Ciebien v. The Queen, docket 2000-338(IT)G

Date: 20020419

Docket: 2000-338-IT-G

BETWEEN:

DAVID CIEBIEN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Lamarre Proulx, J.T.C.C.

[1]            This is an appeal concerning the 1997 taxation year. It is a matter concerning the applicability of subsection 20.1(2) of the Income Tax Act (the "Act "), in a situation where, at any particular time after 1993, a taxpayer ceases to carry on a business and as a consequence, borrowed money would cease to be used by the taxpayer for the purpose of earning income from the business if it were not for the application of that legislative provision.

[2]            In the Notice of Appeal and in the Reply to the Notice of Appeal there was no mention of the possible application of section 20.1 of the Act. It is at the hearing that this matter was raised for the first time by the Appellant. There were other issues in the pleadings. At the end of the hearing, I asked Counsel for the Respondent and the Appellant to provide me with written notes on the possible application of section 20.1 of the Act. In his written submissions, the Appellant informed the Court that he was no longer appealing any other issue than the one concerning paragraph 20.1(2) of the Act.

[3]            The evidence revealed the following.

[4]            On October 19, 1988 David and Christa Ciebien mortgaged their property in the amount of $121,500. The loan reference was 0749-5-11814.

[5]            On October 20, 1988, the Appellant and his wife acquired two hair salons for a price of $150,000. These salons were franchised to operate under the license of Fantastic Sam's.

[6]            On October 22, 1988, the Appellant and his spouse entered into a license agreement with W.S. Hair Salons Ltd. to use the franchise of Fantastic Sam's for their salons.

[7]            One salon was located at 10211 King George Highway, Surrey and the other at 10790 - 148th Street, Surrey, British Columbia. The address of the second salon could also have been 14806 - 108th Avenue, Surrey, since it is this address that appears in the invoices for the year 1990.

[8]            The Appellant and his spouse defaulted in the payment of the weekly license fees and in 1990 were ordered by the Supreme Court of British Columbia to cease operation under the trademarks and name of Fantastic Sam's.

[9]            Accordingly, the Appellant and his spouse changed the names of the hair salons to Surrey Hair World and continued to operate them under that name. Subsequently, the hair salon on King George was closed in 1992. The other salon operated until 1994.

[10]          That salon carrying on business under the name of Surrey Hair World, located at 14806 - 108th Avenue, Surrey, B. C., was sold to Frank El-Asmar for $11,000. The agreement was signed on August 21, 1994. The closing date was August 28, 1994.

[11]          At tab 3 of Exhibit A-1, is found the statement of mortgage account for 1994. It shows an opening balance on the last day of 1993 as being of $114,188.68; interest charged for period: $8,975.28; payments received, principal and interest: $11,670.88, principal prepayments: $4,000; a closing balance on December 31, 1994: $107,493.08.

[12]          Also at tab 3 of Exhibit A-1, can be found the statement of mortgage account for 1997. It shows the opening balance to be in the amount of $99,726.72 and the interest charged in the amount of $8,286.36; the payments received (principal and interest) in the amount of $12,974.20. The closing balance is $95,218.88.

[13]          The business fiscal period as shown at tab 4 of Exhibit A-1 was from November 1 to October 31 of the relevant years.

[14]          Paragraph 20.1(2) of the Act reads as follows:

20.1(2)     Where at any particular time after 1993 a taxpayer ceases to carry on a business and, as a consequence, borrowed money ceases to be used by the taxpayer for the purpose of earning income from the business, the following rules apply:

(a)            where, at any time (in this paragraph referred to as the "time of disposition") at or after the particular time, the taxpayer disposes of property that was last used by the taxpayer in the business, an amount of the borrowed money equal to the lesser of

(i)             the fair market value of the property at the time of disposition, and

(ii)            the amount of the borrowed money outstanding at the time of disposition that is not deemed by this paragraph to have been used before the time of disposition to acquire any other property

shall be deemed to have been used by the taxpayer immediately before the time of disposition to acquire the property;

(b)            subject to paragraph (a), the borrowed money shall, after the particular time, be deemed not to have been used to acquire property that was used by the taxpayer in the business;

(c)            the portion of the borrowed money outstanding at any time after the particular time that is not deemed by paragraph (a) to have been used before that subsequent time to acquire property shall be deemed to be used by the taxpayer at that subsequent time for the purpose of earning income from the business; and

(d)            the business shall be deemed to have fiscal periods after the particular time that coincide with the taxation years of the taxpayer, except that the first such fiscal period shall be deemed to begin at the end of the business last fiscal period that began before the particular time.

[15]          I will quote some of Counsel for the Respondent's written submissions on the application of subsection 20.1(2) of the Act:

3.              However, for this expanded deduction principle to apply, one must demonstrate that the conditions prescribed by the said section 20.1 and in the present matter the specific conditions set by subsection 20.1(2) of the ITA are met.

4.              First, it must be demonstrated that the taxpayer ceased to carry on a business at any time after 1993. In the present case, the evidence presented by the Appellant is not clear as to when exactly the Appellant ceased to operate his business.

5.              In addition, the following elements must also be proven by the one claiming the deduction:

·          s. 20.1(2)(a): the time of disposition; what property that was last used by the taxpayer was the object of disposition;

·          s. 20.1(2)(a)(i): the fair market value of the property at the time of disposition;

·          s. 20.1(2)(a)(ii): the amount of the borrowed money outstanding at the time of the disposition;

·          s. 20.1(2)(d): what was the business last fiscal period that began before the "particular time".

