Date:
20031224
Docket:
2001-1849-IT-G
BETWEEN:
MERVYN DEAN
SMITH,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
O'Connor, J.T.C.C.
[1]
The principal facts in this appeal are set forth in the following
assumptions set forth in the Respondent's Reply,
namely,
11.
In so reassessing the Appellant for the 1996 taxation year, the
Minister made the following assumptions of fact:
...
b)
As of 1996 the Appellant had been employed for over thirteen
years as a stockbroker with Yorkton Securities Inc. in Calgary,
Alberta. As well as providing professional investment advice to
clients, the Appellant traded in securities on his own
behalf.
c)
The Appellant was a trader or dealer in securities.
d)
During the course of his employment, the Appellant had met and
developed a business relationship with Mr. Susumu Ikuta, the
president and CEO of Edo Japan a franchiser of fast food
restaurants.
e)
As a result of discussions with Mr. Ikuta, the Appellant decided
to open up an Edo of Japan franchise in Phoenix, Arizona. The
Appellant intended to sell the franchise at a profit once it
became a viable business.
f)
The Appellant would not have given up his employment to run the
Edo of Japan franchise in Phoenix, Arizona;
g)
In order to facilitate the transaction, the Appellant
incorporated the following corporations, 539406 Alberta Ltd. and
Smith and Chambers Ltd. (a U.S.A. Corporation). The Appellant
owned 85% of the shares of 539406 Alberta Ltd. 10% of the shares
were owned by his spouse, Myrna Chambers, while 5% were owned by
her daughter, Heather Chambers.
h)
539406 Alberta Ltd. was incorporated on August 24, 1992 solely
for the purpose of arranging Canadian financing for the Edo of
Japan franchise.
i)
Smith and Chambers Ltd. was a wholly owned subsidiary of 539406
Alberta Ltd. Smith and Chambers acquired the Edo of Japan
franchise in Phoenix, Arizona.
j)
After two years of not producing a profit the Appellant sold the
Edo of Japan franchise back to Edo of Japan for the amount of the
outstanding bank loan taken out to finance the
project.
k)
At the end of the 1996 taxation year, 539406 Alberta
Ltd:
i)
Was insolvent;
ii)
Did not carry on a business;
iii)
The fair market value of the shares was nil; and
iv)
Was to be dissolved and would not be commencing to carry on a
business.
l)
The debt owing to the appellant at the end of the 1996 taxation
year was established to be a bad debt in that year
m)
439406 Alberta Ltd. was struck from the Alberta Corporate
Registry on October 16, 1998
n)
539406 Alberta Ltd. was not a small business
corporation
o)
The shares in 539406 Alberta Ltd. were never advertised for
sale;
p)
The shareholders of 539406 Alberta Ltd. suffered a total loss of
$77,196 of which the Appellant's portion was $69,696. The
$69, 696 consisted of 100% of shareholder loans of $27,196 and
85% of the $50,000 loss on the sale of the shares.
q)
The purpose of the investment was to develop the Edo of Japan
franchise into a profitable enterprise
ANALYSIS AND CONCLUSION
[2]
Notwithstanding Interpretation Bulletin 497 and notwithstanding
that the Appellant was a securities trader I believe that one
must look at the individual transaction in question. Although the
investment was effected through holding of shares and a loan to a
corporation the actual intent of the Appellant was to acquire a
franchise, hopefully make it profitable and sell the investment
to make a quick profit. Again one must look at the individual
transaction.
[3]
It may be that the Appellant was wrong in filing for other years
on the basis that he had capital gains and capital losses in
various years. However, to definitely know this, one would have
to examine each of the transactions which gave rise to the gains
and losses and evidence on this was lacking.
[4]
It might also be that a trader in securities, in many cases when
making trades for his own account, will be considered as trading
on an income and business loss basis. The fact that the Appellant
may have reported some other gains and losses as capital gains
and capital losses is not determinative of the nature of the
transaction in question. Nor is the fact that he was a trader in
securities necessarily determinative.
[5]
Again it must be remembered that the loss actually results from
the disposition of the franchise and is made up of the loss on
the shareholder loan of $27,196 and the loss of $42,500 on the
sale of the shares of the corporation. It was not simply a loss
on a normal disposition of shares.
[6]
As will be seen from Exhibit A-1, Revenue Canada, first by a
letter of August 1, 1998, granted the Appellant a business loss
and only later did Revenue Canada change its mind and consider
the loss as a capital loss. There can be
no
estoppel against the Crown but there can no doubt
that at first glance Revenue Canada agreed with the Appellant on
the treatment to be accorded to the loss in question. The
Appellant contends that he used the U.S. company for legal
reasons as the owner of the franchise and he used 539406 Alberta
Ltd. as it was thought that the shares of that company would be
easier to sell once the franchise was shown to be
profitable.
[7]
The Appellant's ownership of the Edo franchise investment was
for less than two years. That is a time period consistent with
the concept of a quick flip and a business profit or loss as
opposed to a capital gain or loss. Moreover, a significant
portion of the Edo franchise acquisition was made with bank
financing.
[8]
In my opinion the facts, elements and motivations involved in the
investment in question lead more clearly to a conclusion that
this loss on the investment was a business loss. Consequently,
the appeal is allowed.
Signed at
Ottawa, Canada this 24th day of December, 2002.
J.T.C.C.COURT
FILE
NO.:
2001-1849(IT)G
STYLE OF
CAUSE:
Mervyn Dean Smith v. HMTQ
PLACE OF
HEARING:
Calgary,
Alberta
DATE OF
HEARING:
November 20, 2002
REASONS FOR
JUDGMENT
BY:
The Honourable Judge T. O'Connor
DATE OF
JUDGMENT:
December 24, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for
the
Respondent:
R. Scott McDougall
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa,
Canada
2001-1849(IT)G
BETWEEN:
MERVYN DEAN
SMITH,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on November 20, 2002 at Calgary, Alberta by
the
Honourable Judge Terrence O'Connor
Appearances
For the
Appellant:
The Appellant
himself
Counsel for
the
Respondent:
R. Scott McDougall
JUDGMENT
The appeal from the reassessment made under the Income Tax
Act for the 1996 taxation year is allowed, with costs and the
reassessment is referred back to the Minister of National Revenue
for reconsideration and reassessment on the basis that the
Appellant, in the 1996 taxation year, was entitled to a loss of
$69,696 consisting of one-hundred per cent of shareholder
loans of $27,196 to 539406 Alberta Ltd. and eighty-five per cent
of the $50,000 loss on the disposition of the shares of said
corporation and that the said total loss was a business loss
as
opposed to
a capital loss.
Signed at
Ottawa, Ontario this 24th day of December, 2002.
J.T.C.C.
Email this Content