Tax Court of Canada Judgments

Docket: 2003-3616(IT)I

BETWEEN:

RITA A. ASHLEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on April 16, 2004, at Toronto, Ontario,

By: The Honourable Justice A.A Sarchuk
Appearances:
Agent for the Appellant:	Robert Ashley
Counsel for the Respondent:	Eric Sherbert

____________________________________________________________________

JUDGMENT

          The appeals from assessments of tax made under the Income Tax Act for the 1999 and 2000 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing income, the Appellant may deduct bad debt expenses of $6,400.46 in 1999 and vehicle expenses of $6,569.42 in 2000.

          The Appellant is not entitled to any further relief.

Signed at Ottawa, Canada, this 4th day of January, 2005.

"A.A. Sarchuk"

Sarchuk J.

Citation: 2005TCC1

Date: 20050104

Docket: 2003-3616(IT)I

BETWEEN:

RITA A. ASHLEY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Sarchuk J.

[1]      These are appeals by Rita A. Ashley from assessments of tax with respect to her 1999 and 2000 taxation years:

(a)       In computing income for the 1999 taxation year, the Appellant sought to claim a business investment loss of $36,677.22, resulting in an allowable business investment loss (ABIL) in the amount of $27,507.92 pertaining to a purported investment in AYSH Installation Management Ltd. (AYSH) in 1991. The Appellant also claimed interest expenses and bad debts with respect to an alleged investment in a business, AYSE Installations (AYSE), in the amounts of $3,510.08 and $6,400.46, respectively. In reassessing for this taxation year, the Minister of National Revenue denied both the deduction of the business investment loss and the interest and bad debt expenses claimed by the Appellant.

(b)      In computing income for the 2000 taxation year, the Appellant sought to claim interest expenses, vehicle expenses and legal fees in the amounts of $2,856.90, $6,569.42 and $2,000.00, respectively, with respect to the business AYSE. In reassessing the Appellant for that taxation year, the Minister disallowed all of the items claimed.

[2]      An agreement was reached between the parties with respect to several of the issues. The remaining two components relate to (a) the allowable business investment losses; and (b) the deductibility of legal fees related to a criminal charge against the Appellant. The Appellant did not attend and the only testimony before the Court was that of the Appellant's husband and representative, Robert Ashley.

[3]      In or about 1989, Robert Ashley began to provide office furniture installation services under the name AYSE. He initially obtained a $50,000 line of credit from the Toronto-Dominion Bank (TD). Documents evidencing the line of credit were produced by Robert Ashley including an assignment of book debts, a guarantee signed by him and a General Security Agreement, all of which were dated April 1990. He also entered into evidence an undated promissory note from him in the amount of $50,000 in favour of TD.[1] In or about May 1990, "a second collateral mortgage" was placed on the Ashley home as security for the line of credit with TD which, he said, was used to acquire product, maintain receivables and pay salaries including his. At some point of time, Robert Ashley incorporated AYSH of which he was the principal shareholder.[2] Although all of the foregoing documents referred to Robert Ashley carrying on business as AYSE as the debtor, he stated that at a subsequent point of time the documents were updated to make specific reference to the successor corporation, AYSH.

[4]      According to Robert Ashley at some point of time, AYSH was substantially overdrawn on its account and on February 13, 1992, TD forwarded a letter demanding payment of the amount of $53,579.79 together with interest, failing which "action will be taken for payment". Shortly thereafter, a new first mortgage for an additional $55,000 was placed on the residence owned by Robert Ashley and the Appellant and the additional funds were used to pay the outstanding amount demanded by TD. He maintains that in exchange for his wife's consent to have the new first mortgage placed on the residence, he created a debt in her favour secured by the assets of AYSH. He produced a document dated March 25, 1992 purporting to acknowledge a debt of $55,000 to the Appellant which he said was intended to provide her with all of the assets of AYSH as security.[3] It is this transaction which, he said, ultimately gave rise to the ABIL claimed.

