Molstad Development Co. v. R., 97 DTC 913, [1997] 2 CTC 2360 (TCC)

Rip T.C.J.:

Molstad Development Co. Ltd. (“Development” or “appellant”) has appealed from an assessment for its 1990 taxation year on the basis that it should not have to include the amount of $702,467.27 of forgiven debt in computing its taxable income for the year since it was not subject to the exclusionary provisions of paragraph 80(1 )(/) of the Income Tax Act (“Act”) as it read in 1990 and is therefore subject to the provisions of paragraphs 80(1 )(a) and (b) of the Act.

Counsel for the parties agreed that the facts of the appeal are those set out in highlighted portions of the appellant’s Notice of Appeal. No other evidence was adduced.

On or about February 1, 1991, Development and Prenel Investments Ltd. (“Prenel”) amalgamated to form the appellant. The shareholders of Prenel were Rick Molstad, Howard Molstad and Edward Molstad, each having one-third ownership.

On or about July 24, 1979, Prenel acquired land described as Plan 1617NY, Lot C, containing 4.8 hectares (10.07 acres) (“137 Avenue Lands”) for $850,000 to be held for resale. A mortgage in the amount of $800,000 received from the Canadian Imperial Bank of Commerce (“CIBC”) was registered against the 137 Avenue Lands on July 24, 1979. A mortgage in the amount of $1,150,000 received from the CIBC was registered against the 137 Avenue Lands on June 30, 1981.

On or about July 30, 1986, Prenel, Molstad & Company Limited, Development, Molstad Insurance Ltd., Rick Molstad, Howard Molstad and Edward Molstad entered into a Forbearance Agreement with the CIBC whereby it was stated, inter alia, that Prenel’s indebtedness as at February 28, 1986 to the CIBC was $2,237,172 inclusive of all accrued interest to that date.

The Forbearance Agreement stated, inter alia, that the CIBC agreed to forbear from instituting proceedings against Prenel in consideration of the 137 Avenue Lands to be placed for sale through the Multiple Listing Service of the Edmonton Real Estate Board immediately upon execution of that agreement and to be sold by September 30, 1987 with net proceeds payable to the CIBC.

Notwithstanding the above, the CIBC agreed that if Prenel had been able to complete a sale of the 137 Avenue Lands by September 30, 1986, the CIBC would accept the sum of $2,000,000 in full and final settlement of Prenel’s indebtedness to the bank subject to the further condition and understanding that the net proceeds to be paid to the CIBC for application against Howard Molstad’s indebtedness to the bank.

On or about March 8, 1988, Prenel, Molstad & Company Limited, Development, Molstad Insurance Ltd., Rick Molstad, Howard Molstad and Edward Molstad and the CIBC entered into an agreement entitled “Supplemental Forbearance Agreement” which applied to the period of time up to and including July 31, 1988. The Supplemental Forbearance Agreement stated that the current indebtedness of Prenel to the CIBC was $2,566,828 inclusive of accrued interest as of December 15, 1987.

The parties to the Supplemental Forbearance Agreement agreed that the indebtedness of Prenel to the CIBC be declared at $2,100,000 as of March 1, 1988 with interest accruing on this declared amount of 5 per cent per annum for the period of time up to and including July 31, 1988. The CIBC, inter alia, agreed that if Prenel could complete a sale of the 137 Avenue Lands by July 31, 1988 the bank would accept the sum of $2,100,000 as full and final settlement of the Prenel indebtedness. If the sale price was in excess of the $2,100,000, the CIBC would receive the $2,100,000, accrued interest and 50 per cent of the net proceeds after deducting the $2,100,000 and other disbursements. The CIBC agreed that any additional monies it might receive would be treated as recovery against the principal and interest would otherwise be written off in respect of the Prenel indebtedness.

On or about May 3, 1989, Prenel accepted an offer to purchase the 137 Avenue Lands from Cornwall Developments Ltd. for $2,200,000.

Prenel and Cornwall Developments Ltd. subsequently entered into numerous Extension and Ratification Agreements dated June 6, 1989, June 30, 1989, August 10, 1989, September 8, 1989, September 27, 1989 and October 27, 1989. The August 10, 1989 Extension and Ratification Agreement amended the purchase price to $2,250,000.

On or about January 11, 1990, title to the 137 Avenue Lands was registered in the name of Glenlyon Plaza Holdings Ltd. for $2,250,000.

