D
E
Taylor:—This
is
an
appeal
heard
in
Regina,
Saskatchewan,
on
October
6,
1982
against
an
income
tax
assessment
in
which
the
Minister
of
National
Revenue
disallowed
as
a
deduction
from
income
the
amount
of
a
reserve
for
doubtful
accounts
charged
by
the
taxpayer
for
the
1977
taxation
year.
The
respondent
relied,
inter
alia,
upon
sections
3,
9
and
paragraph
20(1
)(l)
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended.
The
ap-
peal
is
somewhat
complex
and
unusual,
and
described
best
by
quoting
directly
from
the
notice
of
appeal,
and
the
reply
to
notice
of
appeal.
For
the
appellant:
1.
On
January
28,
1976,
G
I
Norbraten
Architect
Limited
(“Norbraten”)
invoiced
Redco
Holdings
Ltd
(“Redco”)
$1,323.30
for
a
feasibility
study
of
the
proposed
renovation
to
the
said
Donahue
Block
(1776
Lome
Street)
in
Regina,
owned
by
Redco.
2.
On
February
16,
1976,
Norbraten
entered
into
an
agreement
with
Redco
to
provide
architectural
services
in
connection
with
renovation
to
the
Donahue
Block.
3.
The
agreement
provided,
inter
alia,
as
follows:
(a)
Fees
of
11%
of
the
cost
of
the
work;
(b)
Fees
to
become
payable
30
days
or
one
month
after
the
date
of
substantial
completion
as
established
by
the
architect’s
certificate;
(c)
Payment
to
be
made
in
regular
and
agreed
upon
monthly
instalments
of
1,000.00
with
interest
at
12%
per
annum,
beginning
one
month
after
the
date
of
substantial
completion;
(d)
The
entire
balance
to
become
due
and
payable
if
default
is
made
on
two
or
more
consecutive
payments.
4.
G
1
Norbraten
Architect
Limited
has
reported
income
for
accounting
and
tax
purposes
on
a
fees
rendered
basis.
5.
On
March
5,
1977,
G
I
Norbraten
Architect
Limited
rendered
an
account
to
Redco
Holdings
Ltd,
which
statement
of
fees
reads
in
part:
Total
fee
11%
of
the
cost
of
the
work
=
100
$87,353.00
6.
Subsequently,
additional
renovation
costs
were
incurred
on
which
Redco
Holdings
Ltd
incurred
a
liability
to
G
I
Norbraten
Architect
Limited
of
$22,786.63
(11%
of
$207,153)
under
the
terms
of
the
February
16,
1976
contract.
G
I
Norbraten
Architect
Limited
did
not
invoice
the
account
as
it
was
not
aware
what
costs
had
been
incurred
because
it
was
not
involved
with
the
expenditure
in
any
way
and
was
not
advised
of
it
by
Redco
Holdings
Ltd.
7.
The
March
31,
1977
financial
statements
of
G
I
Norbraten
Architect
Limited
included
an
allowance
for
doubtful
collection
in
the
amount
of
$73,601
related
to
the
Redco
Holdings
Ltd
receivable.
8.
In
accordance
with
generally
accepted
accounting
principles
and
auditing
standards
as
promulgated
by
the
Canadian
Institute
of
Chartered
Accountants
the
March
31,
1977
financial
statements
of
G
l
Norbraten
Architect
Limited
reflect
the
best
judgement
of
the
management
and
the
auditors
as
to
the
collectibility
of
the
accounts
as
at
March
31,
1977,
taking
into
account
all
relevant
information
to
the
date
the
financial
statements
were
finalized,
which
was
June
21,
1977.
The
information
available
to
that
date
included
the
following
facts:
(a)
According
to
the
terms
of
the
agreement
with
Redco
Holdings
Ltd,
fees
were
to
be
paid
30
days
or
one
month
after
the
date
of
substantial
completion
as
established
by
the
architect’s
certificate.
The
architect’s
certificate
was
dated
February
4,
1977.
Accordingly,
Redco
Holdings
Ltd
was
in
default
of
payment
of
the
March
5,
1977
billing
by
more
than
100
days.
