Citation: 2011 TCC 508
Date: 2011118
Docket: 2009-3948(IT)I
BETWEEN:
BROOKS ALLISEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal in
respect of the appellant’s 2006 taxation year. In filing his tax return for that
year, the appellant reported and claimed a business investment loss (BIL) of
$25,000. The Minister of National Revenue (the “Minister”) reassessed the
appellant, denying his claimed BIL and allowing a capital loss of $25,000.
[2]
In October 2002, the
appellant attended a conference in Vancouver where a
presentation was made to all those in attendance about investing in a business
as a partner. The business was identified as Chivas and more particularly as Chivas Growth
Fund Limited Partnership (CGFLP). The presenter was Mr. Michael Ruge, who
was at all relevant times the only shareholder of a company known as Chivas
Hedge Fund Ltd., which company was in fact doing business under the name of CGFLP.
[3]
The appellant later had
discussions with Mr. Ruge about a possible investment in Chivas. He was given
instructions and in fact received from Mr. Ruge as president of Chivas
Growth Fund Inc., which appears to be a second corporation, a letter dated
October 24, 2002 advising the appellant that he had two basic investment
choices. The letter also detailed exciting year-to-date returns on investment.
[4]
The appellant candidly
admitted he was not sure what he had actually invested in, and in particular he
was unaware whether he was buying shares in a corporation or units in a
partnership. In any event, the documents produced at trial show that the
appellant signed at some point a subscription form for 500 limited partnership
units in the capital of CGFLP at a unit price of $50 for a total of $25,000.
Two cheques were issued by the appellant on November 28, 2002 totalling $25,000
and payable to CGFLP. The next day a receipt for the total amount was issued to
the appellant by CGFLP. It is interesting to note that the October 24, 2002
letter to the appellant stated that the minimum investment was to go up from
$25,000 to $100,000 as of November 1 for investors in British Columbia and
Alberta. The appellant is from British Columbia.
[5]
It is also clear from
the documents that CGFLP’s business is defined as follows (Exhibit A-4):
The Limited Partnership intends to cause Advisors to acquire and
actively trade securities further to a variety of trading techniques from the
Net Proceeds from this Offering and cash on hand.
[6]
The appellant did
receive statements from CGFLP for part of 2003 regarding this investment. His
money was converted into U.S. funds and details of his returns were
provided. In December of 2002, the B.C. Securities Commission ordered that
trading in the securities of CGFLP cease until that entity filed an offering
memorandum and distribution report in the required form, which order was
partially revoked simply to permit CGFLP to make a cash refund of the purchase
price of its securities.
[7]
The appellant
subsequently attempted to get his money back from Mr. Ruge but Ruge, who was
the subject of an investigation by the B.C. Securities Commission, was
eventually fined and bankrupted. The appellant sued Mr. Ruge for $25,000 and on
July 17, 2006 obtained judgment against him for that amount, but never
collected. In filing his 2006 tax return, on the suggestion of his accountant
he claimed the BIL.
[8]
At the audit stage, the
auditor for the Canada Revenue Agency (CRA), reviewed the documents that had
been submitted by the appellant at the time and also conducted her own
investigation. The purpose of the audit was to determine if the loss qualified
as a BIL. The auditor was particularly interested in finding out if Chivas
Hedge Fund Limited doing business as CGFLP was a small business corporation as
defined in the Income Tax Act (the “Act”). Her investigation
revealed that Mr. Ruge and Chivas Hedge Fund Ltd., or Chivas in any form, had
violated securities law in distributing CGFLP units without a prospectus and
without being registered, and that Mr. Ruge had admitted to committing fraud
against the investors.
[9]
The auditor also was
able, through the CRA’s own system, to obtain the following information: Chivas
Hedge Fund Inc.’s activities were described as investment services; no revenues
were reported for its fiscal years ending December 31, 2001, 2002 and 2003; no
payroll account was indicated as existing; and consulting, management and
administrative fees in 2002 and 2003 of $11,351 and approximately $70,000
respectively were paid, which would indicate that there could not have been
more than six full-time employees. The auditor was also able to conclude that
Chivas Hedge Fund Ltd. did not appear to be associated with any other
corporation.
[10]
The issue before this
Court is whether the appellant is entitled to claim a BIL for his 2006 taxation
year. I would point out that other facts were revealed at trial that could
have altered the respondent’s treatment of the appellant’s capital loss. This
Court, however, has no authority to increase an assessment as the respondent
cannot appeal her own assessment.
[11]
On the issue of whether
Chivas was a small business corporation, the appellant’s representative argued
that the appellant believed that Chivas in any of its forms may have had
employees as the appellant was accompanied by traders on the night he attended
the conference. Unfortunately, this belief is not substantiated by the evidence
presented, and the appellant has not met his burden of proof on that issue.
[12]
In dealing with the
issue of whether Chivas was a small business corporation, I will not go through
all the requirements of the Act that must be met in order for an investment to
qualify as a BIL other that to refer to paragraph 39(1)(c), which
provides as follows:
a taxpayer’s business investment loss . . . from the disposition of
any property is the amount . . . by which the taxpayer’s capital loss for the
year from a disposition . . . to which subsection 50(1) applies . . . of
any property that is . . . a debt owing to the taxpayer by a Canadian–controlled
private corporation . . . that is . . . a small business corporation.
[13]
“Small business
corporation” is defined in subsection 248(1) of the Act as follows:
a Canadian–controlled private corporation all or substantially all
of the fair market value of the assets of which . . . is attributable to assets
that are . . . used principally in an active business carried on primarily in Canada by . . . the corporation . . .
[14]
The term “active
business”, also defined in subsection 248(1) means any business carried on
by a taxpayer other than a specified investment business or a personal services
business. A “specified investment business” is defined as follows in
subsection 125(7):
"specified investment business" carried on by a
corporation in a taxation year means a business (other than a business carried
on by a credit union or a business of leasing property other than real
property) the principal purpose of which is to derive income (including
interest, dividends, rents and royalties) from property but, except where the
corporation was a prescribed labour-sponsored venture capital corporation at
any time in the year, does not include a business carried on by the corporation
in the year where
(a) the corporation employs in the business
throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the
corporation provides, in the course of carrying on an active business,
managerial, administrative, financial, maintenance or other similar services to
the corporation in the year and the corporation could reasonably be expected to
require more than 5 full-time employees if those services had not been
provided.
[15]
In tax appeals, the
burden is on the appellant to establish, on a balance of probabilities that the
assessment issued against him is wrong in that the facts upon which the Minister
relied are incorrect. To that extent, the appellant must present a prima
facie case rebutting the Minister's assumptions of fact.
[16]
In this appeal, the
appellant had to establish on a balance of probabilities that he was entitled
to claim a BIL for his 2006 taxation year. The evidence presented is unclear as
to whether there was a debt owing to the appellant by a Canadian‑controlled
private corporation that was a small business corporation. The appellant is not
sure whether he invested in a partnership by buying units therein or whether he
bought shares in a corporation. The documentary evidence indicates that he
bought units in a partnership and that his investment was converted into U.S. funds, which would lead one to believe that the funds
were administered in the U.S. There is no evidence to support the
argument that the requirements for a BIL were met in the present case.
[17]
The appellant has not
met his burden of showing that he was entitled to a BIL for his 2006 taxation
year.
[18]
The appeal is dismissed.
Signed at Ottawa, Canada, this
18th day of November 2011.
« François Angers »
Email this Content