Date: 20010326
Docket: 98-95-IT-I; 98-96-IT-I; 98-139-IT-G
BETWEEN:
MARK KLUCZNYK, ALICIA KLUCZNYK, STANLEY KLUCZNYK,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1]
The appeals are from assessments of tax by Stanley Klucznyk with
respect to his 1993, 1994 and 1995 taxation years, by Alicia
Klucznyk with respect to her 1993, 1994 and 1996 taxation years
and by Mark Klucznyk with respect to his 1993 taxation year. They
will be collectively called the "Appellants".
[2]
The following were set forth in each Appellant's Amended
Notice of Appeal:
1.
The amounts claimed as a loss were a result of an investment in
shares of a Canadian controlled private corporation defined under
the Act as a small business corporation
2.
The investment in shares was an arm's length transaction.
3.
The investment in the said shares became a business investment
loss when the small business corporation became insolvent and
ceased to carry on business.
4.
The original investment was $750,000.
5.
The amount of the business investment loss is $458,000, which is
a permitted deduction under the ABIL provision of the Income
Tax Act.
[3]
In computing their income for the taxation years in issue, the
Appellants claimed the following deductions:
|
APPELLANT
|
TAXATION
YEAR
|
DEDUCTION
|
AMOUNT
DEDUCTED
|
|
Stanley
|
1993
|
Allowable business investment loss
|
$184,639.50
|
|
|
1994
|
Non-capital loss carried forward from 1993
|
$ 87,515.59
|
|
|
1995
|
Non-capital loss carried forward from 1993
|
$ 6,797.00
|
|
|
|
|
|
|
Alicia
|
1993
|
Allowable business investment loss
|
$ 18,000.00
|
|
|
1994
|
Allowable business investment loss
|
$ 30,000.00
|
|
|
1995
|
N/A
|
|
|
|
1996
|
Non-capital loss of other years
|
$ 10,000.00
|
|
|
|
|
|
|
Mark
|
1993
|
Business investment loss
|
$ 92,319.75
|
[3]
In reassessing each Appellant, the Minister disallowed the
deductions.
[4]
The Minister in his Reply for each Appellant set forth the
following pertinent assumptions:
(a)
the Appellant (Stanley Klucznyk), his mother, Alicia Klucznyk,
and his son, Mark Klucznyk (collectively the
"Klucznyks"), loaned $750,000.00 (the "Loan")
to Woodmere Court Investments Inc. (the
"Corporation");
(b)
the Loan was not used to enable the Appellant to purchase shares
of the capital stock of the Corporation;
(c)
in filing their income tax returns the Klucznyks allocated 25% of
the Loan to each of Alicia Klucznyk and Mark Klucznyk, and 50% of
the Loan to the Appellant;
(d)
the Loan was made by way of a promissory note dated March 22,
1985, with an interest rate of 2% per month;
(e)
funds for the Loan were obtained by a $300,000.00 mortgage in
favour of the Ukrainian Toronto Credit Union, and a $500,000.00
demand loan from the Toronto Dominion Bank;
(f)
in 1989 the Klucznyks received not less than $292,000.00 from the
Corporation as repayment of a portion of the Loan;
(g)
at all relevant times the Loan constituted the Corporation's
only asset;
(h)
at all relevant times none of the fair market value of the assets
of the Corporation was attributable to assets that were:
(i) used primarily in an active business carried on primarily in
Canada by the Corporation or by a corporation related to it;
(ii) shares of the capital stock or indebtedness of one or more
small business corporations that were at that time connected to
the Corporation; or
(iii) assets described in subparagraphs (i) and (ii) above;
(i)
throughout the relevant periods the Corporation was not a small
business corporation, for the purposes of the Income Tax
Act, R.S.C. 1985, c. 1(5th Supp.), as amended.
THE EVIDENCE
[5]
Two witnesses were called by the Appellants: John Kotowski, one
of the shareholders and operating officers of Woodmere Court
Investments Inc. (Woodmere), and the Appellant Alicia
Klucznyk.
THE EVIDENCE OF JOHN KOTOWSKI
[6]
In 1985, John Kotowski told the Appellant Mrs. Klucznyk that
Woodmere wanted to acquire El-Beth Enterprises Limited and
Refined Alloys Limited carrying on business in partnership under
the name of Aluminum Reduction Company (ARCO). At that time ARCO
was in or on the brink of receivership. Mr. Kotowski told
Mrs. Klucznyk that he, on behalf of Woodmere, was looking for
funds ($750,000). In response, Mrs. Klucznyk apparently said to
Mr. Kotowski 'why not me'. Mrs. Klucznyk thereafter
advanced funds and all the shares behind ARCO were purchased by
Woodmere. The shares were registered in the name of Woodmere.