(b)
The
financial
statements
of
Redco
Holdings
Ltd
for
the
year
ended
December
31,
1976
showed
the
following:
(c)
The
estimated
cost
of
renovations
was
$500,000
per
the
December
31,
1976
financial
statements
of
Redco
Holdings
Ltd.
Cost
overrunds
known
to
G
I
Norbraten
Architect
Limited
as
early
as
March
5,
1977
amounted
to
nearly
$300,000.
This
information
alone
cast
serious
doubts
on
the
future
viability
of
the
Donahue
Block
as
a
rental
property,
but,
in
light
of
the
disastrous
liquidity
position
portrayed
by
the
December
31,
1976
financial
statements
of
Redco
Holdings
Ltd
and
the
default
on
payments
of
fees
for
an
extended
period
of
time,
it
established
a
compelling
argument
for
allowing
for
the
uncollectibility
of
the
architectural
fees.
|
Working
capital
drain
from
current
operations
|
$52,832
|
|
Working
capital
deficiency
|
$275,099
|
9.
Redco
Holdings
Ltd
has
since
had
insufficient
cash
flow
from
operations
to
repay
its
secured
creditors,
let
alone
G
I
Norbraten
Architect
Limited,
without
a
substantial
rent
increase
and/or
a
large
cash
infusion
by
shareholders:
|
Deficit
to
December
31,
1978
|
$
194,375
|
|
Less
non
cash
items:
|
|
|
Accumulated
depreciation
|
(137,277)
|
|
Accumulate
amortization
|
(4,349)
|
|
Accrued
interest
on
shareholder
loans
|
(28,928)
|
|
Accumulated
cash
flow
(deficit
from
operations
after
payment
|
|
|
of
December
31,
1978
accounts
payable
|
$
(23,821)
|
As
a
result
of
this
net
cash
outflow
from
operations
Redco
Holdings
Ltd
has
to
date
had
to
meet
rather
substantial
principal
repayments
on
loans
by
further
borrowings
from
other
sources.
10.
G
I
Norbraten
Architect
Limited
owns
16
shares
and
Mr
G
I
Norbraten,
principal
shareholder
of
G
I
Norbraten
Architect
Limited,
owns
1
share
of
105
issued
shares
of
Redco
Holdings
Ltd,
for
a
total
of
approximately
17%.
Since
the
company
of
Mr
Norbraten
would
indirectly
benefit
in
an
accounting
sense
to
the
extent
of
17%
of
the
unpaid
fees
through
their
holdings
in
Redco
Holdings
Ltd,
only
83%
of
$73,601
of
the
$88,676.30
of
fees
rendered
was
allowed
for.
However,
the
$15,075
not
allowed
for
was
not
in
any
way
considered
collectible
by
G
I
Norbraten
Architect
Limited
and,
accordingly,
should
not
have
been
included
in
taxable
income.
11.
G
I
Norbraten
Architect
Limited
is
reporting
the
interest
income
(12%)
on
the
unpaid
fees
on
a
cash
basis
for
income
tax
purposes
in
accordance
with
IT-
396.
Should
any
payments
be
forthcoming,
they
would
be
applied
first
to
interest
receivable
and
then
to
principal.
12.
Revenue
Canada
has
reassessed
the
company’s
1977
tax
return,
including
in
income
an
amount
of
$110,139.83
less
$16,398.60
which
had
previously
been
included
in
income.
The
net
adjustment
is
composed
of
a
disallowance
of
the
1977
allowance
of
$73,601.00
plus
an
unbilled
amount
of
$20,140.23
related
to
fees
on
additional
renovation
costs.
13.
An
allowance
for
doubtful
collection
is
justified
in
accordance
with
paragraph
20(1)(I)
of
the
Income
Tax
Act.
As
indicated
in
paragraph
22
of
IT-442:
“For
a
debt
to
be
included
in
a
reserve
for
doubtful
debts
it
is
sufficient
that
there
be
reasonable
doubt
about
the
collectibility
of
it”.
It
is
highly
improbable
that
any
can
or
will
be
made
because
of
the
substantial
and
growing
deficit
of
Redco
Holdings
Ltd.
14.
