Kempo,
T.C.C.J.:—This
appeal
concerns
the
appellants
1983
taxation
year.
Having
sold
a
$342,633
trade
account
receivable
for
$50,000
during
that
year,
the
appellant
claimed
a
deduction
for
the
amount
foregone
in
the
computation
of
its
profit
for
the
year
pursuant
to
subsection
9(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
The
respondent
disallowed
the
claimed
amount
as
an
ordinary
business
expense
and,
rather,
treated
the
disposition
of
the
debt
as
giving
rise
to
a
capital
loss
within
the
meaning
of
paragraph
39(1)(b)
of
the
Act.
In
a
nutshell,
the
appellant
claimed
that
the
disposition
of
the
account
receivable
was
on
income
account
while
the
respondent
asserted
it
was
a
capital
transaction
attracting
capital
treatment.
Thus
the
issue
was
joined.
The
E.C.E.
Group
Ltd.
was
formed
on
December
31,
1982
on
the
amalgamation
of
three
companies
which
had
previously
carried
on
business
as
a
partnership
in
the
E.C.E.
Group.
For
the
purposes
of
what
is
in
issue
in
this
appeal,
it
was
agreed
by
counsel
for
each
party
that
no
significant
difference
existed
between
the
operations
of
the
E.C.E.
Group
partnership
and
the
corporate
appellant.
Therefore,
and
whether
it
concerns
a
pre-
or
a
post-incorporation
period,
the
appellants
name
will
be
used
throughout
these
reasons
for
the
sake
of
simplicity
and
clarity.
Evidence
was
given
by
Mr.
Jack
Chisvin
who
is
an
engineer
and
is
the
appellants
chairman
of
the
board.
The
appellant
provides
consulting
services
in
the
field
of
mechanical
and
electrical
engineering
in
the
areas
of
environment
and
energy.
Specifically
within
the
management
aspect
of
its
services,
the
appellant
designed
and
managed
mechanical
energy
systems
for
use
within
commercial
buildings
which
included
air
conditioning,
heating,
lighting
and
power
distribution.
Their
design
and
management
services
were
directed
to
the
efficient
and
cost
effective
distribution
and
consumption
of
such
energy.
This
kind
of
service
had
been
provided
by
them
since
1955.
During
the
1970s
the
appellant
had
developed
engineering
skills
and
knowledge
in
doing
energy
audits
in
existing
buildings
followed
up
by
their
design
of
improved
control
systems
to
reduce
the
energy
consumed
within
the
existing
structure.
This
was
heavily
dependent
on
ongoing
monitoring
and,
as
the
numbers
of
clientèle
grew
over
a
larger
geographic
area,
the
appellant
realized
the
impracticality
of
sending
individuals
around
from
building
to
building
over
growing
territories.
However,
the
appellant
lacked
the
technological
experience
of
running
central
computer
stations.
Dominion
Electrical
Products
Ltd.
(”
Dominion")
was
then
in
the
business
of
running
central
stations
in
the
security
and
alarm
fields.
It
was
a
wholly-owned
subsidiary
of
an
American
public
company,
American
District
Telegram
Incorporated,
which
had
started
a
prototype
system,
as
envisaged
by
the
appellant,
in
New
Jersey.
Apparently
they
were
not
successful
due
to
their
lack
of
expertise
in
the
energy
side
of
the
business.
Dominion's
expertise
was
in
the
remote
monitoring
of
buildings
as
well
as
in
collecting
and
directing
data
back
to
a
central
station.
They
also
had
the
techniques
in
pricing
and
revenue
management.
A.D.T.
Energy
Systems
Ltd.
("A.D.T.")
was
incorporated
under
the
laws
of
Ontario
in
the
latter
part
of
1978.
The
appellant
and
Dominion
were
the
sole
shareholders,
and
each
was
to
contribute
their
unique
respective
skills
in
order
to
enter
into
a
new
market.
The
appellant
acquired
49
per
cent
of
the
shares
for
which
it
paid
$196,000,
and
Dominion
held
51
per
cent
for
$204,000.
Mr.
Chisvin
testified
that
each
party
felt
the
$400,000
capitalization
would
be
sufficient
to
meet
A.D.T.'s
projected
operational
needs.
The
parties
entered
into
a
shareholders’
agreement
(tab
1
of
the
Book
of
Documents,
Exhibit
A-1)
by
which
they
agreed,
inter
alia:
—
to
buy-sell
rights
under
which
only
Dominion
had
the
right,
after
January
1,
1984,
to
call
for
the
purchase
of
the
appellant's
shares.
After
that
date
the
appellant
could
initiate
the
call
for
a
sale
of
its
shares
to
Dominion;
it
had
no
rights
to
acquire
Dominion's
shares.
The
price
included
matters
of
book
value
however
under
certain
circumstances,
regardless
of
book
value,
the
minimum
value
of
the
shares
was
to
be
$300,000
after
January
1,1984
and
the
appellant's
shares
would
be
49
per
cent
thereof
or
no
less
than
$147,000;
—
to
non-competition
restrictions
and
conditions
applicable
during
pre-
and
post-sale
time
periods;
—
to
discretionary
borrowings
as
approved
by
the
board;
and
—
to
making
further
monetary
contributions
under
certain
conditions
to
meet
board
approved
budgets.
A
management
services
agreement
(tab
2)
was
executed
by
Dominion
and
a
consulting
services
agreement
(tab
3)
was
executed
by
the
appellant.
The
initial
$400,000
treasury
capital
was
expended
to
initiate
the
business
and
to
acquire
the
required
equipment.
According
to
Mr.
Chisvin,
Dominion,
on
its
own
volition,
had
caused
a
considerable
sum
of
non-budgeted
expenditures
to
be
made
on
the
relocation
and
furnishing
of
the
central
monitoring
station
to
its
own
premises.
