Bhagani v. The Queen

Bhagani v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-07-12 Neutral citation 2004 TCC 496 File numbers 2003-3556(IT)I Judges and Taxing Officers Murray A. Mogan Subjects Income Tax Act Decision Content Docket: 2003-3556(IT)I BETWEEN: DAVENDRA BHAGANI, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on April 21, 2004, at Toronto, Ontario, By: The Honourable Justice M.A. Mogan Appearances: Counsel for the Appellant: Maria Louisa Diaz Counsel for the Respondent: Bonnie Boucher ____________________________________________________________________ JUDGMENT The appeals from assessments of tax made under the Income Tax Act for the 1999 and 2000 taxation years are dismissed. Signed at Ottawa, Canada, this 12th day of July, 2004. "M.A. Mogan" Mogan J. Citation: 2004TCC496 Date: 20040712 Docket: 2003-3556(IT)I BETWEEN: DAVENDRA BHAGANI, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Mogan J. [1] The taxation years under appeal are 1999 and 2000. When the Appellant filed his 1999 T1 income tax return, he reported a business investment loss ("BIL") of $567,679. The Appellant did not in fact have a BIL of $567,679 in 1999 but that amount was the amount of a judgment obtained against him in the Ontario Courts. In 1999, the judgment creditor caused a payroll garnishment to be issued against the Appellant; and his employer paid $5,747.08 in 1999 with respect to the garnishment. Similarly, in 2000, the Appellant's employer paid $9,729.46 to the judgment creditor with respect to the garnishment. Therefore, the Appellant claims an allowable business investment loss ("ABIL") of $4,310.31 for 1999 and an ABIL of $7,297.10 for 2000. The Appellant's claims were rejected in assessments issued by Revenue Canada and the Appellant has appealed from those assessments. The issue is whether the Appellant had a BIL of any amount in 1999 or 2000. The Appellant has elected the informal procedure. [2] The Appellant is a senior systems developer with the Canadian Imperial Bank of Commerce ("CIBC"). He resides in Scarborough, Ontario which is a suburb at the east side of Toronto. Prior to 1992, the Appellant was involved in a number of real estate investments with a man identified as Arun Horra. Rouge Hill Development Corporation ("RHDC") is an Ontario Corporation in which the Appellant and Mr. Horra each owned 50% of the issued shares. On May 30, 1991, RHDC purchased a parcel of vacant land on Steeles Avenue in Scarborough, Ontario (hereafter called the "Steeles Land") under the following terms: Vendor: 450214 Ontario Limited ( the "214 Company") Purchase Price: $770,000 Down payment in cash 230,000 Mortgage back to Vendor 540,000 Appellant's loan to RHDC 115,000 Mr. Horra's loan to RHDC 115,000 RHDC used the loans from the Appellant and Mr. Horra to make the down payment to the 214 Company [3] In April and May 1992, Mr. Horra loaned additional cash of $270,000 to RHDC so that RHDC could pay down one-half of the principal amount of its mortgage debt to the 214 Company. On June 25, 1992, the Appellant entered into a written agreement with Mr. Horra and RHDC. That agreement is at Tab 22 of Exhibit A-1, the Appellant's binder of documents. The agreement recites or confirms most of the facts set out in paragraph 2 above and in this paragraph 3. Under paragraph 4 of the agreement, the Appellant assumed full responsibility to pay interest and principal ($270,000) on the remainder of the mortgage taken back by the vendor (the 214 Company); and the Appellant agreed to keep Mr. Horra indemnified from such responsibility. [4] The Appellant failed to provide the money to RHDC to pay the remaining one-half ($270,000) of the mortgage taken back by the vendor (the 214 Company). The mortgage went into default and the 214 Company forced the sale of the Steeles Land under a power of sale. In April 1994, the Appellant commenced an action in the Ontario Court (General Division) against Mr. Horra, RHDC and Rouge Hill Investments Limited (a second corporation in which the Appellant and Mr. Horra were shareholders). The Appellant claimed damages for breach of an alleged employment contract plus other remedies. Mr. Horra defended the action and counterclaimed against the Appellant specifically claiming damages for the loss suffered (by Mr. Horra) from the