As
a
shareholder
and
tenant
of
Redco
Holdings
Ltd,
G
I
Norbraten
Architect
Limited
knew
of
the
financial
affairs
of
the
said
Redco
Holdings
Ltd
and,
therefore,
knew
that
the
costs
of
formal
legal
action
to
collect
the
debt
would
not
be
warranted
because
there
was
no
hope
of
collection.
15.
G
l
Norbraten
Architect
Limited
says
that
the
taxable
income
is
not
distorted
because
the
unbilled
fees,
because
the
effect
is
the
same
as
though
the
amount
had
been
billed
and
then
an
allowance
made
for
a
bad
debt.
16.
G
I
Norbraten
Architect
Limited
says
that
the
financial
statements
and
corporation
income
tax
return
for
the
1977
fiscal
year,
which
included
the
aforementioned
allowance
for
bad
debts
was
properly
drawn
up
with
regard
to
all
information
available
at
the
time
the
statements
were
completed,
and
further
says
that
subsequent
events
supported
the
statement
presentation
and,
therefore,
asks
that
the
appeal
from
the
minister’s
assessment
be
allowed.
For
the
respondent:
A
Statement
of
Facts
1.
He
admits
paragraphs
1,
2,
3,
4,
5,
6,
7,
11
and
12
of
the
Notice
of
Appeal
herein.
2.
He
specifically
denies
the
allegations
of
fact
contained
in
paragraphs
8,
9,
13,
14,
15
and
16
of
the
Notice
of
Appeal
herein.
3.
He
admits
paragraph
10
of
the
Notice
of
Appeal
to
the
extent
that
G
I
Nor-
braten
Architect
Limited
owns
16
shares
and
Mr
G
I
Norbraten,
principal
shareholder
of
G
I
Norbraten
Architect
Limited,
owns
1
share
of
105
issued
shares
of
Redco
Holdings
Ltd
for
a
total
of
approximately
17%,
but
he
does
not
otherwise
admit
the
said
paragraph.
4.
In
assessing
the
Appellant
in
the
manner
set
forth
in
paragraph
12
of
the
Notice
of
Appeal
herein
by
way
of
a
Notice
of
Reassessment
dated
September
4,
1980
by
disallowing
the
reserve
for
doubtful
accounts
claimed
by
the
Appellant,
the
Respondent
relied
on
the
following
assumptions
of
fact:
(a)
Redco
Holdings
Ltd
was
a
client
of
the
Appellant;
(b)
The
amounts
owing
the
Appellant
by
Redco
Holdings
Ltd
were
not
a
doubtful
debt
of
the
Appellant
in
his
1977
taxation
year;
(c)
The
amounts
owing
the
Appellant
by
Redco
Holdings
Ltd
for
which
the
Appellant
claimed
a
reserve
for
doubtful
accounts
were
not
uncollectable
by
the
Appellant;
(d)
Redco
Holdings
Ltd
had
assets
of
sufficient
value
to
pay
the
Appellant
the
amounts
owing
it.
Evidence
The
only
testimony
was
that
of
Gerald
Norbraten,
a
practising
professional
architect,
President
and
controlling
shareholder
of
the
appellant
company,
which
company
was
a
tenant
in
the
Donahue
Building
during
a
part
of
the
times
material.
Mr
Norbraten
was
also
a
shareholder
and
director
of
Redco,
and
at
times
its
treasurer.
The
critical
portion
of
Mr
Norbraten’s
direct
testimony,
in
my
view,
is:
Q
You
rendered
your
account
then,
may
we
assume
that
when
your
account
was
rendered,
that
it
would
have
been
sent,
either
delivered
or
mailed
on
or
about
that
day?
A
Yes.
Q
Were
there
any
discussions
between
you
and
Mr
Kurtz
on
behalf
of
Redco
in
respect
of
the
account?
A
Yes,
there
were
discussions
that
there
were
no
funds
available
to
pay
it.
Q
Has
that
account
been
paid
even
to
this
day?
A
No,
nothing
has
been
paid.
Q
Now,
you
eventually
made
the
decision
that
the
account
of
$73,000
—
some
odd
dollars
set
forth
in
the
Pleadings
would
be
written
off
as
a
bad
debt,
if
I
might
put
it
that
way,
and
what
other
information
did
you
have
at
your
disposal
at
that
time
on
which
you
made
that
decision?