The
appellant
did
not
make
any
contributions
thereto,
nor
had
it
ever
made
any
monetary
contributions
to
any
non-budgeted
expenditures
throughout
the
three-year
period
for
the
reason
that
the
financial
projections
in
each
year
had
indicated
sufficient
cash
flow
from
operations
to
fund
any
such
requirements.
Under
its
consulting
services
agreement
the
appellant
provided
the
called-
upon
services
on
a
fee-for-service
basis.
Invoices
were
prepared
and
delivered
to
A.D.T.
on
a
monthly
basis
in
the
same
matter
and
form
as
was
used
for
the
appellants
other
clientèle
during
1981,
1982
and
1983.
Invoice
copies
representative
of
those
sent
from
A.D.T.
to
the
appellant
throughout
the
subject
periods
were
reproduced
under
tab
4
of
Exhibit
A-1.
They
portray
standard
invoicing
forms
with
a
date,
a
project
number
and
location,
the
period
covered,
and
matters
concerning
progress
billings
if
such
was
the
case.
The
names
of
the
individuals
providing
the
services
were
disclosed
along
with
the
number
of
service
hours
they
had
expended
on
the
described
project.
Mr.
Chisvin
testified
that,
for
the
period
1979
to
1983,
A.D.T.
represented
a
very
small
proportion
of
the
appellant's
work.
He
said
that
of
approximately
$22
million
in
billings
over
that
time,
A.D.T.'s
represented
only
around
$343,000,
that
A.D.T.'s
unpaid
accounts
were
treated
the
same
as
all
of
the
others
for
accounting
and
collection
purposes,
and
that
he
had
never
regarded
the
accumulating
and
growing
receivable
as
a
form
of
loan
to,
or
as
a
shareholder's
investment
in,
A.D.T.
A
statement
of
account
dated
November
30,
1983
(tab
5)
details
the
appellant's
unpaid
invoices
owed
by
A.D.T.
per
project
commencing
in
1979
which
amounted
to
$342,632.88
as
at
that
time.
A
significant
number
of
the
projects
involved
in
these
receivables
concerned
properties
owned
or
managed
by
some
of
the
appellant's
largest
and
major
“
blue-chip”
type
of
clientèle
whose
goodwill
and
continuity
of
business
was
of
prime
concern
to
them
in
the
area
of
new
designs
incorporating
current
energy
technology
for
their
new
buildings
which
remained
outside
the
non-competition
agreement.
Mr.
Chisvin
testified
that
the
new-building
projects
falling
outside
the
non-competition
arrangement
and
the
existing-building
projects
being
serviced
within
the
agreement
both
attracted
the
identical
personnel,
equipment,
skill
and
knowledge
of
the
appellant
and
thus
any
performance
failures
by
A.D.T.
may
have
negatively
impacted
on
its
own
business
with
its
own
largest
and
best
clients.
Mr.
Chisvin
explained
there
were
two
basic
business
reasons
why
the
appellant
continued
to
provide
services
to
A.D.T.
during
the
three-year
period
while
their
payables
to
them
were
accumulating
and
growing.
The
first
reflected
the
appellant's
faith
in
A.D.T.'s
potential;
the
second
(and
more
important)
concerned
goodwill
maintenance
with
the
mutual
clientèle
just
described.
Other
than
the
regular
provision
of
invoices,
no
aggressive
demands
or
postures
for
payment
were
taken.
Mr.
Chisvin
was
familiar
with
A.D.T.'s
financial
affairs;
he
said
that
until
the
latter
part
of
1982
he
had
remained
optimistic
about
its
prospects
notwithstanding
its
operational
losses.
This
soon
changed,
however.
During
1982
interest
rates
soared
causing
A.D.T.'s
clients
to
be
more
concerned
about
debt
servicing
costs
than
costs
related
to
energy
saving
matters.
It
became
increasingly
difficult
to
interest
prospective
clients
in
energy
management
when
it
represented
a
relatively
minor
cost
of
building
management
at
that
time
as
energy
matters
throughout
North
America
became
a
non-issue.
The
appellant's
optimism
of
A.D.T.s
financial
prospects
waned.
In
response
to
these
changing
economic
times,
A.D.T.
was
considering
changing
its
business
focus
into
selling
control
systems
outright
which
the
appellant
could
not
countenance
as
it
would
have
put
them
in
a
conflict
position
whereby
on
the
one
hand
they
would
design
and
specify
systems
and
on
the
other
they
would
have
a
financial
interest
in
the
company
that
would
be
selling
them.
By
1983
it
became
apparent
that
it
was
in
Dominion's
interest
to
own
A.D.T.
outright.
Informal
discussions
as
to
a
buy-out
eventually
led
to
a
formal
agreement
being
executed
as
of
October
7,
1983
(tab
6).
Mr.
Chisvin
said
that
Dominion
had
become
very
aggressive
in
wanting
the
matter
to
be
finalized
before
January
1,
1984
and
that
he
did
not
know
the
reason
for
this
urgency.
During
price
negotiations
both
parties
were
aware
of
A.D.T.'s
financial
state.
According
to
accounting
evidence,
infra,
it
was
then
insolvent.
It
owed
Dominion
roughly
$1.3
million,
with
no
significant
assets
on
hand.
It
owed
$342,000
to
the
appellant
in
respect
of
the
invoices
fur
professional
services.
The
bargaining,
and
its
results,
were
described
in
direct
examination
by
Mr.
Chisvin
thusly:
Q.
How
was
the
amount
of
$50,000
for
those
accounts
receivable
arrived
at?
Do
you
recall?
A.
It
was
just
hard
negotiation
between
two
parties.
Without
being
acrimonious,
we
tried
to
find
an
equitable
distribution
or
value
of
the
cost
and
eventually
we
ended
up
with
$50,000
as
being
probably
both
sides
being
unhappy.