Woodmere was a holding company of the Kotowski family. No
arrangements were made to transfer any of the shares to the
Appellants, however, Mr. Kotowski stated that a portion of the
shares were held by Woodmere for the Appellants.
[7]
At the beginning ARCO was managed by Mr. Kotowski. Shortly
thereafter, to keep the business going, ARCO borrowed several
million dollars from a Mr. Miller. Mr. Miller provided
the funds through a corporation known at that time as Sarsvati
Inc. As security for this loan from Mr. Miller, Woodmere agreed
to pledge all of the issued corporate shares behind ARCO to
Sarsvati Inc. Eventually Mr. Miller, after a series of
events, took over from Mr. Kotowski the management and
control of ARCO. In 1990 ARCO went into receivership and went out
of business.
THE EXHIBITS
[8]
At the time of the acquisition of the corporate shares behind
ARCO in March and April 1985 several documents were created and
issued.
[9]
Exhibit A-1, Tab 6 is a partial funds payment
acknowledgement (dated March 22, 1985) signed by the solicitor
for ARCO and directed to Mrs. Klucznyk. It refers to the
purchase and sale of shares without specificity. It states the
transfer of the shares had been signed and that the solicitor
would hold the shares in escrow pending the receipt of the funds
due and payable.
[10] Exhibit
A-1, Tab 7 is an acknowledgement (dated March 23, 1985) from
Mrs. Klucznyk to the solicitor for ARCO that funds had been
paid in trust to the solicitor for ARCO for the purpose of
purchasing shares of ARCO. It also indicates that $50,000 of the
funds are non-refundable if there is a default in the completion
of the transaction. Further, it states that Woodmere and
Mr. Kotowski are acting on behalf of Mrs. Klucznyk and
that Mrs. Klucznyk is responsible for the completion of the
transaction by Woodmere.
[11] Exhibit
R-1, Tab 1 is a promissory note (March 22, 1985) in the amount of
$750,000 executed by Woodmere to Mrs. Klucznyk. The interest rate
was to be 2% per month and a payment schedule was set
out.1
[12] Exhibit
R-1, Tab 2 is an agreement (March 22, 1985) executed by Woodmere
to Mrs. Klucznyk granting an exclusive option to purchase the
corporate shares behind ARCO exercisable at any time prior to the
date that Woodmere repaid the loan of $750,000.[1]
[13] Exhibit
A-1, Tab 8 is an acknowledgement (April 3, 1985) from Woodmere
and Mrs. Klucznyk to the solicitor for ARCO. Mr. Kotowski
signed on behalf of both Woodmere and Mrs. Klucznyk. The
acknowledgement states that the transaction with respect to the
sale and purchase of shares by Woodmere had been completed and
that no solicitor had the authority to act on behalf of Woodmere
and Mrs. Klucznyk, and that Woodmere and Mrs. Klucznyk wanted to
close without any solicitor acting on their behalf.
[14] Other
exhibit documents that were referred to in the course of the
evidence related to matters occurring some four years after the
original sale and purchase of the shares of ARCO.
[15] Exhibit
R-1, Tab 5 is an Affidavit of John Kotowski (July 27, 1989) filed
in an action[2] in
the Supreme Court of Ontario between Woodmere and El-Beth et
al. wherein the deponent speaks to the issue of who owns
ARCO. Therein Mr. Kotowski states that Woodmere is the
registered holder of all the issued and outstanding shares of
El-Beth and Refined Alloys and that Woodmere beneficially owns
all the issued and outstanding shares of El-Beth and Refined
Alloys and that Woodmere has the right to vote or cause to be
voted all of the shares of El-Beth and Refined Alloys.
[16] Exhibit
R-1, Tab 6 are Minutes of Settlement[3] (July 30, 1989) in the above-noted
action. The Minutes of Settlement make reference to the debt of
Woodmere to Mrs. Klucznyk. The Minutes of Settlement state
the claims of Alicia Klucznyk are warranted by Woodmere as
"valid indebtedness" and that on the original capital
advanced by Mrs. Klucznyk in the amount of $750,000 there was an
anticipated settlement with Mrs. Klucznyk in the amount of
$500,000 on account of the interest due and payable on the
principal sum. Mr. Kotowski executed the Minutes of
Settlement on behalf of Woodmere.