A
I
had
access
to
the
financial
statements
of
Redco,
which
showed
that
Redco
was
in
dire
straits,
I
had
information
from
my
legal
adviser
and,
as
well,
I
was
in
discussion
with
my
auditors.
Q
Your
discussions
with
your
legal
adviser
would
relate
to
what?
A
Trying
to
obtain
payment
of
this
account.
Q
What
information,
or
what
did
you
have
that
you
would
have
to
try
and
get
payment?
A
It
was
advised
that
I
would
have
to
sue
if
I
was
to
attempt
to
get
payment
for
my
account.
Q
Did
you
attempt
to
sue?
A
I
did
not.
Q
Why
did
you
make
that
determination?
A
On
the
advice
of
my
legal
adviser,
it
was
suggested,
and
I
quote,
“You
can't
get
blood
out
of
a
stone”.
Q
You
took
that
to
mean
what?
A
That
if
I
was
to
sue
Redco,
who
had
no
money,
there
was
no
opportunity
for
me
to
get
any
money,
and
I
would
just
incur
additional
legal
expenses.
Q
You
have
also
told
us
that
you
had
certain
information
from
the
auditors?
A
Yes,
my
auditors
advised
that
if
I
was
to
take
this
amount
into
my
earnings
and
list
it
on
my
financial
statement
or
on
the
audit,
they
would
not
sign
the
audit
because
of
the
fact
I
would
be
perpetrating
a
fraud.
And
under
cross-examination:
Q
Why
would
you
not
come
to
some
form
of
arrangement
with
Redco
to
offset,
in
effect,
the
amounts
that
they
owed
you
with
the
rental
you
paid
them?
A
I
was
a
minority
shareholder
in
that
building,
and
still
am.
Q
Was
it
suggested
to
them?
A
I
asked
the
question,
but
I
am
a
minority
shareholder
and
therefore
the
decision
is
not
mine.
Q
That
might
be,
but
you
asked
them
whether
they
were
prepared
to
do
that,
and
you
were
told
no
they
would
not?
A
That’s
correct.
Q
Did
you
ever
think
of
just
not
paying
the
rent?
A
The
thought
crossed
my
mind.
Q
Why
didn’t
you?
A
Because
I
didn't
want
the
building
to
fall
on
its
face,
I
was
trying
to
participate
in
the
building.
Q
You
were
trying
to
participate
in
keeping
the
building
alive?
A
That's
right.
Q
Really,
would
you
not
agree
with
me
that
you
took
no
real
legal
action
or
pressed
the
point
with
the
rent?
A
No,
the
reason
was
expressed
earlier
that
there
was
no
advantage
in
me
extending
more
money
when
I
would
get
no
money
in
return.
Q
This
is
despite
the
fact
that
you
continued
to
work
on
the
building?
A
That’s
right,
and
I
am
working
to
this
date
on
renovations
to
keep
the
building
viable.
Q
Would
you
agree
with
me
that
really
the
problem
that
Redco
had
and
why
it
did
have
its
problem
to
a
certain
extent
was
due
to
the
lack
of
working
capital
it
really
started
out
with?
A
I
can’t
answer
that.
Q
Did
you
issue
the
substantial
completion
certificate
on
March
5th,
1977?
A
It
would
have
been
dated,
I
believe,
February
4th.
Q
Yet
at
that
time
you
still
had
two
floors
to
go?
A
That
was
the
contract
that
was
in
place,
it
was
for
Dusel’s
Construction
for
the
mechanical,
electrical
and
sprinkler
contract.
Q
For
three
floors?
A
For
three
floors.
Q
So
the
total
building
was
not
anywhere
substantially
complete
but
the
first
three
floors
were?
A
The
only
contract
that
I
was
involved
in,
the
only
contract
that
was
in
place
was
for
those
three
floors.
Q
At
that
time?
A
At
that
time.
Q
After
that,
basically
you
embarked
on
a
new
sort
of
arrangement
with
Redco?
A
That’s
right.
Mr
Norbraten
tendered
for
the
Board’s
consideration
the
relevant
agreement
for
the
services
of
the
appellant,
dated
February
16,
1976.
The
terms
of
payment
critical
to
this
matter
are
contained
in
Articles
VIII
and
IX.
