Jones v. R., [1996] 2 CTC 2246 (Informal Procedure)

Bonner J.T.C.C.: — This is an appeal from an assessment of income tax for the 1992 taxation year. In his return of income for that year the appellant claimed to deduct $30,768 as an allowable business investment loss (“ABIL”). The deduction was disallowed by the assessment under appeal.

The claim was made in respect of the loss of the appellant’s investment in an organization known as Technical Trade Joint Venture. It was formed to produce and market a computer training program for the electrical industry. A corporation known as Interactive Ventures Inc. was to act as general managing partner of the joint venture. The appellant became one of the limited partners (also known as funding partners). The appellant made his investment in the venture after a careful consideration and investigation. The venture got under way. Samples and a finished product were produced. Some marketing activity was undertaken. Time passed but no sales were made. The general partner advised the funding partners in June of 1993 that it had become insolvent and was resigning as general managing partner with immediate effect. By virtue of that resignation and the provisions of article 12 of the joint venture agreement, the joint venture was terminated. Unsuccessful efforts were made by the funding partners to salvage something out of the venture. They were left with inventory which was worthless.

The position of the appellant was that he made an investment in a business venture, that the operation was conducted as a business until the end, that his tax return containing the claim for an ABIL was prepared by a professional chartered accountant and that it was unjust to penalize him if the claim did not qualify under paragraph 39(1 )(c) of the Income Tax Act (“Act”). The appellant contends as well that:

...the money was invested in a business that failed. Whether that is called a business investment loss or a personal investment loss. I am not in a position to say. However, I believe that had the Taxation Department, when originally disallowing my claim, taken a little time to explain their position, this situation could have had a different outcome right then. Rather, their actions and vengeful attitude has made me feel like a criminal and has caused not only myself, but my wife many sleepless nights, stress and worry about the accumulating interest and debt.

There is no doubt whatever that the appellant’s actions in respect of this investment cannot be subjected to any criticism. He made an appropriate investment in an ordinary business venture. The fact that the venture failed, that the investment became worthless and that the appellant sought tax relief in respect of his loss does not in any way reflect badly on the appellant. It does not follow however that the appellant became entitled to deduct an AB IL in the circumstances. The term “allowable business investment loss” is defined in paragraph 38(c) of the Act as follows:

38. For the purposes of this Act,

(c) a taxpayer’s allowable business investment loss for a taxation year from the disposition of any property is three-quarters of the taxpayer’s business investment loss for the year from the disposition of that property.

The term “business investment loss” is defined in paragraph 39(1 )(c) of the Act in such a way as to require the disposition of property that 1s:

(iii) a share of the capital stock of a small business corporation, or

(iv) a debt owing to the taxpayer by a Canadian- controlled private corporation (other than, where the taxpayer is a corporation, a debt owed to it by a corporation with which it does not deal at arm’s length) that is

(A) a small business corporation,

(B) a bankrupt (within the meaning assigned by subsection 128(3)) that was a small business corporation at the time it last became a bankrupt, or

(C) a corporation referred to in section 6 of the Winding-up Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time a winding-up order under that Act was made in respect of the corporation,

The interest of the appellant in Technical Trade Joint Venture was not property of the kind described in subparagraph 39(l)(c)(iii) or (iv) of the Act, that is to say, it was neither a share of the capital stock of a corporation of any kind or a debt of any kind. Although the foregoing is by itself sufficient to establish that the appellant’s claim to deduct an AB IL does not qualify under the Act, I will note as well that the evidence does not establish that the appellant disposed of his interest in the joint venture during the 1992 taxation year. On the contrary the evidence points to a conclusion that the appellant continued to hold his interest in the joint venture well into 1993. It is possible that the appellant’s interest in the partnership declined in value during 1992 but the appellant’s interest did not by virtue of that decline cease to exist. There was therefore no disposition. In the circumstances it is evident that the assessment under appeal properly disallowed the deduction sought by the appellant.

The appeal will be dismissed.

Appeal dismissed.