Date: 19990610
Docket: 97-3551(IT)I
BETWEEN:
RICHARD GLEN KARST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier, J.T.C.C.
[1] This appeal
pursuant to the Informal Procedure was heard at Calgary, Alberta
on June 9, 1999. The Appellant testified and called Neil
Macaulay, manager, special debts, Alberta Opportunity Company,
and Terry Zurowski, C.A., of Calgary to testify on behalf of the
Appellant. No witnesses were called by the Respondent.
[2] The Appellant has
appealed the disallowance of a business investment loss and a
deduction of legal fees for the year 1994. Paragraphs 1 to 7,
inclusive, of the Reply read:
1. The only
allegations of fact in the Notice of Appeal are set out in
division "C" of the Notice of Appeal. The Deputy
Attorney General denies that the Appellant has provided proof, to
the standard required by the Income Tax Act (the
("Act"):
a) that the
Appellant invested $70,000 in Quikstep Ladders Inc.
("Quickstep"),
b) that Quikstep
earned business income, and
c) that the
Appellant took legal steps to recover the money invested and
incurred additional legal expenses not exceeding $12,350.
2. The Minister
of National Revenue (the "Minister") initially assessed
the Appellant for the 1994 year by Notice dated May 1, 1995.
3. In computing
income for the 1994 taxation year, the Appellant claimed the
amount of $65,670 as a business investment loss ("BIL")
in respect of a shareholder loan made to Quickstep.
4. The Appellant,
through his representative's letter dated July 18, 1996,
requested that the BIL be increased to $71,397 to reflect an
increase in legal fees of $5,727, which were previously
unclaimed.
5. In reassessing
the Appellant for the 1994 taxation year, the Minister disallowed
the revised claim for a BIL in the amount of $71,397, which
included the increased claim for $5,727 in legal fees.
6. The Appellant
objected to the reassessment and the Minister issued a
Notification of Confirmation stating that the Appellant did not
have a BIL of $72,293. (It should be noted that this amount is
stated in error and should be $71,397 as stated in paragraph 4
above).
7. In so
reassessing the Appellant, the Minister relied on, inter
alia, the following assumptions:
a) The Appellant
did not verify that any funds were loaned to Quickstep.
b) If the
Appellant did loan funds to Quickstep, which is not admitted but
is expressly denied, it has not been verified that the Appellant
received or was to receive interest from the funds loaned.
c) Quickstep was
not a small business corporation within the meaning of the
provisions of the Act as it did not have active business
income from its assets.
d) Quickstep has
never filed income tax returns.
e) The Appellant
has not proven that the debt owing, if any, by Quickstep became a
bad debt in the 1994 taxation year.
f) The
Appellant is not a shareholder in Quickstep.
g) The 100%
shareholder in Quickstep is 363411 Alberta Ltd.
("363411").
h) The Appellant
is the 100% shareholder of 343411.
i) The
Appellant has not submitted documentation to support legal fees
of $12,350.
j) The
alleged legal fees of $12,350 account for a portion of the BIL
claimed by the Appellant in the 1994 taxation year.
k) The Appellant
has failed to establish that he incurred a capital loss with
respect to a debt owing, if any, to Quickstep during the 1994
taxation year.
[3] Assumptions 7(a),
(b), (d), (f), (h) and (j) were established as true by the
evidence.
[4] The evidence is
that in 1987, as a result of work with the Israeli Defence Force,
the Appellant thought of the idea for a light collapsible ladder.
In 1989 he discussed this with Patrick Chao and they formed a
partnership to develop the ladder. Soon their costs amounted to
$109,091, one half of which Mr. Chao invested. Mr. Chao's
corporation also proceeded to obtain patents on the ladder at
that time.
[5] The Appellant
acquired 100% of 363411 before March 28, 1989 (Exhibit R-3)
and continues to own 363411 to this day. Before the end of 1989
388060 Alberta Ltd. ("388060") was formed and Patrick
Chao and 363411 each owned 50% of it (Exhibit R-1). 388060
changed its name to Quikstep Ladder Inc. before December 14, 1990
and by the end of its 1990 fiscal year the shareholdings
were:
Patrick
Chao
32.5%
363411
32.5%
Powell Spencer Management
Inc.
5%
Alberta Opportunity Company ("AOC") 30%
(Exhibit R-2)
[6] There is no
accepted evidence that Mr. Karst ever owned any shares of
Quikstep. He testified that 363411 owned its Quikstep shares for
him, but no trust agreement or any other document was placed in
evidence to verify that. Mr. Zurowski reviewed Exhibit A-12,
a draft March 31, 1990 financial statement of Quikstep, which
refers to shareholders' loans of $131,581 which he confirmed
included the $109,091 already described. Mr. Zurowski testified
that these were loans of shareholders and no one else. Part of
Exhibit A-12 contains statements to June 30, 1990 which enlarge
the shareholders' loans to a total of $179,985.
[7] Mr.
Zurowski's testimony was buttressed by Exhibit A-6 which was
reviewed by him. It is a law firm's letter to Mr. Karst dated
February 20, 1991 which asks him to verify the amount of the
shareholder loan in question and whether it is owed to Mr. Karst
or to 363411 as described in an attached Statement of Claim.
[8] Paragraph 1 of
the Statement of Claim by Mr. Karst and 363411 against Quikstep
and others states that 363411 is a shareholder in Quikstep. Draft
paragraph 11 questions the amount of the loan and the name of the
lender. Mr. Karst and 363411 caused the Statement of Claim
to be issued but Mr. Karst never testified as to what the final
draft of the Statement of Claim stated in paragraph 11.
[9] In early 1990
Quikstep hired a Chief Operating Officer and AOC invested
$250,000 in Quikstep. AOC later increased this to a total of
$270,000. In June, 1990, Mr. Karst was released by Quikstep and
escorted out of its premises whereupon he launched the lawsuit
described in Exhibit A-6 in early 1991.
[10] Mr. Karst testified
that by December 1991 Quikstep had produced 3,000 ladders and
closed its doors. Except for a small amount recovered by AOC, the
remaining investments in Quikstep were not recovered by its
investors and lenders.
[11] On the evidence led by
the Appellant, any money he had used to begin the ladder business
was invested in 363411 when he formed it. He had 363411 become
the shareholder of Quikstep because of his concern that Israeli
authorities might litigate against Quikstep if it discovered that
Mr. Karst had got the idea of the ladder from them and in turn
Mr. Karst or Quikstep had profited from it.
[12] The unanimous
shareholders' agreement dated February 16, 1999 (Exhibit A-4)
confirms the finding that 363411 and not Mr. Karst, was the
shareholder in Quikstep. Mr. Zurowski's testimony established
that 363411 then owned the loans in question in Quikstep.
[13] For these reasons, the
Court finds that Mr. Karst was never a shareholder of Quikstep.
Mr. Karst admitted that 363411 was merely a holding company and
had no active business at any time. For this reason, Mr. Karst is
not entitled to a business investment loss in 1994.
[14] At best, Mr. Karst
established roughly that he spent $4,564 in legal fees in the
lawsuit described in Exhibit A-6. However, he did not prove when
he spent this sum. For this reason, and the reasons already
described, he is not entitled to deduct the legal fees.
[15] The appeal is
dismissed in its entirety.
Signed at Calgary, Alberta this
10th day of June 1999.
J.T.C.C.
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