Q.
Would
you
have
had
an
eye
to
the
financial
statements
or
financial
liability
of
A.D.T.
in
negotiating
the
sale
of
that
debt?
A.
Yes,
we
all
knew
exactly
the
state
of
A.D.T.
Q.
Did
you
expect
that
there
was
a
possibility
of
ever
getting
more
for
that
debt
than
$50,000?
A.
Highly
unlikely.
Q.
Why
was
that?
A.
Because
the
company
was.
.
.if
a
third
party
would
look
at
the
statement,
they
would
say
that
the
company
was
insolvent.
Q.
I
notice
also
in
article
2.02,
E.C.E.
also
sold
its
49
per
cent
shareholding
interest
in
A.D.T.
to
Dominion
Electric
for
$170,000.
A.
That's
correct.
Q.
Can
you
recall
how
that
number
was
arrived
at?
A.
Again,
it
was
a
negotiation.
D.E.P.
probably
took
the
position,
as
I
recall,
that
there
was
no
book
value
for
the
shares.
E.C.E.
said
they
had
$196,000
that
they
paid
for
the
shares
and
if
we
waited
until
1984
we
would
receive
at
least
$147,000
and
we
bargained
the
best
we
could
to
get
something
more
than
$147,000.
Q.
Do
you
recall
when
you
received
the
$50,000
for
the
account
receivable?
A.
It
was
probably
in
December
of
1983.
Q.
When
you
received
the
$50,000
for
the
account
receivable,
did
you
have
any
idea
as
to
A.D.T.'s
financial
position
at
that
point
in
time?
A.
Yes.
Q.
What
was
that?
A.
It
was
essentially
insolvent.
Q.
Did
it
owe
any
money
to
Dominion
Electric?
A.
Yes,
it
did.
Q.
Do
you
recall
how
much
roughly?
A.
$1.3
million
or
something
of
that
nature.
Q.
In
light
of
the
changes
in
the
energy
market
that
you
mentioned
in
1983,
did
you
feel
that
more
than
$50,000
could
have
been
obtained
for
that
debt?
A.
Certainly
not
from
a
third
party.
[T.39-41]
During
his
cross-examination,
Mr.
Chisvin
acknowledged
his
awareness
of
A.D.T.’s
continuing
loss
position.
He
said
that
if
A.D.T.
had
shown
its
debt
to
the
appellant
on
its
financial
statements
as
a
long-term
debt,
it
was
then
without
particular
significance
to
him.
He
pointed
out
that
in
1981
the
appellant
had
considered
these
receivables
to
be
in
the
doubtful
category
and
denied
that
A.D.T.
was
undercapitalized
at
its
inception.
He
explained
that
a
great
deal
of
A.D.T.’s
debt
to
Dominion
arose
out
of
non-budgeted,
discretionary
expenditures
made
by
them
which
Dominion
felt
had
fallen
under
their
own
managerial
prerogative.
Mr.
Peter
Bill
is
a
chartered
accountant
and
was
a
member
of
the
accounting
firm
in
charge
of
the
appellant's
accounting
matters.
That
firm
was
William
Eisenberg
&
Co.
which
is
now
merged
with
Peat
Marwick
Thorne
of
which
Mr.
Bill
is
a
partner.
Mr.
Bill’s
knowledge
and
dealings
with
the
appellant
began
in
1963.
He
verified
that
the
receivables
from
A.D.T.
were
treated
the
same
as
all
other
receivables
with
the
exception
of
the
advantage
gained
by
having
access
to
A.D.T.'s
financial
statements,
and
that
up
until
January
1,
1980
collection
of
A.D.T.'s
accounts
were
not
considered
doubtful
in
his
discussions
with
the
appellant's
management.
Beginning
in
the
year
January
1,
1981
however,
the
accumulated
unpaid
accounts
receivable
from
A.D.T.
at
that
point
of
time,
$158,185,
was
considered
doubtful.
The
appropriate
sums
of
this
amount
had
been
taken
into
income
in
the
periods
1979,
1980
and
1981
but
then
the
whole
amount
was
removed
from
income
in
1981
because
there
was
then
a
doubt
as
to
its
collectibility.
It
was
then
added
back
into
income
in
1982
along
with
current
receivables
amounting
to
$164,251
for
a
total
(rounded-out)
of
$322,443
which
was
then
removed
from
income
as
being
a
doubtful
debt.
In
1983
the
$322,443
was
taken
back
into
income
plus
an
additional
current
receivable
from
A.D.T.
of
$20,190
which
made
up
the
$342,633
total
receivable
sold
for
$50,000.
The
sale
proceeds
were
included
in
income
and
the
appellant
wrote
off
the
foregone
amount
of
$292,633.
Mr.
Bill
testified
that
he
had
reviewed
A.D.T.'s
financial
statements
to
the
end
of
1982,
that
it
was
his
opinion
that
A.D.T.
then
did
not
have
the
ability
to
pay
the
subject
debt
and
that
it
was
then
insolvent.
He
became
aware
of
the
sale
of
the
receivable
after
the
fact.
On
cross-examination
Mr.
Bill
acknowledged
that
by
using
hindsight,
and
there
being
no
value
to
goodwill
at
that
point,
A.D.T.
was
insolvent
by
the
end
of
1981.
A.D.T.'s
financial
statements
had
been
prepared
by
Price
Waterhouse
which
consistently
had
described
their
payables
to
the
appellant
as
"related
party
transactions"
for
the
years
ended
December
31,
1980,
1981
and
1982.
The
explanatory
note
accorded
to
A.D.T.'s
liability
identified
as
“due
to
parent”,
“due
to
associate"
read
as
follows:
3.
Related
party
transactions:
The
company
is
51
per
cent
owned
by
Dominion
Electric
Protection
company
and
49
per
cent
owned
by
The
E.C.E.
Group.
