Citation: 2013 TCC 22
Date: 20130118
Docket: 2011-4032(IT)I
BETWEEN:
DEANE STINSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
The appellant, Deane
Stinson, appeals an assessment made under the Income Tax Act that disallowed
a deduction for an allowable business investment loss (ABIL) claimed in the
2008 taxation year.
[2]
The appellant submits
that he incurred a bad debt in the 2008 taxation year that qualified for
deduction as an ABIL in the amount of $215,403. Since the appellant did not
have enough income in 2008 to fully utilize the deduction, he deducted a
portion of the ABIL in 2008 and requested a carry-back of the excess,
$145,391.23, to the three preceding years. The earlier years are not at issue
in this appeal.
Background
[3]
The appellant is a
retired chartered accountant who lives in Sault Ste. Marie, Ontario.
[4]
For several years, the
appellant and his immediate family were the sole shareholders of Tille
Investments Ltd. (“Tille”). It appears that from time to time Tille earned
income from a variety of sources, such as business consulting, commercial real
estate leasing, and investing.
[5]
The appellant submits that
over the years he and his spouse loaned money to Tille and that at December 31,
2008 the corporation owed $430,061.72 to him and $38,649.75 to his spouse.
[6]
The appellant testified
that the shares of Tille were transferred to unrelated persons in December 2008
at which time the only activity of the corporation was business consulting.
[7]
The appellant further
testified that he and his spouse made a formal demand for repayment of the
loans when the ownership of the corporation changed. He said that management
determined that the loans could not be repaid and therefore it was determined
that the debt owed to him was a bad debt and eligible for deduction as an ABIL.
Analysis
[8]
The issue in this
appeal is whether the appellant incurred an ABIL on December 31, 2008 on the
basis that his loans to Tille were uncollectible at that time.
[9]
The central provisions
that are relevant are subsection 50(1), paragraph 39(1)(c), and the definition
of “small business corporation” in subsection 248(1) of the Act. Excerpts
of these provisions are reproduced below.
50. (1) Debts
established to be bad debts and shares of bankrupt corporation - 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) […]
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.
39. (1) Meaning
of capital gain and capital loss [and business investment loss] - 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 and Restructuring 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,
[…]
248. (1) Definitions - In this Act,
[…]
“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;
(Emphasis added)
[10]
The respondent submits
that claim of the ABIL was properly disallowed on the basis of any one of the
following:
(a) Tille was not a small business corporation
at any time in 2008,
(b) the appellant had not made any loans to
Tille, and
(c) the appellant has not established that any
loans became bad debts in 2008.
[11]
I would first comment
that the appellant’s case depends in large part on his own self-interested
testimony and on a limited number of documents that were within the appellant’s
control. I have found that there is insufficient documentation to establish the
ABIL, and that and the appellant’s testimony and some of the documents entered
into evidence are not reliable.
[12]
As for the appellant’s
testimony, there was no detailed and coherent testimony about any of the facts
necessary to support the claim. In particular, the testimony was vague in
relation to the business activities of Tille, the loans purportedly made to
Tille, the purported change of ownership of Tille, and the circumstances to
support a determination that the loans became bad in 2008.
[13]
As for the documents
that were entered into evidence, I have concluded that some of the key
documents are not reliable. For example,
(a)
The appellant provided
to the Canada Revenue Agency (CRA) promissory notes evidencing the debt that
were purportedly signed by one of the new owners of Tille. The reliability of
the notes is doubtful because there are different versions of the notes that
have different wording and also different signatures.
(b)
The purported demand
for payment made by the appellant (Ex. A-11) states an amount owing that does
not correspond with the other evidence.
(c)
The purported change of
ownership on December 12 and 20, 2008 whereby shares were transferred to
unrelated persons (evidenced by a hand-written shareholders’ ledger) is
inconsistent with a statement made by the appellant in Tille’s corporate tax
return for the year ended April 30, 2009 that his sons were the only
shareholders. The ownership by the sons is also reflected in an ABIL
questionnaire that was provided to the CRA on January 31, 2011.
(d)
The appellant submitted
a list of employees to the CRA which attempts to establish that Tille had at
least five full time employees. The evidence surrounding these employment
relationships was implausible.
[14]
As for the appellant’s
testimony that new management determined that the loans were uncollectible at
the end of 2008, I would note that (1) Tille’s balance sheet as at April 30,
2009 which was included with its tax return recorded assets that were greater
than liabilities, and (2) Tille has continued to carry on income‑earning
activities since 2008 with the appellant’s involvement.
[15]
The problems with the
evidence were so profound that the relevant facts regarding the ABIL claim
cannot be determined.
[16]
I would conclude that
the appeal should be dismissed on the ground that the appellant has failed to
establish, even on a prima facie basis, that any debts became bad in
2008. In particular, I am not satisfied that any shares of Tille were acquired
by unrelated persons in 2008, or that any debts owing to the appellant in 2008 became
uncollectible in that year.
[17]
The appeal will be
dismissed.
Signed at Ottawa, Ontario this 18th day of January
2013.
“J. M. Woods”
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