Graham Gilhooly v. Minister of National Revenue, [1987] 1 CTC 2047, 87 DTC 4

Taylor, T.C.J.:—This is an appeal against an income tax assessment for the year 1983, heard in Ottawa, Ontario, on October 14, 1986, in which the Minister of National Revenue disallowed a deduction of $17,750 the appellant claimed for a "business investment loss".

Mr. Gilhooly is a sales analyst with the Federal Department of Transport in Ottawa, Ontario. He was a shareholder, officer and employee of a corporation, 429011 Ontario Ltd., which operated a hotel. In 1979 and 1980 the taxpayer had loaned a total of some $35,500 to that corporation, and he also held 50 shares of the issued capital stock of the company. On May 2, 1983, Mr. Gilhooly filed an assignment in bankruptcy. Later, he filed an income tax return for the period of January 1, 1983 to May 2, 1983 (to the date of bankruptcy), and also a further return for the period May 3, 1983 to December 31, 1983. In 1983, the mortgage holder with the corporation 429011 Ontario Ltd. had been operating the business, and finally the corporation was wound up and its charter surrendered on December 29, 1983. In the tax return for the period May 3, 1983 to December 31, 1983 Mr. Gilhooly claimed as an ‘‘allowable business investment loss", one half of the $35,500 noted above loaned to the corporation. Basically it was the assertion of the taxpayer that he should be allowed to claim this amount because it could not be said that the loan was uncollectible — a bad debt — until the corporation was dissolved. The Minister however contended the amount was a bad debt as at May 2, 1983 — the date of Mr. Gilhooly’s personal bankruptcy, and the loss (if to be claimed) applied to the period ended on that date, not to the subsequent period, as required under subparagraph 128(2)(f)(iii) of the Income Tax Act.

Subparagraph 128(2)(f)(iii) of the Act reads:

128(2) Where individual bankrupt. Where an individual has become a bankrupt, the following rules are applicable:

(f) notwithstanding paragraph (e), the individual shall file a separate return of his income for any taxation year during which he was a bankrupt, computed as if

(iii) in computing taxable income, the individual was not entitled to any deduction under section 111 with respect to any losses for a previous taxation year,

and the individual is liable to pay any tax payable under this Part by him in respect of such taxable income for the taxation year.

The issue therefore in this appeal, is whether it can be said the amount of $35,500 was a “bad debt” at the date of bankruptcy of Mr. Gilhooly.

Counsel for the Minister filed with the Court as Exhibit R-1, the "Statement of Affairs” of Mr. Gilhooly as at May 2, 1983, signed by him for the purpose of the assignment in bankruptcy. That statement showed his total declared assets to be an automobile worth an estimated value of $3,000. The attached statement of liabilities (Appendix "A”), showed:

The $3,000 "secured” liability above was the chattel mortgage on the automobile shown as an asset above; the $28,000 "preferred” liability was really a "contingent liability” in connection with his personal guarantee, (together with other shareholders) on a mortgage held by the Canadian Imperial Bank of Commerce on the hotel property of 429011 Ontario Ltd. There was no reference at all to either the loan to 429011 Ontario Ltd. (as an asset of the taxpayer) or to the 50 shares of capital stock in 429011 Ontario Ltd., although it was stated by Mr. Gilhooly that both he and the Trustee recognized at the date of bankruptcy that the 50 shares of stock had no value. However there was the following reference on another schedule, "Appendix B” attached to the statement of affairs:

10. Feb 80 — Sold house in Munster, Ontario. $33,000.00 net gain invested in 429011 Ontario Ltd. (Hotel Operation) since lost to mortgagees.

It was Mr. Gilhooly's testimony that this $33,000 was part of the $35,500 loan noted above.

Mr. Gilhooly indicated certain reliance on other sections of the Act, which in my view are of no value to him, and ultimately summarized the situation as:

I feel that the loss, the tax loss was not available at the time I filed for bankruptcy. It only became available when the corporation was dissolved. Up to that point money could have been put into that corporation to restore it to a viable operation or possibly earn money to repay its debts including that of the shareholders. I maintain that the question is the date of the loss. The loss was recognized. The corporation recognized it in October 1983 when they realized they had no money coming from their assets and there was no way it could earn funds to pay any debts after December 1983 when it received a dissolution order.

In answer to questions Mr. Gilhooly added:

At the time I filed the bankruptcy, the ownership of the hotel was fully discussed. The assets had been seized at this point in time. The Trustee felt there was nothing to be gained in the hotel. The hotel had not declared bankruptcy. The mortgagees were operating the hotel and they had the assets at that time. It wasn't until later that we even knew that they had sold the hotel. . . .

Counsel for the Minister related subparagraph 128(2)(f)(iii) of the Act for the circumstances of this case, back to paragraph 50(1 )(a) of the Act which reads:

Section 50. Debts established to be bad debts and shares of bankrupt corporation

(1) For the purposes of this subdivision, where

(a) a debt owing to a taxpayer at the end of a taxation year (other than a debt owing to him in respect of the disposition of personal-use property) is established by him to have become a bad debt in the year,

the taxpayer shall be deemed to have disposed of the debt or the share, as the case may be, at the end of the year and to have reacquired it immediately thereafter at a cost equal to nil.

It was counsel's view that the conduct of the taxpayer — declaring bankruptcy on May 2, 1983, and not declaring as an asset of the estate, the $35,500 loan in question, should be interpreted by the Court as sufficient to fulfil the terms of that section . is established by him to have become a bad debt in the year . . .”.

I agree with the Minister completely. Mr. Gilhooly’s statement of liabilities (above) contained a reference to a $28,000 “contingent liability”, which he was never called upon to make good. Obviously there existed for Mr. Gilhooly as an offsetting factor to that $28,000 some equity in some assets of the corporation — and no such contrasting “possible asset" was shown when he declared bankruptcy. On that basis, for purposes of this review, it would be perfectly proper to ignore the $28,000 “contingent liability", thereby reducing his listed liabilities to some $20,507. In the event he had attached to the $35,500 loan at issue in this appeal as at May 2, 1983, the same value he now wishes to attribute to it on the same date for purposes of the “loss" he is claiming, he would have shown some $38,500 in assets, and some $20,507 in liabilities — hardly an insolvent position, let alone one of bankruptcy. It might also be noted that if indeed the $35,500 was a viable asset as at May 2, 1983, (which must be the basis of Mr. Gilhooly’s current claim) then whatever value resides therein now should rest with the Trustee, and could be attachable by the Trustee, rather than by Mr. Gilhooly. That attachment by the Trustee might be extended to include any alleged “reduction in income tax", which would arise out of the deduction Mr. Gilhooly now claims. Finally I would note that the rationale upon which Mr. Gilhooly bases his contention that the $35,500 was a viable asset for him at May 2, 1983, while at the same time agreeing with the Trustee that the 50 shares of stock had no value at the same date, completely escapes me. The reference to the $33,000 on Appendix “B’’, (above) made to the Trustee on filing bankruptcy should give Mr. Gilhooly cause to consider the following comments made in the recent Tax Court judgment of Michael M. Walters v. M.N.R., [1986] 2 C.T.C. 2327; 86 D.T.C. 1740:

The governing principle of this doctrine* [1] was stated in Spencer Bower on Estoppel by representation and adopted by Sir Raymond Evershed, M.R. in Hopgood v. Brown, [1955] 1 All E.R. 550 (C..) thusly at 559:

. . . where one person ("The representor") has made a representation to another person (“the representee") in words or by acts or conduct, or (being under a duty to the representee to speak or act) by silence or inaction, with the intention (actual or presumptive), and with the result, of inducing the representee on the faith of such representation to alter his position to his detriment, the representor, in any litigation which may afterwards take place between him and the representee, is estopped, as against the representee, from making, or attempting to establish by evidence, any averment substantially at variance with his former representation, if the representee at the proper time, and in the proper manner objects thereto.

I would also make reference to the concise summary of the determination of “bad debts" to be found in another Tax Court judgment Romualdo Ber- retti v. M.N.R., [1986] 2 C.T.C. 2293; 86 D.T.C. 1719. I am unable to find any merit at all in Mr. Gilhooly’s appeal.

The appeal is dismissed.

Appeal dismissed.