Yau v. The Queen, 2004 TCC 246 (Informal Procedure)

Citation: 2004TCC246

Date: 20040505

Docket: 2003-3189(IT)I

BETWEEN:

BENJAMIN YAU,

Appellant,

And

HER MAJESTY THE QUEEN,

Respondent.

AMENDED REASONS FOR JUDGMENT

Delivered orally from the

bench on March 11, 2004

Bonner, J.

[1]      This is an appeal from an assessment of income tax for the 2000 taxation year.

[2]      The assessing action which is in dispute is described in paragraphs 8 and 9 of the Reply to the Notice of Appeal (Reply) as follows:

8.          By way of a T1 Adjustment Request received by the Minister on March 26, 2002, the Appellant requested a deduction for an ABIL of $17,270 calculated as follows:

                        Gross Business Investment Loss             $23,022.76

                                                                                    X____3/4_

                        ABIL                                                    $17,270

9.          In response to the Appellant's T1 Adjustment Request, the Minister reassessed the Appellant on November 4, 2002 to allow the Appellant a capital loss of $17,100, of which the allowable portion is 50%.

[3]      The basis of that action as set out in the Reply was:

16.        He submits that as the Appellant did not lend money to Matrix Interactive Café Inc., the Appellant was not owed a debt by a Canadian controlled private corporation that was a small business corporation and therefore, he is not entitled to claim a business investment loss in the 2000 Taxation Year pursuant to paragraph 39(1)(c) of the Act.

[4]      At the commencement of the hearing, counsel for the Respondent admitted that the correct amount of the allowable business investment loss (ABIL), if there was an ABIL at all which he did not admit at that stage, should be $20,108.10 and not $17,270 as set out in paragraph 8 of the Reply.

[5]      The existence of an ABIL depends of course on the taxpayer having sustained a "business investment loss". That term is defined in paragraph 39(1)(c) of the Income Tax Act (the "Act"). It reads in part:

(c)         a taxpayer's business investment loss for a taxation year from the disposition of any property is the amount, if any, by which the taxpayer's capital loss for the year from a disposition after 1977

            (i)          to which subsection 50(1) applies, or

(ii)          to a person with whom the taxpayer was dealing at arm's length

of any property that is

(iii)          a share of the capital stock of a small business corporation, or

(iv)         a debt owing to the taxpayer by a Canadian-controlled private corporation (other than, where the taxpayer is a corporation, a debt owing to it by a corporation with which it does not deal at arm's length) that is

                        (A)        a small business corporation, ...

[6]      The issue here is whether the small business corporation in question, Matrix Interactive Café Inc., owed approximately $20,000 to the Appellant before February 28, 2000. No other element of the Appellant's claim was in dispute.

[7]      The Respondent's position is based on the finding that the loan giving rise to the debt was made by the Appellant at a time when the corporation did not exist, that is to say at the time when the Matrix partnership was reorganized as a consequence of the withdrawal of the Appellant's son. The promissory note evidencing the debt, which is dated November 28, 1999, was signed by Evan How and Essam Metwally, the two continuing partners.

[8]      It is not necessary to attempt to sort out exactly what transactions took place in relation to the debt in the days and weeks between November 28 and the end of February. The Crown's position is based on a finding that because the money was advanced by the Appellant before the Matrix corporation came into existence, the Appellant was not owed a debt by a Canadian-controlled private corporation that was a small business corporation.

[9]      On the evidence, I conclude that the finding was in error. The Appellant sued in the Alberta Court of Queen's Bench to recover the debt. He recovered judgment against a number of defendants including the two partners How and Metwally and, as well, Matrix Interactive Café Inc. In my view, the judgment of the Court (Exhibit R-6) is clear evidence that the Matrix corporation was indebted at the relevant time. There is no suggestion that the corporation became indebted to the Appellant after February 28, 2000.

[10]     The appeal will be allowed, with costs, and the assessment referred back to the Minister of National Revenue for reassessment in accordance with these Reasons.

Signed at Toronto, Ontario, this 5th day of May 2004.

"M.J. Bonner"

Bonner, J.