The
company
is
dependent
upon
its
shareholders
for
certain
management,
administrative
and
technical
services.
The
amounts
owing
by
the
company
to
its
shareholders
are
interest
free
and
have
no
formal
repayment
terms.
Mr.
Bill
testified
that
the
latter
statement
was
incorrect
because
the
appellant's
invoices
to
A.D.T.
had
been
issued
in
their
normal
course
of
business
and
subject
to
the
appellant's
normal
repayment
terms.
As
noted
earlier
Mr.
Chisvin,
as
a
board
member
of
A.D.T.,
indicated
he
has
probably
seen
this
representation
on
its
financial
statement
but
that
it
was
without
any
significance
to
him
at
the
time.
Mr.
Bill
said
he
was
not
consulted
with
respect
to
business-related
matters
of
the
appellant.
One
of
the
facts
relied
upon
by
the
respondent,
as
reflected
in
paragraph
5(f)
of
the
reply
to
notice
of
appeal,
was
that"A.D.T.
paid
the
full
amount
of
its
payable
to
[Dominion]
in
1983”.
No
direct
evidence
was
led
with
respect
to
this
aspect
of
the
matter
by
either
party.
This
amount
must
have
been
paid
after
Dominion
had
exclusive
control
over
A.D.T.'s
affairs;
the
reason
for,
or
methodology
of,
its
payment
is
unknown
and
therefore
remains
merely
speculative.
No
accounting
opinion
evidence
of
an
expert
nature
was
called
by
either
party.
The
nub
of
the
respondent's
assessing
position
is
reflected
in
paragraph
5(e)
of
the
reply;
and
is
summarized
in
paragraphs
6
and
7
thereof:
5.
In
assessing
the
appellant
to
tax
for
its
1983
taxation
year,
the
respondent
proceeded
upon
the
following
facts:
(e)
the
appellant
never
made
any
effort
to
collect
its
receivable
from
A.D.T.;
indeed,
following
its
claim
for
an
allowance
for
doubtful
debts
as
at
January
1,
1982,
the
payable
by
A.D.T.
was
increased
by
$97,407
and
$20,189
in
1982
and
1983
respectively;
(f)
A.D.T.
paid
the
full
amount
of
its
payable
to
D.E.P.
in
1983;
(g)
the
disposition
by
the
appellant
of
A.D.T.'s
indebtedness
to
it
was
not
a
transaction
occurring
in
the
ordinary
course
of
the
appellant’s
business;
(h)
the
appellant's
receivable
from
A.D.T.
was
not
a
doubtful
account
or
a
bad
debt
during
the
appellant's
1983
taxation
year;
(i)
as
at
the
end
of
its
1983
taxation
year,
the
appellant
did
not
have
a
debt
owing
to
it
from
A.D.T.;
(j)
the
disposition
by
the
appellant
of
its
receivable
from
A.D.T.
resulted
in
a
capital
loss
to
the
appellant
in
its
1983
taxation
year.
6.
The
respondent
relies,
inter
alia,
upon
sections
3,
9,
paragraph
20(1)(p)
and
40(2)(g)(ii)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
as
amended
("the
Act").
7.
The
respondent
respectfully
submits
that
the
appellant
has
properly
been
assessed
for
its
1983
taxation
year
as
it
did
not
have
a
debt
owing
to
it
which
had
become
a
bad
debt
in
the
year,
and
therefore
no
deduction
is
available
to
the
appellant
in
respect
of
the
prior
indebtedness
of
A.D.T.
under
paragraph
20(1)(p)
of
the
Act.
The
respondent
submits
that
the
disposition
of
the
debt
to
D.E.P.
gave
rise
to
a
capital
loss
to
the
appellant
for
its
1983
taxation
year,
the
deduction
of
which
is
governed
by
sections
38,
39,40,
53,
54,
111
and
3
of
the
Act.
He
further
respectfully
submits
that
the
appellant
and
D.E.P.
were
not
dealing
with
one
another
at
arm's
length,
and
therefore
the
loss
from
the
disposition
of
the
debt
to
D.E.P.
is
deemed
to
be
nil
by
virtue
of
subparagraph
40(2)
(ii)
of
the
Act.
With
respect
to
the
allegation
in
the
last
part
of
paragraph
7
that
the
loss
ought
to
be
nil
rather
than
as
capitalized
by
the
respondent,
counsel
for
the
appellant
was
quite
correct,
in
my
view,
in
her
submission
that
to
now
accede
to
this
position
would
amount
to
allowing
the
respondent
an
appeal
from
his
own
assessment
which
cannot
be
done.
Additionally
the
respondent
has
effectively
recognized
and
accepted
an
arm's
length
situation
between
the
appellant
and
Dominion
in
that
not
only
did
he
allow
a
loss
but
also
in
his
reply,
by
paragraph
2,
he
specifically
admitted
the
appellant's
pleading
in
paragraph
4
of
their
notice
of
appeal
that
the
appellant
had
sold
A.D.T.'s
debt
"to
an
arm's
length
purchaser".
Counsel
for
the
appellant
submitted:
—
the
loss
here
did
not
arise
in
a
capital
context
but
rather
arose
on
an
income
account
receivable
incurred
in
the
very
course
of
carrying
on
its
revenue
earning
activity.
A.D.T.’s
debt
to
the
appellant
was
not
a
shareholder’s
loan
or
investment
vehicle.
It
arose
in
the
same
manner
and
received
identical
treatment
as
those
of
the
appellants
other
clientèle.
The
decision
to
continue
providing
services
was
a
normal
business
decision
founded
on
solid
business
reasons.
The
simple
passage
of
time
does
not
convert
a
trade
receivable
into
a
shareholder
investment,
or
a
loan
by
deficit
financing,
in
the
absence
of
the
appellants
intent
to
do
so.
