Hamlyn
J.T.C.C.:—This
appeal
was
heard
under
the
informal
procedure.
It
is
an
appeal
for
the
1990
taxation
year.
In
computing
his
income
for
the
1990
taxation
year,
the
appellant
deducted
an
allowable
business
investment
loss
("ABIL")
of
$74,999.25
in
respect
of
his
shares
in
Dougall's
Roadhouse
Tavern
Ltd.
(the
"corporation").
In
assessing
the
appellant
for
the
1990
taxation
year
by
notice
of
assessment
dated
August
28,
1992,
the
Minister
of
National
Revenue
(the
"Minister")
disallowed
the
deduction
of
the
said
ABIL.
Issue
The
issue
to
be
decided
is
whether
the
appellant
is
entitled
to
deduct,
in
computing
his
income
for
the
1990
taxation
year,
an
amount
of
$74,999.25
in
respect
of
an
ABIL.
The
taxpayer's
position
(from
the
notice
of
appeal)
The
assets
of
Dougall’s
Roadhouse
Tavern
Ltd.
were
sold
during
February
1990
and
all
proceeds
were
withdrawn
by
the
sole
shareholder
[the
appellant]
in
the
form
of
taxable
or
capital
dividends.
The
company's
shares
had
no
value
as
at
April
30,
1990.
The
taxpayer
[the
appellant]
elected
in
1990
under
subparagraph
50(1
)(b)(iii)
a
deemed
disposition
of
his
shares
in
Dougall’s
Roadhouse
Tavern
Ltd.
for
NIL
proceeds.
The
taxpayer's
[the
appellant’s]
cost
base
of
the
shares
was
$100,000.
Therefore
a
capital
loss
results.
The
loss
is
a
business
investment
loss
under
paragraph
39(1
)(c)
as
the
shares
qualify
as
small
business
corporation
shares
due
to
the
12-month
grace
period
provided
in
the
definition
of
a
small
business
corporation
pursuant
to
section
248.
Subparagraph
50(1
)(b)(iii)
should
apply
since
the
corporation
was
insolvent
at
April
30,1990.
The
balance
sheet
filed
by
Dougall’s
Roadhouse
Tavern
Ltd.
as
at
April
30,
1990
was
incomplete.
It
did
not
reflect
two
liabilities
which
existed
at
that
time;
namely,
accounts
payable
of
$1,500
and
corporate
income
taxes
of
$23,513.
These
two
liabilities
were
known
to
the
company's
accountant.
However,
the
liabilities
were
credited
against
cash
advances
made
to
the
shareholder
by
means
of
an
accounting
entry.
The
$1,500
payable
was
not
assignable
without
the
creditors'
consent
and
the
$23,513
payable
for
income
taxes
was
not
assignable
under
any
circumstances.
Moreover,
there
was
no
documentation
prepared
or
signed
by
the
shareholder
purporting
to
acknowledge
assumption
of
these
liabilities.
Therefore,
the
obligations
remain
those
of
the
company.
The
corporate
income
tax
liability
remains
outstanding
to
this
day.
Under
the
definition
provided
under
the
Canadian
Bankruptcy
and
Insolvency
Act,
R.S.C.
1985,
c.
B-3,
Dougall’s
Roadhouse
Tavern
Ltd.
was
insolvent
as
of
April
30,1990.
.
.
.
The
minister's
position
(from
the
reply
to
the
notice
of
appeal)
.
.
.
the
corporation
was
not
insolvent
at
the
end
of
the
said
[1990]
taxation
year;
that
the
appellant
therefore
could
not
elect
pursuant
to
subsection
50(1)
of
the
Act
to
be
deemed
to
have
disposed
of
his
shares
in
the
corporation
as
set
out
in
that
subsection;
and
that,
accordingly
the
appellant
did
not
have
a
business
investment
loss
(ABIL)
pursuant
to
paragraph
39(1)(c)(i)
of
the
Act.
The
facts
The
appellant
purchased
the
shares
of
Dougall’s
Roadhouse
Tavern
Ltd.,
an
Ontario
corporation,
from
W.
Dougall
on
or
about
March
10
1987.
The
appellant
as
well
as
being
a
shareholder
was
also
a
director
of
the
corporation.
The
purchase
price
for
the
shares
was
$100,000
and
that
amount
was
paid.
Prior
to
February
1990
the
corporation
operated
an
active
business.
The
corporation's
year
end
was
April
30.
In
February
1990,
the
corporation
sold
all
of
its
operating
assets
and
ceased
to
operate
an
active
business.
