492581 Ontario Limited v. The Queen, 2005 TCC 45 (Informal Procedure)

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Agent for the Appellant: George Vandenberg

Counsel for the Respondent: Jonathon Penney

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REASONS FOR JUDGMENT

(Delivered orally from the Bench at

Toronto, Ontario, on October 28, 2004)

BowieJ.

[1]      These appeals are from income tax assessments for the taxation years 1998, 1999, 2000, 2001 and 2002. The Appellant claims to be entitled to a deduction from income of $213,206 on account of a bad debt expense in the year 2001. It further claims that this expense caused it to have a non-capital loss of $140,374 for 2001, and that it is entitled to carry that loss back to each of the years 1998, 1999 and 2000, and forward to 2002. The appeals for those other years are therefore consequential upon the result of the appeal for 2001. It is also argued in the alternative that if the Appellant is not entitled to deduct the amount of $213,206 as an expense under paragraph 20(1)(p) of the Act then it is entitled to treat it as business investment loss giving rise to a deduction for an allowable business investment loss.

[2]      The initial loan was made to 865628 Ontario Ltd. (865) by the Appellant and another numbered company, both of them wholly owned by Mr. Azman. Subsequently, the Appellant bought the debt of the other numbered company, 253687 (253), paying cash for it, so that by the year 2001, which is the year in which the bad debt is claimed to be deductible, the Appellant owned the entire debt. Mr. Azman testified that the debt was $250,000; it was claimed as a write-off in the amount of $213,206.

[3]      A taxpayer that is not in the business of lending money needs to bring a debt within paragraph 20(1)(p) of the Act if it is to be entitled to write it off. That paragraph permits the write-off of debts owing to the taxpayer that are established by the taxpayer to have become bad debts in the year, and that have been included in computing the taxpayer's income for the year or a preceding taxation year. This Appellant is not in the business of lending money.

[4]      In other words, if a taxpayer is in a trading business and sells goods on credit and takes the selling price into income and then is subsequently unable to collect that debt, then it is entitled to deduct the unpaid amount. What occurred here is an intercorporate loan. It is not an amount that was ever taken into income by the lending company. The Appellant loaned the amount to a related company; the related company has not paid it back, and the Appellant claims to be able to write it off as a bad debt. It does not qualify because it was never previously taken into income.

[5]      Moreover, the appeal would fail in any event because it has not been established that the debt is uncollectible. Mr. Azman's evidence was that the Appellant company loaned this money to 865 so that that company could engage in a joint venture with two individuals to acquire a gas station property formerly owned by Petro-Canada and redevelop it. The property, he said, when it was acquired was supposedly cleaned up and free of any environmental contamination. It was purchased on that basis. Mr. Azman was somewhat vague on the details, but this much is clear: after the transaction had closed, it became apparent that the property had not been fully cleaned up. As a former gas station site, it was subject to some contamination, and the costs of the additional cleanup required, according to the evidence of Mr. Azman, were estimated to be $450,000.

[6]      253 and presumably the individuals involved in the joint venture as well, sued Petro-Canada unsuccessfully in the Supreme Court of Ontario. I have not been given as part of the evidence a copy of that judgment or the reasons for it, but Mr. Azman testified, and I have no reason to disbelieve him, that in arriving at his decision Mr. Justice Campbell of that Court stated that the property had a value of $1.5 million. Even after expending whatever is required to effect the cleanup, therefore, it would have a substantial remaining value. That, according to Mr. Azman, was the basis on which the lawsuit did not succeed.

[7]      Mr. Azman testified that the property is still there and subject to a lien for taxes of $500,000 on the part of the City of London. If it costs $450,000 to clean it up and $500,000 to discharge the liability for back taxes, that leaves $550,000 value in the property, which is more than twice the amount of the debt that the Appellant seeks to write off. I have heard no evidence of any other claims against 865 or the property.

[8]      A taxpayer has the onus of establishing that the debt it seeks to write off is in fact a bad debt. The Minister, in assessing the Appellant, pleaded at paragraph 10(f) of the Reply:

The Appellant did not incur a bad debt expense in the amount of $213,206 in the 2001 taxation year.

It was up to the Appellant to prove that the debt was in fact not collectible. The only evidence on the subject tends to show that 865 is in fact solvent, or was solvent, at the material time.

[9]      The Notice of Appeal claims, in the alternative, and I quote paragraph 8:

... the Appellant should be allowed to claim the amount as an Allowable Business Investment Loss.

I heard no argument as to that, nor did I hear that claim specifically abandoned. However, subsection 39(1)(b) makes it clear that an allowable business investment loss may arise when a debt owing to a taxpayer by a Canadian-controlled private corporation becomes worthless, but it cannot apply where the debt is owing between two corporations that do not deal at arm's length, which is the situation here. The debtor company and the creditor company are both owned by Mr. Azman. Paragraph 39(1)(b) like paragraph 20(1)(p), also requires the Appellant to establish that the debt is in fact bad.

[10]     The appeal for 2001 fails because the debt has not been established to be a bad debt. Nor could it be brought within paragraph 20(1)(p), or within subsection 39(1) for the reasons I have outlined. The appeals in respect of the other years, being consequential, are also dismissed.

Signed at Ottawa, Canada, this 12th day of April, 2005.

Bowie J.