BETWEEN:
and
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Appeal heard on November 3, 2006 at Prince Albert, Saskatchewan
Before: The Honourable Justice G. Sheridan.
Appearances:
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JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 2003 taxation year is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 19th day of January, 2007.
"G. Sheridan"
Sheridan, J.
BETWEEN:
MELVIN E. DEFOREST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant, Melvin DeForest, is appealing the reassessment of the Minister of National Revenue of his 2003 taxation year. The Minister disallowed the Appellant's claim for a terminal loss following the sale of a hotel he owned in Yellow Creek, Saskatchewan. In confirming the reassessment of tax for the 2003 taxation year, the Minister made the following assumptions of fact:
(a) the terminal loss claimed was in respect of the disposition of a capital property known as the Yellow Creek Hotel (the "Hotel");
(b) the Hotel is located in the village of Yellow Creek, Saskatchewan;
(c) the Appellant purchased the hotel in or around 1999 or 2000;
(d) the Appellant was not able to prove the amount paid by him for the initial purchase of the Hotel;
(e) in computing his income for the 2001 and 2002 taxation years, the Appellant claimed net business losses in respect of the operation of the Hotel in the amount of $14,278.00 in 2001 and $9,830.00 in 2002;
(f) on April 26, 2002, the Appellant entered into an agreement to sell the Hotel, the business and business equipment (the "Agreement") to Donald and Christine Duh (the "Purchasers");
(g) pursuant to the Agreement, the Purchasers were to pay to the Appellant the amount of $30,000.00, to be made by payments of $500.00 per month over a 60 month period, the first payment being due June 1, 2002 and the last payment being due May 1, 2007;
(h) pursuant to the Agreement, the Purchasers were to take possession of the Hotel and commence business on June 1, 2002;
(i) pursuant to the Agreement, the Agreement would become null and void at the Appellant's discretion if the payments for the purchase of the Hotel were late or uncollected for two months;
(j) the Appellant reacquired possession of the Hotel as the Purchasers did not make the payments as required under the Agreement;
(k) the Appellant was not able to prove that he incurred any capital expenses in renovating the Hotel;
(l) in claiming the business losses from the operation of the Hotel for 2001 and 2002, the Appellant did not report any revenue in either year;
(m) the Appellant was not able to provide any details with respect to the expenses which comprised the business losses claimed in 2001 and 2002;
(n) expenses for renovating the Hotel, if incurred, were included as current expenses in determining the business losses claimed by the Appellant in the 2001 and 2002 taxation years;
(o) the Appellant subsequently disposed of the Hotel for sale proceeds of $500.00 in 2003; and
(p) the Appellant did not incur a terminal loss on the disposition of the Hotel[1].
[2] This recital of events reveals little of how thoroughly unrewarding the Appellant's time as a hotel proprietor would prove to be.
[3] The only witness to testify at this Informal Procedure hearing, the Appellant explained that in 2000, he was employed as a project manager for Cameco. His work required him to remain for several days at a stretch in northern Saskatchewan following which, he would have a period of time off. In 2000, he bought a hotel on a lot in the small town of Yellow Creek for $3,600. He had the (as he later learned, mistaken) idea that he could run the business on his days off and entrust its management to his employees while he was working in the north. The hotel was in bad shape when he acquired it and he estimated that, exclusive of the cost of his own time, he put approximately $3,600 worth of improvements into it.
[4] In May 2001, the hotel opened for business. Although the hotel had rooms for rent, this was mainly to ensure compliance with Saskatchewan liquor laws; the real business of the hotel was to sell alcoholic beverages. In each of 2001 and 2002, the hotel business lost money. According to the Appellant, his operating costs far exceeded revenue. In response to assumption 8(l), it was his understanding that he need only report the operating loss in his income tax return, rather than showing both revenues and expenses and then the calculation of the loss. As for his lack of supporting documents, he explained that in 2001, the Yellow Creek area had experienced severe flooding and what records he had were either destroyed or badly damaged by mould. Further, he had neither the time nor the experience to keep detailed records.