By
the
end
of
April
1990,
the
appellant
had
withdrawn,
as
dividends
from
the
corporation,
all
remaining
assets
with
the
exception
of
$436
cash.
This
action
was
directed
and
approved
by
the
appellant
as
the
sole
director
of
the
corporation.
The
balance
sheet
of
the
corporation
as
of
April
30,
1990,
showed
an
indebtedness
by
the
appellant
to
the
corporation
in
the
amount
of
$13,523
leaving
an
asset
balance
of
$13,959.
The
balance
sheet
did
not
reflect
outstanding
tax
and
other
liabilities
in
the
sums
of
$23,513
and
$1,500.
In
December
of
1991,
the
appellant
filed
his
personal
tax
return
for
the
1990
taxation
year
on
the
basis
that
he
was
not
indebted
to
the
corporation
and
all
the
assets
were
paid
to
the
appellant
as
dividends.
The
evidence
further
shows
the
appellant
disposed
of
his
shares
in
the
corporation
on
December
20,
1991
for
$1.00.
The
tax
return
for
the
appellant
for
the
1990
taxation
year
was
received
by
the
Minister
of
National
Revenue
on
December
23,
1991
ana
in
that
return
the
appellant
deducted
an
ABIL
of
$74,999.25
on
the
basis
of
a
deemed
disposition
of
the
corporation's
shares
pursuant
to
subparagraph
50(1)(b)(iii)
of
the
Act.
Analysis
Under
subparagraph
50(1
)(b)(iii)
for
a
shareholder
to
claim
a
capital
loss
in
relation
to
the
shares
of
the
corporation,
the
shareholder
must
show
the
corporation
has
ceased
to
carry
on
business
and
the
corporation
is
insolvent,
and
further,
the
fair
market
value
of
the
shares
is
nil,
and
that
it
is
reasonable
to
expect
the
corporation
will
be
dissolved
and
will
not
commence
to
carry
on
any
business.
Definition
of
insolvent
The
Shorter
Oxford
English
Dictionary
on
Historical
Principles
(3rd
edition)
defines
an
insolvent
as
follows:
Unable
to
pay
one’s
debts
or
discharge
one's
liabilities.
.
.
From
section
2
of
the
Ontario
Bankruptcy
and
Insolvency
Act,
an
insolvent
person
is
defined
as:
.
.
.
a
person
who
is
not
bankrupt
and
(b)
who
has
ceased
paying
his
current
obligations
in
the
ordinary
course
of
business
as
they
generally
come
due.
.
.
.
In
this
case,
as
a
director,
the
appellant,
in
April
1990,
caused
to
be
paid
dividends
that
resulted
in
the
corporation
apparently
being
unable
to
discharge
its
debts.
Under
the
Ontario
Corporations
Act,
R.S.O.
1990,
c.
C.38,
subsection
62(3)
provides
the
following
as
to
when
a
dividend
can
not
be
declared:
62(3)
The
directors
shall
not
declare
and
the
company
shall
not
pay
any
dividend
or
bonus
when
the
company
is
insolvent,
or
any
dividend
or
bonus
the
payment
of
which
renders
the
company
insolvent
or
that
diminishes
its
capital,
and,
if
any
dividend
or
bonus
is
declared
and
paid
contrary
to
this
subsection,
the
directors
are
jointly
and
severally
liable
to
the
company
for
the
amount
of
the
dividend
so
declared
and
paid
or
such
part
thereof
as
renders
the
company
insolvent
or
diminishes
its
capital.
In
this
case,
the
action
of
the
appellant
was
such
as
to
attempt
to
render
the
corporation
insolvent
by
declaring
dividends.
Because
of
subsection
62(3)
the
appellant
is
liable
to
the
corporation
for
the
amount
of
such
dividends.
Therefore,
this
Court
concludes
the
corporation
was
not
insolvent
at
the
time
of
the
alleged
deemed
disposition,
that
is
it
has
not
been
proven
the
corporation
was
unable
to
discharge
its
liabilities
at
the
relevant
time.
The
corporation
as
at
the
end
of
April
1990
had
a
“substantial
asset",
namely,
the
statutory
right
of
recovery
against
the
appellant
for
the
dividends
that
purported
to
render
the
corporation
insolvent.
Conclusion
Subparagraph
50(1
)(b)(iii)
of
the
Act
is
not
applicable
to
this
appellant’s
fact
situation
as
the
corporation
was
not
insolvent
within
the
meaning
of
the
Act.
Decision
The
appeal
is
dismissed.
Appeal
dismissed.
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