Appellant's breach of the agreement dated June 25, 1992, and the Appellant's failure to keep in good standing the mortgage owing by RHDC to the 214 Company. [5] The action came on for hearing before Justice Ground of the Ontario Court (General Division) whose reasons for judgment are at Tab 8 of Exhibit A-1. Judge Ground dismissed the Appellant's claim to any employment relationship but allowed Mr. Horra's counterclaim in the amount of $385,000 (being his payments to RHDC of $115,000 plus $270,000) plus pre-judgment interest of $44,198. See Exhibit A-1, Tab 9. The Appellant's appeal to the Ontario Court of Appeal was dismissed on April 12, 1999. See Exhibit A-1, Tabs 10 and 11, and Exhibit R-2. Following final judgment, Mr. Horra obtained a Notice of Garnishment to the CIBC dated May 12, 1999 in the amount of $567,679. See Exhibit A-1, Tabs 12 and 13. [6] Pursuant to the garnishee proceedings, CIBC paid to Mr. Horra (or his agent) $5,747.08 in 1999 and $9,729.56 in 2000. See Exhibit A-1, Tabs 3 and 4. The Appellant has claimed allowable business investment losses of $4,310.31 for 1999 and $7,297.10 for 2000 being 75% of the amounts recovered by Mr. Horra under the garnishee proceedings. Analysis [7] A business investment loss ("BIL") is defined in paragraph 39(1)(c) of the Income Tax Act. The definition is lengthy and I shall set out only those words which I think are relevant. 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 (iii) 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 (v) ... If a taxpayer had a BIL in 1999 within the meaning of paragraph 39(1)(c), paragraph 38(c) defined an ABIL as 75% of the BIL. The 75% was changed to 50% in 2000 in a manner which is not relevant to this appeal. [8] The most important condition for a BIL is that a taxpayer have a capital loss which results from owning shares of a small business corporation or from holding a debt owed by a Canadian-controlled private corporation that is a small business corporation. The reference to subsection 50(1) in subparagraph 39(1)(c)(i) incorporates a provision which permits a taxpayer to elect to have a capital loss in a particular year with respect to a debt owing to the taxpayer which became a bad debt in that year. There are precise conditions set out in subsection 50(1) which are not relevant in this appeal. The only significant debt in this appeal is the judgment debt of $567,679 which Mr. Horra obtained against the Appellant. It is with reference to that judgment debt that $5,747.08 was garnished from the Appellant's salary in 1999 and $9,729.56 was garnished from the Appellant's salary in 2000. [9] The amounts garnished from the Appellant's salary in 1999 and 2000 were not in any way connected with the Appellant's ownership of shares in any corporation, or with the Appellant's loan of any funds to a corporation. Quite the contrary. Mr. Horra obtained a judgment against the Appellant because the Appellant had failed (in 1992) to lend $270,000 to RHDC; and such failure had caused Mr. Horra to lose his investment of $385,000 ($115,000 plus $270,000) in RHDC. [10] The short and simple answer to the Appellant's claim is that the debt of $567,679 (owed by the Appellant to Mr. Horra) was not a debt owed to him by a Canadian-controlled private corporation. Accordingly, the Appellant did not have a BIL in 1999 or 2000. The amount of $115,000 which the Appellant loaned to RHDC in 1991 to purchase the Steeles Land may have resulted in a BIL in 1994 when the Steeles Land was lost under a power of sale but there were indications at the hearing that the Appellant had already claimed an ABIL in 1994 or 1995 with respect to such $115,000. The appeals for 1999 and 2000 are dismissed. Signed at Ottawa, Canada, this 12th day of July, 2004. "M.A. Mogan" Mogan J. CITATION: 2004TCC496 COURT FILE NOS.: 2003-3556(IT)I STYLE OF CAUSE: Davendra Bhagani and Her Majesty the Queen PLACE OF HEARING: Toronto, Ontario DATE OF HEARING: April 21, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice M.A. Mogan DATE OF JUDGMENT: July 12, 2004 APPEARANCES: Counsel for the Appellant: Maria Louise Diaz Counsel for the Respondent: Bonnie Boucher COUNSEL OF RECORD: For the Appellant: Name: Maria Louise Diaz Firm: Maria Louise Diaz For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada