Jenset v. The Queen

Jenset v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2003-06-11 Neutral citation 2003 TCC 407 File numbers 98-2820(IT)I Judges and Taxing Officers Murray A. Mogan Subjects Income Tax Act Decision Content Docket: 98-2820(IT)I BETWEEN: PETER ANTON JENSET, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeals heard on August 29 and 30, 2002, at Toronto, Ontario, By: The Honourable Judge M.A. Mogan Appearances: Counsel for the Appellant: A. Christina Tari and Marcella Aroca Counsel for the Respondent: Brianna Caryll ____________________________________________________________________ JUDGMENT The appeals from assessments of tax made under the Income Tax Act for the 1992, 1993 and 1994 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant had an allowable business investment loss of $38,119 in 1985 and an allowable business investment loss of $77,533 in 1990. Signed at Ottawa, Canada, this 11th day of June, 2003. "M.A. Mogan" J.T.C.C. Citation: 2003TCC407 Date: 20030611 Docket: 98-2820(IT)I BETWEEN: PETER ANTON JENSET, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Mogan J. [1] The taxation years under appeal are 1992, 1993 and 1994. The Appellant claims that he is permitted to carry forward and deduct in computing taxable income for the years under appeal certain non-capital losses from prior years. Specifically, the Appellant claims that he had an allowable business investment loss ("ABIL") in each of the years 1985 and 1986; that he was not able to deduct those ABILs in 1985 or 1986; and that he did not deduct those ABILs in any year prior to 1992. The Respondent denies that the Appellant had an ABIL in 1985 or 1986. [2] The primary issue in this appeal is whether the Appellant had a business investment loss ("BIL") in 1985 or 1986. A BIL is described in paragraph 39(1)(c) of the Act. In commercial language, it is a capital loss incurred on the disposition of (i) a share in a small business corporation; or (ii) a debt owing by a Canadian-controlled private corporation which is a small business corporation. An ABIL is described in paragraph 38(c) of the Act as a fraction of a BIL. For the years 1985 and 1986, an ABIL was one-half (½) of the BIL incurred in the year. The Appellant's claimed BIL and ABIL in 1985 and 1986 are the result of his purchasing shares in and lending money to Skinner Sports (1976) Limited, an Ontario corporation. There is no dispute between parties on the question of whether Skinner Sports (1976) Limited (the "Company") was a Canadian-controlled private corporation and a small business corporation at all relevant times. Therefore, the only issues of fact are whether the Appellant invested money (by share purchase or loan) in the Company, and whether the Appellant incurred a loss from such investment in 1985 or 1986 or in any other year prior to 1992. [3] Under the Income Tax Act, if a taxpayer in a particular year has an ABIL which is not deducted in computing income for that year, the amount of that ABIL becomes part of the taxpayer's "non-capital loss" under paragraph 111(8)(b) of the Act; and that amount may be deducted in computing taxable income for adjoining years under paragraph 111(1)(a) of the Act. A non-capital loss may be carried back three years and carried forward seven years. [4] At the commencement of the hearing, the parties filed amended pleadings. Counsel for the Appellant filed a "Fresh as Amended Amended Notice of Appeal" and counsel for the Respondent filed a Reply to that document. Counsel for the Appellant also entered as Exhibit A-1 a binder of documents containing 13 tabs. The 13 documents are accepted as having been proved. In the facts summarized below, I am, relying on the binder of documents (Exhibit A-1) referred to by tab number and the oral testimony of the Appellant who impressed me as a totally credible witness. Facts [5] The Company operated a retail store in Toronto selling hunting and fishing equipment. In December 1980, the Appellant purchased a 50% shareholder interest in the Company. Tab 5 shows the stubs of two cheques in the amounts of $5,000 and $12,500. The Appellant identified the $5,000 as an amount paid on November 25, 1980 to Bussin & Bussin (a Toronto law firm) being part of the cost of his 50% shareholder interest. He identified the $12,500 as an amount paid on December 15, 1980 to Cassels, Brock (a Toronto law firm) being a loan to the Company. Each cheque stub bears the note "Re Skinners". Tab 1 is the Company's Shareholder Register showing that the Appellant acquired two common shares on December 15, 1980. Donald M. Rogers was the other 50% shareholder owning two common shares. Tab 4 is a letter from Cassels, Brock dated June 3, 1981 confirming the Appellant's purchase of 50% of the common shares and his loan of $12,500 to the Company. [6] After profitable years in 1981 and 1982, the Company started to lose money in 1983 and 1984. The Appellant and Donald Rogers made loans to the Company in 1984. Tab 2 is the Company's