Eugene Hanusch v. Minister of National Revenue, [1985] 1 CTC 2022, 85 DTC 32, [1985] DTC 34

Tremblay, TCJ:—This appeal was heard on June 7, 1984, in the city of London, Ontario.

1. The Point at Issue

The point is whether the appellant is correct in applying a non-capital loss incurred in 1978 in the computation of his income for his 1979, 1980 and 1981 taxation years.

According to the respondent, the non-capital loss incurred in 1978 was completely applied against the income of 1977, pursuant to paragraph 11 l(l)(a) of the Income Tax Act and therefore, there remained no loss to be applied against the years 1979, 1980 and 1981.

In his 1978 tax return the appellant claimed a non-capital loss of $9,598. However, in his notice of appeal the appellant contends that the loss of 1978 in the amount of $9,598 was not well computed by his then accountant and therefore, it seems that another quantum of loss is involved. However he does not give any figure concerning the new loss for 1978. He only says that he has the right to amend his 1978 return.

In the appellant’s reply to the respondent’s reply to notice of appeal, the appellant again invoked the right to amend the 1978 return but did not give more information concerning the quantum of the new loss.

In the notice of appeal, as in the appellant’s reply to the respondent’s reply, the appellant says that the years involved in the appeal are 1978, 1979, 1980 and 1981.

The respondent, however, contends that no notice of objection was formally filed concerning the years other than 1979 and, therefore, the latter year is legally the only one in appeal.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

4. In assessing tax as aforesaid, the respondent relied upon the following findings or assumptions of fact:

(a) the facts set out above;

they are described in paragraphs 2 and 3 hereinafter.

(2) In the Income Tax Return filed by the appellant for the 1979 taxation year,

he deducted a prior non-capital loss in the amount of $6,520.32.

(3) By Notice of Reassessment dated March 25, 1982, the Minister of National

Revenue disallowed the said prior non-capital loss of $6,520.32.

(b) the appellant incurred a non-capital loss in the amount of $9,598 in his 1978 taxation year;

(c) the full amount of the 1978 $9,598 non-capital loss was deductible in the computation of the appellant’s income for the 1977 taxation year and there was no non-capital loss available with respect to the 1979 taxation year;

(d) the appellant has not filed Notices of Objection with respect to his 1977,1978, 1980 or 1981 taxation years.

3. The Facts

3.01 The appellant testified that in 1978, he was a framing carpenter. As a sideline, he built and sold houses. He had built two in the previous years and sold them.

3.02 In July 1978, he bought a lot and started building a third one. In December 1978,

it was mostly ready, at least at 80%. (TS pp 7, 8)

He sold it on February 23, 1979 for $60,500. The total cost was $50,189.37.

3.03 Pursuant to a statement prepared by the appellant himself (Exhibit A-l), the rest of the expenses for the houses in 1978 added up to $39,545.20 including $20,900 for the piece of land. In filing his 1978 income tax return, the appellant declared a gross business income of $8,930 from subcontracting and expenses of $25,564.97 leaving a business loss of $17,634.97. After applying his loss against the employment income and rental income and others, it remained a loss of $9,598.

3.04 This loss of $9,598 was obviously applied against the taxable income of 1977. No evidence was given concerning the net income and taxable income for the said year. The agent for the appellant said he has on hand the 1977 reassessment for that year, but did not file it. It seems that the taxable income after the exemptions was around $5,500.

3.05 The contention of the appellant, through his agent who gave the explanation, was that the previous accountant had made an error in 1979, in computing the income for 1978. According to him the taxable income was $5,847.93 and no loss at all. The previous accountant indeed had not to take into account as he did, the expenses concerning the house which was not completed at the end of 1978.

There was $22,000 worth of expenses that did not have any bearing on the income of that particular year. (TS pp 13, 14)

3.06 On June 16, 1982, the agent for the appellant, after realizing the error of his partner, the previous accountant, filed an amended return for 1978 (Exhibit A-3) but it was not accepted by the respondent.

3.07 Following that refusal by the respondent, no notice of objection was filed by the appellant concerning 1978 on the basis that it was a nil assessment. The same reason applies for 1977.

