Dockets: A-65-14
A-66-14
Citation:
2014 FCA 281
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CORAM:
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DAWSON J.A.
STRATAS J.A.
NEAR J.A.
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BETWEEN:
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MICHAEL COVELEY AND SOLBYUNG COVELEY
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Appellants
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and
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HER MAJESTY THE QUEEN
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Respondent
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REASONS
FOR JUDGMENT
STRATAS J.A.
[1]
The appellants, husband and wife, appeal from
the judgments of the Tax Court of Canada (per Justice D’Auray): 2013 TCC
417. The Tax Court dismissed their appeals of assessments concerning the
taxation years 2005 and 2006.
[2]
In their returns for the 2005 taxation year, both
appellants claimed an allowable business investment loss (“ABIL”). In their returns for the 2006 taxation years, both
appellants claimed against their incomes a non-capital loss carry-forward
arising from their ABIL claims in 2005. The Minister disallowed the appellants’
claims on the ground that they did not meet the requirements for claiming an
ABIL under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).
[3]
The Tax Court confirmed the rejection of the
appellants’ ABIL claims for two main reasons:
1)
Both appellants had failed to establish a
prerequisite under subsection 50(1) of the Act for their ABIL claim, namely
that debts owing to them had become bad in 2005.
2)
In the case of the appellant Mr. Coveley, his
ABIL claim was barred under subparagraph 40(2)(g)(ii) of the Act for
another reason: he did not incur the debt owing to him for the purpose of
gaining or producing income from a business or property. This was because he
was not a shareholder of the debtor company, cStar Technologies Inc.
The appellants
appeal on both issues and this Court has consolidated the appeals.
[4]
It is only necessary to deal with the first
issue.
[5]
In finding that the debts had not become bad in
2005, the Tax Court applied this Court’s decision in Rich v. Canada,
2003 FCA 38, [2003] 3 F.C. 493 to the evidence before it. All parties in this
Court accept Rich as the governing authority. In my view, the Tax Court
did not misstate or misapply the principles in Rich in any way.
[6]
Broadly speaking, Rich provides that
taxpayers claiming that a debt has become bad must show among other things, that
they honestly and reasonably determined that their debt had become bad during
the taxation year in question. Rich enumerates several factors to be
considered in making this determination. In this case, the Tax Court assessed
the evidence before it using these factors and held that the appellants had
failed to show that that they honestly and reasonably determined that their
debts had become bad during 2005.
[7]
This is a finding of mixed fact and law suffused
by factual appreciation. Therefore, in these circumstances, the appellants must
persuade this Court that the finding is vitiated by palpable and overriding
error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235. Under
this standard, it is not this Court’s task to reweigh the evidence. Rather, our
primary task under this standard is to determine whether there was evidence
upon which the Tax Court could make the finding it did.
[8]
The Tax Court had evidence before it supporting
its finding. It noted that as of the end of the 2005 taxation year, the
appellants continued to hold out hope that the debtor company could pay the
debts. Among other things, the Tax Court relied upon an assessment made by Ms.
Coveley in an email that 2006 was going to be a “great
year” for the company, the company had just launched a successful pilot
project, and the company had emerging business prospects with several notable
organizations including Bell Canada, Coca-Cola, Sunnybrook Hospital and the US
Department of Homeland Security (at paragraphs 56-60 and 114). Throughout 2005,
the company continued to buy equipment for delivery in 2005 and 2006, the
appellants continued to advance funds to the company, and the company was “was not [in] a better or in a worse position on December 31,
2005” compared to previous years (at paragraph 126). Far from giving up
hope that the company could repay the debts, Mrs. Coveley admitted that it had “great assets, intellectual property [and]… innovative
solutions” that may be a “little bit too advanced
for the market” but “someday…will be there”
(at paragraph 129). Further, renovations to the company’s premises took place
in 2006 following tornado and flood damage (at paragraphs 55, 127 and 128). The
Tax Court also had concerns about the credibility of the appellants’ testimony
(at paragraphs 77, 104 and 151).
[9]
There was evidence supporting a different
conclusion (see, e.g., at paragraphs 46 and 52-56) but weighing all of the
evidence, the Tax Court made the finding it did. As I have said above, it is
not open to this Court, reviewing for palpable and overriding error, to reweigh
the evidence before the Tax Court.
[10]
In oral submissions, the appellants emphasized
that as matters turned out, the business prospects did not pan out and matters
got worse for the company. But the relevant time for assessment is the end of
the 2005 taxation year, December 31, 2005. The Tax Court held that in the
circumstances existing at that time, the appellants did not reasonably view the
debts as bad.
[11]
In my view, for the foregoing reasons, the Tax Court
did not commit any palpable and overriding error.
[12]
Therefore, despite the able submissions of Ms.
Somerville Taylor, I would dismiss the appeals with costs. I would direct that
a copy of these reasons be placed in both files A-65-14 and A-66-14.
"David Stratas"
“I agree
Eleanor
R. Dawson J.A.:”
“I agree
D.G.
Near J.A.”
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