Lindsay D. Anderson v. Her Majesty the Queen, [1992] 2 CTC 2406, 92 DTC 2296

Beaubier, T.C.C.J.:—This matter was heard in Regina, Saskatchewan, on August 25, 1992. It is an appeal pursuant to the general procedure of this Court. The appellant was the only witness. He was reassessed and denied deductions of allowable business investment losses which he had claimed in his 1986 and 1987 income tax returns. He appeals to this Court on the basis that a proper deduction was taken in 1986 and 1987 in respect of shares of an insolvent corporation which ceased to carry on business. He elected to recognize a capital loss in the 1986 taxation year pursuant to subparagraph 50(1)(b)(iii) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

In 1983, the appellant and Lloyd Andersen incorporated Buck & Dickinson Furniture and Antiques (1983) Ltd. (hereinafter called "B & D"). Each owned 50 per cent of the shares and each was one of two directors in B & D.

The appellant testifies and the Court accepts as fact that the appellant did the following with respect to B 8: D at the time it was incorporated in 1983:

1. Paid $50 for his shares.

2. Transferred $21,000 worth of inventory to B & D from his proprietorship in return for a shareholder's loan of $21,000.

3. Transferred $6,000 worth of receivables to B & D from his proprietorship in return for a shareholder's loan of $6,000.

4. Personally guaranteed a loan to B & D by The Toronto-Dominion Bank which he personally paid out in early 1985 in the approximate amount of $11,312.

No documents were produced respecting the transfers and shareholders’ loans described in (2) and (3) of the foregoing paragraph. However, B & D's balance sheet for October 31, 1984, (Exhibit A-3), verifies that shareholders’ loans were then outstanding in the amount of $47,921.57 and that assets corresponded in amounts to numbers alleged to have been transferred in. This is a substantial period after the transfers in 1983, but it is verified by the fact that a new bank manager called B & D's bank loan in December of 1984. This indicates that the bank thought B & D was not doing business in a satisfactory fashion.

B & D had an auction of some assets and sold other assets to retailers in Saskatchewan and British Columbia. It moved out of its leased premises in March of 1985 and it was also struck from the Saskatchewan Corporations Register in 1985. All discussions between the shareholders as to a revival of the business concluded on or about June of 1985.

The appellant was frank and forthright in his testimony. What he says is believed by the Court. In particular, his testimony respecting the occurrences in 1985 was detrimental to his cause. Nonetheless, he was forthright in his responses both to examination-in-chief and cross-examination. The appellant stopped talking to Mr. Lloyd Andersen after June of 1985. Only about three conversations between the two occurred through April, May and June of 1985. It is obvious that feelings between the two were bitter. No conversations after 1985 were in evidence excepting one which occurred between the two the day before the trial. There is no question that the corporation was not intended to be resuscitated and that the business was concluded as an operating entity in its fiscal 1985 taxation year. In addition, it is evident to the Court from the testimony that after the occurrences respecting B & D the appellant went into a depression and simply stayed out of the antique business and lost any interest whatsoever in business until some time in 1986. From the nature of the testimony and the manner in which it was presented to the Court, the Court is of the view that the appellant either had a depression or a bitter and unfortunate business experience which caused this rejection of the antique business and his association with that business.

The appellant claimed allowable business investment losses in his 1986 and 1987 income tax returns arising from the closure of B & D and the subsequent failure of B & D to repay its loan with The Toronto-Dominion Bank which the appellant had assumed. The appellant claimed 50 per cent of $38,362 (the total of amounts transferred in and the amount of B & D's loan he assumed) as his share of an allowable business investment loss in his 1986 return and carried forward the unused balance to his 1987 taxation year.

It is crucial to note that, in the taxation years the appellant claimed allowable business investment losses, the appellant did not fall under subsection 50(1). It was only by virtue of two amendments to subsection 50(1) after 1985, each being retroactive to and including the year 1985 that the appellant could fall under the subsection and elect to have the subsection apply retroactively. In 1988, subparagraph 50(1)(b)(iii), under which the appellant falls, was added by 1988, c. 55, subsection 28(1) and made applicable to the 1988 and subsequent taxation years and, where the taxpayer so advises the Minister of National Revenue ("Minister") in writing, to his 1985, 1986 or 1987 taxation year. The relevant paragraph then read as follows:

(1) For the purposes of this subdivision, where. . .

(b) a share (other than a share received by a taxpayer as consideration in respect of the disposition of personal-use property) of the capital stock of a corporation is owned by the taxpayer at the end of a taxation year and

(i) the corporation has during the year become a bankrupt (within the meaning of subsection 128(3)),

(ii) the corporation is a corporation referred to in section 6 of the Winding- up Act that is insolvent (within the meaning of that Act) and in respect of which a winding-up order under that Act has been made in the year, or

(iii) the corporation ceased to carry on all of its businesses and was insolvent during the year, and

(A) at the end of the year, the fair market value of the share is nil and it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on any business, and

(B) the corporation did not commence to carry on any business in the year or within 24 months following the end of the year,

the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year and to have reacquired it immediately thereafter at a cost equal to nil.

