Citation: 2012 TCC 244
Date: 20120710
Docket: 2010-1728(IT)G
BETWEEN:
JANET McDOWELL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
In 2002, Janet McDowell loaned
$1,150,000 to a corporation that was wholly-owned by her spouse, Bruce
Henderson. The loan became worthless and in 2007 Ms. McDowell claimed the
loss on her income tax return as an allowable business investment loss (ABIL). This appeal concerns the assessment for the 2007 taxation year which
disallowed the ABIL.
[2]
The respondent submits that the
ABIL was properly disallowed because the corporation had not carried on an
active business at any time in the 12 months prior to the loan becoming uncollectible
in 2007. It is also submitted that the ABIL should be disallowed for the 2007
taxation year because the loan became uncollectible in an earlier year.
Background facts
[3]
In 2002, Ms. McDowell lent a sum
of money with interest to HMS Equipment Inc. (“HMS”) pursuant to a request by
Laurentian Bank, which had outstanding loans with the corporation. The amount advanced
was $1,150,000.
[4]
HMS had previously been wholly-owned
by Ms. McDowell. In 2002, however, the corporation was wholly-owned by her
common law spouse, Bruce Henderson. He also controlled the business
operations which involved the manufacture, refurbishing, sale and lease of
equipment. Ms. McDowell was not involved in the business at this time due to
health issues and she had little knowledge of the state of the business.
[5]
Within a few months after the loan
was made, a receiver was appointed for the business by John Deere Credit Inc.,
which had provided equipment financing for the business. In short order, the
receiver disposed of almost all of the corporation’s assets.
[6]
Meanwhile, Ms. McDowell and her
spouse commenced a new equipment business in another corporate entity. She
testified that this likely occurred in 2003 or 2004.
[7]
Litigation with John Deere ensued.
The parties agreed to a settlement on November 30, 2006 which provided that HMS
and another corporation were liable to John Deere in the amount of $6,295,697.
The settlement was reflected in a judgment of the Superior Court of Justice
dated January 9, 2007.
[8]
The financial statements for HMS
show some inventory as at the year ended April 30, 2003. As at April 20, 2004,
however, the only item on the balance sheet is cash of $499. No liabilities are
recorded. No financial statements were prepared for later years.
Analysis
[9]
An ABIL is a special category of capital loss which may
be deducted from any income source (s. 3(d) of the Act). In
certain circumstances, a loan that becomes worthless as a bad debt may be
claimed as an ABIL in the year in which the debt becomes uncollectible (s.
50(1) and 40(1)(b)).
[10]
One of the conditions of an ABIL
is that the loan be to a corporation that carried on an active business within
12 months prior to the time that the loss was incurred. The relevant provision
is the definition of “small business corporation” in s. 248(1) of the Act,
which reads:
“small business corporation”, at any particular time, means,
subject to subsection 110.6(15), a particular corporation that is a
Canadian-controlled private corporation all or substantially all of the fair
market value of the assets of which at that time is attributable to assets that
are
(a) used principally in
an active business carried on primarily in Canada by the particular corporation
or by a corporation related to it,
(b) shares of the capital
stock or indebtedness of one or more small business corporations that are at
that time connected with the particular corporation (within the meaning of
subsection 186(4) on the assumption that the small business corporation is at
that time a “payer corporation” within the meaning of that
subsection), or
(c) assets described in
paragraphs (a)
and (b),
including, for the purpose of
paragraph 39(1)(c),
a corporation that was at any time in the 12 months preceding that time a small
business corporation, and, for the purpose of this definition, the fair market
value of a net income stabilization account shall be deemed to be nil;
[11]
In this case, the Minister made an
assumption that HMS ceased to carry on an active business in 2004. Ms. McDowell
acknowledged in her testimony that this assumption is accurate.
[12]
This is fatal to the appeal. The loss
must be incurred within 12 months after the business ceases in order for
the ABIL to be claimed.
[13]
In argument, Ms. McDowell cited
authority that a company that is temporarily dormant may still be carrying on
an active business. This argument would assist Ms. McDowell only if the cessation
of HMS’s business was considered to be temporary sometime after December 31,
2006. The significance of this date is that it is 12 months prior to the time
that the loss was deemed to have been incurred in accordance with s. 50(1). The
evidence was insufficient to establish that the business cessation was temporary
in 2004 let alone after December 31, 2006. Accordingly, the judicial authorities
dealing with a temporary cessation of business do not apply to the facts of
this case.
[14]
In light of my conclusion
concerning active business, it is not necessary that I consider the
respondent’s second argument which is that the debt became uncollectible in 2006
when the settlement was reached with John Deere.
[15]
In light of my conclusion on the
active business issue, the appeal will be dismissed. The respondent is entitled
to its costs.
Signed at Ottawa, Ontario this 10th day of July 2012.
“J. M. Woods”
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