Neil H. Duncan v. Minister of National Revenue, [1986] 2 CTC 2083, 86 DTC 1549

Couture, C.J.T.C.:—This appeal deals with the taxation year 1979 and is concerned with a deduction in the amount of $21,305.88 claimed by the appellant in computing his income as an allowable business investment loss within the meaning of paragraph 38(c) of the Income Tax Act (the Act).

The appellant acted on his own behalf and his evidence disclosed the following facts:

In the taxation year under appeal the appellant was a teacher at the Ottawa Technical High School. He retired in June 1985.

In 1968 he and two other individuals, Kenneth M. Craig and Stephen Rawlings, incorporated Conark Design and Development Corporation (Conark). The three were equal shareholders. The appellant, however, never was an employee of the company, but he did give advice from time to time. The other two shareholders ran its operations, Rawlings as its president and Craig as vice-president. They carried on the day-to-day business of the company.

The company’s first business operation consisted of printing blueprints and other related documents for building contractors until 1969 when it became involved in the construction business.

According to the evidence the appellant was the only shareholder who could support the company financially and between 1968 and 1973 he ad- vanced either directly or by way of guarantees some $41,681.70, interest free or without a charging fee for such service, to assist it in its operations. The appellant either borrowed money from the bank and loaned it to the company, or guaranteed its loans from the bank during the said period.

Its operations in both the printing and construction businesses were not successful. By the end of 1973 the appellant withdrew his financial support because he was satisfied that the company could not repay him the amounts that he had already loaned or for which he was a guarantor and from 1974 it remained inactive until 1979 when it surrendered its charter.

The aggregate of the amounts that the appellant had borrowed or for which he was a guarantor and which he repaid between 1971 and 1982 are listed in a letter dated March 4, 1985 addressed by him to Mr. D. Gibson of the Tax litigation section of the Department of Justice as follows:

In filing his income tax return for the taxation year 1979 the appellant claimed as a deduction in computing his income an allowable business investment loss in the amount of $21,305.88.

Paragraph 38(c) of the Act defines an allowable business investment loss to be half of a taxpayer's business investment loss for the year. The appellant's alleged business investment loss for the year under appeal was $41,681.70 and, therefore, his allowable business investment loss, if he is successful in his appeal, should accordingly be reduced to a maximum amount of $20,840.85 in lieu of $21,305.88 claimed.

Counsel for the respondent submitted in argument that for the appellant to be able to avail himself of the allowable business investment loss deduction provided by section 3, paragraphs 38(c) and 39(1)(c) of the Act he must first establish that he incurred a capital loss in the taxation year 1979 on the disposition of debts owed to him by Conark. Furthermore, these losses must not be rendered nil by the operation of subparagraph 40(2)(g)(ii) which provides that a loss from the disposition of a debt is nil unless the debt was acquired by the taxpayer for the purpose of gaining or producing income from a business or property.

I agree with this submission. In my opinion it is the correct interpretation that must be assigned to the relevant provisions of the legislation.

The definition of the expression allowable business investment loss is found in paragraph 38(c) and reads:

(c) a taxpayer’s allowable business investment loss for a taxation year from the disposition of any property is /2 of his business investment loss for the year from the disposition of that property.

The expression business investment loss referred to in 38(c) is itself defined in paragraph 39(1)(c) as:

(c) a taxpayer’s business investment loss for a taxation year from the disposition of any property is the amount, if any, by which his capital loss for the year from a disposition after 1977

(i) to which subsection 50(1) applies, or

(ii) [not applicable]

of any property that is

(iii) [not applicable]

(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 another corporation with which it does not deal at arms' length,

[The remainder of the paragraph is not relevant.]

So in accordance with the provisions of this paragraph, as a first requirement, only a capital loss from a disposition which occurred after 1977 is eligible as a business investment loss, half of which is deductible in computing a taxpayer's income for a taxation year.

Furthermore, when a Capital loss, as in the present case, is one to which subsection 50(1) applies the debt which gave rise to the capital loss must also meet the requirements of this paragraph which reads:

50(1) For the purposes of this subdivision, where

(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to him in respect of the disposition of personal use property) is established by him to have become bad in the year, or

(b) [not applicable]

the taxpayer shall be deemed to have disposed of the debt or 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. [Emphasis is mine.]

So under these provisions the taxpayer must establish that a debt has become bad in the year, if the debt is to be deemed to have been disposed of, and be eligible as a business investment loss.

Counsel for the respondent referred the Court to the decision of the Income Tax Appeal Board in the case of Geoffrey Hogan v. M.N.R., 15 Tax ABC 1; 56 D.T.C. 183, in which it was held that under the provisions of the legislation as it existed then it was incumbent upon the taxpayer to establish that debts he was claiming as bad debts had become bad in the taxation year 1953 which was the taxation year under appeal. In paragraph 50(1 )(a) of the Act we find basically the same wording as in paragraph 11(1)(f) which was the provision under consideration by the Board in the Hogan appeal.

While the evidence in respect of the status of Conark between 1974 and 1979 was not as complete as it could have been, I am satisfied, based on the few elements of evidence adduced at the hearing, that the company was, at least during the years it operated, a Canadian controlled private corporation within the meaning of subsection 125(6). Furthermore, I am satisfied from the evidence that the loss incurred by the appellant was a capital loss. However, the appellant did not lead any evidence which could support a conclusion that the debts of Conark had become bad in 1979, and thereby eligible in the computation of the deduction claimed, as required by the provisions of paragraph 50(1)(a) of the Act.

The evidence before me is that the company was incorporated in 1968, and between that year and 1973 it carried on unsuccessfully a house construction business and a plan reproduction business and by the fall of 1973 it had ceased all operations. The company's businesses were operated as previously noted by, Messrs. Rawlings and Craig. The financial situation at the end of 1973 of the company is summarily explained by the appellant in his cross-examination by counsel for the respondent.

Q. Sir, then by the fall of 1973, when the company sort of ceased operations, would it be fair to say that the reason why the company just ceased operations at that time was because they were having an awful hard time just paying their debts and they couldn't see any way to make money.

A. That is right. Not only that, I had refused to put any more money into the company. I had enough of it at that point.

After the company ceased its operations Rawlings and Craig found other jobs independent of each other and the company remained inactive until 1979 when its charter was surrendered.

In the light of such a set of circumstances, a company with no assets, no employees after 1973, no activity until 1979 and left only with liabilities cannot give support in my opinion to the claim of the appellant, if he is to be successful, that the debts owing to him by the company became bad in 1979. It is self-evident from the summary of its situation after 1973 as described above that these debts had become bad prior to 1979 and most likely prior to 1977.

For these reasons, I do not have to address the other submissions of counsel for the respondent since, in my opinion, the appellant did not incur a business investment loss in 1979 within the meaning of this expression as defined in paragraph 39(1 )(c) of the Act, and therefore the appeal is dismissed.

Appeal dismissed.