In 1991, the amendment, 1991, c. 49, subsection 28(1), changed clause (B) and it was to be read as follows:

(B) in the taxpayer's return of income under this Part for the year the taxpayer elects to have this subsection apply in respect of the share,

The new subparagraph 50(1)(b)(iii) was made applicable

(a) to the 1990 and subsequent taxation years; and

(b) where a taxpayer so elects in respect of a share of the capital stock of a corporation by notifying the Minister of National Revenue in writing before 1992, to each of the taxpayer's 1985 to 1989 taxation years in respect of the share owned by the taxpayer at the end of the year, except that subsection (1) is not applicable in respect of any such taxation year in respect of the share where the corporation or a corporation controlled by it carries on business during the 24-month period immediately following the end of the year, and, where a taxpayer makes an election under this paragraph in respect of a share of the capital stock of a corporation,

(i) the taxpayer shall be deemed to have elected, in the taxpayer's returns of income under Part I of the said Act for each of those years, to have subsection 50(1) of the said Act, as amended by subsection (1), apply in respect of the share, and

(ii) notwithstanding subsections 152(4) to (5) of the said Act, such assessments of tax, interest and penalties shall be made as are necessary to give effect to the election.

There was argument as to whether or not the appellant had "advised" the Minister of his claim pursuant to subsection 50(1) for 1986 and 1987. There was also argument as to whether or not the appellant had "elected" in respect of his 1986 and 1987 taxation years. With the 1988 addition of subparagraph 50(1)(b)(iii) to the Act, a taxpayer could choose to have this subparagraph apply to the 1985, 1986 or 1987 taxation year, if he advised the Minister in writing. With the 1991 amendment of subparagraph 50(1)(b)(iii), a taxpayer could elect to have subsection 50(1) apply to each of the taxpayer's 1985 to 1989 taxation years by notifying the Minister in writing before 1992. In both amendments the advising or electing must be in writing. No election could have been communicated at the time the 1986 return was filed by virtue of the fact that at that time there was no election to be made. An election, pursuant to the 1988 amendment, to have the subsection apply retroactively must be in writing and given after the 1988 amendment came into force. The letter from the appellant's accountant to Revenue Canada dated November 22, 1990 meets this requirement. This letter does not indicate the specific subsection or amendment under which he claims the allowable business investment losses. But the letter indicates that the appellant wants the Minister to recognize that allowable business investment losses were incurred and he wants these losses to be applied against his 1986 and 1987 income. The essence of the communication was that the appellant wants to be allowed to claim allowable business investment losses in respect of his shares in B & D. That is sufficient to communicate the taxpayer's election.

Counsel for the appellant argued that clause 50(1)(b)(iii)(B) means that the appellant taxpayer can choose the year in which he elects to have the subsection apply. It is apparent, from the number of amendments, that the: subsection was causing many problems for both taxpayers and Revenue Canada. The Department of Finance's Technical Notes, May 1991, gives some insight into the intention and operation of the legislative amendments:

The second change to subparagraph 50(1)(b)(iii) adds a new clause (B) which provides that the taxpayer must elect to have subsection 50(1) apply in his return of income under Part I for the year the conditions in subparagraph 50(1)(b)(iii) are met. Where a taxpayer does not elect under clause 50(1)(b)(iii)(B) in the first year the conditions in subparagraph 50(1)(b)(iii) are met he will not be precluded from claiming that loss on a subsequent disposition of the share or a disposition treated as having occurred under subparagraph 50(1)(b)(i), (ii) or (iii).

The amendments to subparagraph 50(1)(b)(iii) are generally applicable to the 1990 and subsequent years. Where, however, the taxpayer elects by notifying the Minister of National Revenue in writing before 1992, subparagraph 50(1)(b)(iii) will be applicable to the taxpayer's 1985 to 1989 taxation years.

In other words, a taxpayer must elect to have the subsection apply because there is no automatic application of the subsection in the year where the conditions are met or a bad debt is established. The taxpayer can elect in the year the bad debt has been established. The Act does not, however, limit the taxpayer's election to the year in which the bad debt is established. The taxpayer can elect to have the subsection apply in any year after the bad debt has been established. The only restriction is that if a taxpayer wants to elect for the 1985 to 1989 taxation years the taxpayer must notify the Minister in writing before 1992.

The facts indicate that the conditions requisite for the establishing of a bad debt with respect to shares of B & D were met in 1985. I find that the appellant notified the Minister in writing pursuant to the 1988 amendment to paragraph 50(1)(b). The election crystallized the bad debt into a capital loss in 1986. paragraph 111(1)(a) of the Act permits allowable business investment losses not deducted in 1986 to be brought forward to 1987.

For the foregoing reasons, the appeal is allowed and the matter is referred back to the respondent for reassessment on the basis that an election was properly made in 1990 in respect of the appellants shares in B & D. The appellant is awarded costs.

Appeal allowed.