|
Citation: 2003TCC922
|
|
Date: 20031219
|
|
Docket: 2003-1900(IT)I
|
|
BETWEEN:
|
|
LARRY KILBACK,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
Docket: 2003-1901(IT)I
AND BETWEEN:
CAROL KILBACK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
|
____________________________________________________________________
REASONS FOR JUDGMENT
Beaubier, J.
[1] These appeals were heard together
on common evidence at Kelowna, British Columbia on December 5,
2003. Larry Kilback was the only witness. He is Carol's
husband. Larry's appeal is for 1998 and is of a reassessment
for 1998 which disallowed his claim for a spousal tax credit of
$5,380. The result of his appeal turns on whether Carol's
appeal is allowed or not. Therefore the substance of these
reasons relate to Carol.
[2] Paragraphs 3 to 12 inclusive of
the Reply to Carol's Notice of Appeal read:
3. In respect
of paragraph 3 of the Notice of Appeal, he admits that the Nevada
Bob's Canada Inc ("NBCI") shares
(the "Shares") were the only stocks the Appellant
has ever purchased and that the intention was to sell them but he
otherwise has no knowledge of and does not admit the facts
contained in that paragraph.
4. In respect
of paragraph 4 of the Notice of Appeal, he admits that the Shares
were purchased to sell at a profit but he otherwise has no
knowledge of and does not admit the facts contained in that
paragraph.
5. He denies
all other allegations of fact contained in that paragraph.
6. In filing
her Return of Income for the 1998 taxation year, the Appellant
claimed a business loss of $38,291.00 (the "Loss") in
respect of the disposition of the Shares.
7. The
Minister of National Revenue (the "Minister") initially
assessed the Appellant for the 1998 taxation year on April 26,
1999 as filed by the Appellant.
8. On February
28, 2002, the Minister reassessed the Appellant for the 1998
taxation year disallowing the Loss as a business loss and
allowing the Loss as a capital loss.
9. In so
assessing the Appellant for the 1998 taxation year, the Minister
relied on the following assumptions of fact:
a) the
Appellant did not carry on any active business in the 1998
taxation year;
b) in the
period from May 14, 1998 to June 24, 1998, the Appellant
purchased 122,100 shares of NBCI using funds provided by her
husband;
c) the
Appellant's husband provided the funds free of interest and
with no terms of repayment;
d) on or about
November 3, 1998, the Appellant sold 36,000 of the Shares for
proceeds of $34,863.00;
e) the
Appellant reported the Loss from the sale of the Shares as a
business loss, calculated as follows:
|
Gross income
|
$34,863.00
|
|
Less: Purchases
|
73,154.00
|
|
Net Loss
|
$38,291.00
|
f) after
December 31, 1998, the Appellant transferred the remaining Shares
to her husband, receiving no proceeds;
g) at all
relevant times, the Appellant:
i) was not
a trader or dealer in securities,
ii) had no
extensive history of buying or selling stocks, and
iii) had no
knowledge or experience in the securities market;
h) the buying
and selling of stocks was not part of the Appellant's
ordinary business;
i) the
time invested by the Appellant in the course of buying and
selling the Shares was minimal; and
j)
neither the Appellant or her husband received any insider
knowledge in respect of the Shares.
B. ISSUE
TO BE DECIDED
10. The issue is whether
the Loss reported by the Appellant is a business loss or a
capital loss.
C.
STATUTORY PROVISIONS RELIED ON
11. He relies on sections
9, 38 and 39 and subsection 248(1) of the Income Tax Act
(the "Act"), as amended for the 1998 taxation
year.
D.
GROUNDS RELIED ON AND RELIEF SOUGHT
12. He submits that the
Loss incurred by the Appellant in the 1998 taxation year from the
disposition of the Shares was not in respect of a business
carried on by the Appellant or an adventure in the nature of
trade and therefore was not a business loss. Therefore, the Loss
has been properly assessed as a capital loss according to section
38 of the Act.
[3] Assumptions 9 b), c), d), e), f),
g), h) and i) were not refuted by the evidence. Assumptions 9 a)
and j) are the heart of the dispute.
[4] The Court accepts all of
Larry's testimony as true. It also finds that Larry was the
operating mind in Carol's transactions, although Carol did
them of her own free will. This finding is made in the context of
what occurred.
[5] Larry and a partner each owned 50
per cent of a company that operated two Nevada Bob's
franchises in the lower mainland of British Columbia. In
1997's they sold them out for cash and shares in NBCI when
NBCI bought up all of its franchises in Canada. Larry and Carol
then moved to Kelowna and retired. Larry appears to be in his
late 50s. Larry's shares in NBCI were tied up in escrow-like
agreements so that he could not sell them on the Alberta Stock
Exchange, where NBCI was listed or, for that matter, elsewhere.
Nonetheless, in 1998 he had cash of about $250,000 or slightly
more as a result of the franchise sale.
[6] Larry stayed in contact with his
former employees at the lower mainland Nevada Bob's and with
the NBCI employee who negotiated the sale of Larry's
franchises. He also golfed occasionally with NBCI's chief
officer, Ian Higginson, who lived in Kelowna. The conditions on
his shares in NBCI were that he could sell 137,500 shares after
each of May 31, 1998, 1999, 2000 and 2001.
[7] Larry learned from these people
that NBCI was going to buy up all of its United States franchises
from its franchisees and that it was going to move its listing to
the Toronto Stock Exchange. NBCI's shares had been going up
in price and the consensus was that they would more than double
again. Larry and Carol discussed this and they thought so too.
Given Larry's tax and share restriction situation, they
decided that Carol would buy NBCI shares with money borrowed from
Larry. She did so through a local broker.
[8] Larry testified, and the Court
accepts it as true that they expected the shares at least to
double in value before April of 1999, that Carol would sell when
the shares doubled in value, that she would pay Larry back, and
that he would pay his large income tax bill with these monies at
the end of April, 1999. One of the many reasons this is believed
by the Court is that it is what most happily married couples who
are unfamiliar with the share capital business, its problems,
manipulations and machinations would think, plan and do - as they
did. It also fits in completely with their financial
circumstances and what they saw and heard respecting NBCI's
shares.
[9] But the price went down and kept
going down. They needed the money. So Carol sold in November 1998
at a loss. She had owned those shares for less than six
months.
[10] On the evidence, Carol used borrowed
money for the transaction, bought quickly, held for a short time,
intended to sell out within twelve months or less and did so,
apparently locked all of the couple's cash into the NBCI
shares, purchased shares that had no dividend history and were
listed on a lesser stock exchange and, on the evidence, she had
no other business or financial interests - she had no other
income. It was an organized scheme to make a quick, substantial
profit out of a prompt sale of a very substantial number of
shares.
[11] In the Court's view Carol conducted
a business transaction; it was an adventure in the nature of
trade.
[12] The appeals are allowed. These matters
are submitted to the Minister of National Revenue for
reconsideration and reassessment accordingly.
Signed at Saskatoon, Canada, this 19th day of December
2003.
Beaubier, J.
Email this Content