Date: 19990107
Docket: 97-373-IT-I
BETWEEN:
GEORGE HORVATH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 20, 1998 at Winnipeg, Manitoba, by
the Honourable Judge R.D. Bell
Reasons for judgment
Bell, J.T.C.C.
ISSUE:
[1]
The issue is whether the Appellant had non-capital losses from
activities conducted in 1991 and 1992 which in whole or in part
could be carried forward to be deducted from income in his 1994
taxation year.
GENERAL:
[2]
Reference to section numbers relate to the Income Tax
Act.
FACTS:
[3]
The Appellant's uncontradicted testimony was that he
undertook business adventures in 1991 and 1992, same being
carried on in the U.S.A. He said that he was not aware that
expenses incurred outside Canada could be deducted from Canadian
income. He said further that because he did not believe these to
be deductible he disposed of all records in connection with the
activities. He testified that he reconstructed his activities and
expenses. His detail was impressive and I accept the fact that
these sums were incurred. In this regard, counsel for the
Respondent said that she accepted his evidence and that it seemed
reasonable.
[4]
He outlined his activities as including attendance at trade
shows, vehicle expenses and hotel and food expenses, all in the
U.S.A. He described business expenses incurred in Las Vegas while
attending trade shows and advertising and business trips to Fargo
and Minneapolis and St. Paul. He also said that he spent funds on
newspaper ads, that he had telephone expenses, that he had a
materials booth at trade shows, that he rented equipment,
produced brochures and other printed matter and used projectors
and screen slides to promote his products. His evidence in
respect of these expenses was that for the numerous trips and
expenditures in 1991 the total was $3,629.85 Canadian and for
1992 was $2,515.59 Canadian. He was dealing with nutritional and
weight loss products and anticipated the company opening in
Canada where he had intended to conduct business. Because,
according to him, of its unusual expansion in the United States
it did not open in Canada as soon as he had expected and he was
unable to survive economically in the U.S. operation. He said he
had no income from the U.S.A. and no income from Canada in this
period.
[5]
The Appellant, in computing income for his 1992 taxation year in
Canada recorded a total, net and taxable income of nil. No
information was given as to his filing for 1991.
ANALYSIS AND CONCLUSION:
[6]
Respondent's counsel's submission was simply that the
Appellant had no losses in 1991 and 1992, that he had filed no
claim for losses for those years and had filed no valid Notice of
Objection. She referred to subsection 152(8) of the Income Tax
Act ("Act") and asserted that the Appellant
had filed returns for 1991 and 1992 and they the assessments were
valid and binding. It reads as follows:
An assessment shall, subject to being varied or vacated on an
objection or appeal under this Part and subject to a
reassessment, be deemed to be valid and binding notwithstanding
any error, defect or omission therein or in any proceeding under
this Act relating thereto.
[7]
In not agreeing with Respondent's counsel, I rely, inter
alia, upon the following cases, none of which were presented
by her. .
[8]
In Aallcann Wood Suppliers Inc. v. The Queen, 94 DTC
1475, Bowman, J.said:
The Minister's position in the original reply to the
notice of appeal that the Minister's ascertainment of a loss
for a particular taxation year is immutable unless a loss
determination is made under subsection 152(1.1) is, however,
wrong. ... In the absence of a binding loss determination under
subsection 152(1.1), it is open to a taxpayer to challenge the
Minister's calculation of a loss for a particular year in an
appeal for another year where the amount of the taxpayer's
taxable income is affected by the size of the loss that is
available for carry-forward under section 111. In challenging the
assessment for a year in which tax is payable on the basis that
the Minster has incorrectly ascertained the amount of a loss for
a prior or subsequent year that is available for deduction under
section 111 in the computation of the taxpayer's taxable
income for the year under appeal, the taxpayer is requesting the
court to do precisely what the appeal procedures of the Income
Tax Act contemplate: to determine the correctness of an
assessment of tax by reviewing the correctness of one or more of
the constituent elements thereof, in this case the size of a loss
available from another year. This does not involve the
court's making a determination of loss under subsection
152(1.1) or entertaining an appeal from a nil assessment. It
involves merely the determination of the correctness of the
assessment for the year before it.
This follows the logic set forth in New St. James v.
M.N.R., 66 DTC 5241 and is followed, with approval, in
Samson et Fréres Ltée v. The Queen, 97 DTC
642. In this case Dussault, J. at 647 and 648 said:
...it is clear that, for the purpose of the assessment in
respect of a taxation year, the Minister may determine the amount
of the non-capital loss that a taxpayer is entitled to deduct for
the purposes of computing his taxable income. Similarly, in his
appeal from such an assessment, the taxpayer may dispute the
amount thus assessed, even if the year in which the loss was
incurred is time-barred and may have been the subject of a
"nil" assessment.
[9]
Paragraph 111(1)(a) states that:
For the purpose of computing the taxable income of a taxpayer
for a taxation year, there may be deducted such portion as the
taxpayer may claim of the taxpayer's...
(a)
non-capital losses for the 7 taxation years immediately preceding
and the 3 taxation years immediately following the year;
[10] The term
"non-capital loss" is defined in subsection 111(8) of
the Act.
[11] The
limitation on the deductibility of loss is set forth in section
111(3) which states:
(3) For the purposes of subsection (1),
(a) an amount in respect of a non-capital loss ... for a
taxation year is deductible ... in computing the taxable income
of a taxpayer for a particular taxation year only to the extent
that it exceeds the total of
(i) amounts deducted under this section in respect of that
non-capital loss ... in computing taxable income for taxation
years preceding the particular taxation year,
..., and
(b) no amount is deductible in respect of a non-capital loss
...for a taxation year until
(i) in the case of a non-capital loss, the deductible
non-capital losses, ...
for preceding taxation years have been deducted.[1]
[12] This is
the authority for the deduction by the Appellant of his
non-capital losses from 1991 and 1992 by applying same to his
1994 taxation year. Those non-capital losses are constituent
elements of the assessment of tax for the 1994 taxation year.
[13]
Accordingly, the expense amount of $2,515.59 in the 1992 taxation
year and the portion of the expense amount of $3,629.85 in the
1991 taxation year not previously deducted constitute non-capital
losses which can be carried forward in accordance with the
provisions of section 111.
[14] The
appeal is allowed to that extent.
Signed at Ottawa, Canada this 7th day of January, 1999.
"R.D. Bell"
J.T.C.C.
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