[5] In 2002, realizing that the business was floundering, the Appellant entered into an agreement to sell the hotel business for $30,000. As it turned out, the would-be purchasers defaulted on the deal after making only four payments of $500 each. They stripped the hotel and decamped, leaving him with a botched sale and unpaid taxes of $2,261.81. The Appellant tried unsuccessfully to enforce the sale agreement in small claims court. In the end, he was left with a piece of property in, more or less, its original unimproved condition and an indebtedness of some $6,000. He repaid this amount to preserve his credit rating. Finally, in 2003 he managed to sell the building for $500.
[6] In his 2003 income tax return, the Appellant claimed what he understood to be a terminal loss in respect of the hotel business. He determined this amount to be $29,500[2], calculated as $30,000 less the $500 for which he ultimately disposed of the hotel. On cross-examination, the Appellant freely admitted he had never kept any capital cost allowance records: for example, he had not allocated his cost of $3,600 between the hotel building and the lot[3] upon which it was situated, he had not listed those capital improvements which might have been eligible as depreciable property, he had not tracked or claimed depreciation on any of these assets. Included in his reasons for failing to do so were the following: the hotel was a very small enterprise, it was losing money, he had enough business expenses losses without worrying about claiming a capital cost allowance deduction and in any event, he lacked both an understanding of the capital cost allowance system and the expertise to set up his records accordingly.
[7] In these circumstances, I am persuaded by the Respondent's argument that the Appellant has failed to show that the Minister's assumptions were wrong. Briefly summarized, a terminal loss is what occurs under the capital cost allowance system when all of the assets in a particular class are disposed of and an undepreciated capital cost amount remains[4]. To be able to determine whether a terminal loss exists, a taxpayer must have, among other things, identified his capital assets, determined whether they belonged to a capital cost allowance class as prescribed by the Income Tax Act, applied the appropriate rate of depreciation to its cost of acquisition and deducted that amount in the years prior to the disposition. As is evident from even this short summary, the capital cost allowance system is a complicated one that permits deductions only where the taxpayer has conformed, as evidenced by adequate records keeping[5], to its stringent requirements.
[8] The Appellant was given every opportunity to track down as much documentation as possible to support his claim. To give the Appellant additional time, I adjourned this matter from its original hearing date in August 2006 to my November sittings in Prince Albert. For her part, although ready to proceed in August, counsel for the Respondent did not oppose the adjournment and made every effort to make herself available (even up to and including the hearing) to assist the Appellant in making a careful review of his documents. At the objection stage, officials at the Canada Revenue Agency made repeated requests for documentation, explaining the kinds of documents needed. While he failed to respond to their requests, I am satisfied that prior to this hearing, the Appellant made a good faith effort to put together all he was able to muster.
[9] Unfortunately, it was not enough to meet his onus of proving wrong the assumptions upon which the Minister based his assessment. Given the Appellant's lack of records, in particular, capital cost allowance records, and his inability to comply with the Act's terminal loss conditions, there is no basis for interfering with the Minister's reassessment. Accordingly, the appeal must be dismissed.
Signed at Ottawa, Canada, this 19th day of January, 2007.
"G. Sheridan"
Sheridan, J.
STYLE OF CAUSE: MELVIN E. DEFOREST AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Prince Albert, Saskatchewan
DATE OF HEARING: November 3, 2006
DATE OF JUDGMENT: January 19th, 2007
APPEARANCES:
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Anne Jinnouchi |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada
[1] This is a conclusion of law rather than an assumption of fact.
[2] For reasons he can no longer explain, this amount was shown in his 2003 income tax return as $29,250 rather than $29,500.
[3] An important distinction, since land is not eligible for capital cost allowance.
[5] Section 230 of the Act obliges the taxpayer to maintain adequate books and records.