[5]      Reference was made to statements of AYSH's profit and loss for the years 1991, 1992 and 1993 which Robert Ashley says he prepared in March 1993. However, during cross-examination, he conceded that no T2 returns had been filed for those years. The balance sheets forming part of these statements disclose that in 1993, there were no longer any bank liabilities because, as he explained, TD had been paid off with the new mortgage. When asked why there was no record in these statements, or in any other documentation, to indicate that a liability to the Appellant had existed, he responded "No particular reason, no. It was just a statement of where the company was and her interest in the company is considered as part of the company".

[6]      Robert Ashley testified that AYSH went out of business in 1995 and alleges that its only outstanding liability was the purported indebtedness of $55,000 to the Appellant. He conceded that there were assets at that time which consisted of inventory, some cash, equipment and certain judgments "that were never collected" and says he valued these assets based on their "book value" of $20,000.[4] Some of these assets were used in another business, carried on under the name AYSE from 1995 through to the taxation years in issue. He maintains that his wife had received these assets and as a result only the balance of $36,677 was claimed by her as a business investment loss in taxation year 1999.

[7]      The primary issue in this appeal is whether the Appellant sustained a business investment loss in 1995 in the amount of $36,677 giving rise to an ABIL in the amount of $27,507. An ABIL arises on the disposition at a loss of the share of a small business corporation or of a debt owing to the Appellant by a Canadian-controlled private corporation under section 50 of the Income Tax Act. Where a debt owing to a taxpayer is established to have become a bad debt in a year, it is deemed to have been disposed of at the end of the year for nil proceeds and reacquired at a nil cost. The argument advanced on behalf of the Appellant is that she had loaned money to AYSH in 1992 and that the debt became bad in 1995 when AYSH closed down its business. The Respondent's position is that there was no debt owing to the Appellant and alternatively, if there was, it was not acquired for the purpose of gaining or producing income and accordingly under subparagraph 40(2)(g)(ii) of the Act, the Appellant's loss from the deemed disposition is nil.

Conclusion

[8]      The relevant provisions of the Act read as follows:

18(1)     In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a)         an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(b)         ...

39(1)     For the purposes of this Act,

(a)         ...

(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)          ...

(iv)        a debt owing to the taxpayer by a Canadian-controlled private corporation (other than, where the taxpayer is a corporation, a debt owing to it by a corporation with which it does not deal at arm's length) that is

(A)        a small business corporation,

(B)        a bankrupt (within the meaning assigned by subsection 128(3)) that was a small business corporation at the time it last became a bankrupt, or

(C)        a corporation referred to in section 6 of the Winding-up Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time a winding-up order under that Act was made in respect of the corporation,

exceeds the total of

(v)         ...

40(2)     Notwithstanding subsection (1),

           

            (a)         ...

(g)         a taxpayer's loss, if any, from the disposition of a property, to the extent that it is

(i)          ...

(ii)         a loss from the disposition of a debt or other right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income) or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length,

(iii)        ...

[9]      In 1992, AYSH was indebted to TD in the amount of $53,579.79. A demand for payment had been made and the necessary funds were obtained by way of a new first mortgage on the family residence of which $55,000 was paid to TD. This amount was considered by the Appellant's husband as a loan by the Appellant to AYSH. He relied on the March 25, 1992 letter, the purpose of which he said was "to give her some comfort" because she was "putting up her equity in the house to basically pay off the business loans". There is, in my view, a substantial question as to whether the advance to AYSH made in this manner constituted a loan. There was nothing in the contemporaneous financial statements of AYSH showing any such indebtedness to the Appellant. On balance it appears more in the nature of an advance of capital. Furthermore, the Appellant was not a shareholder, and there is no evidence that she could have earned any interest from this transaction. In all likelihood she was doing no more than assisting her husband by agreeing to remortgage their residence, and I emphasize the words "their residence", by contributing capital to pay off the debts incurred by AYSH.

[10]     Counsel for the Respondent further argued that even if there was a debt owing to the Appellant, it had not been acquired for the purpose of earning or producing income and that as a result pursuant to subparagraph 40(2)(g)(ii) of the Act the Appellant's loss from the deemed disposition is nil. This submission is well-founded. The "comfort letter" even if it could be taken to establish an indebtedness makes it quite clear that no "profit" motive was involved since the purported "interest" referred to therein could only account for interest indebtedness incurred by the increased mortgage.

[11]     Given the evidence before the Court, I have concluded that the Minister was correct in disallowing the Appellant's claim for an ABIL.

Legal fees

[12]     The Appellant also seeks to deduct legal fees as a business expense in relation to the unincorporated business, AYSE, that was carried on in 2000. This business included the delivery of newspapers. Robert Ashley testified that one night a physical altercation occurred between himself and the Appellant and that the police were called. Both were arrested and the Appellant was subsequently charged. Bail was granted and one of the bail conditions was that she was to have no contact with him which, he observed, "obviously made it very difficult to jointly sit in the car and do newspapers". She retained counsel and according to Robert Ashley, the lawyer "arranged an early court date" and she was released. According to Robert Ashley, the amount of $2,000 claimed was as an eligible deduction because it was paid to a lawyer to represent the Appellant at the hearing. The rationale advanced with respect to the deduction of this amount was that when initially granted bail, a condition thereof was that there be no contact between the parties and that they live separate. He contended that in order to continue the newspaper delivery business which involved the active participation of both parties, it was deemed necessary that the trial be expedited. This was accomplished, the Appellant appeared in Court, entered a plea of guilty and was sentenced to three years' probation, was prohibited from having weapons, and was told to take anger management counselling. This result enabled her to return to work with him and establishes that the expense for counsel's services was deductible to the Appellant.

[13]     The Appellant cannot succeed on this ground. The relevant portions of the Act are as follows:

8(1)       In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(a)         (Repealed)

(b)         amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer;

The evidence adduced falls far short of establishing that the lawyer's fees in issue were amounts paid on account of legal expenses incurred by her to collect or establish a right to salary or wages owed to her by an employer or former employer. Furthermore there is no evidence that these fees were paid in connection with normal activities, transactions or contracts incidental or necessary to the earning of income from a business or property. Counsel for the Respondent also noted that in the 2000 taxation year, the Appellant was employed fulltime by the Ontario Public Service Employee's Union and also earned employment income from Homelife Metro Reality Inc. Based on the evidence, there is no source of income reported from which these fees might have been deductible.

[14]     I turn next to the remaining items.

(a)       In the 1999 taxation year, the Appellant claimed a bad debt expense in the amount of $6,400.46. Counsel for the Minister conceded that this amount should be allowed.

(b)      In the 2000 taxation year, the Appellant claimed vehicle expenses in the amount of $6,569.42. In assessing, the Respondent initially allowed the amount of $3,285. At trial, counsel conceded that the remaining balance is also no longer contested by the Minister and should be allowed.

(c)      In the 2000 taxation year, the Appellant also claimed interest expense in the amount of $2,856.90 with respect to an investment the Appellant claimed to have made in AYSH. No evidence was adduced in respect of this amount. Accordingly, this amount is disallowed.

Signed at Ottawa, Canada, this 4th day of January, 2005.

"A.A. Sarchuk"

Sarchuk J.

CITATION:

2005TCC1

COURT FILE NO.:

2003-3616(IT)I

STYLE OF CAUSE:

Rita A. Ashley and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

April 16, 2004

REASONS FOR JDUGMENT BY:

The Honourable Justice A.A. Sarchuk

DATE OF JUDGMENT:

January 4, 2005

APPEARANCES:

Agent for the Appellant:

Robert Ashley

Counsel for the Respondent:

Eric Sherbert

COUNSEL OF RECORD:

For the Appellant:

Name:

N/A

Firm:

N/A

For the Respondent:

John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada

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