6.              These essential facts are required to be proven by the Appellant in order to claim the deduction allowed under subsection 20.1(2). The Appellant failed to provide any evidence regarding any of those required facts at any time. The figures referred to in the course of the presentation of his legal arguments do not constitute evidence or proof of any of the elements required. The lack of evidence on this particular issue is crucial and the Appellant cannot succeed in his appeal with respect to this issue.

[16]          I quote some of the Appellant's written submissions:

2.              ... In the Appellant's case the proceeds from the original loan were used in the same business up until the time that the business was sold in 1994. NO other businesses were bought or sold by the Appellant in this period. The original loan of $121,500 which was used to acquire the business resulted in proceeds from sale of $11,000 approximately 6 years later. The proceeds were used to payoff a portion of the loan. In the Appellant's case, both the original use of funds and the current use of funds in 1994 when the business was sold were similar and that was for the purchase of a hair salon business.

...

4.              With regard to the Respondent's contention that I failed to demonstrate that the business ceased at any time after 1993, the Appellant included in his documentation the bill of sale dated August 21, 1994. The document clearly shows that the Appellant ceased owning the salon on August 28, 1994. The Appellant did not own any other assets related to the hair salon following this date.

5.              The Respondent claims that the Appellant must prove what property was sold. The sales agreement which was submitted as evidence states that it applies to a Hair Salon located at 14806 - 108th Ave., Surrey, BC. It includes "the furniture, fixtures and equipment, all saleable stock, the leasehold interest and goodwill."

6.              The Respondent states that the Appellant must show the fair market value of the property at the time of disposition. The fair market value at the time of disposition was what I received in an arm's length sale to a third party after having advertised the business for a considerable period of time and amounted to $11,000. The disposition proceeds were clearly shown in the sales agreement which was part of the Appellant's documentation which was provided to the Respondent weeks prior to the hearing. No other assets were owned by the Appellant related to hair salons following that date.

7.              The Respondent states that the Appellant must show the amount of borrowed money outstanding at the time of the disposition. The Appellant provided the Respondent with the mortgage statement for 1994 showing the principal amount outstanding on both the first and last day of the year. Based on the bank statement, the amount outstanding on August 28, 1994 was therefore about $112,423.62 based on the evidence provided. Several subsequent mortgage statements are also provided which support this amount.

8.              The Respondent asks the business' fiscal period that began before the "particular time". The fiscal period is stated on the business income and expense statement which was provided with the tax return and again in the documentation to this case. The period was November 1, 1993 - October 31, 1994. The business however was sold on August 28, 1994.

9.              The Respondent has no real arguments against the applicability of section 20.1(2) to the Appellant's case so he is now challenging the question of whether the documentation is in order. The Appellant provided all the facts the Respondent claims are required. The Appellant presented his book of documents to the Court. The Respondent had copies of all documents in question several weeks prior to the Court date. If the Respondent had any questions regarding the documents, he should have posed his questions while the Appellant was on the stand.

Conclusion

[17]          The evidence has revealed that the borrowing had been made for the purpose of acquiring hair salons that were franchised, not only for the franchises as seems to have been thought by the Respondent. When the franchises were lost, the business of the hair salons continued.

[18]          The sale of the hair salon took place on August 28, 1994, that is, after 1993. I have no reason to doubt that the price obtained for its sale was the price that the Appellant was able to get and that the deal was made at arm's length.

[19]          Counsel for the Respondent argued that the figures referred to in the course of the presentation of the Appellant's legal arguments did not constitute evidence. Regarding this submission, it has to be said that the documents referred to by the Appellant were all in his book of documents produced as Exhibit A-1. It is true that they were among a jumble of other irrelevant documents. However, if Counsel for the Respondent had wanted a reopening of the hearing to question some of the most relevant documents, in particular those in respect of the sale of the hair salon on August 28, 1994, he could have asked for it and I could have considered the request favourably.

[20]          It is my view that the Appellant come within the purview of subsection 20.1(2) of the Act and that he is entitled to deduct the payments made on the portion of the borrowed money outstanding at any time after August 21, 1994, that is not deemed by paragraph 20.1(2)(a) of the Act to have been used before that subsequent time to acquire property. In accordance with paragraph 20.1(2)(d) of the Act, the business shall be deemed to have fiscal periods after the particular time that coincide with the taxation years of the taxpayer, except that the first such fiscal period shall be deemed to begin at the end of the business last fiscal period that began before August 28, 1994.

[21]          The appeal is allowed and the Appellant's assessment is referred back to the Minister for reconsideration and reassessment on the basis of what is expressed in the preceding paragraph. No costs shall be awarded.

Signed at Ottawa, Canada, this 19th day of April, 2002.

"Louise Lamarre Proulx"

J.T.C.C.

COURT FILE NO.:                                                 2000-338(IT)G

STYLE OF CAUSE:                                               David Ciebien and Her Majesty the Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           November 19, 2001

REASONS FOR JUDGMENT BY:      The Hon. Judge Louise Lamarre Proulx

DATE OF JUDGMENT:                                       April 19, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Gatien Fournier

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-338(IT)G

BETWEEN:

DAVID CIEBIEN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on November 19, 2001 at Ottawa, Ontario by

the Honourable Judge Louise Lamarre Proulx

Appearances

For the Appellant:                                         The Appellant himself

Counsel for the Respondent:                          Gatien Fournier

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1997 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgement.

          The Appellant is not entitled to any further relief.

Signed at Ottawa, Canada, this 19th day of April, 2002.

"Louise Lamarre Proulx"

J.T.C.C.