Teskey
J.T.C.C.:—Both
appellants
herein
appeal
from
assessments
of
income
tax
for
the
1987
and
1988
taxation
years.
These
appeals
were
heard
on
common
evidence.
Issues
Originally
there
were
three
issues,
namely:
Firstly
Are
both
appellants
entitled
to
a
deduction
for
an
allowance
for
a
doubtful
debt
in
1987
and
a
deduction
for
bad
debts
in
1988
or
are
the
amounts
in
question
capital
losses?
Secondly
Both
appellants
claimed
certain
expenses
that
were
disallowed
for
1988
and
Serin
Holdings
Ltd.
("Serin")
claimed
certain
expenses
for
1987
that
were
disallowed;
are
the
appellants
allowed
deductions
for
automobile
expenses
for
the
taxation
years
1987
and
1988?
Thirdly
Serin
made
an
advance
of
$42,914
to
Strand
Properties
U.S.
Inc.
(Strand)
and
the
issue
is
whether
this
was
on
account
of
capital
or
income.
This
second
issue
has
been
settled
in
that
Terrador
Investments
Ltd.
("Terrador")
appeal
on
this
issue
is
dismissed
and
Serin’s
appeals
are
allowed
and
the
matter
is
referred
back
to
the
Minister
of
National
Revenue
(the
"Minister")
for
reconsideration
and
reassessments
on
the
basis
that
Serin
is
entitled
to
an
additional
deduction
for
automobile
expenses
of
$3,000
in
taxation
year
1987
and
$3,050
in
taxation
year
1988.
Facts
The
parties
placed
in
evidence
an
agreed
statement
of
facts.
The
facts
contained
therein
are
over
and
above
agreed
facts
as
disclosed
by
the
pleadings
as
well
as
certain
questions
and
answers
given
by
an
officer
of
the
appellant
on
discovery.
The
agreed
statement
of
facts
reads:
1.
Both
appellants,
Serin
Holdings
Ltd.
(’’Serin”)
and
Terrador
Investments
Ltd.
("Terrador"),
are
corporations
resident
in
Canada.
2.
On
April
19,
1985,
Serin
transferred
21
per
cent
of
the
shares
of
Serin
(U.S.)
Holdings
Ltd.
("Serin
(U.S.")),
a
United
States
corporation,
to
Terrador
and
elected
under
the
provisions
of
subsection
85(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
3.
Subsequent
to
April
19,
1985,
Serin
was
the
owner
of
79
per
cent
and
Terrador
was
the
owner
of
21
per
cent
of
the
shares
of
Serin
(U.S.).
4.
On
April
24,
1985,
Serin
(U.S.)
was
liquidated.
Prior
to
the
liquidation,
Serin
(U.S.)
sold
all
of
its
properties
and
reported
the
profit
on
its
final
U.S.
income
tax
return.
5.
As
partial
consideration
for
the
sale
of
all
its
properties,
Serin
(U.S.)
received
interest-bearing
promissory
notes
the
values
of
which
at
the
date
of
liquidation
was
reflected
by
their
principal
amounts
as
follows:
The contents of this table are not yet imported to Tax Interpretations.
6.
Serin
(U.S.)
at
the
time
of
liquidation
distributed
the
promissory
notes
with
a
value
of
(U.S.)
$1,661,782
and
cash
in
the
amount
of
approximately
(U.S.)
$117,000
(at
(Cdn.)
$136,610
to
Serin
and
Terrador
as
liquidation
proceeds
in
proportion
to
their
shareholdings
of
Serin
(U.S.).
7.
Serin
included
a
capital
gain
of
$1,890
in
its
1985
taxation
year
based
on
elected
proceeds
of
disposition
of
$41,390
and
an
adjusted
cost
base
of
$39,500.
8.
Terrador
reported
a
nil
capital
gain
in
its
1985
taxation
year
based
on
elected
proceeds
of
disposition
of
$71,353
and
an
adjusted
cost
base
of
$71,353.
9.
Serin
and
Terrador
each
elected
pursuant
to
subsection
93(1)
of
the
Act
to
deem
a
portion
of
their
share
of
the
proceeds
of
disposition
on
liquidation
to
be
a
dividend
received
from
Serin
(U.S.).