financial statements at October 31, 1984 showing that the shareholders advanced $225,737 ($260,567 minus $34,830) in the 12 months preceding October 31, 1984. Tab 3 shows that Donald M. Rogers loaned $167,000 to the Company from January 1 to October 31, 1984. After deducting the advances of Donald Rogers ($167,000) from total shareholder advances ($225,737), the Appellant claims that he loaned $58,737 to the Company during its 1984 fiscal period. Total Shareholder advances $225,737 Advances by D.M. Rogers 167,000 Advances by Appellant $58,737 [7] There is no evidence to contradict the Appellant's statements and documents. Therefore, I find that up to October 31, 1984, the Appellant had invested not less than $76,237 in the Company as follows: Cost of Shares in 1980 $5,000 Loan in 1980 12,500 Loans in 1984 $58,737 Cost of Shares in 1980 $76,237 [8] The Appellant and Donald Rogers had delivered guarantees to the Royal Bank of Canada with respect to the indebtedness of the Company to the Bank. On April 1, 1985, the Bank demanded payment of all amounts outstanding. According to a letter from Donald Rogers dated April 9, 1985 (Tab 8), Mr. Rogers had paid the Bank $180,417.73; he had acquired the Bank's secured position; and he appointed Dunwoody Limited as receiver and manager of the assets and undertaking of the Company with power to sell such assets and undertaking. According to a subsequent letter of May 13, 1985 from Borden & Elliot, solicitors for Mr. Rogers (Tab 9), the receiver/manager had realized $80,000 from the assets of the Company leaving a shortfall of $100,417.73. [9] The letter from Borden & Elliot (Tab 9) demanded payment of $50,208.61 from the Appellant as his 50% contribution to the shortfall. When the Appellant was not able to pay the $50,208.61, Mr. Rogers attempted to petition the Appellant into bankruptcy on June 11, 1985 (Tab 7, part A). The Appellant disputed the petition by document dated November 12, 1985 (Tab 7, part B) but an Ontario Court issued a Receiving Order on November 20, 1985 (Tab 7, part C) holding the Appellant to be a bankrupt, and appointing Dunwoody Limited as the trustee-in-bankruptcy. The Appellant claimed that he was not insolvent in 1985 because he had an interest in his father's estate the value of which, in 1985, exceeded the aggregate of his liabilities. [10] According to an affidavit sworn by the Appellant in February 2002 (Tab 7) in support of his application to have the Receiving Order of November 20, 1985 annulled, the trustee-in-bankruptcy received $366,808 in settlement of the Appellant's claim against his father's estate, and disbursed $315,813 in legal fees and costs (Tab 7, part E). The affidavit also stated that, after the settlement of the Appellant's claim against his father's estate in the summer of 1990, Borden & Elliot issued two cheques to Donald Rogers as follows (Tab 7, part D): July 24, 1990 $362,689 December 14, 1990 264,812 It is the Appellant's understanding that those cheques satisfied Rogers' claim against the Appellant's bankrupt estate. Donald Rogers did not oppose the Appellant's application to have the Receiving Order annulled. The Ontario Superior Court of Justice issued an Order on February 28, 2002 (Tab 12) which annulled the Receiving Order dated November 20, 1985. [11] The Appellant claims that the whole amount of $50,208.61 which he owed to Donald Rogers as his (the Appellant's) 50% share of the shortfall owing to the Royal Bank was, in fact, paid to Mr. Rogers through the trustee-in-bankruptcy and the amounts paid out by Borden & Elliot in 1990 following the settlement of the action against the estate of the Appellant's father. See Tab 7, parts D and E and the Appellant's affidavit, Tab 7, paragraphs 17, 18, 19 and 20. It appears to me that all claims of the Appellant's unsecured creditors were paid in full subject to the Superintendent's Levy. Having regard to the fact that Donald Rogers and the Company waived their claims against the Appellant's estate in bankruptcy, I conclude that the amount of $50,208.61 owing to Donald Rogers was paid in full by the trustee-in-bankruptcy as agent for the Appellant. [12] There is a third transaction through which the Appellant claims that he invested indirectly in the Company. In December 1980, the Estate of E. Fryer purchased 100 preference shares in the Company at a cost of $100,000 but, because of a conflict of interest between the Appellant and the Fryer Estate, the Appellant and Donald Rogers were required to guarantee the redemption of the preference shares. When the Company was put into receivership in April 1985, and was unable to redeem the preference shares, the Appellant and Donald Rogers were called on their guarantees. The preference shares had to be redeemed as follows: July 1, 1985 $20,000 January 2, 1986 30,000 June 30, 1986 50,000 [13] Donald Rogers wrote to the Appellant on June 28, 1985 (Tab 10) asking him to contribute his $10,000 (50%) of the amount required to redeem $20,000 of preference shares on