Article
VIII
The
following
additional
terms
are
added
and
shall
become
part
of
this
Agreement:
It
is
agreed
that
Article
VI,
Payment
to
Architect
shall
be
amended
as
follows:
It
is
agreed
that
1.
Payment
of
the
Architect’s
fee
shall
not
become
due
until
30
days
or
one
month
after
the
date
of
substantial
completion
as
established
by
the
Architects’
certificate.
2.
Payment
shall
be
made
commencing
one
month
after
the
date
of
substantial
completion
in
regular
and
agreed
upon
monthly
installments
of
approximately
$1,000.00
with
interest
at
the
rate
of
12%
per
annum.
3.
Should
the
client
be
in
default
of
more
than
two
(2)
consecutive
payments,
the
balance
owing
shall
immediately
come
due
and
payable.
Article
IX:
Arbitration
(a)
All
matters
in
dispute
under
this
Agreement
shall
be
submitted
to
arbitration
at
the
instance
of
either
party.
(b)
No
one
shall
be
nominated
or
act
as
arbitrator
who
is
in
any
way
financially
interested
in
the
conduct
of
the
work
or
in
the
business
affairs
of
either
party.
(c)
The
laws
of
the
Province
of
Saskatchewan
shall
govern
the
arbitration.
(d)
The
award
of
the
arbitrator
or
arbitrators
shall
be
final
and
binding
upon
the
parties
and
this
covenant
to
submit
to
arbitration
is
to
be
construed
as
an
integral
part
of
this
Agreement
between
the
parties.
A
copy
of
the
appellant’s
account
to
Redco
dated
March
5,
1977
was
also
tendered.
Argument
For
the
appellant:
This
taxpayer
has
said
to
you
that,
with
the
information
he
had
and
with
all
of
the
information
that
was
at
his
disposal,
that
he
concluded
he
would
have
perpetrated
a
fraud
on
his
creditors,
and
respective
clients,
had
he
dealt
with
this
doubtful
account
in
any
other
way,
and
I
suppose
that
is
a
sensible
way
to
look
at
it.
In
my
submission,
a
taxpayer
does
not
have
to
expend
money
to
pay
a
lawyer
to
do
something
for
which
he
is
not
going
to
gain
and,
on
top
of
that,
the
debt
was
not
denied,
it
was
just
that
there
was
no
payment,
no
funds
from
which
payments
could
be
made.
It
seems
to
me
it
is
strictly
a
question
of
whether
or
not
we
have
satisfied
you
that
the
steps
taken
with
the
knowledge
that
this
taxpayer
had
that
the
financial
statement
was
set
up
in
a
reasonable
way.
For
the
respondent:
We
say
two
things,
first
of
all
we
say
really
the
account
as
a
whole
was
not
owing
as
of
1977
financial
year,
ie
March
31st,
1977,
because
effectively
all
that
was
owing
at
that
date
was
$2,000
pursuant
to
the
contract.
The
account
had
been
rendered
and
what
had
been
rendered
and
what
was
obligated
was
$1,000
per
month.
The
total
amount,
in
other
words
the
full
$73,000,
was
not
payable
by
Redco
to
Norbraten
until
two
months
of
consecutive
default
—
in
effect,
once
the
account
was
rendered.
The
account
was
rendered
March
5th,
(and
on)
March
31st
we
have
the
situation
where
the
financial
year
end
is
in
place.
What
to
do
to
Norbraten
at
that
time.
In
effect,
on
March
31st
they
were
not
even
entitled
to
the
first
thousand
dollars.
Before
you
can
start
setting
up
a
reserve
for
doubtful
accounts,
you
have
to
be
in
a
position
where
you
are
entitled
to
it.
And
at
that
stage,
mind
you
it
is
a
very
technical
point
and
I
would
be
the
first
to
say
that,
but
the
law
on
income
tax
is
filled
with
technicalities,
and
we
are
saying
he
has
got
the
wrong
year
if
he
is
right
in
being
entitled
to
a
reserve
of
doubtful
accounts
in
the
first
place.
The
next
position
we
would
take
is
this,
we
say
look
on
the
facts
and
the
circumstances
before
you
—
really,
it
was
never
a
doubt
(1)
it
is
not
a
reasonable
reserve
in
terms
of
the
total
amount
and,
second
of
all,
it
is
not
a
doubtful
account.
