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Citation: 2003TCC917
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Date:20031229
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Docket: 2003-384(IT)I
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BETWEEN:
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EDWARD J. PAINTER,
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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
O'Connor, J.
[1] This appeal was heard at
Vancouver, British Columbia on September 24, 2003.
[2] The facts and issues are disclosed
by the following paragraphs from the Reply to the Notice of
Appeal:
The Minister of National Revenue (the "Minister")
initially assessed the Appellant for the 2001 taxation year by
Notice dated April 15, 2002.
In computing income for the 2001 taxation year the Appellant
claimed a non-capital loss carry forward from prior years
of $15,006.00
The Minister assessed the Appellant's 2001 taxation year
on April 15, 2001 and allowed $1,799.00 on account of a
non-capital loss carry forward from prior years.
5. In so assessing the Appellant, the Minister relied on the
following assumptions of fact:
a) the Appellant declared bankruptcy on March 7,
1994;
b) the Appellant's absolute discharge from bankruptcy was
November 15, 1996;
c) the Appellant incurred a net loss of $1,799.00 in the
1998 taxation year which was available to the Appellant to carry
forward as a non-capital loss;
d) the Appellant did not incur any losses in excess of
the $1,799.00 referred to in paragraph 5c herein subsequent to
his discharge from bankruptcy that would be available to carry
forward as a non-capital loss.
ISSUES TO BE DECIDED
The issue is whether the Appellant is entitled to a
non-capital loss carry forward in excess of the $1,799.00
non-capital loss allowed in calculating his income for the 2001
taxation year.
STATUTORY PROVISIONS RELIED ON
He relies on paragraph 128(2)(g) and subsections 111(1)
and 248(1) of the Income Tax Act, R.S.C. 1985, c.1 (5th
Supp.), as amended (the "Act").
GROUNDS RELIED ON AND RELIEF SOUGHT
He respectfully submits that the Appellant's 2001 taxation
year was correctly assessed to allow $1,799.00 as a non-capital
loss carry forward pursuant to paragraphs 111(1)(b) and
128(2)(g) of the Act.
[3] At the hearing of this appeal, the
Appellant referred to an Order Conditionally Discharging Bankrupt
and a later Absolute Order of Discharge. He was given until
October 31, 2003 to produce those Orders (which was done) and
both parties were given to November 28, 2003 to comment on the
Orders.
[4] The Appellant did not provide
comments. The submissions of counsel for the Respondent are set
forth in a letter to the Tax Court dated November 10, 2003; it
reads in part as follows:
The Appellant became bankrupt on March 7, 1994. On August 28,
1995, the Court of Queen's Bench of Manitoba granted an Order
Conditionally Discharging Bankrupt (the "Conditional
Order"). The Conditional Order provided that, upon the
Registrar being satisfied that the Appellant had paid the
bankruptcy Trustee $5,000.00 within 18 months and made an
assignment of future tax refunds and GST credits, an Absolute
Order of Discharge would issue. The Appellant testified that he
paid the bankruptcy Trustee the $5,000.00 in July of 1996. On
November 15, 1996, the Court of Queen's Bench of Manitoba
issued a new Absolute Order Discharging Bankrupt (the
"Absolute Order").
The issue in this appeal is whether, in the 2001 taxation
year, the Appellant may deduct non-capital losses carried forward
from 1995 under paragraph 111(1)(a) of the Income Tax
Act. The Respondent's position is that the Appellant may
not do so because of paragraph 128(2)(g) of the
Act. In simple terms, that paragraph (as it applied to
bankruptcies that occurred before 1995) provided that a taxpayer
who became a bankrupt may not carry forward, for deduction in a
future year under section 111, losses from before the year in
which an order of discharge from bankruptcy is granted.
In this case, the Respondent maintains that the Appellant is
not entitled to carry forward losses from the 1995 taxation year
because that year is before the year in which his order of
discharge was granted. In 1995, the Appellant had the legal
status of bankrupt under the Bankruptcy and Insolvency
Act, R.S.C. 1985, c. B-3, as amended. He retained that legal
status until the Absolute Order was granted on November 15,
1996.
The Respondent submits that the Appellant's order of
discharge cannot be said to have been granted before 1996 for two
reasons. First, the Appellant was not discharged in 1995 by the
Conditional Order because he remained a bankrupt under the
Bankruptcy Act at least until he fulfilled the conditions
of that Order, which he did not do until July of 1996. This is
supported by the cases Re Gray and Re Harrison,
which both hold that after-acquired property acquired while a
conditional order of discharge is in effect, but before the
conditions are fulfilled, is part of a bankrupt's estate
because the discharge does not have effect until the conditions
are fulfilled.
