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Citation: 2004TCC549
Date: 20040827
Docket: 2002-4041(IT)I
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BETWEEN:
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MARKUS SCHMALZ,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
(delivered orally from the Bench at
Calgary, Alberta, on June 17, 2004)
[1] This appeal pursuant to the
Informal Procedure was heard at Calgary, Alberta on June 15,
2004. The Appellant was the only witness.
[2] Paragraphs 5 to 16 inclusive of
the Reply to the Notice of Appeal outline the matters in dispute.
They read:
5. By Notice
of Assessment dated August 17, 2001, the Minister assessed the
Appellant for the 2000 taxation year to, inter alia:
a) Disallow
the Appellant's claim for an ABIL of $135,707.25; and
b) Disallow,
in the calculation of the Appellant's tax payable, tax
deductions at source of $2,247.53.
6. On October
24, 2001, the Appellant filed a Notice of Objection on the basis
that:
a) Tax
deductions at source of $2,247.53 should be allowed; and
b) The
Appellant should be allowed an ABIL of $66,110.00, calculated as
follows:
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Proceeds
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$ --.
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Due to shareholder
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99,176.00
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Less - Share Capital
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(10.00)
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Business Investment Loss
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$99,166.00
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X 2/3
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ABIL
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$66,110.00
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7. By Notice
of Reassessment dated July 22, 2002, the Minister reassessed the
Appellant for the 2000 taxation year to allow, in the computation
of his tax payable, tax deductions at source of $2,247.53.
8. In so
assessing the Appellant for the Appellant's 2000 taxation
year, the Minister relied on the following assumptions of
fact:
a) On June 4,
1996, MUC was incorporated as 698494 Alberta Ltd.
b) MUC was
engaged in the business of forestry operations.
c) The
Appellant was married to Ursula Schmalz in the Appellant's
2000 taxation year.
d) At all
material times, the Appellant held 38% of the voting shares of
MUC.
e) At all
material times, Ursula Schmalz held 38% of the voting shares of
MUC.
f) At
all material times, Clinton Roszell held 25% of the voting shares
of MUC.
g) The
Appellant did not deal with MUC at arm's length.
h) On October
14, 1997, the Appellant executed a personal guarantee in respect
of MUC's indebtedness to Canadian Western Bank (the
"Appellant's Guarantee").
i)
Ursula Schmalz executed a personal guarantee of the indebtedness
of MUC to Canadian Western Bank.
j) The
Appellant did not pay any amount under the Appellant's
Guarantee in respect of the indebtedness of MUC to Canadian
Western Bank.
k) No debt was
owing to the Appellant by MUC at the end of the Appellant's
2000 taxation year in respect of the indebtedness of MUC to
Canadian Western Bank.
l) No
debt was owing to the Appellant by MUC at the end of the
Appellant's 2000 taxation year in respect of any legal
obligation of the Appellant to pay amounts in respect of the
indebtedness of MUC.
m) No debt was owing
to the Appellant by MUC at the end of the Appellant's 2000
taxation year in respect of personal funds loaned by the
Appellant to MUC as a shareholder loan or in respect of any other
outstanding shareholder loan or outstanding shareholder loans
made by the Appellant to MUC.
n) No debt was
owing to the Appellant by MUC at the end of the Appellant's
2000 taxation year in respect of any other loan or transfer of
funds by the Appellant to MUC.
o) If a debt
was owing to the Appellant by MUC at the end of the
Appellant's 2000 taxation year, which is denied, no debts
were established by the Appellant to have become bad debts in
respect of MUC in the Appellant's 2000 taxation year.
p) If the
Appellant incurred a loss in the Appellant's 2000 taxation
year, which is denied, such a loss was not in respect of the
disposition of a debt or other right to receive an amount that
was acquired by the Appellant for the purpose of gaining or
producing income from a business or property or as consideration
for the disposition of capital property to a person the Appellant
was dealing with at arm's length.
q) The
Appellant's ordinary business during the Appellant's 2000
taxation year did not include the lending of money.
r) MUC
did not cease permanently to carry on business in the
Appellant's 2000 taxation year.
s) MUC was
dissolved on December 2, 2001.
B. ISSUES
TO BE DECIDED
9. The issue
are:
a) Whether, in
computing income for the Appellant's 2000 taxation year, the
Appellant is entitled to deduction in respect of an ABIL
calculated in respect of a business investment loss of
$99,166.00; and
b) If the
Appellant is entitled to deduction in respect of an ABIL for the
Appellant's 2000 taxation year, which is denied, which period
the business investment loss was incurred and, as such, which
fraction applies to the Appellant under paragraph 38(c) of the
Act.
C.
STATUTORY PROVISIONS RELIED ON
10. He relies on sections
3, 38, 39, 110.6 and 251, subsections 50(1), 125(7), and 248(1),
paragraphs 20(1)(p), and subparagraph 40(1)(g)(ii) of the
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended
(the "Act").