A.D.T.’s
representations
in
its
financial
statements
merely
conformed
with
normal
accounting
rules
whereby
related
company
transactions
were
to
be
shown
separately;
—
the
account
receivable
sold
by
the
appellant
to
Dominion
at
a
loss
was
a
trade
account
receivable
from
A.D.T.
which
arose
from,
and
was
disposed
of
in,
the
course
of
the
appellant's
business;
—
at
the
time
of
the
sale
the
debt
was
uncollectible
and
bad
as
A.D.T.
was
then
financially
insolvent;
—
there
exists
no
logical
reason
which
compels
the
appellant
to
bring
into
income
and
pay
tax
on
$342,633
of
revenues
when
it
received
only
$50,000
of
those
revenues;
—
essentially,
when
a
trade
debt
is
sold
other
than
in
the
course
of
the
sale
of
an
entire
business,
any
loss
therefrom
remains
an
ordinary
business
expense.
This
may
be
so
because
section
22
of
the
Act
attracts
capital
treatment
on
the
sale
of
receivables
in
the
course
of
selling
the
whole
business
out
of
which
it
arose.
When
that
is
not
the
factual
case,
income
treatment
is
the
appropriate
one,
provided
it
was
a
trade
debt;
—
the
claimed
amount
of
$292,633
was
a
loss
arising
in
the
appellant's
business
which
is
deductible
pursuant
to
subsection
9(1)
of
the
Act,
otherwise
its
profit
for
the
year
becomes
grossly
overstated.
Counsel
for
the
respondent
submitted:
—
the
true
characterization
of
A.D.T.'s
debt
to
the
appellant
was
in
the
nature
of
deficit
financing
through
the
provision
of
services
route.
The
account
was
always
in
arrears
and
was
allowed
to
increase
from
year
to
year
by
the
provision
of
further
services
at
a
time
when
A.D.T.'s
deficits
were
growing
from
$176,000
in
1979,
$524,000
in
1980,
$705,000
in
1981
to
$1,013,489
in
1982.
As
at
1982
there
existed
a
minimum
of
$818,000
in
available
losses
to
A.D.T.
The
original
$400,000
injected
was
inadequate,
and
this
was
the
appellant
shareholder’s
way
of
injecting
further
financing;
—
A.D.T.'s
financial
statements
had
been
prepared
by
a
reputable
firm
of
chartered
accountants
which
reflected
the
subject
liability
was
not
an
ordinary
account
payable;
—
the
appellant
disposed
of
the
right
to
receive
the
A.D.T.
debt
which
is
a
Capital
transaction;
—
the
subject
receivable
was
in
the
nature
of
a
capital
asset
on
the
appellant's
balance
sheet
which
it
disposed
of
in
1983
and
the
respondent
has
recognized
the
disposition
of
that
asset
as
giving
rise
to
a
capital
loss;
—
it
is
common
ground
that
the
appellant
had
treated
the
subject
receivables
in
accordance
with
proper
accounting
principles
and
in
conformity
with
the
Act,
and
paragraph
20(1)(p)
does
not
apply
because
there
was
no
A.D.T.
debt
in
existence
at
year-end
to
be
written-off
thereunder.
Analysis
and
conclusions
I.
(a)
With
respect
to
the
first
branch
of
the
case,
the
evidence
fails
to
support
respondent-counsel's
submission
that
the
true
nature
of
the
trade
account
was
deficit
financing
and
thus
an
investment
in
A.D.T.
Rather,
the
evidence
was
that
it
arose
as
an
ordinary
trade
debt.
Mr.
Chisvin's
explanations
concerning
the
annual
increases
and
non-payment
were,
in
my
opinion,
appropriately
founded
on
reasonable
business
reality
and
on
justifiable
expectations
at
that
time
that
marketing
matters
would
improve.
Concurrently,
his
concerns
about
disturbing
existing
clientèle
relations
was
realistic
and
reasonable.
His
evidence,
that
A.D.T.
had
been
appropriately
capitalized
at
the
outset
and
that
its
subsequent
losses
arose
out
of
unforeseen
changes
in
the
market
place
and
non-controllable
decisions
made
and
carried
out
by
Dominion,
has
not
been
refuted
nor
diminished
in
any
way.
(b)
The
two
to
three-year
period
of
growth
in
and
non-payment
of
this
receivable
account
is
not
of
itself
determinative.
In
D.W.S.
Corporation
v.
M.N.R.,
[1968]
2
Ex.
C.R.
44,
[1968]
C.T.C.
65,
68
D.T.C.
5045
(Ex.
Ct.),
affirmed
without
written
reasons
69
D.T.C.
5023
(S.C.C.),
the
Court
concluded
that
ten
years
of
non-payment
did
not
attract
capitalization
of
the
trade
debt.
The
analysis
of
Thurlow,
J.
at
page
76
(D.T.C.
5052),
is
equally
applicable
to
the
case
at
bar:
It
was
said
first
that
the
evidence
showed
that
the
appellant's
liability
for
a
large
portion
of
the
balance
owing
in
the
account
had
been
in
existence
for
more
than
ten
years
and
that
it
should
on
that
account
be
regarded
as
having
been
a
capital
rather
than
a
trading
obligation.
With
respect
to
this
submission
I
am
unable
to
see
how,
in
the
absence
of
any
applicable
statutory
provision,
the
mere
length
of
time
in
which
the
obligation
was
outstanding
has
any
effect
in
a
situation
of
this
kind
in
changing
what
was,
at
the
time
it
was
incurred
a
trading
obligation
into
an
obligation
on
capital
account.
(c)
Further,
the
characterization
of
the
debt
as
being
a
trade
debt
at
all
times
has
not
been
diminished
by
reason
of
its
recording
in
A.D.T.'s
financial
statement
as
related
party
transactions
rather
than
as
trade
liabilities.
The
situation
in
Sutherland
v.