The second reason why the order discharging the Appellant from
bankruptcy may not be said to have been granted before 1996 is
because the Conditional Order did not operate retroactively to
discharge the Appellant as of August 28, 1995 once its
conditions were fulfilled. In the Re Gray and Re
Harrison cases, the bankrupts were granted actual discharge
orders subject to conditions, such that when the conditions were
met the discharges took effect. In this case, however, the
Conditional Order did not operate to discharge the Appellant once
he had paid his Trustee the $5,000.00. Rather, the Conditional
Order merely provided that a new, separate Absolute Order of
Discharge would issue. Therefore, the Conditional Order may not
even be read as retroactively discharging the Appellant as of
August 28, 1995, once the condition was fulfilled. The new
Absolute Order, which was issued on November 15, 1996, has effect
from that date forward. It is not a retroactive order either, on
its very face.
The evidence is clear that the order discharging the Appellant
from bankruptcy was granted in 1996, and therefore no losses from
years before 1996 may be carried forward because of paragraph
128(2)(g) of the Act. The Appellant argued that he
could have realized the losses in question in 1996 instead of
1995 had he known of the tax consequences of his discharge.
However, the Respondent submits that we are not concerned with
what the Appellant could have done, but what he actually did, and
what the Conditional and Absolute Orders actually provide.
Therefore, the appeal ought to be dismissed.
[5] The submission of the Appellant is
that he should be entitled to claim in 2001 the entire amount of
the non-capital loss carry forward of $15,006. He argues that the
difference between $15,006 and the amount allowed by the Minister
$1,799, namely $13,207 was a shareholder loan by the Appellant to
a corporation, which loan was made after the date of the
Conditional Order. Therefore, he argues that the loss resulting
from the loan was not a loss which was incurred prior to the
Conditional Discharge and therefore
paragraph 128(2)(g) of the Income Tax Act
should not operate to deny him the ability to carry forward that
loss.
Analysis
[6] The Conditional Order dated August
28, 1995 reads as follows:
IN THE MATTER OF THE BANKRUPTCY OF
EDWARD JAMES PAINTER
CONDITIONAL ORDER DISCHARGING BANKRUPT
Upon the application of Edward James Painter, who made an
assignment on the 7th day of March, 1994, and upon reading the
report of the Trustee as to the bankrupt's conduct and
affairs, and upon hearing the Trustee's representative, and
the bankrupt absent but excused, and no creditors present or
opposing;
AND WHEREAS proof has been made of the following fact under
Section 173 of the Bankruptcy and Insolvency Act, namely the
assets of the bankrupt are not of a value equal to
fifty cents in the dollar on the amount of his unsecured
liabilities;
IT IS ORDERED THAT, upon the Registrar being satisfied that the
bankrupt has made payment to the Trustee in the amount of
$5,000.00 within 18 months, and
he has made assignment of future tax refunds and GST credits
for the purpose of satisfying any outstanding balance
an Absolute Order of Discharge shall issue.
SIGNED at the City of Winnipeg in the Province of Manitoba this
28th day of August, 1995.
[7] The absolute Order discharging
bankrupt dated November 15, 1996 reads as follows:
IN THE MATTER OF THE BANKRUPTCY OF
EDWARD JAMES PAINTER
ABSOLUTE ORDER DISCHARGING BANKRUPT
UPON the application of Edward James Painter, who made an
assignment on the 7th day of March, 1994;
AND WHEREAS the bankrupt has complied with the order of the
Court dated the 16th day of August, 1995 setting terms for the
discharge of the bankrupt;
IT IS ORDERED that he be and he is hereby discharged.
SIGNED at the City of Winnipeg in the Province of Manitoba this
15th day of November, 1996.
[8] Subsection 111(1) and paragraph
128(2)(g) of the Income Tax Act, as applicable,
read as follows:
111(1) Losses deductible - For the purpose of computing
the taxable income of a taxpayer for a taxation year, there may
be deducted such portion as the taxpayer may claim of the
taxpayer's
(a) non-capital losses - non-capital losses for
the 7 taxation years immediately preceding and the
3 taxation years immediately following the year;
...
128(2) Where an individual has become bankrupt the following
rules are applicable:
(g) where an absolute order of discharge is granted in
respect of the individual, for the purpose of section 111 any
loss of the individual for a taxation year preceding the year in
which the order of discharge was granted is not deductible by the
individual in computing the individual's taxable income for
the taxation year in which the order was granted or any
subsequent year;
[9] I find that the Respondent's
counsel's written submissions are correct and make it clear
that until an absolute discharge is granted the bankruptcy
continues. A conditional discharge subject to conditions does not
constitute an absolute discharge, which is what paragraph
128(2)(g) contemplates.
[10] Consequently for the reasons set forth
in the written submissions of counsel for the Respondent the
appeal is dismissed.
Signed at Ottawa, Canada, this 29th day of December 2003.
O'Connor, J.
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