3.08 The appellant said the reassessment is incorrect because

while the profit now for a house for the next year; it’s about over $25,000 which never made them. The profit is about close to $9,000 you see. (TS pp 19, 20)

3.09 In filing his 1979 taxation year, the appellant did not include a net business income for the year of $3,659.69 which is the result of the sale price of the house of $60,500 less $56,840.31 of expenses. This net business income was not included in line 19 of the first page of the return despite the statement of business income attached with the return. The Court states that the expenses which created the loss in 1978 were again claimed in 1979 to compute the net income of $3,659. The appellant’s total net income was $21,391. Moreover, in the computation of the taxable income, the appellant claimed a non-capital loss of $6,520 made in 1978. The taxable income was $4,477. In the assessment issued June 20, 1980, the respondent only made a few changes from the original return. In fact the taxable income was increased from $4,477 to $5,100. (Exhibit R-l)

3.10 However on March 25, 1982, a reassessment was issued and then the respondent disallowed the non-capital loss of $6,520 on the basis that the said loss had been totally applied against the 1977 income. The Court states that the $3,659.69 of business income was not even added to the appellant’s income by the respondent. On May 12, 1982, the appellant filed a notice of objection for 1979. On June 6, 1982, the appellant filed an amended return for 1979 (Exhibit R-2) including the net business income of $3,659.69 and not taking into account the non-capital loss. The appellant’s taxable income is $15,323 rather than $5,100 of the first assessment. In the notification of confirmation issued on November 24, 1982, the respondent confirmed the reassessment issued on March 25, 1982. It reads as follows:

The Minister of National Revenue has considered the facts and reasons set forth in your Notice(s) of Objection and hereby confirms that the assessment(s) has (have) been made in accordance with the provisions of the Income Tax Act for the following reasons:

the non-capital loss for the 1978 taxation year of the taxpayer has been properly determined and taken into account and fully utilized in computing the taxable income for the 1977 taxation year of the taxpayer in accordance with the provisions of subsection 9(2) and paragraph 11 l(l)(a) of the Act and accordingly there was no non-capital loss in 1979 that was deductible in computing the taxable income of the taxpayer in accordance with the provisions of subsection 9(2), paragraph 11 l(l)(a) and subparagraph 111(3)(b)(i) of the Act.

Thence the respondent did not include the business income of $3,659.69.

4. Law — Cases at Law — Analysis

4.01 Law

The main provision of the Income Tax Act involved in this case is 11 l(l)(a). It reads as follows:

Sec. 111. Losses deductible.

(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted from the income for the year such of the following amounts as are applicable:

(a) Non-capital losses — non-capital losses for the 5 taxation years immediately preceding and the taxation year immediately following the taxation year, but no amount is deductible in respect of non-capital losses from the income of any year except to the extent of the taxpayer’s income for the year minus all deductions permitted by the provisions of this Division other than this paragraph, paragraph (b) or section 109.

4.03 Analysis

4.03.1 The agent for the appellant contended in his submission that the years 1978 to 1981 were involved in this appeal because in a letter from the registrar of the Court to the parties, the latter referred to the said years when, in fact, it is a technical reference taken from the heading of the notice of appeal. The registrar could not guess that the notices of objection for the years 1978, 1980 and 1981 were not filed. This does not change the law wherein the filing of a notice of objection is a sine qua non prerequisite for filing a notice of appeal.

4.03.2 In his submission the agent for the appellant said that the respondent forced the appellant to apply the 1978 loss against the income of 1977. He contends that because in section 111 it is said . . there may be deducted . . .”,

therefore he was not obliged to apply it to 1977 but he had the choice to apply it to the years 1979, 1980 and after.

The word “may” is used by the legislator because sometimes it is not possible to apply the loss to the previous year especially when there is no income in that previous year. But when there is an income, the taxpayer and the assessor are obliged to apply the loss against the said year pursuant to subsection 111(3) of the Act.

4.03.3 Finally the agent for the appellant contends that if the appeal is allowed, the effect would be that the profit of $25,000 on the sale of the house would fall to approximately $9,000.

From the adduced evidence, the Court cannot follow the appellant. As I see the evidence indeed, even if the Court would allow the appeal and would consider the amended returns for 1978 and 1979 filed by the appellant in June 1982, as correct, the additional income would be added as follows:

The Court cannot recognize “the fall from $25,000 to $9,000” especially when nothing had been taxed in 1979 as business income. Moreover the returns for those years were not filed to [sic] the Court to shed light on that point.

4.03.4 The appellant is far from having reversed the burden of proof. In effect, the evidence shows that he owes more taxes than the assessments require. The Court has not however the jurisdiction to increase the burden of taxes from the assessment or reassessment which is the object of the appeal. The Court may dismiss the appeal or allow the appeal but not increase the tax. Fortunately for the appellant, the reassessment must be maintained and the appeal dismissed.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.