THE EVIDENCE OF MRS. KLUCZNYK
[17]
Mrs. Klucznyk's viva voce evidence was that
she advanced the money to ARCO's solicitor (Exhibit A-1,
Tab 6) and executed the undertaking to do so (Exhibit A-1, Tab 7)
as part of the purchase and sale of the shares behind ARCO. She
also stated she was to be a shareholder of ARCO.
Mrs. Klucznyk, however, could not say if and when she
acquired the shares but at the time of the advancing of the
monies she asked and received the promissory note (Exhibit R-1,
tab 1) and a share option purchase agreement (Exhibit R-1, tab 2)
from Woodmere. Mrs. Klucznyk's position was precise. She
wanted security. She said while she trusted Mr. Kotowski,
she said she was 'never sure'. Eventually
Mrs. Klucznyk sued to recover on the promissory note given
to her by Woodmere because in her view Mr. Kotowski caused
her money to be lost. In an apparent settlement of the law suit,
Mrs. Klucznyk received $292,000.
ANALYSIS
[18] The
evidence of Mrs. Klucznyk was that notwithstanding the
promissory note and the share option agreement, she was
purchasing a proportionate share of the shares of ARCO.
[19] Little
evidence beyond this supports the Appellants' position that
the Appellants purchased shares of ARCO. Indeed, most of the
evidence leads to a contrary conclusion.
[20] The
evidence of Mr. Kotowski, in respect of the ARCO share ownership,
is in conflict on several points with the documentary evidence,
and this conflict is not explained away by
Mr. Kotowski's bare assertion that he did not want to
reveal to anyone the ownership of the ARCO shares. His evidence
is particularly troubling when he (Mr. Kotowski), under oath in
the Affidavit (Exhibit R-1, tab 5), swears that Woodmere is
the beneficial owner of all the issued and outstanding shares of
El-Beth and Refined Alloy and that the shares are free of all
encumbrances.
[21] Further,
there is no sustainable evidence that the reference to a share
purchase (Exhibit A-1, tab 6) to Mrs. Klucznyk was ever
completed. Indeed, the evidence is to the contrary.
[22] In
summary, the promissory note for $750,000 to Mrs. Klucznyk,
the option agreement giving Mrs. Klucznyk the right to buy
shares (Exhibit R-1, tab 2), and the Minutes of Settlement
wherein Woodmere warrants and represents that Mrs. Klucznyk
was owed $500,000 against the principal sum of $750,000 (Exhibit
R-1, tab 6), all point to the conclusion there was a loan of
$750,000 by Mrs. Klucznyk to Woodmere, secured by a
promissory note and a share purchase option agreement. I conclude
from the totality of the evidence that the Appellants did not
acquire any interest in the shares of the corporations behind
ARCO.
[23] The
provisions of the Income Tax Act provide that a business
investment loss (paragraph 39(1)(c)) is a special type of
capital loss resulting from the disposition of shares or a debt
of a "small business corporation". A business
investment loss can be incurred when there is a deemed
disposition for nil proceeds (i.e. this can occur where the
corporation is bankrupt or insolvent or when the debt is
considered to be uncollectible)(subsection 50(1)). A small
business corporation (subsection 248(1)) is defined as a
Canadian-controlled corporation of which all or substantially all
of the fair market value of its assets are used in an active
business carried on primarily in Canada. Shares or debt of a
connected corporation may be considered in the determination.
Subsection 125(7) provides that active business carried on
by a corporation means any business carried on by the corporation
other than a specified investment business or a personal services
business and includes an adventure or concern in the nature of
trade. A specified investment business carried on by a
corporation means in part the principal purpose of which is to
derive income from property including interest, dividends or
royalties.
[24] The issue
that remains is whether the Appellants met the onus of
demolishing the assumptions set out herein and relied upon by the
Minister in making the assessments. In this case the
Minister's stated assumptions about Woodmere as a corporate
entity, i.e. not a small business corporation, and the use of the
corporate assets, i.e. the fair market value of the corporate
assets not used in active business carried on primarily in
Canada, have not been addressed. Indeed, the Appellants did not
present any evidence to show that the loan, which is the subject
of the Minister's assumptions, was a business investment loss
within the meaning of the Act.
[25] The
appeals are dismissed. There will be no order as to costs as two
of the appeals heard together with the General Procedure appeal
were heard under the Informal Procedure.
Signed at Ottawa, Canada, this 26th day of March 2001.
"D. Hamlyn"
J.T.C.C.
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