The
deemed
dividend
was
equal
in
amount
to
the
balance
of
Serin’s
(U.S.)
"exempt
surplus
account”
as
that
term
is
defined
in
Regulation
5907.
10.
The
deemed
dividends
upon
liquidation
were
included
in
computing
the
income
of
Serin
and
Terrador
as
required
by
subsection
90(1)
and
paragraph
12(l)(k)
of
the
Act.
11.
In
computing
their
taxable
incomes
for
the
1985
taxation
year,
Serin
and
Terrador
each
claimed
a
deduction
pursuant
to
subsection
113(1)
of
the
Act,
as
the
dividend
included
in
their
income
pursuant
to
subsection
90(1)
and
paragraph
12(1
)(k)
was
paid
out
of
the
’’exempt
surplus”
of
Serin
(U.S.).
12.
Serin
advanced
a
further
$42,914
to
Strand
Properties
(U.S.)
Inc.
("Strand”)
in
order
to
protect
its
interest
in
and
increase
the
probability
of
repayment
of
amounts
owing
under
the
promissory
notes
between
Serin
and
Strand.
13.
Although
a
few
payments
were
made
to
Serin
and
Terrador
on
account
of
the
principal
and
interest
outstanding
on
the
notes,
Serin
and
Terrador
were
unable
to
collect
the
balance
outstanding.
14.
In
1987,
Serin
claimed
a
reserve
for
doubtful
debts
in
the
amount
of
$355,143.
In
1988,
Serin
claimed
a
bad
debt
expense,
net
of
the
doubtful
debt
reserve
taken
in
1987,
in
the
amount
of
$1,097,199,
and
an
additional
bad
debt
of
$42,914
in
respect
of
the
amount
advanced
to
Strand.
15.
In
1987,
Terrador
claimed
a
reserve
for
doubtful
debts
in
the
amount
of
$94,405.14.
In
1988,
Terrador
claimed
a
bad
debt
expense,
net
of
the
doubtful
debt
claimed
in
1987,
in
the
amount
of
$291,660.88.
The
questions
and
answers
read
into
evidence
from
the
examinations
for
discovery
were
as
follows:
Q.
Now,
you
mentioned
that
your
motivation
in
liquidating
your
U.S.
assets
was
to
I
believe
get
some
of
the
gain
of
your
U.S.
properties,
is
that
correct?
A.
Right.
Q.
Okay.
Did
you
have
any
discussions
with
your
accountant
with
respect
to
tax
reform
in
the
United
States
and
the
possible
changes
to
the
Canada/U.S.
Tax
Treaty?
A.
I
may
have.
Q.
Okay.
Do
you
recall
discussing
whether
or
not
you
could
in
effect
get
back
the
gain
in
Serin
(U.S.)
without
paying
either
Canadian
or
American
income
tax?
A.
Yes.
I
think
we
did.
Q.
Okay.
Now,
you
mentioned
that
you
considered
that
your
properties,
for
example,
had
gone
up
in
value
I
take
it,
and
that
was
one
of
the
reasons
why
you
were
liquidating?
A.
It
had
gone
up
substantially
in
value.
Q.
Okay.
At
tab
16,
we
have
a
note
for
$882,000
U.S.,
April
23,
1985.
Now,
if
we-do
you
recall
what
this
note
was
given
for?
A.
Yes.
I
believe
that
secured
the-well,
that
was
for
three
separate
holdings
that
Serin
had.
One
was
Heritage
House,
which
was
I
believe
$66,000;
the
general
partnership
interest
in
Harper
Tract,
which
was
$250,000;
and
an
interest
in
Great
Hills,
which
was
a
land
tract
in
Austin,
was
$566,000.
I
believe
that
totals
$882,000.
Q.
This
again
then
is
Serin
(U.S.)
liquidating
all
its
equity
interests
in—
A.
That’s
right.
Q.
-American
real
estate?
A.
That’s
correct.
Q.
Okay.
So
it
took
the
note
back
of
$882,085
for
the
three
real
estate
interests.
Did
it
have
any
further
involvement
then
with
any
of
these
three
properties?
A.
No.
Q.
Did
any
of
your
other
companies,
or
were
you
personally
involved
in
any
further
real
estate
development?
A.
No.
Q.
Now,
turning
back
then
to
April
1985,
you
had
to,
or
you
did
transfer
21
per
cent
of
Serin
(U.S.)
from
the
appellant
to
Terrador
Investments?
A.
Correct.
Q.
And
Terrador
was
a
company
that
you,
what?
Newly
incorporated?
A.
Correct.
Q.
And
what
was
the
reasoning
for
incorporating
Terrador
and
transferring
the
21
per
cent?
A.
I
believe
that
was
a
requirement
by
law
to
accommodate
the
liquidation.
Q.
Okay.
And
is
your
understanding
that
that
was
a
requirement
of
U.S.
tax
law?
A.
I
believe
that’s
correct.
Q.
When
Serin
(U.S.)
then
had
these
three
notes,
what
was
its-what
was
it
planning
to
do
with
the
notes,
or?
A.
With
the
notes?
Collect
them.
Q.
Collect
them.
Just
wait
for
payment?
It
wasn’t
planning
to
sell
them?
A.
No.
We
thought
they
were
great.
There
was
really
no
reason
to
sell
them.
In
fact,
I
had
great
plans
for
them.
Issue
I
Appellants’
position
Both
appellants
deemed
a
portion
of
their
share
of
the
proceeds
of
disposition
of
its
shares
in
Serin
U.S.
to
be
a
dividend
pursuant
to
paragraph
93(1
)(a)
of
the
Income
Tax
Act,
and
included
the
amount
in
question
as
income
pursuant
paragraph
12(
1
)(k)
of
the
Act.
The
appellants
submit
that
the
combined
effect
of
these
provisions
is
what
was
a
capital
transaction
became
an
income
transaction.
Section
113
excludes
this
income
in
the
calculation
of
taxable
income.
Since
the
deemed
dividend
was
brought
into
income,
then
pursuant
to
paragraphs
20(1
)(p)
and
20(1
)(1)
(the
provisions
for
doubtful
accounts
and
bad
debts)
applies
and
those
portions
of
the
promissory
notes
that
became
uncollectible
can
be
deducted
from
income
and
are
not
a
capital
loss.
Respondent’s
position
That
the
transaction
involved
was
a
capital
transaction
and
what
was
reported
by
the
appellants
were
proceeds
of
disposition.
What
is
being
attempted
by
the
appellants
is
to
take
a
capital
transaction
and
turn
it
into
an
income
transaction
and
get
a
deduction
for
doubtful
debts
and
bad
debts.
To
be
able
to
apply
either
paragraph
20(1
)(1)
or
20(1
)(p)
the
amount
or
the
debt
must
be
owing.
Since
the
amount
is
deemed
to
be
a
dividend,
it
is
also
deemed
to
have
been
received.
Analysis
Issue
I
It
is
of
primary
importance
in
determining
this
issue
to
remember
what
originally
took
place.
Herein
both
appellants
in
essence
disposed
of
all
their
shares
(a
capital
asset)
in
Serin
U.S.
for
their
proportioned
share
of
the
total
assets
of
Serin
U.S.
This
can
only
be
described
as
a
capital
transaction.
Before
the
event
both
appellants
held
capital
assets,
namely,
the
Serin
U.S.
shares.
Each
appellant
disposed
of
these
shares
and
in
return
what
each
received
was
capital.
Section
93
of
the
Act
under
the
heading
"Election
re
disposition
of
share
in
foreign
affiliate"
provides
that
a
corporation
may
elect
to
designate
an
amount
of
the
proceeds
of
disposition,
that
the
amount
is
a
deemed
dividend.
The
operative
portion
of
this
section
reads:
93(1)
For
the
purpose
of
this
Act,
where
a
corporation
resident
in
Canada
so
elects,
in
prescribed
manner
and
within
the
prescribed
time,
in
respect
of
any
share
of
the
capital
stock
of
a
foreign
affiliate
of
the
corporation
disposed
of
by
it
or
by
another
foreign
affiliate
of
the
corporation,
(a)
the
amount
(in
this
subsection
referred
to
as
the
"elected
amount")
designated
by
the
corporation
in
its
election
not
exceeding
the
proceeds
of
disposition
of
the
share
shall
be
deemed
to
have
been
a
dividend
received
on
the
share
from
the
affiliate
by
the
disposing
corporation
or
disposing
affiliate,
as
the
case
may
be,
immediately
before
the
disposition
and
not
to
have
been
proceeds
of
disposition;
and
This
provision
does
not
change
the
character
of
what
was
received.