Canada,
[1991]
1
C.T.C.
495,
91
D.T.C.
5318
(F.C.T.D.),
a
decision
not
cited
by
either
counsel,
involved
an
analogous
issue
as
to
the
characterization
of
two
years
of
unpaid
management
fees
which
the
debtor,
while
suffering
ongoing
operational
losses,
had
classified
as
shareholder's
advances
in
the
notes
to
its
financial
statements.
The
taxpayer-creditor
sought
to
deduct
the
unpaid
fees
as
a
bad
debt
rather
than
as
an
allowable
business
investment
loss
as
the
Minister
had
treated
it.
The
taxpayer
had
included
the
full
amount
of
the
fees
as
earned
income
for
each
of
the
two
years.
The
Court
noted
the
debtor
was
at
all
times
financially
incapable
of
paying
it
even
if
a
demand
had
been
advanced.
Noting
that
the
taxpayer's
subjectively
based
assertions
had
the
support
of
the
testimony
of
his
accountant
as
to
the
true
nature
of
the
unpaid
management
fees,
the
Court,
at
page
502
(D.T.C.
5324),
determined
The
notes
to
the
[financial]
statements
were
not
intended
to
be
a
definitive
classification
of
the
nature
of
the
various
liabilities
for
any
purpose,
but
rather,
were
intended
to
inform
third
parties
that
such
liabilities
did
in
fact
exist.
An
identical
conclusion
is
applicable
here.
The
notes
to
A.D.T.'s
financial
statements
themselves
do
not
prevail
over
the
testimony
of
Messrs.
Chisvin
and
Bill
that
the
subject
liabilities
had
at
all
times
been
perceived
and
treated
as
arising
out
of
the
appellant's
trade.
(d)
In
summary,
the
evidence
establishes
that
the
appellant's
trade
account
with
A.D.T.
had
not
at
any
material
time
constituted
a
form
of
equity
financing
or
investment
in
A.D.T.,
that
its
genesis
was
the
appellant's
income
earning
operations,
that
it
had
not
gained
any
separate
characteristics
by
the
passage
of
time
or
by
the
manner
it
was
reflected
in
A.D.T.'s
financial
statements
and
that
it
remained
a
trade
account
until
its
disposition.
II.
Respondent-counsel's
alternate
submission
that
the
transaction
here
was
capital
because
it
represented
the
sale
of
a
right
to
collect
the
account
(i.e.,
a
capital
property)
is
not
sustainable.
Analytically,
this
perception
contemplates
the
presence
of
two
severable
elements
within
this
account;
one
being
a
right
to
its
receipt
and
the
other
as
something
else.
No
authorities
were
advanced
in
support.
Indeed,
and
interestingly
enough,
other
taxpayers
have,
unsuccessfully,
advanced
similar
logic
on
seeking
to
capitalize-out
foreign
exchange
gains
arising
out
of
payments
made
on
their
trade
accounts:
cf.
Eli
Lily
and
Company
(Canada)
Ltd.
v.
M.N.R.,
[1955]
C.T.C.
198,
55
D.T.C.
1139
(S.C.C.)
and
Tip
Top
Tailors
Ltd.
v.
M.N.R.,
[1957]
S.C.R.
703,
[1957]
C.T.C.
309,
57
D.T.C.
1232.
In
D.W.S.
Corporation
v.
M.N.R.,
supra,
the
Minister,
unsuccessfully,
sought
to
disallow
a
deduction
for
foreign
exchange
losses
suffered
by
the
taxpayer
in
paying
trade
accounts
by,
inter
alia,
isolating
foreign
exchange
matters
out
of
these
liabilities.
M.N.R.
v.
Independence
Founders
Ltd.,
[1953]
2
S.C.R.
390,
[1953]
C.T.C.
310,
53
D.T.C.
1177
is
another
example
in
which
the
taxpayer
was
unsuccessful
in
the
attempt
to
isolate
a
capital
element
out
of
its
ownership
of
certain
investment
certificates
which
it
held
for
the
purposes
of
its
business.
III.
There
are
two
aspects
to
the
final
branch
of
the
case.
(a)
All
parties
agreed
the
appellant
had
throughout
the
period
complied
appropriately
with
paragraph
20(1)(e)
of
the
Act.
The
annually
determined
trade
receivables
from
A.D.T.
had
been
included
in
the
appellants
income
for
each
year,
it
was
then
fully
deducted
at
each
year-end
as
a
doubtful
account
followed
thereafter
by
its
inclusion
in
income
in
the
immediately
following
taxation
year.
The
fiscal
problem
as
I
understand
it
arises
because
the
debt,
having
been
disposed
of
during
the
year,
was
not
owned
by
the
appellant
at
its
1983
year-end.
If
it
had
been
held
and
written
off
fully
at
year-end
as
a
bad
debt
(which
was
to
all
intents
and
purposes
qua
the
appellant
uncollectible
and
bad
at
its
disposition),
it
would
have
attracted
full
deductibility
as
and
on
account
of
an
income-based
trade
account.
Within
this
line
of
thinking,
counsel
for
the
respondent
submitted
that
subparagraphs
20(1)(e)
and
(p),
infra,
of
the
Act
are
a
complete
code
respecting
doubtful
and
bad
debt
deductibility,
and
that
if
the
factual
situation
does
not
fall
within
its
parameters
there
is
no
statutory
vehicle
permitting
deduction.
In
other
words,
once
the
prior
years'
trade
receivable
had
been
taken
into
income
as
a
doubtful
account
at
the
commencement
of
the
1983
taxation
year,
there
is
no
statutory
mechanism
for
its
deductibility
if
it
was
not
owned
by
the
appellant
at
its
year-end.
The
material
provisions
of
subsection
20(1)
the
Act
as
they
read
in
1983
follows:
20.
Deductions
permitted
in
computing
income
from
business
or
property.
