Sandra Munn v. Minister of National Revenue, [1983] CTC 2153, 83 DTC 136

Guy Tremblay:—This appeal was heard on July 13, 1982, at the City of St John’s, Newfoundland.

1. The Point at Issue

The point at issue is whether the appellant has the choice of electing to claim a capital loss or a business investment loss in the computation of her income for the 1978 and 1979 taxation years, the business investment loss being financially more advantageous to her.

2. 1979 Taxation Year

At the commencement of the hearing, counsel for the respondent made a motion to dismiss the appeal concerning the 1979 taxation year on the basis that it is a nil assessment.

Indeed, the Board has no jurisdiction to hear such an appeal, therefore it was dismissed from the bench. Tribunals have many times given decisions about that.

3. The Burden of Proof

3.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3.02 In the same judgment, the Court decided that the assumed facts on which the respondent based the assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to the notice of appeal as follows:

4. In so reassessing the Appellant’s income tax liability, the Respondent relied, inter alia, on the following assumptions of fact:

(a) The 336 shares owned by the Appellant in Baird & Company Limited were

shares of capital stock of a Canadian-controlled private corporation;

(b) The Appellant still owned the 336 shares referred to in paragraph 4(a) on December 31, 1979;

(c) As a result of the bankruptcy of Baird & Company Limited on March 27, 1979, the Appellant was deemed to have disposed of the 336 shares at the end of her 1979 taxation year and to have reacquired them immediately thereafter at a cost equal to nil;

(d) The Appellant incurred a business investment loss with respect to the deemed disposition of the 336 shares referred to in paragraph 4(c) in the amount of $126,000.00;

(e) The Appellant’s allowable business investment loss in 1979 was $63,000.00;

(f) The Appellant’s total income in 1978 and 1979 was as follows:

1978 — $44,049.00

1979 — $48,990.00

4. The Facts

The facts are not in dispute.

4.01 On August 28, 1972, the appellant inherited three hundred and thirty six (336) common shares in Baird & Company Limited from the estate of her father. the late James Baird.

4.02 At the time of death, a value of one hundred and twenty six thousand dollars ($126,000) was accepted by the Department of National Revenue as the value of the three hundred and thirty six (336) common shares.

4.03 On March 27, 1979, Baird & Company Limited was adjudicated as bankrupt.

4.04 As a consequence of the bankruptcy of Baird & Company Limited, the appellant was deemed to have disposed of the said shares at the end of 1979 for nil thereby incurring a loss of one hundred and twenty six thousand dollars ($126,000).

4.05 The said loss of the appellant, upon the deemed disposition of the said shares in Baird & Company Limited, was claimed as a capital loss for the taxation years ended December 31, 1978 and 1979.

4.06 The said loss of the appellant, upon the deemed disposition of the said shares in Baird & Company Limited, was reassessed as an allowable business investment loss.

9. Law — Analysis

5.01 Law

The provisions of the Income Tax Act, SC 1970-71-72, c 63, as amended, involved in the present case are paragraphs 3(b), 3(d), 3(e), section 38, and paragraphs 39(1 )(b), 39(1 )(c), 111 (1 ) (a), and 111 (8)(b).

5.02 Analysis

5.02.1 In claiming a capital loss, the appellant wants to be able to deduct from capital accumulations in the future. As the appellant has no business investment income at all to permit it to be used in business investment loss, and as she has income from capital assets, therefore she prefers to consider the loss as capital loss and not to be precluded from deduction.

5.02.2 The allowable business investment of $63,000 was deducted by the respondent ($14,148 in 1978 and $48,852 in 1979).

CCH Canadian Limited well explained the application of the business investment loss and the capital loss:

One-half of a taxpayer’s business investment loss for a year is the taxpayer’s allowable business investment loss under paragraph 38(c). Under section 3 the allowable business investment loss is not deducted from taxable capital gains but is deducted in whole from income from all sources. One-half of ordinary capital losses are deducted from taxable capital gains and then, in the case of an individual, from other income to the maximum of $2,000 each year.

If the taxpayer’s allowable business investment loss in a year exceeds his income from all sources for that year, the excess may be carried back one year and forward five years as non-capital loss and applied against income from all sources in those years. . . . Ordinary allowable capital losses may be carried back one year and forward indefinitely but may be applied only against taxable capital gains and, in the case of an individual, against up to $2,000 each year of other income.