Subsection
12(1)
of
the
Act
under
the
general
heading
’’Inclusions"
reads:
12(1)
There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
a
business
or
property
such
of
the
following
amounts
as
are
applicable:
[Emphasis
added.
I
Paragraph
12(
1
)(k)
therein
reads:
(k)
any
amount
required
by
subdivision
i
to
be
included
in
computing
the
taxpayer’s
income
for
the
year
in
respect
of
a
dividend
paid
by
a
corporation
not
resident
in
Canada
on
a
share
of
its
capital
stock
or
in
respect
of
a
share
owned
by
the
taxpayer
of
the
capital
stock
of
a
foreign
affiliate
of
the
taxpayer;
This
provision
in
essence
says
you
treat
the
capital
received
(i.e.,
the
dividend)
"as"
income,
but
it
does
not
make
it
income.
The
operative
words
being
“as
income"
this
does
not
make
a
capital
property
such
as
a
car
given
as
an
employee
bonus
into
income,
the
value
of
the
car
is
treated
"as
income",
the
same
as
the
promissory
notes
herein.
Section
113
excludes
this
amount
from
taxable
income.
Paragraphs
20(1
)(n)
and
20(1
)(p)
deal
with
debts
that
were
in
fact
income
arising
out
of
a
taxpayer’s
business
not
capital
that
is
included
"as
income"
pursuant
to
paragraph
12(1
)(k)
of
the
Act.
There
is
a
specific
section
in
the
Act
that
deals
with
capital
debts,
namely,
subsection
50(1).
If
I
accepted
the
appellants’
position
there
would
be
no
need
for
subsection
50(1).
Issue
II
Serin’s
position
At
the
time
Serin
advanced
the
$42,914
to
Strand,
it
owed
Serin
and
Terrador
$900,785
on
two
promissory
notes,
both
of
which
bore
interest
at
the
rate
of
10
per
cent
per
annum,
it
being
agreed
in
paragraph
12
of
the
agreed
statement
of
facts
that
"the
advance
was
made
in
order
to
protect
Serin’s
interest
in
and
increase
of
probability
of
repayment
of
amount
Owing
under
the
promissory
note
between
Serin
and
Strand".
Since
the
promissory
notes
bore
interest
of
10
per
cent
per
annum,
the
notes
were
income
producing
assets
and
that
since
the
outlay
was
made
for
the
purpose
of
attempting
to
shore
up
the
continued
viability
of
a
source
of
income
that
the
outlay
is
properly
deductible
and
is
not
prohibited
by
paragraph
18(1)(b).
Respondent’s
position
The
respondent
submits
that
since
there
is
no
suggestion
that
Serin
was
trading
in
notes,
the
notes
were
a
capital
asset
and
the
sum
of
money
that
was
advanced
to
Strand
U.S.
is
an
attempt
to
protect
the
existence
of
the
capital
asset.
Issue
III
Analysis
Serin
in
support
of
its
position
on
this
issue
referred
me
to
four
cases,
namely:
The
Queen
v.
Jones
(F.H.)
Tobacco
Sales
Co.
Ltd.,
[1973]
C.T.C.
784,
73
D.T.C.
5577
(F.C.T.D.);
The
Queen
v.
Lavigueur,
[1973]
C.T.C.
773,
73
D.T.C.
5538
(F.C.T.D.);
Cline
Associates
London
Ltd.
v.
M.N.R.,
[1992]
2
C.T.C.
2581,
92
D.T.C.
2209
(T.C.C.);
Panda
Realty
Ltd.
v.
M.N.R.,
[1986]
1
C.T.C.
2417,
86
D.T.C.
1266
(T.C.C.).
The
respondent
in
support
of
his
position
on
the
issue
also
refers
me
to
four
cases,
namely:
Stewart
&
Morrison
Ltd.
v.
M.N.R.,
[1974]
S.C.R.
477,
[1972]
C.T.C.
