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Citation: 2003TCC202
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Date: 20030805
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Docket: 2002-2110(IT)I
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BETWEEN:
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PERRY JONES,
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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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AMENDED REASONS FOR JUDGMENT
Little, J.
A. FACTS:
[1] The Appellant is a heavy equipment
operator and a member of the Operating Engineers Union
("OEU").
[2] On the 31st day of December 1986
Bremith Contracting Ltd. (the "Company") was
incorporated under the laws of the Province of British
Columbia.
[3] All of the issued shares of the
Company were registered in the name of Brenda Smith, the
Appellant's wife. However, the Appellant testified that he
was the beneficial owner of all of the issued shares of the
Company. The Appellant said that the shares of the Company were
registered in his wife's name rather than his name because of
the policy of the OEU that union members could not also be
Owner-Operators of construction equipment. The Appellant
also said that the OEU policy regarding Owner-Operators
that was in effect in 1980-90 no longer applies.
[4] The Company was in the
construction business. The Company assisted in the development of
subdivisions and carried out excavations for buildings and other
structures. The main asset owned by the Company was a D3
Caterpillar bulldozer.
[5] The Appellant said that he
advanced money to the Company to enable it to carry on its
business.
[6] In 1999 the Appellant withdrew
$37,500.00 from his Registered Retirement Savings Plan with the
OEU. After paying income tax of $11,509.00 on this withdrawal the
Appellant said that he advanced the sum of $25,000.00 to the
Company.
[7] The Appellant said that his wife
was responsible for the accounting and secretarial work for the
Company and the preparation of income tax returns. The Appellant
also said that in the year 2000 his wife sold assets (the
bulldozer and other assets) owned by the Company and retained the
funds in spite of a Court Order prohibiting his wife from
disposing of Company owned assets.
[8] The Appellant said that the
Company no longer carries on any business activity. The Appellant
maintains that the Company continued to operate its business
until 1999. The Appellant said that the Company became insolvent
in 1999, the shares of the Company are worthless and the
Company cannot repay the money that the Appellant advanced to the
Company.
[9] When the Appellant filed his
income tax return for the 1999 taxation year he did not claim an
Allowable Business Investment Loss ("ABIL") with
respect to the losses suffered by him in connection with the
loans that he made to the Company.
[10] When the Minister of National Revenue
(the "Minister") issued a Notice of Assessment for the
Appellant's 1999 taxation year the Appellant filed a Notice
of Objection. In the Notice of Objection the Appellant maintained
that he was entitled to claim an ABIL of at least $25,000.00 in
connection with the loans and other advances that he made to the
Company.
B. ISSUE:
[11] Is the Appellant allowed to claim an
ABIL of $25,000.00 or more in determining his income for the 1999
taxation year?
ANALYSIS:
[12] Paragraph 39(1)(c) of the
Income Tax Act (the "Act") provides that
a taxpayer may claim an Allowable Business Investment Loss if
certain conditions are satisfied.
[13] One of the conditions that must be met
is that the corporation must be a small business corporation both
at the time that the loan was made and the time that the loan
became worthless.
[14] In this situation the Company was
engaged in an active business until at least 1996. However the
Appellant testified that in the 1997, 1998 and 1999 years the
Company leased the D3 bulldozer, on a "bare rental"
basis to other contractors, i.e. the contractor would pay the
Company so much per hour for the use of the bulldozer.
[15] Paragraph 39(1)(c) of the
Act provides that a taxpayer may claim a business
investment loss where the loss was incurred in respect of shares
in a small business corporation or in respect of loans made to
the corporation:
[16] The phrase "small business
corporation" is defined in subsection 248(1) as
follows:
"small business corporation" - "small business
corporation", at any particular time, means, subject to
subsection 110.6(15), a particular corporation that is a
Canadian-controlled private corporation all or substantially all
of the fair market value of the assets of which at that time is
attributable to assets that are
(a) used
principally in an active business carried on primarily in Canada
by the particular corporation or by a corporation related to
it,
(b) shares of
the capital stock or indebtedness of one or more small business
corporations that are at that time connected with the particular
corporation(within the meaning of subsection 186(4) on the
assumption that the small business corporation is at that time a
"payer corporation" within the meaning of that
subsection), or
(c) assets
described in paragraphs (a) and (b),
including, for the purpose of paragraph 39(1)(c), a
corporation that was at any time in the 12 months preceding that
time a small business corporation, and, for the purpose of this
definition, the fair market value of a net income stabilization
account shall be deemed to be nil;
[17] The phrase "active business"
is defined in subsection 248(1) of the Act as follows:
"active business" in relation to any business
carried on by a taxpayer resident in Canada, means any business
carried on by the taxpayer other than a specified investment
business or a personal services business;
[18] It will be noted that the definition of
"active business" excludes a specified investment
business.
