http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/119626/index.do
Kokai-Kuun Estate v. The Queen (August 31, 2015 – 2015 TCC 217, Lyons J.).
Précis: This decision concerned 40 acres of undeveloped land (the “Land”) owned by the late Mr. Zoltan Kokai-Kuun for 16 years (1992-2008) prior to its sale. He purchased the property for $110,000 and sold it for $370,000 but did not report any gain in his 2008 income tax return. The Minister assessed his estate for a capital gain of $235,755.60 in 2008. The estate resisted the assessment on two bases: 1. It claimed that the adjusted cost base (“ACB”) of the Land was increased by carrying charges of $179,391 over the period he held the property; and 2. It claimed that he incurred capital losses in 2006 in the amount of $162,372.80 that were available to reduce the capital gain in 2008 on the sale of the Land.
The Court denied both arguments advanced by the estate. On the evidence the Land was not held for the purposes of earning or producing income and therefore carrying costs were not allowed as an adjustment to ACB. The capital losses claimed were said to arise from bad debts but the late Mr. Kokai-Kuun did not elect pursuant to paragraph 50(1)(a) of the Income Tax Act (the “Act”) in 2006 or any other taxation year in respect of the debts. Accordingly the claim in respect of the capital losses failed. The Court was without jurisdiction to consider the estate’s arguments on fairness relief.
As a result the appeal was dismissed. No costs were awarded as the Court concluded that the Crown should have agreed that the late Mr. Kokai-Kuun was a shareholder in various companies, a matter that involved considerable time at trial and which was clear from the documentation.
Decision: The executor of the estate (“Anthony”) computed the additions to the ACB of the Land:
[14] Using simple interest, Anthony estimated that during the 16 years that Zoltan held the Land, he had incurred substantial interest and carrying charges (the “interest/charges”) on the money borrowed from the CIBC and TD banks under a line of credit. He described the amount totalling $135,732.80 as a conservative amount. Anthony had prepared a “Spreadsheet of costs to hold land - 4.3 and 4.4” showing that as an estimated amount plus property taxes and levies (“property taxes”) totalling $14,947.71 with documents substantiating the latter. At trial, he revised the estimate for interest/charges, based on compound interest, to $179,391 (collectively the $179,391 and property taxes comprise “the Amounts”).
The Court did not accept that the charges could be deducted or added to the ACB of the Land as a matter of law:
[44] The evidence established that the Land was purchased as an investment to sell it at a higher price because of its proximity to a golf course. Anthony admitted that during the 16 years that Zoltan owned it, he did not use it in business nor produce income from it. Rather, Zoltan and Agnes, his spouse since 1997, visited the Land once or twice per year. Similar to Anthony’s testimony, Ms. Villeneuve, Ms. Lariviиre and Patrick also said that the Land was purchased for investment purposes with the hope that it would increase in value. Patrick said that Zoltan had described it as a “gold mine.”
[45] In Stirling, the Federal Court of Appeal held that interest on money borrowed to acquire property for the purpose of making a capital gain, rather than an income-earning purpose, is precluded, on disposition, from forming part of the cost of the property and cannot be added to the acb.
[46] I find that the purpose of the money borrowed to acquire the Land was not to earn income from a business or property and the appellant fails to meet the criteria under paragraph 20(1)(c) in that there was no evidence of an income‑earning purpose in order that the interest/charges could be deducted.
[Footnote omitted]
As to the capital losses claimed from 2006, the evidence was clear that the late Mr. Kokai-Kuun never elected pursuant to paragraph 50(1)(a) of the Act in respect of such losses:
[54] Under paragraph 50(1)(a), the conditions that must be satisfied, relating to the debt, before losses can be claimed are:
1. it must be owing to a taxpayer at year-end;
2. it was established that it became bad during the year; and
3. the taxpayer elects in his return of income for the year to have the subsection apply.
[55] In Harris v The Queen, 2005 TCC 501, 2005 DTC 1179, Sheridan J. found that the failure by Ms. Harris to file an election in her return was fatal to her eligibility to be able to claim $15,000 invested in a business as well as another loan in respect of shares. At paragraph 3, the Court stated “To be eligible to claim either of the amounts as a deduction, Mrs. Harris must have complied with subsection 50(1) of the Income Tax Act.”
[56] In the present case, a letter dated July 1, 2006, was sent to Zoltan by 489, signed by Anthony, stating that all of the assets of 489 had been “liquified,” the proceeds were used to pay its debts and those of VAM and NVA. Therefore, 489 was not in a position financially to repay his shareholder loan in the amount of $162,372.80.
[57] It is undisputed that in the 2006 taxation year Zoltan did not claim capital losses of any investments in the Companies in his income tax return nor was there evidence he had claimed such losses in any other taxation year. Anthony was unsure why he did not claim the losses and said that he had invested in ACK and lost money on other investments. In 2006, Zoltan was repaid $15,210 resulting in shareholder’s loans owed to him in the amount of $218,757 which continued to remain outstanding when he died. Anthony indicated that the remaining debt and shareholder’s loans were placed into 527 and are still active at the time of the hearing.
[58] Given the appellant failed to make an election in 2006, or any other year, as required under paragraph 50(1)(a), the appellant cannot succeed as it is imperative to claim that a capital loss is available for application in 2008.
[Footnotes omitted]
The fairness relief claimed by the Estate was beyond the Court’s jurisdiction.
As a result the appeal was dismissed. No costs were awarded as the Court concluded that the Crown should have agreed that the late Mr. Kokai-Kuun was a shareholder in various companies, a matter that involved considerable time at trial and which was clear from the documentation.