One
of
the
factors,
I
will
go
through
a
series
of
factors
and
I
don’t
think
I
really
have
to
go
through
the
cases,
obviously
from
your
comments
you
have
gone
through
a
pile
yourself.
It
is
really
—
look,
at
the
time
the
taxpayer
entered
into
this
management
contract
with
Redco,
he
was
aware
of
the
situation
involving
Redco,
really
what
they
had
was
a
lack
of
working
capital,
they
bought
a
building
and
they
were
going
to
renovate
that
building.
Through
all
this
carrying
on
the
work
because
of
his
close
relationship
in
Redco
and
his
work
with
the
Appellant,
the
taxpayer
Nor-
braten,
he
was,
we
would
submit,
fully
aware
of
the
situation
all
the
way
through.
All
the
way
through,
he
continued
to
do
his
work.
He
was
not
concerned,
I
submit,
when
he
rendered
the
account
because
when
you
look
at
intent,
and
really
that
is
what
this
taxpayer
is
saying,
look,
when
I
rendered
the
account
I
didn't
think
I
was
going
to
collect
it.
I
think
there
are
an
abundance
of
cases
to
say
the
intent
that
is
expressed
today
is
one
factor,
intent
that
you
infer
from
circumstances
in
the
past
is
a
different
one.
.
.
.
we
have
assumed
it
in
the
Reply
that
the
asset
itself
would
have
been
sufficient
to
cover
the
particular
outstanding
amount,
and
the
onus
again
is
on
my
friend
to
rebut
that
particular
proposition.
.
.
.
nothing
became
due
until
such
time
as
the
account
was
rendered,
and
then
you
have
to
look
at
the
contract
as
to
what
is
due
and
how
it
is
to
be
paid.
If
you
look
to
the
contract
effectively
nothing
is
to
be
paid,
it
is
$1,000
a
month,
and
the
full
amount
is
not
due
and
payable
until
there
are
two
consecutive
defaults.
Findings
It
seems
to
me
that
several
points
are
raised
by
this
appeal
and
these
should
be
dealt
with
in
a
chronological
order.
First,
should
the
amount
at
issue
have
been
included
in
income
by
the
taxpayer?
The
answer
to
that
is
found
in
the
learned
judge’s
comments
on
the
Co/ford*
judgment
to
be
found
at
5320
of
Wilchar
Construction
Limited
v
The
Queen,
[1981]
CTC
415;
81
DTC
5318.
“For
the
taxation
year
1953,
the
taxpayer
did
not
report
progress
payments
of
$80,000
actually
received
or
holdbacks
of
$67,000
not
yet
received
relating
to
three
contracts
not
completed,
a
large
one
in
Ontario
and
two
smaller
ones
in
Quebec.
The
Court
decided
firstly
that
the
payments
of
$80,000
actually
received
in
1953
were
properly
taxable
in
1953
under
the
Income
Tax
Act.
It
decided
further
that
in
the
case
of
that
portion
of
the
holdbacks
where
architect’s
or
engineer’s
certificates
had
been
received
in
the
taxation
year
1953,
that
portion
was
properly
taxable
in
1953
as
“amounts
receivable”
in
1953
within
the
meaning
of
subsection
85B(1)(b)
of
the
Income
Tax
Act,
RSC
1952,
c
1487
notwithstanding
that
they
were
not
payable
in
that
taxation
year
under
the
terms
of
the
contract.
However,
in
the
case
of
the
remaining
portion
of
the
holdback
where
the
engineer
or
architect’s
certificate
did
not
issue
until
subsequent
years,
the
Court
held
that
this
portion
was
not
an
“amount
receivable”
within
said
subsection
85B(1)(b),
supra."
In
the
instant
case,
it
was
established
at
the
hearing
that
the
account
in
question
was
billed
to
Redco
after
the
relevant
certificate
of
final
completion
had
been
issued
by
Norbraten.
Second,
it
should
be
noted
that
the
claim
by
the
appellant
is
for
a
reserve
for
a
doubtful
account
under
paragrah
20(1
)(l)
of
the
Act,
not
for
a
bad
debt
under
paragraph
20(1
)(p)
of
the
Act.