[19] The phrase "specified investment
business" is defined in subsection 125(7) of the
Act as follows:
"specified investment business" carried on by a
corporation in a taxation year means a business (other than a
business carried on by a credit union or a business of leasing
property other than real property) the principal purpose of which
is to derive income (including interest, dividends, rents and
royalties) from property but, except where the corporation was a
prescribed labour-sponsored venture capital corporation at any
time in the year,
does not include a business carried on by the corporation in
the year where
(a) the
corporation employs in the business throughout the year more than
5 full-time employees, or
(b) any other
corporation associated with the corporation provides, in the
course of carrying on an active business, managerial,
administrative, financial, maintenance or other similar services
to the corporation in the year and the corporation could
reasonably be expected to require more than 5 full-time employees
if those service had not been provided;
[20] The above definition provides that a
specified investment business is one whose principal purpose is
to derive income from property (including interest, dividends,
rents or royalty). However, it will be noted that the definition
of a specified investment business does not include a corporation
whose business is "leasing property other than real
property...". (Emphasis added)
[21] In this situation the Appellant
testified that the principal and only business of the Company in
1997, 1998 and for part of 1999 was renting the bulldozer on a
"bare rental" basis to other parties.
[22] In my opinion the Company was not a
specified investment business in 1997, 1998 and 1999 and
therefore the Company satisfies the test that it was a small
business corporation in 1999.
[23] In order for a taxpayer to claim an
ABIL the tax payer must be a shareholder of the Company.
COMMENT - In this situation, Brenda Smith was the
registered shareholder of the Company. However, I am satisfied by
the Appellant's testimony that the Appellant was the
beneficial owner of the shares of the Company.
[24] In reaching the conclusion that the
Appellant was the beneficial owner of the shares of the Company I
have reviewed and I agree with the comments made by Mr. Justice
Cattanach, 83 DTC 5193. At pages 5198-5199, Cattanach, J.
referred to the creation of a trust and said:
...Equity looks to the intent rather than the form and if an
intention to create a trust can be unmistakably inferred the
court will give effect to that intention.
Despite the difficulty in giving an all embrasive definition of a
trust the concept thereof is easy enough to grasp. The general
idea of a trust is that one person in whom property is vested is
compelled in equity to hold the property for the benefit of
another.
[25] The taxpayer must also establish that
the money was advanced to the Company in order to earn
income.
COMMENT - In this situation the Appellant advanced
$25,000.00 to the Company to enable the Company to make payments
on its main asset - the bulldozer. If the Company was successful
in the rental of the bulldozer the Appellant would receive a
repayment, dividends on other amounts from the Company.
[26] As noted above the Appellant testified
that he withdrew $37,500.00 from his RRSP and after paying income
tax of $11,509.00 he advanced $25,000.00 to the Company.
[27] The evidence of Mrs. Tomlinson and the
information contained in Exhibit A-6 confirm the advance of
$25,000.00 that was made by the Appellant to the Company.
[28] The taxpayer must also establish that
the Company which received the advance is insolvent or unable to
repay the advance.
COMMENT - The Appellant testified that his wife sold
the Company's main asset (a bulldozer) and that the Company
was insolvent in 1999.
[29] I am satisfied that the Appellant
has met the tests imposed by paragraph 39(1)(c) of
the Act and that he should be allowed a Business
Investment Loss of $25,000.00. Pursuant to paragraph 38(c)
of the Act the Appellant is allowed to claim an Allowable
Business Investment Loss equal to 75% of the $25,000.00 or
$18,750.00 in determining his income for the 1999 taxation
year.
[30] In reaching this conclusion I
have referred to a number of decision of the Tax Court of Canada
and the Federal Court of Appeal including the recent unreported
decision of the Federal Court of Appeal in Larry W. Rich v.
The Queen, [2003] F.C.J. No. 109. In the Rich case Mr.
Justice Rothstein referred to the amount of the ABIL that was
claimed and said at paragraph 33:
The appropriate standard of review is proof on a balance of
probabilities, not one of bookkeeping perfection. In all the
circumstances, I am satisfied that there is sufficient evidence
that the indebtedness amounted to $125,000 at the end of
1995.
I agree with the comments of Mr. Justice Rothstein.
[31] The agent for the Appellant argued that
the Appellant had advanced more than $25,000.00 to the Company.
However, I am not satisfied on the evidence presented to the
Court that the Appellant can claim an ABIL in excess of
$25,000.00 in the 1999 taxation year.
[32] The appeal is allowed without
costs.
Signed at Vancouver, British Columbia, this 5th day of August
2003.
Little, J.
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