Date: 20050504

Docket: A-505-04

Citation: 2005 FCA 163

CORAM:       LINDEN J. A.

SEXTON J. A

EVANS J. A.

BETWEEN:

                                                                             

JAMES D. SERVICE

Appellant

                                                                                                                                                           

                                                                           and

HER MAJESTY THE QUEEN

Respondent

Heard at Toronto, Ontario, on May 4, 2005.

Judgment delivered from the Bench at Toronto, Ontario, on May 4, 2005.

REASONS FOR JUDGMENT OF THE COURT BY:                                           SEXTON J.A.

Date: 20050504

Docket: A-505-04

Citation: 2005 FCA 163

CORAM:       LINDEN J. A.

SEXTON J. A

EVANS J. A.

BETWEEN:

JAMES D. SERVICE

Appellant

                                                                                                                                                           

                                                                           and

HER MAJESTY THE QUEEN

Respondent

REASONS FOR JUDGMENT OF THE COURT

(Delivered from the Bench at Toronto, Ontario, on May 4, 2005)

SEXTON J.A.

[1]                The Appellant, a lawyer in the Toronto area, appeals from the Tax Court which dismissed his appeal from a tax assessment which inter alia disallowed his claim for a business investment loss in the amount of $ 75,665.00 for the 1995 taxation year.

[2]                At all material times, the Appellant was one of the shareholders of Homage Investments Corp. (Homage), owning 320 shares. The rest of the shares in Homage were owned by Prescient Incorporated (Prescient) (690 shares) and Ferdinand Wagner (1000 shares).

[3]                The sole shareholder and only officer of Prescient was the Appellant's wife.

[4]                Homage owned a piece of real estate in Toronto upon which it proposed to construct a condominium project. The project experienced both developmental and financial difficulties as a result of which both the Appellant and Prescient made loans to Homage. The Appellant also made a loan to Prescient, which provided that company with the funds to make a loan to Homage. The loan by the Appellant to Prescient was in the amount of $ 78,628.00, was non interest bearing and was a loan to which the Appellant attached no conditions.

[5]                Homage experienced further financial difficulty and ultimately the property was sold under power of sale by one of the mortgagees. As a result, by 1995, Homage had no assets with which to repay any of its loans. Thus the Appellant was not repaid his loans to either Homage or Prescient.

[6]                The Appellant claimed business investment losses both for his direct loan to Homage and for his loan to Prescient. He claimed that he anticipated receiving, at some later time, interest on his loan to Prescient although there was no legal basis on which he could demand such interest. Neither was the Appellant a shareholder in Prescient, so that he had no realistic legal basis for expecting any return from Prescient.

[7]                The Minister allowed the Appellant's claim for business losses based on his loan to Homage but rejected his claim for business losses relating to his loan to Prescient.

[8]                Upon appeal by the Appellant, the Tax Court held that there was insufficient evidence to refute the Minister's assessment. The Court held that the Appellant's loan to Prescient was not made for the purpose of gaining or producing income from a business or property and therefore, his loss must be deemed to be nil under Section 40(2)(g)(ii) of the Income Tax Act (ITA).

40(2) Notwithstanding subsection (1)

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

(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 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, is nil.

[9]                In considering this section of the ITA, the Tax Court held that the taxpayer carries the burden of demonstrating a nexus between the investment of the funds and the generation of income. He was unable to find sufficient nexus in the present case.   

[10]            The Appellant argued that the monies loaned by him to Prescient were in turn loaned to Homage so as to ensure the success of Homage. This would, in turn result in the Appellant ultimately receiving legal and management fees, as well as dividends from Homage.

[11]            The Appellant relied on Byram v. Canada [1999] F.C.J. No. 92. However, that case is distinguishable on its facts. Firstly, the Minister in that case admitted that the loans in question had been made for the purpose of gaining or producing income. There was no such admission in the present case. Secondly, the trial judge found on the facts, a direct link between the loan and the income-producing potential because although the taxpayer in that case did not loan the money directly to USCO, (the company which had the potential to produce the income), he did make the loan to the major shareholder of USCO. Hence, it was held that he would have a legitimate expectation of income if USCO was successful. In the present case, the Appellant was not a shareholder in Prescient. Hence, the Byram case is not analogous to the present case.

[12]            The Appellant had no right to receive any interest on his loan to Prescient, nor was he a shareholder with an expectation of dividends. Nor did the Appellant have any right to receive any income or benefit from Prescient. Hence, in the judgment of the Tax Court Judge there was insufficient evidence of any realistic expectation of income arising from that loan. The required nexus was not shown.

[13]            It is not sufficient for this Court to say that it might have reached a conclusion different from the Tax Court Judge. Since the issue in this appeal involves the application of the law to the facts, the Court must conclude that the Tax Court Judge made a palpable and overriding error in his conclusions. We are unable to so conclude in this case.

[14]            The appeal will therefore be dismissed with costs fixed at $ 2000.00.

"J. E. Sexton"   

                                                                                                      J.A.                     

                          FEDERAL COURT OF APPEAL

   NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                  A-505-04

STYLE OF CAUSE: JAMES D. SERVICE

Appellant

and

HER MAJESTY THE QUEEN

                                                                        Respondent

PLACE OF HEARING:                                 TORONTO, ONTARIO         

DATE OF HEARING:                                  MAY 4, 2005

REASONS FOR JUDGMENT

OF THE COURT:                                          LINDEN, SEXTON, EVANS, JJ.A.

DELIVERED FROM THE

BENCH BY:             SEXTON J.A.

APPEARANCES:

James D. Service         FOR THE APPELLANT

Eleanor Thorn             FOR THE RESPONDENT

SOLICITORS OF RECORD:

James D. Service

King City, ON             FOR THE APPELLANT

John H. Sims, Q.C.

Deputy Attorney General of Canada FOR THE RESPONDENT