
the corporation is a corporation referred to in section 6 of the Winding-up 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, and
(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(1) 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) and (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; (société exploitant une petite entreprise)
Analysis
[16] The
respondent submits that there was no debt owing to the appellant by the company
in the amount of $97,627. I respectfully disagree with this interpretation of
the facts. In my view, the appellant demonstrated with supporting documentary evidence
that she did incur and pay expenses for the renovations and fit-up of the restaurant.
That is not where the problem lies.
[17] Rather,
the problem resides in the fact that the appellant did not dispose of her debt
in 2005. The debt continued to exist until the company was dissolved in 2006. As
a result, the appellant could not be entitled to an ABIL in 2005.
[18] Since
the appellant did not enter into evidence her income tax return for the 2005
taxation year, she was unable to demonstrate that she elected to apply the provisions
of subsection 50(1) of the Act to a debt that has become
a bad debt in the year. Said election probably should have been made in
respect of the 2003 taxation year following the closure of the restaurant.
[19] Even
if the appellant were considered to have disposed of her debt in 2005, the
appellant would not have been able to claim an ABIL because the company was not,
in 2005 and 2004, a small business corporation; the company ceased to carry on business effective August 2003.
[20] As
of August 2003, all or substantially all of the fair
market value of the company’s
assets were not attributable to assets used principally in an active business
carried on by the company itself or by a corporation related to it.
[21] Finally,
it should be noted that the debt owing by the company was not acquired for the
purpose of gaining or producing income from a business or property. As
indicated in the company’s opening balance sheet as of September 1, 2002, and financial
statements as of February 28, 2003, the amount owed to the director did not
include interest or terms of repayment. The appellant did not present evidence to the contrary. In such a
case, paragraph 40(2)(g) of the Act deems a loss from the
disposition of a property to be nil.
[22] As
for the proceeds of disposition of the immovable, it should be noted that the
appellant herself reported the capital gain realized on the sale of the
immovable using proceeds of disposition of $325,000. The appellant could not be
unaware that she only received $320,000 pursuant to the transaction entered
into a few days before the sale.
[23] The
transaction, which was confirmed by the Court of Québec, did not specify what the
immovable had to be sold for, but did specify the payment terms for the amount
of $320,000 to which the appellant was entitled and the steps required for
the parties to grant each other full and final acquittance.
[24] Without
the benefit of having seen the notarial deed of sale of
the immovable, I can only assume that the sale was made
at the price of $325,000 but that the appellant only received in cash the
amount of $320,000. The $5,000 shortfall must have been
applied to compensate the purchaser or persons related to the purchaser for the
reduction in value of the immovable that occurred as the direct result of the
structural inspection of the immovable.
[25] In
any event, the notarial deed of sale is an authentic act that is proof of its contents.
The only way to challenge the validity of an authentic act is by improbation. None
of this was done by the appellant. Consequently, the appellant cannot
contradict what is set out in the deed of sale. The proceeds of disposition of the
immovable must therefore be $325,000.
[26] For these reasons, the appellant’s appeal is dismissed.
Signed at Ottawa, Canada, this 22nd day of January 2016.
“Réal Favreau”
Translation certified true
on this 21st day of March 2016
Daniela Guglietta,
Translator
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