The cost of the 137 Avenue Lands to Prenel as of January 11, 1990 was $3,068,228.07 calculated as follows:

Prenel calculated the forgiveness of debt of $702,467.27 as follows:

The indebtedness to the CIBC by Prenel was settled or extinguished by an amount that was less than the principal amount owing to it resulting in a forgiveness of debt in the amount of $702,467.27.

Prenel held the 137 Avenue Lands for resale.

In computing its income for the 1990 taxation year, Prenel reported for accounting purposes, inter alia, a loss on the sale of land in the amount of $782,121 and a gain on forgiveness of debt in the amount of $702,467.27. Prenel’s income from interest ($79,744) and rent ($1,500) aggregated $80,069. For accounting purposes, Prenel reported net income of $415. For tax purposes, however, the appellant, on its T25(l) form, deducted the amount of forgiveness of debt of $702,467.27 from its net income of $415, thereby resulting in a business loss for the 1990 taxation year in the amount of $702,052. In other words, for tax purposes, Prenel ignored the amount of debt forgiven in computing its income.

The date of the appellant’s initial assessment for the 1990 taxation year is August 9, 1990. By reassessment, notice of which is dated April 11, 1994, the Minister of National Revenue (“Minister”) included in the appellant’s income for the 1990 taxation year an amount of $702,467.27 as proceeds of disposition with respect to the disposition of the land resulting in the appellant having net income of $415. The Minister applied a non-capital loss of $415 from the 1990 taxation year against this net income. The reassessment resulted in arrears interest assessed of $19.02.

The respondent’s position is that the amount of $702,467.27 was properly included in the appellant’s income for its 1990 taxation year in accordance with section 9 of the Act as Prenel held the 137 Avenue Lands on account of inventory; the said amount was subject to the exclusionary provisions of paragraph 80(1 )(/) of the Act and therefore is not subject to the provisions of paragraphs 80(1)(a) and (b) of the Act.

In 1990, subsection 80(1) of the Act read as follows:

Where at any time in a taxation year a debt or other obligation of a taxpayer to pay an amount is settled or extinguished after 1971 without any payment by him or by the payment of an amount less than the principal amount of the debt or obligation, as the case may be, the amount by which the lesser of the principal amount thereof and the amount for which the obligation was issued by the taxpayer exceeds the amount so paid, if any, shall be applied

(a) to reduce, in the following order, the taxpayer’s

(i) non-capital losses,

(1.1) farm losses,

(ii) net capital losses, and

(iii) restricted farm losses,

for preceding taxation years, to the extent of the amount of those losses that would otherwise be deductible in computing the taxpayer’s taxable income for the year or a subsequent year, and

(b) to the extent that the excess exceeds the portion thereof required to be applied as provided in paragraph (a), to reduce in prescribed manner the capital cost to the taxpayer of any depreciable property and the adjusted cost base to him of any capital property,

unless

(f) the excess is otherwise required to be included in computing his income for the year or a preceding taxation year or to be deducted in computing the capital cost to him of any depreciable property, the adjusted cost base to him of any capital property or the cost amount to him of any other property,

Appellant’s Submissions

The appellant’s position is that for the purpose of determining its profit, and thus its income, for 1990 in accordance with section 9 of the Act, it was not required to include the amount of $702,467.27, and that amount was not otherwise required to be included in the appellant’s income for tax purposes. The appellant was not required to deduct the amount of $702,467.27 in calculating the cost amount of the 137 Avenue Lands and therefore the amount of forgiven debt was not subject to the exclusionary provisions of paragraph 80(l)(/). On the facts, the appellant fell within the preamble of section 80 and the amount forgiven should be applied in the manner described in paragraphs 80(1 )(a) and b). Furthermore, the amount of $702,467.27 did not constitute proceeds of disposition for purposes of calculating the loss on the sale of the 137 Avenue Lands.

Before 1971, whether an amount of forgiven debt was or was not to be included in computing the income of a taxpayer was determined by the case law. There was no provision in the Act similar to section 80. The leading case was the United Kingdom decision of British Mexican Petroleum Co. v. Commissioners of Inland Revenue, (sub nom. British Mexican Petroleum Co. v. Jackson) (1932), 16 Tax Cas. 570 (H.L.). The company on June 30, 1921 was indebted to a supplier of raw materials. The company had deducted the amount of debt in computing its income for the year ending on that date. In November 1921 the supplier released the company from payment of a large proportion of the debt. The House of Lords held that the amount so forgiven was not a receipt of income for the period in which the forgiveness took place.