July 1, 1985. The Appellant thinks that he paid his 50% share ($10,000) in 1985 but his own Exhibit A-1 (Tab 11) indicates otherwise. A letter dated March 3, 1987 from Borden & Elliot to the trustee-in-bankruptcy (Tab 11) claims $25,609.37 with respect to the amount which Mr. Rogers paid on June 30, 1986 to redeem preference shares and also claims $27,559.37 with respect to amounts paid on July 1, 1985 and January 2, 1986 to redeem preference shares. It is my understanding from the Appellant's affidavit and other documents at Tab 7 that those amounts were paid by the Appellant's trustee-in-bankruptcy 100 cents on the dollar in the last six months of 1990 when all of Mr. Rogers' claims against the Appellant's bankrupt estate were paid in full. [14] Having regard to the facts summarized above, I have concluded that the Appellant invested the following amounts in the Company by the purchase of shares, by loans to the Company and by having the trustee-in-bankruptcy advance money to Donald Rogers to indemnify him with respect to guarantees which the Appellant and Mr. Rogers had given to the Royal Bank of Canada and to the Fryer Estate: 1980 purchase of common shares $5,000 1980 loan to Company 12,500 1984 loan to Company 58,737 Royal Bank guarantee 50,208.61 Fryer Estate (July 1/85 and January 2/86) 27,559.37 Fryer Estate (June 30/86) 25,609.37 Analysis [15] In the above table, the first three amounts were actually paid by the Appellant in 1980 and 1984. Therefore, when the Company went into receivership in April 1985, the Appellant suffered a BIL of $76,237 in 1985 (the total of the first three amounts). The last three amounts in the above table were not paid out directly by the Appellant but were paid on his behalf by the trustee-in-bankruptcy in late 1990 after the trustee had settled the action commenced against the estate of the Appellant's father. Although the trustee in law acts on behalf of the creditors, in the circumstances of this case, it may be said that the trustee was also acting on behalf of the Appellant because all of the creditors appear to have been paid 100 cents on the dollar. In my opinion, the Appellant had a BIL of $103,377 in 1990 (the total of the last three amounts). [16] Under paragraph 38(c) of the Act, an ABIL in 1985 was one-half of a taxpayer's BIL in 1985. And in 1990, an ABIL was three-quarters of a taxpayer's BIL in 1990. Accordingly, with respect to my findings in paragraph 15 above, I conclude that the Appellant had an allowable business investment loss of $38,119 in 1985 (one-half of $76,237) and an allowable business investment loss of $77,533 in 1990 (three-quarters of $103,377). Although the Appellant was, in law, bankrupt from November 20, 1985 when the Receiving Order was made (Tab 7, part C) until February 26, 1988 when he was discharged (Tab 7, part F), I have regarded the trustee-in-bankruptcy as the agent of the Appellant for the payment of his debts (i) because of the Appellant's uncontradicted evidence that his debts to Donald Rogers and the Company were paid in full; and (ii) because the Receiving Order was annulled (without opposition from Donald Rogers) in February 2002 (Tab 12). [17] Counsel for the Respondent stated in argument that she did not challenge the Appellant's credibility but she did challenge his memory. She confirmed my own impression of the Appellant as totally credible. I have tried not to rely on the Appellant's memory with respect to any material fact unless it was supported by a contemporaneous document. [18] These are informal appeals for the taxation years 1992, 1993 and 1994. I am satisfied that the Appellant's ABILs of $38,119 for 1985 and $77,533 for 1990 have not been "used" as non-capital losses under paragraph 111(1)(a) of the Act in any year prior to 1992. Because these are informal appeals, there are financial limitations to the relief which the Appellant may obtain in any one year. Having decided that the Appellant had an ABIL of $38,119 in 1985 and an ABIL of $77,533 in 1990, I will allow the appeals but leave it to the parties to work out the amount of "non-capital loss" which the Appellant may carry forward and apply in each year under appeal. I understand that a non-capital loss from 1985 may not be carried forward beyond 1992. The parties may come back to this Court on motion if they are not able to agree on the application of non-capital losses. Signed at Ottawa, Canada, this 11th day of June, 2003. "M.A. Mogan" J.T.C.C. CITATION: 2003TCC407 COURT FILE NO.: 98-2820(IT)I STYLE OF CAUSE: Peter Anton Jenset and Her Majesty the Queen PLACE OF HEARING: Toronto, Ontario DATE OF HEARING: August 29 and 30, 2002 REASONS FOR JUDGMENT BY: The Honourable Judge M.A. Mogan DATE OF JUDGMENT: June 11, 2003 APPEARANCES: Counsel for the Appellant: A. Christina Tari and Marcella Aroca Counsel for the Respondent: Brianna Caryll COUNSEL OF RECORD: For the Appellant: Name: A. Christina Tari Firm: Richler and Tari For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada