Granby Construction & Equipment Ltd. v. Minister of National Revenue, [1989] 2 CTC 2239, 89 DTC 456

Lamarre Proulx, T.C.J.:—This is an appeal from reassessments of income tax for the appellant's 1981 and 1982 taxation years.

The question in issue is whether the appellant was right in establishing that debts owed to it by Amix Salvage & Sales Ltd. (Amix) in the amount of $75,584.63 and $50,000 had become bad debts, pursuant to subsection 50(1) of the Income Tax Act.

At the outset of the hearing Counsel for the appellant said that the appellant was no longer claiming a deduction in the amount of $22,500 as shown in the notice of appeal. He also requested the Court to include in the Court's judgment that the appellant was entitled to carry-back losses in the amount of $63,000. Counsel for the respondent agreed with this request.

The respondent assumed the following facts: the appellant did not attempt collection of the amounts from Amix; the appellant continued to lend Amix further moneys; Amix continued to operate as a going concern and made payments on account of principal on some debts and that the amounts of $50,000 in 1982 and $75,584.63 in 1981 were not bad debts within the meaning of subsection 50(1).

Both parties agreed that, in the event that the Court found the appellant did properly establish that the said amounts were bad debts pursuant to subsection 50(1) of the Act, paragraph 39(1)(c) would apply.

Mr. Raymond McLean testified for the appellant. He is an accountant by profession. He and a Mr. Tucker were shareholders of the appellant and have managed it since 1958. Mr. McLean looked after the financial administration of the business, Mr. Tucker, after the operations.

The appellant in order to provide financial assistance to a related company, purchased certain assets from Amix, a corporation dealing in scrap metal. These assets consisted of 40 per cent of the issued shares of Amix and debts owing to the related company. The debts were for goods and services provided by the related company. The fair market value of the assets acquired is not in question. Mr. McLean was a secretary and director of Amix. He was not a shareholder of Amix. Both parties agreed that the appellant and Amix were dealing at arm's length.

Owing to the strict and demanding financing requirements of the banks, a sharp decrease in the price obtained for scrap metal and a sharp increase in the interest rates, the appellant came to the conclusion that Amix was in a severe cash bind and could not repay for the years in question its debts of $75,000 and $50,000. The banks had asked the appellant for additional security in relation to debts owed by Amix to them. There was no possibility of a financial improvement in the foreseeable future. The witness testified to the effect that if he had insisted on the appellant being repaid it would have meant the bankruptcy of Amix. In his view, he was only being realistic.

Cases to which I was referred to are the following: No. 415 v. M.N.R. (1957), 17 Tax A.B.C. 110; 57 D.T.C. 226, Geoffrey Hogan v. M.N.R. (1956), 15 Tax A.B.C. 1; 56 D.T.C. 183, Associated Investors of Canada Limited v. M.N.R., [1967] 2 Ex. C.R. 96; 67 C.T.C. 138, Picadilly Hotels Ltd. v. The Queen, [1978] C.T.C. 658; 78 D.T.C. 6444, Thomas Fritz v. M.N.R., [1985] 2 C.T.C. 2185; 85 D.T.C. 507, Browning Harvey Limited and A. Harvey & Company Limited v. M.N.R., [1988] 1 C.T.C. 2209; 88 D.T.C. 1164, and Romualdo Berretti v. M.N.R., [1986] 2 C.T.C. 2293; 86 D.T.C. 1719.

In Hogan v. M.N.R., supra, at page 192, Mr. Fisher of the Tax Appeal Board referred to the factors described in No. 81 v. M.N.R. (1953), 8 Tax A.B.C. 82; 53 D.T.C. 98, by the then Chairman of the Tax Review Board and says that they would equally be applicable to the determination of bad debts. They are:

Among the factors which may be taken into consideration by a taxpayer who claims a deduction "as a bad debt" would be: the time element, the history of the account; the financial position of the client, the past experience of the taxpayer with the writing off of his bad debts, the general business condition in the country in a case like in the present one where the taxpayer is doing business all over Canada, the business condition in the locality where the client lives, the increase or decrease in the total sales and accounts receivable at the end of the year for which the deduction is claimed, as compared with previous years.

Later on he went on to Say at page 193:

For the purposes of the Income Tax Act, therefore, a bad debt may be designated as the whole or a portion of a debt which the creditor, after having personally considered the relevant factors mentioned above in so far as they are applicable to each particular debt, honestly and reasonably determines to be uncollectible at the end of the fiscal year when the determination is required to be made, notwithstanding that subsequent events may transpire under which the debt, or any portion of it, may in fact be collected.

These words have been agreed upon and cited in most relevant cases and may apply to the case at bar as well. It appeared to me from the evidence that the appellant had acted on sound grounds, and to use my colleague Judge Sarchuk's words in the Berretti case, supra, page 2298 (D.T.C. 1723), the appellant had acted in a "pragmatic businesslike manner" when it determined the debts to be bad debts.

In each of the decisions cited by counsel there was evidence upon which the Court was satisfied that the taxpayer acted in a pragmatic businesslike manner.

There was no evidence brought forward by the respondent to contradict or call in question this evidence.

The witness who was the appellant’s financial manager, impressed me by his accuracy and his commonsense. He appeared to me to be a sincere and honest man. Reasonableness, honesty and truthfulness of the taxpayer have been elements that seem to have been the determining factors in all decisions in favour of the taxpayers.

I believe the witness when he says that in the years under appeal and in many years thereafter there was just no liquidity to repay the debts and that any attempt to collect these debts would have meant the bankruptcy of the debtor.

Where there is a serious and thorough consideration of the relevant factors and there is an honest and reasonable determination that a debt is uncollectible at the end of the fiscal year, this debt is a bad debt within the meaning of subsection 50(1) of the Income Tax Act. In my view the appellant's consideration and determination meet the test.

Therefore the appeal is allowed with costs on the basis that the amounts of 75,000 and $50,000 are bad debts and that the appellant has an available loss in the amount of $63,000 that could be carried back.

Appeal allowed.