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Citation: 2004TCC496
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Date: 20040712
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Docket: 2003-3556(IT)I
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BETWEEN:
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DAVENDRA BHAGANI,
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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
Mogan J.
[1] The taxation years under appeal
are 1999 and 2000. When the Appellant filed his 1999 T1 income
tax return, he reported a business investment loss
("BIL") of $567,679. The Appellant did not in fact have
a BIL of $567,679 in 1999 but that amount was the amount of a
judgment obtained against him in the Ontario Courts. In 1999, the
judgment creditor caused a payroll garnishment to be issued
against the Appellant; and his employer paid $5,747.08 in 1999
with respect to the garnishment. Similarly, in 2000, the
Appellant's employer paid $9,729.46 to the judgment creditor
with respect to the garnishment. Therefore, the Appellant claims
an allowable business investment loss ("ABIL") of
$4,310.31 for 1999 and an ABIL of $7,297.10 for 2000. The
Appellant's claims were rejected in assessments issued by
Revenue Canada and the Appellant has appealed from those
assessments. The issue is whether the Appellant had a BIL of any
amount in 1999 or 2000. The Appellant has elected the informal
procedure.
[2] The Appellant is a senior systems
developer with the Canadian Imperial Bank of Commerce
("CIBC"). He resides in Scarborough, Ontario which is a
suburb at the east side of Toronto. Prior to 1992, the Appellant
was involved in a number of real estate investments with a man
identified as Arun Horra. Rouge Hill Development Corporation
("RHDC") is an Ontario Corporation in which the
Appellant and Mr. Horra each owned 50% of the issued shares. On
May 30, 1991, RHDC purchased a parcel of vacant land on Steeles
Avenue in Scarborough, Ontario (hereafter called the
"Steeles Land") under the following terms:
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Vendor:
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450214 Ontario Limited ( the "214
Company")
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Purchase Price:
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$770,000
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Down payment in cash
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230,000
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Mortgage back to Vendor
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540,000
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Appellant's loan to RHDC
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115,000
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Mr. Horra's loan to RHDC
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115,000
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RHDC used the loans from the Appellant and Mr. Horra to
make the down
payment to the 214 Company
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[3] In April and May 1992, Mr. Horra
loaned additional cash of $270,000 to RHDC so that RHDC could pay
down one-half of the principal amount of its mortgage debt to the
214 Company. On June 25, 1992, the Appellant entered into a
written agreement with Mr. Horra and RHDC. That agreement is at
Tab 22 of Exhibit A-1, the Appellant's binder of documents.
The agreement recites or confirms most of the facts set out in
paragraph 2 above and in this paragraph 3. Under paragraph 4 of
the agreement, the Appellant assumed full responsibility to pay
interest and principal ($270,000) on the remainder of the
mortgage taken back by the vendor (the 214 Company); and the
Appellant agreed to keep Mr. Horra indemnified from such
responsibility.
[4] The Appellant failed to provide
the money to RHDC to pay the remaining one-half ($270,000) of the
mortgage taken back by the vendor (the 214 Company). The mortgage
went into default and the 214 Company forced the sale of the
Steeles Land under a power of sale. In April 1994, the Appellant
commenced an action in the Ontario Court (General Division)
against Mr. Horra, RHDC and Rouge Hill Investments Limited (a
second corporation in which the Appellant and Mr. Horra were
shareholders). The Appellant claimed damages for breach of an
alleged employment contract plus other remedies. Mr. Horra
defended the action and counterclaimed against the Appellant
specifically claiming damages for the loss suffered (by Mr.
Horra) from the Appellant's breach of the agreement dated
June 25, 1992, and the Appellant's failure to keep in good
standing the mortgage owing by RHDC to the 214 Company.
[5] The action came on for hearing
before Justice Ground of the Ontario Court (General Division)
whose reasons for judgment are at Tab 8 of Exhibit A-1. Judge
Ground dismissed the Appellant's claim to any employment
relationship but allowed Mr. Horra's counterclaim in the
amount of $385,000 (being his payments to RHDC of $115,000 plus
$270,000) plus pre-judgment interest of $44,198. See Exhibit A-1,
Tab 9. The Appellant's appeal to the Ontario Court of Appeal
was dismissed on April 12, 1999. See Exhibit A-1, Tabs 10 and 11,
and Exhibit R-2. Following final judgment, Mr. Horra obtained a
Notice of Garnishment to the CIBC dated May 12, 1999 in the
amount of $567,679. See Exhibit A-1, Tabs 12 and 13.
[6] Pursuant to the garnishee
proceedings, CIBC paid to Mr. Horra (or his agent) $5,747.08 in
1999 and $9,729.56 in 2000. See Exhibit A-1, Tabs 3 and 4. The
Appellant has claimed allowable business investment losses of
$4,310.31 for 1999 and $7,297.10 for 2000 being 75% of the
amounts recovered by Mr. Horra under the garnishee
proceedings.
Analysis
[7] A business investment loss
("BIL") is defined in paragraph 39(1)(c) of the
Income Tax Act. The definition is lengthy and I shall set
out only those words which I think are relevant.
39(1) For the purposes of this
Act,
...
(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) ...
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 ... that
is
(A) a small business
corporation,
(B) ...
exceeds the total of
(v) ...
If a taxpayer had a BIL in 1999 within the meaning of
paragraph 39(1)(c), paragraph 38(c) defined an ABIL
as 75% of the BIL. The 75% was changed to 50% in 2000 in a manner
which is not relevant to this appeal.
[8] The most important condition for a
BIL is that a taxpayer have a capital loss which results from
owning shares of a small business corporation or from holding a
debt owed by a Canadian-controlled private corporation that is a
small business corporation. The reference to subsection 50(1) in
subparagraph 39(1)(c)(i) incorporates a provision which
permits a taxpayer to elect to have a capital loss in a
particular year with respect to a debt owing to the taxpayer
which became a bad debt in that year. There are precise
conditions set out in subsection 50(1) which are not relevant in
this appeal. The only significant debt in this appeal is the
judgment debt of $567,679 which Mr. Horra obtained against the
Appellant. It is with reference to that judgment debt that
$5,747.08 was garnished from the Appellant's salary in 1999
and $9,729.56 was garnished from the Appellant's salary in
2000.
[9] The amounts garnished from the
Appellant's salary in 1999 and 2000 were not in any way
connected with the Appellant's ownership of shares in any
corporation, or with the Appellant's loan of any funds to a
corporation. Quite the contrary. Mr. Horra obtained a judgment
against the Appellant because the Appellant had failed (in 1992)
to lend $270,000 to RHDC; and such failure had caused Mr. Horra
to lose his investment of $385,000 ($115,000 plus $270,000) in
RHDC.
[10] The short and simple answer to the
Appellant's claim is that the debt of $567,679 (owed by the
Appellant to Mr. Horra) was not a debt owed to him by a
Canadian-controlled private corporation. Accordingly, the
Appellant did not have a BIL in 1999 or 2000. The amount of
$115,000 which the Appellant loaned to RHDC in 1991 to purchase
the Steeles Land may have resulted in a BIL in 1994 when the
Steeles Land was lost under a power of sale but there were
indications at the hearing that the Appellant had already claimed
an ABIL in 1994 or 1995 with respect to such $115,000. The
appeals for 1999 and 2000 are dismissed.
Signed at Ottawa, Canada, this 12th day of July, 2004.
Mogan J.
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