Rowlatt, J. in the King’s Bench Division stated, at pages 585-86 that: ... the debt was absolutely fixed at the time and has not been diminished by any sort of consideration owing to the validity or the disputability of the debt or anything of that kind. It has been diminished purely, for this purpose I must regard it, as an act of grace although business motives were behind it. But it has simply been forgiven and nothing else — for no reason and for no point connected with the transaction or the debt itself. It is purely for collateral business reasons that they do not want this Company to founder under the debts of past years. That is what that is. ...

In the House of Lords, Lord Thankerton wrote, at page 592:

... I am unable to see how the release from a liability, which liability has been finally dealt with in the preceding account, can form a trading receipt in the account for the year in which it is granted.

In Canada, a shipbuilding company contracted to build five vessels for a Chinese company. The taxpayer suffered financial difficulties and during the contract borrowed heavily from a Canadian government corporation to build the ships. The government corporation abated part of the taxpayer’s debt. The Minister assessed the cancelled portion of the debt as the taxpayer’s trade receipts since the amount in question was a subsidy to lessen the appellant’s trade loss: George T. Davie & Sons Ltd. v. Minister of National Revenue, (sub nom. Davie, G.T. & Sons Ltd. v. Minister of National Revenue) [1954] C.T.C. 124, 54 D.T.C. 1045 (Ex. Ct.). The taxpayer’s appeal to the Exchequer Court was allowed. Cameron, J. stated at page 133 (D.T.D. 1049), that the government corporation itself

... Was in exactly the same position as a banker advancing working capital or as a lender who had advanced working capital and had taken security by way of mortgage. ...

Cameron, J. held, at page 139 (D.T.C. 1052), that the British Mexican case

... 18 authority for the proposition that the mere cancellation or abatement of an undisputed trade debt does not give rise to taxable income in the hands of a taxpayer whose trade debt has been cancelled or abated, subject perhaps to the question reserved by Lord Macmillan and which I have referred to above. [1] That being so, it cannot be found that the abatement of a capital indebtedness — as in the instant case — can give rise to taxable income.

Cameron, J. found the benefit conferred on Geo. T. Davie by the cancellation of the debt “as not something received in the course of its normal trading operations. It was outside those operations entirely”. He added that “the liability was diminished purely as an act of grace, coupled possibly to some extent with ... business motives”.

Similarly, the release of a debt in J.D. Stirling Ltd. v. Minister of National Revenue, (sub nom. Stirling, J.D. Ltd. v. Minister of National Revenue) [1969] C.T.C. 418, 69 D.T.C. 5259 (Ex. Ct.), per Jackett, P., as he then was, did not of itself give rise to revenue from the debtor’s business even though the amount released was a debt that in a prior year had been taken into account as an expense of that business.

Counsel for the appellant also referred to the Supreme Court of Canada judgment in Oxford Motors Ltd. v. Minister of National Revenue, [1959] S.C.R. 548, [1959] C.T.C. 195, 59 D.T.C. 1119, distinguishing it from Brit- ish Mexican and Geo. T. Davie. In Oxford Motors, the appellant, an importer and distributor of automobiles, had an overstock of cars as its sales declined. In order to keep the appellant in business, its English supplier, to whom the appellant was indebted in an amount of over $1,500,000 agreed to grant the appellant a rebate of $250 for each car sold from existing inventory, the rebates to be applied in retiring the appellant’s outstanding indebtedness. The Minister included the rebates in the appellant’s income. The Supreme Court dismissed the taxpayer’s appeal. The rebates were likened to payments of subsidies. Abbott, J. writing for the majority, stated at page 201 (D.T.C. 1122):

... rebates were intimately related to the appellant’s trading operation, and in my opinion the profit realized from them was clearly a trading profit from the business.

Abbott, J. explained that in British Mexican, at pages 201-02

[W]hat really happened was that the ... creditors assisted in restoring the capital position of the company by writing off claims which could no longer be paid out of the proceeds of available assets.

Counsel also cited Minister of National Revenue v. Enjay Chemical Co., (sub nom. Enjay Chemical Co. Ltd. v. Minister of National Revenue), [1971] C.T.C. 535, 71 D.T.C. 5293 (F.C.), which held that where debt forgiveness by a vendor to a purchaser is intimately connected or tied to the overall business dealings of the parties, British Mexican does not apply.

