Gregory v. R, [1999] 1 CTC 2279

Mogan T.C.J.:

In computing taxable income for the 1995 taxation year, the Appellant deducted a non-capital loss of $32,122.20 from prior years. When assessing tax for 1995, the Minister of National Revenue disallowed the deduction on the assumption that the Appellant did not have a non-capital loss from any prior year. The broad issue in this appeal is whether the Appellant had a non-capital loss in a prior year which would permit the deduction of $32,122.20 in computing taxable income for 1995. The Appellant has elected the informal procedure.

The Appellant claims that he had an allowable business investment loss ("ABIL") in 1992 which was too big to deduct under paragraph 3(d) of the Income Tax Act in computing his income for 1992. Any portion of an ABIL which cannot be deducted in the year when it occurs becomes part of the taxpayer’s non-capital loss within the meaning of subsection 111(8) of the Act and may, with certain time limits, be deducted in computing taxable income for a subsequent year. The more precise issue in this appeal is whether the Appellant had an ABIL in 1992. A business investment loss is defined in paragraph 39(1)(c) of the Act from which I will quote only the relevant parts:

39(1) For the purposes of this Act,

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

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

(ii)

of any property that is

(111) 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 ... that is

(A) a small business corporation;

(B) ...

exceeds the total of...

An ABIL is defined in paragraph 38(c) as 3/4 of a taxpayer’s business investment loss. I therefore have to determine first whether the Appellant had a business investment loss in 1992. The only witness in this appeal was the Appellant himself and his uncontradicted evidence is summarized below.

In 1989, the Appellant and William Crossin decided to go into business together. They caused the incorporation of The Pewter House Canada Ltd. (referred to herein as "PHC") in which each owned 50% of the issued shares. The business of PHC was to import certain products from England for sale in Canada. PHC was incorporated in October 1989; it commenced business in May 1990; and its first fiscal operating year was May 31, 1991. In the summer of 1992, PHC was insolvent with significant debts to its bank and to its two shareholders, the Appellant and William Crossin. In August 1992, the Appellant transferred his half of the shares in PHC to Crossin for no consideration but the Appellant was obliged to assume $186,000 of the debt held by PHC. See Exhibit A-3, paragraph 4 of a letter dated June 30, 1992 from PHC to the Appellant. See also paragraph 1 of a letter dated August 27, 1992 from PHC to the Appellant, also part of Exhibit A-3.

The Appellant described how his share of the debt was $186,000. PHC had borrowed $300,000 from the Royal Bank of Canada and the Appellant agreed to pay one-half of that loan. PHC had borrowed $50,000 from the Bank of Nova Scotia and the Appellant agreed to pay one-half of that loan. And lastly, PHC had borrowed $22,000 from a friend of William Crossin and the Appellant agreed to pay one-half of that loan:

Royal Bank of Canada $150,000 Bank of Nova Scotia 25,000 Friend of Crossin 11,000

$186,000

Exhibit A-2 is a copy of the unaudited financial statements of PHC as at May 31, 1992. The balance sheet shows bank indebtedness of $299,262; advances from principals of $187,298; and a deficit (no retained earnings) of $350,020. Even though Exhibit A-2 is not audited, it provides some corroboration for the Appellant’s evidence about the business misfortunes of PHC. There is further corroboration in Exhibit A-1 (a letter of June 4, 1990 from the lawyers for the Royal Bank to their Bank client describing certain guarantees obtained from the Appellant’s wife), Exhibit A-3 (the two letter agreements of June 30, 1992 and August 27, 1992 between PHC and the Appellant referred to above) and Exhibit R-2 which is the Appellant’s 1992 income tax return showing a business investment loss of $186,000 claimed in that return. Quite apart from the corroboration referred to above, I found the Appellant to be a very credible witness. I believe and accept all of his evidence with respect to his business venture in PHC and his loss of $186,000.

Counsel for the Respondent argued that the appeal should be dismissed because the Appellant had not proven with a precise paper trail that he had paid $186,000 to PHC or that he was directly obligated to pay $186,000 of PHC’s debts. Counsel is correct in the sense that there is not in evidence a series of cheques from the Appellant to PHC making a total of $186,000 or a promissory note from PHC to the Appellant proving that amount of debt but some credence must be given to the very believable sworn and uncontradicted evidence of the Appellant himself plus the corroborating documents. While the onus of proof is on the Appellant, it is only a civil onus. I am satisfied that the Appellant discharged the onus on him and shifted the onus to the Respondent.

Relying on the Appellant’s evidence, I conclude that PHC really was insolvent in August 1992 and that the Appellant was obliged to pay $186,000 to the Royal Bank with respect to the debts of PHC. The Minister of National Revenue would know from the income tax returns (if any) of PHC whether it had survived its financial crisis of August 1992 and whether it had subsequently prospered in business. If the Minister had any serious reason to believe that the Appellant did not suffer a loss of $186,000 in his business venture in PHC, the Respondent could have called as witnesses, Mr. Crossin, any other person who now operates PHC or some person from the Royal Bank familiar with the Appellant’s obligation to pay part of the PHC debt to the Royal Bank. No such witness was called.

According to Exhibit A-2 (the financial statements of PHC), there were only two shares of PHC issued for two dollars. Because the shares were initially owned 50/50, one would think that the Appellant could not lose more than one dollar on the transfer of his one share to Crossin in August 1992. The evidence, however, is otherwise. Upon the transfer of the Appellant’s share to Crossin in August 1992, the Appellant was obliged to assume a portion of PHC’s debt to the Royal Bank. The Appellant’s portion was $186,000 and Crossin’s was $114,000. According to the Appellant, the debt obligations were evenly distributed because Crossin agreed to pay the full amount of the debt to the Bank of Nova Scotia ($50,000) and to his friend ($22,000). Crossin’s debts may be summarized as follows:

The Appellant’s share of the debt is summarized in paragraph 4 above. Notwithstanding that summary, it appears that the Appellant did not pay any amounts to the Bank of Nova Scotia or to Crossin’s friend but paid $186,000 only to the Royal Bank. It appears that Crossin made payments to the three parties in accordance with the summary in paragraph 8 above. The net result is that the Appellant and Crossin each paid one-half of the PHC aggregate debt of $372,000 ($300,000 plus $50,000 plus $22,000).

I find that the Appellant suffered a loss of $186,000 on the disposition of his share in PHC in August 1992. If it were necessary to do so, I would also find that any debt owing by PHC to the Appellant in August 1992 was a bad debt at that time within the meaning of subsection 50(1) of the Income Tax Act. The appeal is allowed on the basis that the Appellant had a business investment loss of $186,000 in 1992; an ABIL of $139,500 in 1992; and a non-capital loss of $32,122.20 in 1995.

Appeal allowed.