(1)
Notwithstanding
paragraphs
18(1)
(a),
(b)
and
(h),
in
computing
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
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:
(e)
Reserve
for
doubtful
debts.—a
reasonable
amount
as
a
reserve
for
(i)
doubtful
debts
that
have
been
included
in
computing
the
income
of
the
taxpayer
for
that
year
or
a
previous
year,
(p)
Bad
debts.—the
aggregate
of
debts
owing
to
the
taxpayer
(i)
that
are
established
by
him
to
have
become
bad
debts
in
the
year,
and
(ii)
that
have
been
included
in
computing
his
income
for
the
year
or
a
previous
year;
In
my
view,
respondent-counsel's
interpretative
conclusion
bears
some
scrutiny
as
it
is
not
without
difficulty.
There
is
a
line
of
authority
which
requires
that
a
determination
of
debt
collectibility
ought
to
be
made
at
or
near
the
creditor's
year-end.
However,
that
is
not
the
precise
issue
here.
In
the
first
place,
this
provision
does
not
say
in
clear
and
unambiguous
language
that
the
debt
is
to
be
owned
at
the
end
of
the
taxation
year.
Such
desirable
clarity
is
found,
for
example,
in
subsection
50(1)
which
states,
and
I
am
paraphrasing,
that
for
the
purposes
of
subdivision
(c)
(taxable
capital
gains
and
allowable
capital
losses)
where
a
debt
owing
to
a
taxpayer
at
the
end
of
a
taxation
year
is
established
by
him
to
have
become
a
bad
debt
in
the
year
the
taxpayer
is
deemed
to
have
disposed
of
the
debt
at
the
end
of
the
year
and
to
have
reacquired
it
immediately
thereafter
at
a
cost
equal
to
nil.
The
language
of
paragraph
20(1)(p),
supra,
is
not
worded
in
the
prohibitive.
Rather,
it
permits
a
deduction
in
the
computation
of
business
income
for
debts
owing
to
the
taxpayer
in
the
year
that
have
become
bad
in
the
year.
The
word
"owing"
ostensibly
has
formed
the
foundation
for
the
respondent's
longstanding
interpretative
conclusion
that
it
means
owing
at
a
point
of
time
which
is
at
year-end
when
the
income
for
the
full
fiscal
year
is
known
and
is
being
computed.
In
my
opinion,
it
is
equally
reasonable
that
the
word
"owing",
when
interpreted
contextually
with
the
other
words
of
paragraph
20(1)(p),
may
also
be
read
in
the
past
tense
to
include
matters
which
had
happened
during
the
year.
In
other
words,
the
mixed
tenses
of
the
terminology
employed
of
"owing"
and
“to
have
become”
may
well
reflect
legislative
intent
to
permit
a
deduction
for
a
trade
debt
that
had
been
owing
in
the
year
and
which
had
gone
bad
in
the
year.
As
I
see
it
this
interpretative
approach
harmonizes
the
actual
text
and
its
tenses,
and
it
avoids
internal
disharmony.
It
would
also
be
in
accord
with
section
11
of
the
Interpretation
Act
which
states:
Every
enactment
shall
be
deemed
remedial,
and
shall
be
given
such
fair,
large
and
liberal
construction
and
interpretation
as
best
ensures
the
attainment
of
its
objects.
The
objects
of
paragraphs
20(1)(e)
and
20(1)(p),
supra,
are
in
recognition
of
ordinary
and
sensible
commercial
accounting
principles
wherein
the
actual
realization
of
profits,
which
are
to
be
included
in
income
at
the
time
they
are
earned,
may
either
be
delayed
or
not
received
at
all.
The
appellant's
receivables
from
A.D.T.
had
already
been
recognized
as
income
in
the
calculation
of
profit
under
subsection
9(1),
and
paragraphs
20(1)(e)
and
20(1)(p)
simply
maintain
that
status.
That
being
the
case,
there
is
no
logic
driving
paragraph
20(1)(p)
to
mean
that
a
loss
on
a
bad
debt
is
deductible
as
a
business
loss
only
if
it
is
held
to
the
creditor's
year-end
but
is
not
deductible
as
a
business
loss
if
it
was
sold
during
the
year
in
an
arm's
length
transaction
for
some
consideration.
In
respondent's
Interpretation
Bulletin
IT-442R,
paragraph
1,
the
highlighted
portions
appear
to
address
the
appellant's
situation.
It
reads:
Discussion
and
Interpretation
Bad
Debts
1.
Subparagraph
20(1)(p)(i)
authorizes
a
deduction
for
a
bad
debt
if
the
following
requirements
are
met:
(a)
the
debt
was
owing
to
the
taxpayer
at
the
end
of
the
taxation
year,
(b)
the
debt
became
bad
during
the
taxation
year,
and
(c)
the
debt
was
included
or
is
deemed
to
have
been
included
in
the
taxpayer's
income
for
that
taxation
year
or
a
previous
taxation
year.
The
requirement
in
(a)
above
prohibits
a
deduction
under
subparagraph
20(1)(p)(i)
where
a
debt
was
sold,
discounted
or
assigned
absolutely
by
the
taxpayer
during
the
course
of
the
year,
even
though
the
taxpayer
may
remain
liable
to
indemnify
the
purchaser
or
assignee
if
the
debt
should
prove
to
be
uncollectible.
However,
where
such
a
debt
was
of
a
kind
that
would
have
qualified
for
consideration
as
a
bad
debt
had
it
been
retained
until
the
end
of
the
taxation
year,
any
loss
at
the
time
of
its
disposition,
or
later
because
of
non-payment
by
the
debtor,
would
normally
be
deductible
by
the
taxpayer
as
a
general
business
expense.
Such
loss
would
be
deductible
provided
the
disposition
of
the
debt
was
made
in
the
ordinary
course
of
the
business
or
as
part
of
trading
in
accounts
receivable.