Appellant’s counsel submitted that the relationship between the creditor and debtor in the appeal at bar is one of lender and borrower, not vendor and purchaser. The forgiveness of the debt by the CIBC was not a transaction which arose in the normal course of the appellant’s business operations. Hence, absent section 80 from the Act, the forgiveness of the debt would fall within the principles of British Mexican.

Section 80, counsel argued, does not bring the amount of debt forgiven into the calculation of income for purposes of the Act. Section 80 essentially applies the amount of the debt forgiveness to various tax pools the taxpayer may have: paragraphs 80(1)(a) and b). To the extent the amount of debt forgiven is greater than the amounts in the various pools, the difference, or the excess, is not brought into income.

Finally, counsel referred to the appeal of Denthor Developments Ltd. v. R., [1996] T.C.J. 1189. [2] In that case also, a lender, a bank, forgave debt to a borrower, a company carrying on the business of buying land for development and sale. On the payment of the sum of $2,000,000 to the bank, the borrowers were released of the balance of the debt. The appellant corporation, one of the borrowers, treated its portion of the forgiveness amount in accordance with section 80. The Minister appears to have assessed on the basis that the forgiveness amount was a profit under section 9 of the Act. Beaubier, T.C.J. held that paragraph 80(1 )(/) of the Act did not apply to the appellant in 1987 because the forgiveness of the debt was not in respect of an expense that was deductible in computing income for tax purposes in that year.

Respondent’s Submissions

The respondent’s position is that Prenel held the 137 Avenue Lands on account of inventory and, as such, the amount $702,467.27 was properly included in computing the appellant’s income for 1990. The amount of the forgiven debt was subject to the exclusionary provisions of paragraph 80(1)(f) of the Act and, therefore, was not subject to the provisions of paragraphs 80(1 )(a) and (b).

Respondent’s counsel agreed that paragraphs 80(l)(a) and (&) are designed to reduce losses for preceding years to the extent of the amount that would be deductible in the year in which the debt is forgiven or subsequent years.

For accounting purposes, the appellant treated the amount of debt forgiven as a business loss in the year that it was forgiven. The result, counsel stated, is a negative net income for federal income tax purposes. She argued that if the appellant’s filing of his income tax return for 1990 is correct, a business loss has been created, as alleged in the Notice of Appeal, and in theory at least, the loss can be carried forward to offset income in subsequent years. Counsel submitted that this is not what section 80 was designed to accomplish.

Counsel referred to Alco Dispensing Canada Ltd. v. /?., [1996] 1 C.T.C. 2662, 96 D.T.C. 1586 (T.C.C.), a decision of Bonner, T.C.J. In 1986 the taxpayer accrued and deducted management bonuses payable to its three shareholders. A portion of the bonuses was paid by the taxpayer during 1987 but the remaining portion was extinguished in that year without cost to it, as a result of its three shareholders having agreed to sell all of its shares. In computing its 1987 income for tax purposes, the taxpayer sought section 80 debt extinguishment treatment to the cancelled portion of the bonuses. The Minister added such cancelled portion to its income by virtue of section 9 of the Act alleging that section 80 did not apply by virtue of paragraph 80(l)(/) of the Act. The taxpayer’s appeal was dismissed. Judge Bonner commented that in the taxpayer’s domestic financial statements for 1987 it reversed the unpaid accrued bonuses. It entered the amount forgiven as “other revenue” in its statement of earnings for the year but for purposes of income tax, it deducted an amount of $1.589 million as “section 80 settlement of debt” in the reconciliation of income per financial statements with net income for tax purposes. Bonner, T.C.J. stated, on page 2666 (D.T.C. 1588):

In the determination of profit for purposes of section 9 it is ordinary commercial a principles which govern, not GAAP. What constitutes ordinary commercial principles is a matter of law. A complete summary of the law on this point is set out in Ikea Ltd. v. The Queen, 94 D.T.C. 1112 ...

Judge Bonner found that in the light of the decision of Mohawk Oil Co. v. R., (sub nom. Mohawk Oil Co. v. The Queen) (sub nom. Canada v. Mohawk Oil Co.) [1992] 1 C.T.C. 195, (sub nom. R. v. Mohawk Oil Co.) 92 D.T.C. 6135 (F.C.A.) leave to appeal refused, (sub nom. Mohawk Oil Co. v. Minister of National Revenue) (1992), 141 N.R. 393 (note), the release of liability to pay bonuses cannot be treated as having changed the character of liability. The taxpayer’s assertion that the forgiveness of the bonuses was a capital transaction was clearly illogical. If the creation of an enforceable obligation to pay bonus results in a cost which diminishes profit so also must the receipt of a waiver intended to boost profit by eradicating that same obligation must result in an increase in profit. Bonner, T.C.J. called for a common sense commercial view of the matter.

Respondent’s counsel declared that Alco Dispensing supports her view that there is a significant difference for tax purposes when debt is in respect of inventory or capital for at least two reasons. If the debt is of an income nature, the court must conclude that there has been a change of character such that the forgiveness of debt is a capital transaction for the appellant to succeed. Second, if property was once considered inventory it is not necessary to always be classified as inventory, but there must be sufficient evidence before the court to satisfy it that there has been a change of character for the appellant to succeed. Counsel stated that there was no such change of character in the case at bar. The forgiveness of debt was intimately connected with the appellant’s business as a land developer selling property held for resale. The forgiveness was in consideration for listing the property and the amount of forgiveness was therefore connected to the ultimate selling price. As a matter of commercial reality what the appellant realized at the end of the day was a release from a liability that it would otherwise have to pay. The appellant received a direct benefit as a result of its release of debt by the CIBC. The manner in which the appellant treated the forgiveness of debt in its financial statements was correct and it is appropriate to bring the gain represented by the forgiven debt into income. The forgiveness of the debt enabled the appellant, as in Enjay Chemical, to make a profit in 1990. Counsel suggested that it is clear from the Notice of Appeal that the Forbearance Agreement was in consideration of putting the land up for sale. The transaction therefore must have been on income account.

Counsel argued that when the appellant reconciled its financial statements for accounting purposes with its financial statements for income tax purposes it ought not to have deducted the forgiveness of debt in the computation of income for tax purposes. It is the financial statements which reflect the reality of the situation and the common sense referred to by Judge Bonner.

Counsel distinguished the British Mexican on the basis that that case involved a company in dire financial straits and that the debt forgiven was essentially an injection of capital so that the company could continue to operate. These situations were not present in the appeal at bar. The CIBC was not trying to rejuvenate the appellant.

In Dominion Taxicab Assn. v. Minister of National Revenue, [1954] S.C.R. 82, [1954] C.T.C. 34, 54 D.T.C. 1020, the Supreme Court confirmed the principle that ordinary commercial principles, not generally accepted accounting principles (“GAAP”), govern. Cartwright, J., as he then was, wrote at pages 37-8 (D.T.C. 1021):

... The expression “profit” is not defined in the Act. It has not a technical meaning and whether or not the sum in question constitutes profit must be determined on ordinary commercial principles unless the provisions of the Income Tax Act require a departure from such principles. ... It is well settled that in considering whether a particular transaction brings a party within the terms of the Income Tax Acts its substance rather than its form is to be regarded.

Respondent’s counsel also argued that the amount forgiven ought to be included in the appellant’s proceeds of disposition from the sale of the 137 Avenue Lands. She relied on Robert v. Minister of National Revenue, [1990] 1 C.T.C. 2407, 90 D.T.C. 1281 (T.C.C.). In Robert the vendor sold interests in multiple unit residential buildings (“M.U.R.B.s”). Part of the consideration was paid by the purchasers by way of promissory notes to the vendor. Eventually, there was a dispute between the vendor and the purchasers and the purchasers resold the M.U.R.B.s back to the vendor. The debt on the promissory notes owing to the vendor was cancelled on closing of the resale. The purchasers claimed their gain on the cancellation of the debt was not proceeds of disposition of the sale back to the vendor. Lamarre Proulx, T.C.J. held that the amounts forgiven on the cancellation of the promissory notes were part of the purchase price on the resale, and were stated to be so in an addendum to the relevant agreement of purchase and sale. The Minister was therefore successful in maintaining her assessment that the cancelled amounts were to be included in the taxpayer’s proceeds of disposition from the sale. Judge Lamarre Proulx wrote, at pages 2412

(D.T.C. 1284-85):

In order to determine the sale price, what we must look for its the true consideration for the transfer of ownership. In order to find what this consideration was, we must examine the sequence of events which led to the transfer of ownership.