D.
GROUNDS RELIED ON AND RELEIF SOUGHT
11. He submits that the
Appellant did not incur a business investment loss of $99,166.00
and is therefore not entitled to an allowable business investment
loss of $66,110.00 pursuant to paragraphs 38(c) and 39(1)(c) of
the Act.
12. He respectfully
submits that the Appellant did not have a capital loss in the
Appellant's 2000 taxation year; therefore, there is no loss
to consider in the calculation of a business investment loss;
therefore, paragraph 39(1)(c) of the Act is not applicable to the
Appellant in respect of the Appellant's 2000 taxation
year.
13. He further submits
that no debt was owing to the Appellant by MUC at the end of the
Appellant's 2000 taxation year; therefore, the Appellant had
no debt that could be established by the Appellant to have become
a bad debt in respect of MUC within the meaning of subsection
50(1) of the Act in the Appellant's 2000 taxation year.
14. He further submits
that, even if a debt was owing to the Appellant by MUC at the end
of the Appellant's 2000 taxation year, which is denied, no
debt was established by the Appellant to have become a bad debt
in the Appellant's 2000 taxation year pursuant to subsection
50(1) of the Act.
15. He further submits
that the Appellant did not elect in his return of income for the
Appellant's 2000 taxation year to have subsection 50(1) of
the Act apply in respect of the alleged debt owing to the
Appellant by MUC; therefore, the Appellant is not deemed to have
disposed of the alleged debt at the end of the Appellant's
2000 taxation year for proceeds equal to nil and will not have
reacquired the alleged debt immediately after the end of 2000 at
a cost equal to nil, pursuant to subsection 50(1) of the Act.
16. He further submits
that the loss claimed by the Appellant was not in respect of the
disposition of a debt or other right to receive an amount that
was acquired by the Appellant for the purpose of gaining or
producing income from a business or property or as consideration
for the disposition of capital property to a person the Appellant
was dealing with at arm's length; therefore the
Appellant's capital loss, if any, arising from the
disposition of that debt would be nil, pursuant to subparagraph
40(2)(g)(ii) of the Act; accordingly, for the purpose of section
3 of the Act, the Appellant had no business investment loss
within the meaning of paragraph 39(1)(c) of the Act.
[3] Assumptions 8 a), b), c), g), h)
and i) were not refuted.
[4] Respecting the remaining
assumptions in paragraph 8:
d), e) and
f)
The shareholdings until December 30, 1999 were:
Markus 37.5%
Clint
25
%
Ursula
37.5%
On December 30, 1999, by a buy-sell agreement, Markus acquired
100 percent of the shares.
j) December
22, 1999 Markus paid MUC's trustee in bankruptcy $40,000 in
trust for MUC's creditor Canadian Western Bank. Trust
conditions were satisfied on January 5, 2000, when the $40,000
was paid out as follows:
(1) Canadian Western
Bank
$37,500
(2) Trustee
fees
$2,500 (Exhibit A-2)
In December, 1996 or in early 1997 Markus loaned the sum of
$35,046 to MUC which was never repaid. (Exhibit A-2).
In October, 1998, Ursula Schmalz loaned the sum of $8,000 to
MUC. (Exhibit A-2).
k), l), m) and n) In the
evidence, MUC owed the Appellant himself $75,046 at the end of
2000, of which $40,000 related directly to the indebtedness of
MUC to Canadian Western Bank. All of these were shareholder loans
to MUC and were elected as ABILs by the Appellant in the year
2000, the same year in and for which he elected to declare them
as bad debts.
o) All of these debts
were bad. On the evidence any debts factually became bad debts
when MUC's forestry equipment was surrendered to Canadian
Western Bank on April 21, 1999 after which MUC was defunct and
could not recover. (Exhibit A-1).
p) The Appellant's
bad debts respecting MUC were incurred for the purpose of gaining
or producing income from his shares in MUC.
q) Is correct.
r) MUC did cease
permanently to carry on business in the Appellant's 2000 tax
year.
[5] Thus, respecting the amounts in
question:
(1) $35,046 factually became a bad
debt on April 21, 1999 and was so elected in 2000. Therefore it
qualifies as a bad debt and an ABIL at any time thereafter chosen
by the Appellant, namely in 2000.
(2) $40,000 was a bad debt on January
5, 2000 when it was released from trust conditions by the
trustee. It was elected as a bad debt and ABIL in 2000. The
Appellant's taxation year end is not in evidence, but he is
an individual and it is assumed (but not so found) that his 2000
taxation year end is December 31. The fraction to be applied
shall be reassessed in accordance with these findings.
[6] This appeal is referred to the
Minister of National Revenue for reconsideration and reassessment
accordingly. The Appellant is awarded his disbursements incurred
in respect to this appeal which are fixed at $200.
Signed at Saskatoon, Saskatchewan, this 27th day of August
2004.
Beaubier, J.
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