73,
72
D.T.C.
6049
(S.C.C.);
Morflot
Freightliners
Ltd.
v.
Canada,
[1989]
1
C.T.C.
413,
89
D.T.C.
5182
(F.C.T.D.);
McLaws
v.
M.N.R.,
[1970]
C.T.C.
420,
70
D.T.C.
6289
(Ex.
Ct.);
Taylor
v.
M.N.R.,
[1978]
C.T.C.
258,
78
D.T.C.
6176
(F.C.A.).
The
single
thread
that
runs
through
all
four
of
the
cases
referred
to
me
by
the
appellant
deals
with
taxpayers
that
made
loans
to
protect
their
existing
business.
Jones
Tobacco
was
in
the
business
of
selling
tobacco,
Lavigueur
was
in
the
business
of
renting
space
and
buildings.
In
Cline
the
Court
found
that
there
was
a
legitimate
relationship
between
the
amount
loaned
and
the
profit
making
structure
of
Cline.
In
Panda
the
Court
concluded
the
moneys
spent
were
used
to
preserve
an
ongoing
source
of
rental
income.
Panda
was
in
the
rental
business.
The
first
three
cases
referred
to
me
by
the
respondent
all
deal
with
loans
made
by
a
parent
corporation
to
a
subsidiary
corporate
and
offer
no
real
help.
LeDain
J.A.
of
the
Federal
Court
of
Appeal
in
Taylor,
notes
at
page
C.T.C.
258,
D.T.C.
6179
that:
"The
loans
made
by
the
partnership
did
not
have
as
their
‘principal
object’
the
accommodation
of
persons
in
return
for
income
in
the
form
of
interest;
they
were
merely
a
device
for
the
financing
of
projects
through
which
profit
was
to
be
made
by
other
means".
[Quotations
marks
added.]
Herein
Serin
loaned
Strand
$42,914
to
protect
its
interest
in
notes
that
were
providing
an
income
stream
of
approximately
$90,000
a
year,
the
appellant
was
not
in
the
business
of
lending
money.
The
notes
did
not
arise
from
a
business
carried
on
by
Serin.
It
can
be
equally
said
that
the
loan
of
$42,914
was
made
to
pay
and
protect
the
principal
assets,
namely,
the
notes
as
well
as
to
protect
the
income
stream.
The
agreed
statement
of
facts
herein
reads:
12.
Serin
advanced
a
further
$42,914
to
Strand
Properties
(U.S.)
Inc.
(’’Strand”)
in
order
to
protect
its
interest
in
and
increase
the
probability
of
repayment
of
amounts
owing
under
the
promissory
notes
between
Serin
and
Strand.
Serin’s
interest
in
the
notes
was
both
the
principal
therein
and
the
income
stream
thereon.
It
is
impossible
to
conclude
that
payment
was
for
the
principal
object
of
the
protection
of
the
capital
asset
or
for
the
principal
object
of
the
protection
of
the
income
stream.
It
was
obviously
made
for
both
purposes.
Since
LeDain
J.A.
in
the
Chaffey
decision
used
the
wording
"principal
object",
I
conclude
that
I
must
determine
the
principal
object
for
the
making
of
the
loan.
Since
I
cannot
conclude
from
the
evidence
before
me
that
the
principal
object
of
the
loan
was
to
protect
a
stream
of
income
and
since
the
Minister,
having
assessed
on
the
basis
that
the
loan
was
on
capital
account,
the
appeals
on
this
issue
also
fail.
The
appeals
of
Terrador
Investments
Ltd.
are
dismissed.
On
consent,
the
appeals
of
Serin
Holdings
Ltd.
are
allowed
and
the
assessments
are
referred
back
to
the
Minister
for
reconsideration
and
reassessments
on
the
basis
that
Serin
Holdings
Ltd.
is
entitled
to
an
additional
deduction
for
automobile
expenses
of
$3,000
in
taxation
year
1987
and
$3,050
in
taxation
year
1988.
Serin
Holdings
Ltd.
is
entitled
to
no
further
relief.
Costs
awarded
on
a
party-and-party
basis
to
the
respondent
with
only
one
set
of
costs
for
the
trial
and
preparation
thereof.
Appeals
dismissed.
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