In the case at bar, the sequence of events, according to counsel for the respondent, consisted of an inducement by the CIBC to sell the property and an amount of debt forgiven intimately connected to the ultimate sale proceeds. Paragraph two of the relevant Forbearance Agreement speaks of providing an “inducement”. The net proceeds of disposition from the sale amounted to $2,286,106. The appellant was relieved from a liability to pay $702,467 in connection with the sale of the said property and the taxpayer was enriched by this amount. Whether the amount of the enrichment is to be included in the appellant’s income depends on the principles of commercial reality and whether or not the amount of the enrichment was an inventory account.

The respondent’s counsel also referred to the definition of the word “proceeds” in Black’s Law Dictionary:^ [3]

.. Proceeds does not necessarily mean only cash or money ...

and declared a forgiveness of debt may be included in proceeds of disposition.

Counsel distinguished Denthor Developments, supra, on its facts. In that case the debt was settled but the debtor still held the land. In Denthor Developments the appellant had not made a deduction in computing its income under subsection 18(2) since it had no gross revenue from the land. Beaubier, T.C.J. stated:

Paragraph 10. At the material time Denthor’s debt related exclusively to its business of acquiring, developing and selling land. In this regard, subsection 18(2) of the Income Tax Act provides that in circumstances where land is held primarily for development or resale, the amount of any interest expense relating to the acquisition of land which can be claimed for tax purposes in a year cannot exceed the revenue obtained from the property for that year.

Paragraph 11. Denthor’s business consisted of the acquiring, developing and reselling of land. There are no proceeds from the sale of land and no business profit within the terms of subsection 9(1) of the Act can occur unless and until land is sold. Denthor could not use any interest expense, except upon making sales of land. Paragraph 80(1 )(/) did not apply to the Appellant in 1987 because the excess was not required to be included in Denthor’s income by any provision of the Income Tax Act. The excess would only have to be included in income if the forgiveness of the debt was in respect of an expense that was deductible in computing income for tax purposes that year. ...

In the appeal at bar, respondent’s counsel stated, accrued interest and property taxes were added to the cost of the land and the amount so added affected the appellant’s gain on the sale of the land. Denthor Developments, therefore, is of limited value to the appellant, she concluded.

Analysis

I agree with the submission of respondent’s counsel that unless there has been a change in the character of the debt, the amount of forgiveness of the debt will be on revenue or capital account, depending on whether the debt itself was on revenue or capital account. However, in characterizing the loan by the CIBC to Prenel as debt in respect of inventory, counsel ignores the origin and nature of the loan and the relationship between the bank and Prenel.

When a person subscribes for share capital in a corporation the transaction is a capital transaction regardless of the use the corporation applies the money. The corporation may use the funds to purchase a plant or use the funds to purchase its inventory; in both case the money obtained from shareholders is capital. Similarly when a corporation borrows money from its banker to finance acquisition of assets, including inventory, for example, the transaction between the lender and borrower is a capital transaction. The debt is on capital account.

I fail to see how the use to which the borrowed funds is put by the debtor affects the character of the borrowed money. The CIBC, a lender, advanced working capital to Prenel, a borrower and took security by way of mortgage on the 137 Avenue Lands. There was never any change to this relationship during the term of the loan. The forgiveness of debt was not lost profits and expenditures thrown away and then recouped as damages. [4] The creation of the debt between the CIBC and Prenel did not diminish Prenel’s profit as did the creation of an enforceable obligation to pay a bonus in Alco Dispensing, supra.

An appellant corporation in the turkey farming business became insolvent in 1964. [5] Maple Leaf Mills Limited, a milling company, forgave the appellant $206,700 owing to it. A major part of the debt had been incurred for feed purchased by the appellant from Maple Leaf. Some $24,000 represented a sum which Maple Leaf had, by way of financial accommodation, paid to Cuddy Turkey Farms from whom the appellant had purchased turkeys poults. The appellant treated the forgiveness of the $24,222 as a capital gain in its 1964 tax return.

In Gibson, J.’s view the question before him was whether the forgiveness of the $24,000 was an abatement of a capital liability or an abatement received in the course of the appellant’s normal trading operations. If it was the latter, the amount forgiven is income since it would be a profit from the appellant’s business for 1964. Gibson, J. found that the relationship between Cuddy Turkey Farms Limited and the appellant was one of debtor and creditor in respect of the turkey inventory of the appellant in the sum of $24,222. The relationship between Maple Leaf and the appellant was that of lender and borrower in respect of a similar sum of $24,222.

