Date: 20010703
Docket: 2001-187-IT-I
BETWEEN:
DORA OLIVA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1]
This is an appeal from assessments of income tax for the 1994 to
1998 taxation years.
[2]
In computing income for 1997, the Appellant deducted an allowable
business investment loss (ABIL) resulting in a non-capital loss
for the year. The Appellant sought to carry the non-capital loss
back to 1994, 1995 and 1996 and forward to 1998. The Minister of
National Revenue (the "Minister") disallowed the claim.
The Minister assessed on the basis that the Appellant was not
entitled to deduct the ABIL because the loss was, by virtue of
subparagraph 40(2)(g)(ii) of the Income Tax Act,
nil. That provision reads:
(2) Notwithstanding subsection (1)
(g) a
taxpayer's loss, if any, from the disposition of a property,
to the extent that it is
...
(ii)
a loss from the disposition of a debt or other right to receive
an amount., unless the debt or right, as the case may be, was
acquired by the taxpayer for the purpose of gaining or producing
income from a business or property (other than exempt income) or
as consideration for the disposition of capital property to a
person with whom the taxpayer was dealing at arm's
length.
...
is nil;"
[3]
The claim for the ABIL was in respect of a payment of $210,000
made by the Appellant to the Bank of Nova Scotia pursuant to her
guarantee of a loan made by the Bank to Fifeshire Developments
Limited.
[4]
Fifeshire had two principal shareholders, David Navy Enterprises
Ltd. and Panda Construction Company Limited. The Appellant was
not a shareholder of Fifeshire, Navy or Panda. The
Appellant's husband Letterio Oliva and her father-in-law were
the two shareholders of Panda.
[5]
Fifeshire carried on the business of the construction of houses
for resale. It increased the scale of its business operations and
for that purpose required additional financing. In 1990, the
Appellant's husband approached her and told her that the bank
required loan guarantees from certain individuals including her
and that, as well, it required a collateral mortgage on the home
in which the Appellant and her husband resided. The Appellant
testified that she was reluctant and that she asked her husband
what was "in it" for her. She said that she wanted to
clear the first mortgage on the family home and that her husband
indicated that after Fifeshire completed and sold four homes
which it was constructing he would have plenty of money to pay
off the mortgage on the family home. The Appellant then signed
the guarantee and the mortgage. Subsequently, the residential
real estate market declined drastically, the houses which
Fifeshire was building declined in value and the loan which the
Appellant had guaranteed went into the default. The bank took
legal action to enforce the guarantee. It recovered judgment
against the defendants including the Appellant. The bank then
settled its claim against the Appellant in consideration of the
payment to it of the sum of $210,000. The payment was made in
September of 1997.
[6]
It would seem to be common ground that the Appellant is deemed by
subsection 50(1) of the Income Tax Act to have
disposed of the debt to her from Fifeshire arising from
subrogation at the end of 1997 for proceeds equal to nil.
[7]
The question which must be answered here is whether the debt in
question was acquired by the Appellant "... for the
purpose of gaining or producing income from a business or
property..." within the meaning of
subparagraph 40(2)(g)(ii) of the Income Tax
Act. This requirement, the so-called business purpose test,
has been considered by the courts in a number of cases. Counsel
for the Appellant submitted that the more recent authorities
place decreasing importance on what he described as the old
formalities. He argued that the guarantee was given in the
expectation that the house building activities of Fifeshire would
yield financial benefit to Mr. Oliva thereby increasing family
prosperity and enabling husband and wife to repay the mortgage on
the family home. Counsel referred to The Queen v. Byram,
99 DTC 5117, in which McDonald J.A. noted at page 5120:
"While subparagraph 40(2)(g)(ii) requires a
linkage between the taxpayer (ie the lender) and the income.
There is no need for the income to flow directly to the taxpayer
from the loan."
Counsel noted as well McDonald J.A.'s observation that:
(page 5120)
"There is a growing body of jurisprudence that considers
current corporate reality as being sufficient to demonstrate that
the expectation of dividend income justifies a capital loss
deduction under subparagraph 40(2)(g)(ii).
[8]
The difficulty with all of this is that, as Bowie J. noted in
McKissock v. Her Majesty the Queen[1]:
"The cases show a clear distinction between those in
which the taxpayer enters into a transaction to assist another
family member, and those in which the purpose of the transaction
is to produce financial gain or reward for the taxpayer
himself..."
[9]
Here the Appellant gave the guarantee to enable Fifeshire to
borrow money and use it to earn profit which might flow in the
form of dividends to Panda and might flow further in the form of
dividends paid by Panda to the Appellant's spouse. The
arrangement did not offer the Appellant the prospect of earning
income of any sort. The potential dividend income would quite
evidently have been income of the Appellant's spouse and not
income of the Appellant. If the husband had been enriched by such
a chain of events and if he had repaid the mortgage on the family
home as the Appellant desired that repayment would not have
resulted in the receipt by the Appellant of taxable income. The
rather vague arrangement between the Appellant and her husband as
described in evidence was of a personal or family nature. I do
not view it as an agreement by Mr. Oliva to pay consideration to
the Appellant for agreeing to guarantee the loan. This case is
essentially similar in principle to O'Blenes vs. M.N.R.[2]. In my view
the indirect advantage which the Appellant sought to gain by
guaranteeing the loan to Fifeshire could not have constituted
income in the Appellant's hands.
[10] Counsel
for the Appellant argued further:
"With the subject appeal, there is no doubt that the
Appellant had a profit motive in mind when she signed the Scotia
mortgage and guarantee. By not being a shareholder of Panda
Construction Company Limited ("Panda") (the holding
company) or Fifeshire Developments Limited
("Fifeshire") (the income earning company) she in
effect used her husband as the conduit or trustee for the
purposes of the investment or the loan to Fifeshire. If Fifeshire
made money on the loan/investment and did not account to her for
her share, she certainly would have a cause of action on many
different legal grounds to recover the money. If the money went
to Panda or the husband and the wife did not receive back her
money, she would have a right of action including equalization
rights against the husband underSections 4 and 5 of the
Family Law Act of Ontario 1986."
[11] The
evidence simply does not bear out the assertion that the
Appellant used her husband as a conduit or trustee for the
purposes of investing or lending money to Fifeshire. There is no
foundation whatever for the suggestion that there existed any
relationship between the Appellant and her husband which would
have constituted the husband the trustee of the Appellant in
respect of any dividends received by him from Panda. Nothing in
the circumstances brought any provision of the Family Law
Act into play.
[12] For the
foregoing reasons, the appeal will be dismissed with costs.
Signed at Ottawa, Canada, this 3rd day of July 2001.
"Michael J. Bonner"
J.T.C.C.
COURT FILE
NO.:
2001-187(IT)I
STYLE OF
CAUSE:
Dora Oliva and Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
June 20, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge M.J. Bonner
DATE OF
JUDGMENT:
July 3, 2001
APPEARANCES:
Counsel for the Appellant: Neil L. Boyko
Counsel for the
Respondent:
Sherry Darvish
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-187(IT)I
BETWEEN:
DORA OLIVA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on June 20, 2001 at Toronto,
Ontario by
the Honourable Judge Michael J. Bonner
Appearances
Counsel for the
Appellant:
Neil L. Boyko
Counsel for the
Respondent:
Sherry Darvish
JUDGMENT
The
appeal from the assessments made under the Income Tax Act
for the 1994, 1995, 1996, 1997 and 1998 taxation years is
dismissed, with costs, in accordance with the attached Reasons
for Judgment.
Signed at Ottawa, Canada, this 3rd day of July 2001.
J.T.C.C.
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