Docket: A-323-14
Citation: 2015 FCA 204
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CORAM:
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NADON J.A.
PELLETIER J.A.
GAUTHIER J.A.
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BETWEEN:
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LOUIS-FRED MARTIN
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Appellant
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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
NADON J.A.
[1]
This is an appeal from a decision by Justice
Boyle (the Judge) of the Tax Court of Canada (the Tax Court) dated June 19,
2014, 2014 TCC 200, dismissing the appellant’s appeal against an assessment
made under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act),
for the 2010 taxation year.
[2]
More specifically, the Judge found that the
appellant was entitled to neither a $14,000 deduction for income loss for his
2010 taxation year nor a capital loss of $14,800,000 for the same year.
[3]
The present tax dispute arises from the fact
that the appellant, who had been working for the financial advice company
Promutuel since 2005, lost his job in June 2010 after his employer was bought by
the Peak brokerage firm.
[4]
Unfortunately for the appellant, he was unable
to find a job with another brokerage firm, nor was he able to obtain the
requisite approval from the provincial authorities to become an independent
financial advisor or to establish his own firm. As a result, his clients did
not follow him and continued to do business with Peak.
[5]
According to the appellant, Peak stole the
clients he had been serving for several years.
[6]
This is the background of the dispute brought before
the Judge and before this Court.
[7]
Regarding the loss of income he alleges he
suffered in the 2010 taxation year, the appellant explained before the Tax
Court that $14,000 represented a net income of $2,000 a month which the clients
he had while he was working at Promutuel would have generated for him from June
to December 2010.
[8]
In other words, according to the appellant, the
$14,000 constitutes the income he could have earned had he continued working as
a financial advisor after leaving his former employer.
[9]
The Judge was of the opinion that the loss
claimed by the appellant was not a tax loss under the Act. According to the
Judge, since a loss of income only arises to the extent that the expenses
incurred by the taxpayer in a year exceed income for that same year, the
appellant’s claim had to be dismissed on the basis that he had not earned any
income during the 2010 taxation year. Consequently, the $14,000 in income
anticipated by the appellant but not earned by him could not give rise to a
deduction for loss of income. In other words, no income, no eligible expenses.
[10]
Regarding the capital loss, the appellant argued
before the Judge that the loss of his clients represented the loss of a
valuable asset. According to the appellant, this loss was equal to the difference
between the value of his client base, calculated by taking into account the income
this client base was capable of generating and the fact that he received no
compensation for this client base after he left Peak.
[11]
The appellant further argued before the Judge
that his capital loss was higher since there had to be added to the loss all
the costs related to the disposition of the asset (the theft) that he had to
incur. To be included in these costs is the value of his own property,
including his home and other property seized or lost as a result of his
insolvency.
[12]
According to the appellant, the adjusted cost
base of his capital loss amounted to $800,000, which he increased to $14,800,000
after he filed his income tax return for the 2010 taxation year.
[13]
Here is how the Judge explains the situation in
paragraphs 7 and 8 of his reasons:
[7] In computing his capital loss, to
reflect his loss of his valuable clientele, M. Martin estimated his
adjusted cost base to be $800,000. Using a 3% assumed annual return on investment,
an $800,000 pool would have been needed to generate his $24,000 anticipated but
lost revenues. Since he had received nothing from Peak or anyone else for his
clientele, M. Martin claimed an $800,000 capital loss in his 2010 tax return.
It is his position that his capital loss should be repaid to him and not simply
available to reduce future capital gains.
[8] After filing his 2010 tax return, M.
Martin sought to claim $14,000,000 of disposition costs for his former
clientele and increase his capital loss by a like amount – from $800,000 to
$14,800,000. M. Martin arrived at his $14,000,000 disposition costs number as
follows. He estimated that $2,000,000 was the value of his property seized or
lost as a result of the loss of his clientele and the revenue generated
thereby. This included the value of his home, his country property, his
collection of vehicles, his library, and all of his other collections and
belongings. As mentioned, these properties were seized as a consequence of his
resulting financial difficulties. M. Martin then multiplied the $2,000,000
value of his lost property by seven, relying upon the proverbial exhortation to
thieves to pay back sevenfold what they stole.
[14]
The Judge rejected the appellant’s arguments and
concluded that the loss did not qualify as a capital loss.
[15]
First of all, it was not clear to the Judge that
the clients served by the appellant were property owned by the appellant and
thus susceptible of being sold. In this regard, the Judge noted that a capital
loss generally represents a loss resulting from the disposal of property
belonging to a taxpayer.
[16]
Second, the Judge pointed out that the adjusted
cost base of a capital asset that has been disposed of generally reflects the
after-tax amounts expended by a taxpayer for the asset and for its improvement.
According to the Judge, this is clear from sections 53 and 54 of the Act.
Consequently, the Judge was satisfied that the Act in no way permitted the
fixing of the cost of property on the basis of its market value since such an
approach would remove any possibility of capital gains being realized under the
Act.
[17]
The Judge then noted the fact that the appellant
had not bought his clientele, adding that the expenses incurred by him to build
up that clientele had been claimed and allowed as business expenses in the
years in which they were so incurred.
[18]
Lastly, at paragraph 13 of his reasons, the
Judge found that the object of the provisions of the Act dealing with the
concepts of income loss and capital loss was not the compensation of a taxpayer
for financial losses resulting from a breach of contract or a theft. Yet this,
in his opinion, seemed to be the goal of the appellant’s appeal from the
assessment made in the instant case with respect to the appellant’s 2010 taxation
year.
[19]
In my view, a close reading of the appellant’s
memorandum confirms beyond any doubt the thinking of the Judge stated at
paragraph 13 of his reasons. More specifically, the appellant’s memorandum does
not in any way address the issue actually before the Judge or before us in this
appeal, namely, the deductibility of lost income and of capital losses under
the Act. It is important to note that, at the hearing before us, the appellant
continued to assert that he was entitled to reimbursement or compensation for
the financial losses he suffered after leaving Peak.
[20]
It is clear that what the appellant is seeking here
is to be reimbursed for the losses he suffered as a result of the breach of his
employment contract with Peak and as a result of the “theft” of his clientele.
There can be no question that the Tax Court has no jurisdiction with respect to
such a claim and that it cannot order the reimbursement sought by the
appellant.
[21]
In conclusion, the Judge held as he did on the
basis of specific provisions of the Act and generally accepted accounting
principles. The appellant did not satisfy me that the Judge erred either in law
or in his assessment of the facts before him.
[22]
Consequently, I would dismiss the appeal with
costs.
“M Nadon”
“I agree.
J.D. Denis Pelletier J.A.”
“I agree.
Johanne
Gauthier J.A.”
Certified true translation
Erich Klein
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