Gibson, J. held that the relationship germane to the adjudication of the appeal was that between Maple Leaf and the appellant. The amount of the abatement of the debt was profit to the appellant arising out of its dealings with Maple Leaf and this abatement, he said, at p. 5200

... arose in dealings when the relationship between the appellant and Maple Leaf ... was that of lender and borrower

and therefore the profit arising out of the relationship was not income within the meaning of that term in the Act, as it read before 1971, and was not taxable.

The reasons for allowing the appeal in Golden Horseshoe, supra, are not dissimilar from those in Geo. T. Davie, supra. Here, too, the forgiveness of a portion of the debt was a business decision by the CIBC and the forgiveness arose in dealings when the relationship between the CIBC and Prenel was that of lender and borrower.

I do not agree with the view of respondent’s counsel that the amount forgiven should be included in the appellant’s proceeds of disposition from the 137 Avenue Lands. Her authorities supporting this submission are not on point. The facts in Robert are quite different from those at bar. In Robert, purchasers of M.U.R.B.s sold the properties back to the vendors, and in negotiating the transaction, the vendor and purchasers agreed to cancel the outstanding promissory notes that arose out of the original sale. An addendum to the agreement of purchase and sale stated the amounts outstanding on the promissory notes were part of the purchase price. Clearly, as held by Lamarre Proulx, T.C.J., the amount of debt forgiven in such a situation is part of proceeds of disposition. At bar, however, the purchaser of the 137 Avenue Lands had absolutely nothing to do with the forgiveness of debt. That was a matter between the lender, the CIBC, and the borrower, Prenel and nobody else. The forgiveness of debt was not negotiated between the vendor and purchaser, nor by anyone on their behalf, in arriving at a sale price. I doubt that the Minister would argue that the purchaser’s cost amount or cost base of the components of the 137 Avenue Lands would be allocated on the basis of the aggregate of the price paid, $2,250,000, and $702,467.27, the amount forgiven; that is, $2,952,467.27.

The CIBC and Prenel entered into a transaction that had the potential of benefiting each other. Prenel was essentially a single asset company and the value that asset was written up in its books for 1989 at more than its fair market value, based on the selling price. On the evidence, one would not describe Prenel in 1990 as a successful corporation with a promising future. Quite simply, Prenel was not in good financial shape and the CIBC knew it probably could not collect on all the debt owing. The CIBC, rather than foreclosing on the property and calling various guarantees, provided an inducement to Prenel to sell the property at a certain date in return for a possibility of debt forgiveness, dependent on the sale price.

Both paragraph 13(21)(J) and subsection 54(/t) of the Act define proceeds of disposition of property to include, inter alia,

the sale price of property that has been sold ...

The sale price of the 137 Avenue Lands was $2,250,000. This was the bargain reached by the vendor and purchaser. There is no authority in the Act to increase the proceeds of disposition by an amount equal to the forgiveness of a debt by a person who is not a party to the transaction of purchase and sale. We should not concern ourselves with some theoretical exercise once the vendor and purchaser, dealing at arm’s length, have decided in their minds what the proceeds of disposition were. [6] The CIBC was not deal ing with the purchaser and the amount forgiven Prenel by the CIBC cannot be considered part of Prenel’s proceeds of disposition of the 137 Avenue Lands.

The appellant included the forgiven amount in computing its income for accounting purposes. Whether an amount is or is not to be included in income for purposes of the Act is a question of law for determination by the Court having regard to “well accepted principles of business (or accounting) practice” or “well accepted principles of commercial trading”.? [7] The repayment of the loan by Prenel would not have affected its profit in the year of payment; neither should the forgiveness of part of the loan affect its profit. The partial forgiveness of the debt amounted to no more than a saving to Prenel and a saving of money is not to be included in a taxpayer’s income.® [8]

The loan by the CIBC to Prenel was on account of capital. Its character had not changed. The forgiveness of a part of the loan was no doubt a profit to Prenel. But the profit was on account of capital and not a trading profit to Prenel and is not required to be included in computing Prenel’s income for 1990 or a preceding year. Subsection 80(f) does not apply to the facts at bar.

The appeal will be allowed with costs.

Appeal allowed.