(CCH Topical Law Reports, page 5157)

5.02.3 The appellant’s contention is that when the Income Tax Act was amended in 1978 to provide that capital loss could be included in business investment income, the legislator’s intention was to give to the taxpayer a wider applicability of deductibility: “It was for the benefit of the taxpayer that this particular provision was brought in.”

In fact, the crux of the matter is “can the tax authority compel that the loss be treated as a business investment or can the taxpayer elect to treat it as a capital loss”?

5.02.4 Firstly, it is obvious to the Board that a business investment loss is a capital loss. This clearly appears from the definition of business investment loss given in paragraph 39(1 )(c) of the Act:

Sec 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 his capital loss for the year from a disposition after 1977 . . .

It is a capital loss, but it is a special capital loss to which the legislator gives a particular treatment: it is entirely deductible from income of all sources. The appellant’s contention that it can also be deductible from taxable capital gain is based first on the fact that in paragraph 39(1 )(e) of the Act, the legislator used the word “is” rather than the words “shall be”. In using “shall be”, the legislator would have made the provision mandatory. In using “is” it is not mandatory. Therefore, it leaves open for the taxpayer to elect to treat it either as a capital loss or as a business investment loss.

Moreover, counsel for the appellant referred to Interpretation Bulletin IT- 484 dealing with business investment losses. He said:

.. . where a business investment loss is realized by the estate of a deceased taxpayer in its first taxation year, an election may be filed to treat the amount as a business investment loss of the deceased, in the year of death, rather than merely as a capital loss. (SN page 15)

. . . In fact, paragraph 9 of the said Interpretation Bulletin reads as follows:

9. Where the estate of a deceased taxpayer realizes in its first taxation year, a capital loss that qualifies as a business investment loss, it is the Department’s view that an election under subparagraph 164(6)(d)(i) may be utilized to effectively have it treated as a business investment loss of the deceased in the year of death in the application of subsection 164(6), rather than merely as a capital loss of the deceased in that year. Of course this treatment would be effective only for the amount of the business investment loss less the excess of any capital gains over capital losses other than business investment in the estate. To the extent that a business investment loss is subject to such an election it would not be deducted from other income pursuant to paragraph 3(d) in computing the income of the estate.

The fundamental issue to be retained is that there are specific provisions in the Act which provide that a taxpayer can make an election (subparagraphs 164(6)(d)(i) and (ii)). These provisions existed before the application of the business investment loss.

0.02.5 It is the Board’s opinion that the appellant’s theory is economically logical and pursuant to equity. However, the Board cannot share the appellant’s opinion that the provisions of the Act providing the business investment loss can be construed in the sense that the taxpayer can make an election to treat the loss either as a capital loss or as a business investment loss.

When the legislator has the intention to permit an election to the taxpayer, it is clearly stipulated. One may read, among others, subsections 28(1), 29(1), 39(4), 45(2), 85(1) and 104(14) of the Act, which are all provisions whereby the taxpayer may make an election in the calculation of income.

If it is the legislator’s intention to permit an election to the taxpayer, he must clearly express it.

5.02.6 Given the provisions of the Act quoted above, as they are written, it is the Board’s opinion that one must conclude that the legislator has not given the taxpayer the choice of making an election.

(a) In paragraph 39(1 )(b) of the Act, the legislator, in giving the definition or better the computation of the capital loss pursuant to section 3, expressly excludes the business investment loss provided in paragraph 3(d).

(b) Moreover, the legislator in subparagraph 3(b)(ii) of the Act expressly excludes business investment loss in the computation of capital loss to be subtracted in the computation of taxable capital gain for the year.

(c) The same logic is followed by the legislator in paragraph 111 (8)(b) of the Act which provides the definition of non-capital loss (business loss). Indeed, business investment loss is included in business loss, the balance of which may be deducted in the computation of the income of the taxpayer’s fiscal year preceding the year of the loss and in the computation of the five fiscal years following the year of the loss, as provided for in paragraph 111 (1 )(a).

5.02.7 The Income Tax Act must be construed as it is written. The legislator has not clearly permitted an election to the taxpayer to treat the said loss as a Capital loss or as a business investment loss, despite the fact that it seems that it would be equitable and economically logical to permit such an election.

6. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.