[Emphasis
added.]
In
my
view
respondent-counsel's
submissions,
that
paragraph
20(1)(p)
is
part
of
a
complete
code
which
in
turn
operates
to
prohibit
the
deduction,
are
not
sustainable.
The
words
employed,
together
with
its
want
of
linguistic
clarity,
weighs
against
these
conclusions.
Further,
any
doubts
arising
out
of
ambiguous
provisions
are
to
be
resolved
in
favour
of
the
taxpayer.
Accordingly,
paragraph
20(1)(p)
does
not
preclude
the
deduction
sought
for
the
loss.
(b)
There
is
a
further
approach
which
logically
flows
from
and
arises
out
of
the
present
analysis.
It
is
this.
If
paragraph
20(1)(p)
neither
governs
nor
applies
to
the
actual
factual
situation,
then
the
entire
matter
remains
to
be
accountable
under
ordinary
accounting
principles
under
subsection
9(1)
of
the
Act.
Associated
Investors
of
Canada
Ltd.
v.
M.N.R.,
[1967]
2
Ex.
C.R.
96,
[1967]
C.T.C.
138,
67
D.T.C.
5096
was
not
raised
by
either
counsel.
There,
the
Minister’s
counsel
urged
(as
it
was
here
urged)
that
no
deduction
for
a
bad
debt
could
be
made
unless
it
was
authorized
by
paragraph
11(1)(f),
which
is
now
paragraph
20(1)(p),
of
the
Act.
Jackett,
P.
(after
finding
the
advances
made
by
the
taxpayer
to
its
sales
employees
which
had
become
non-recoverable
were
made
as
an
integral
part
of
the
business
operations)
said
at
page
149
(D.T.C.
5102):
Section
11(1)(f)
[now
20(1)(p)]
does
not,
in
terms,
prohibit
any
deduction
for
"bad
debts".
It
does,
however,
expressly
authorize
in
qualified
terms
a
deduction
that
could
have
been
made,
in
accordance
with
ordinary
business
principles,
in
the
computation
of
profit
from
a
business.
/t
might
therefore
have
been
thought,
as
the
respondent
contends,
that
a
deduction
for
a
"bad
debt"
that
is
excluded
from
section
11(1)(f)
by
the
qualifications
expressed
in
it
is
impliedly
prohibited.
Such
an
interpretation
would
however,
have
results
that
cannot,
in
my
view,
have
been
contemplated.
For
example,
a
bond
dealer,
who,
in
effect,
buys
and
sells
debts
would,
on
such
interpretation,
be
precluded
from
taking
into
account
losses
arising
from
bonds
becoming
valueless
by
reason
of
the
issuing
company
becoming
insolvent.
If
section
11(1)(f)
is
not
to
be
interpreted
as
impliedly
prohibiting
such
an
obvious
and
necessary
deduction
in
arriving
at
the
profits
of
a
business,
I
am
of
opinion
that
it
is
not
to
be
interpreted
as
impliedly
eluding
the
deduction
of
the
losses
that
are
in
question
in
this
appeal,
which,
in
my
opinion,
are
just
as
obvious
and
necessary
in
computing
the
profits
from
the
appellant's
business.
[Emphasis
added;
footnote
omitted.]
These
observations
and
findings,
and
its
rationale,
are
all
equally
applicable
to
the
matter
at
bar
and
the
loss
on
the
sale
of
A.D.T.s
debt
would
be
deductible
under
subsection
9(1)
in
the
calculation
of
the
appellant's
business
profit
for
its
1983
taxation
year
which
reads:
9.
Income
from
business
or
property.
(1)
Subject
to
this
Part,
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
The
following
proposition
expounded
by
Hannan
and
Farnsworth
in
Principles
of
Income
Taxation,
(England:
Stevens
&
Sons
Ltd.,
1952)
at
page
438
is
applicable
to
the
matter
at
hand.
It
was
raised
and
relied
upon
by
counsel
for
the
appellant:
Any
loss
incurred
in
the
course
of
operations
directed
to
the
earning
of
profits
is,
in
principle,
an
allowable
deduction.
The
principle
necessarily
excludes
losses
of
a
capital
or
private
nature.
.
.
.
The
commonest
examples
of
such
losses
are
afforded
by
bad
debts
for
goods
supplied
to
customers.
Where
the
relevant
charges
have
been
brought
to
account
and
treated
as
income
derived.
.
.there
is
no
rational
ground
for
refusing
a
deduction
in
respect
of
losses
incurred
through
the
non-realisation
of
that
income.
.
.
.
Non-realization
of
earned
business
income
can
happen
in
many
ways.
Full
write-off
is
just
one,
sale
at
a
discount
triggering
a
loss
is
another.
The
purported
fiscal
non-recognition
of
the
loss
which
arose
here
leads
to
absurdity,
and
it
results
in
taxation
of
non-realized
income.
The
appellant
appropriately
included
the
$50,000
proceeds
of
disposition
in
income
in
the
calculation
of
its
profit
for
1983
pursuant
to
subsection
9(1),
and
in
my
opinion
it
appropriately
deducted
the
net
loss
arising
therefrom
as
a
business
loss
in
accordance
with
that
provision.
Conclusion
For
the
reasons
given,
I
find
that
the
appellant
has
shown
error
on
the
part
of
the
respondent
and
that
the
amount
of
the
claimed
loss
is
deductible
pursuant
to
subsection
9(1)
of
the
Income
Tax
Act.
Accordingly
the
appeal
for
the
appellants
1983
taxation
year
is
allowed,
with
costs,
and
the
matter
is
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
appellant
is
entitled
to
a
deduction
from
income
for
the
year
in
the
amount
of
$292,633
pursuant
to
subsection
9(1)
of
the
Income
Tax
Act.
Appeal
allowed.