In
my
view,
the
comments
of
the
Board
in
Highfield
Corporation
Ltd
v
MNR,
[1982]
CTC
2812;
82
DTC
1835,
are
consistent
with
those
found
in
Picadilly
Hotels
Ltd
v
The
Queen
[1978]
CTC
658;
78
DTC
6444,
with
regard
to
the
distinctions
to
be
made
between
these
two
situations.
Further,
I
would
emphasize
the
point
made
by
the
learned
judge
in
Picadilly
(supra)
at
662
and
6447
respectively:
Nor
was
there
any
evidence
that
Mr
Bernard,
in
his
business
judgment
in
1971,
considered
the
so-called
debt
as
uncollectable.
In
the
instant
case,
the
entire
matter
revolves
around
the
opinion
and
belief
of
Mr
Norbraten
that
the
account
would
not
and
could
not
be
collected.
I
am
all
too
aware
of
the
arguments
raised
by
counsel
for
the
respondent
in
this
matter,
which
would
indicate
a
very
nonchalant
and
unbusinesslike
approach
to
the
possibility
of
collection
by
this
appellant.
Nevertheless
I
am
not
aware
of
any
requirements
under
the
Act
or
in
relevant
jurisprudence
making
it
mandatory
that
a
taxpayer
make
every
attempt,
in
fact
any
attempt,
to
collect
a
receivable
or
obtain
security
for
the
debt
before
he
is
entitled
to
avail
himself
of
the
provisions
in
the
Act
permitting
its
deductibility
as
a
doubtful
debt-providing
he
is
able
to
substantiate
his
conclusion
regarding
its
worth
or
rather
lack
of
it.
The
provisions
of
paragraph
12(1
)(i)
of
the
At
require
the
inclusion
of
a
subsequent
collection
of
a
bad
debt
in
income
when
and
if
it
occurs.
Finally,
what
about
the
amount
at
issue?
The
appellant’s
method
of
calculating
the
amount
of
the
reserve
is
at
least
unusual.
Whether
that
calculation
is
proper,
the
Board
need
not
determine
under
the
circumstances
of
this
case
—
that
is
not
the
point
to
be
considered
at
this
time.
The
issue
is
that
raised
by
counsel
for
the
respondent
—
that
even
if
the
appellant
is
legally
entitled
to
use
paragraph
20(1
)(l)
of
the
Act
to
set
up
a
reserve
(and
I
have
above
determined
that
this
is
the
case),
there
is
mathematically
nothing
available
to
him
to
set
up
as
a
reserve
because
Norbraten
could
not
have
been
certain
by
the
end
of
the
fiscal
year
(March
31,
1977)
that
the
amount
would
not
be
paid.
According
to
counsel
for
the
Minister,
considering
the
payment
period
available
to
the
debtor
company,
the
amount
could
not
even
be
considered
overdue
by
that
date.
While
I
might
find
merit
(1
do
not
say
I
would)
in
that
argument
if
the
point
at
issue
arose
out
of
paragraph
20(1
)(p)
of
the
Act
as
a
“bad
debt”,
I
do
not
agree
with
it
with
reference
to
a
“doubtful
account”.
It
is
perfectly
conceivable
to
me
that
due
to
his
close
affinity
with
the
project
and
the
debtor,
that
Mr
Norbraten
would
be
aware
of
the
financial
difficulty
he
suggests
existed
in
Redco
long
before
the
first
payment
on
the
account
was
due
according
to
the
contract.
Even
the
fiscal
year
end
would
not
be
critical
in
my
view,
since
the
total
information
available
to
the
accountants
at
the
date
of
making
up
the
financial
statements
would
be
equally
or
more
important.
Mr
Norbraten
contended
that
he
probably
would
not
collect
the
first
year’s
instalment
on
the
appellant’s
account
and
following
the
same
logic,
I
am
not
aware
of
any
bar
to
him
from
also
concluding
that
the
entire
account
was
at
risk
—
and
that
a
full
reserve
was
warranted.
Reference
here
should
be
made
to
The
Queen
v
Timagami
Financial
Services
Limited,
[1982]
CTC
314;
82
DTC
6268.
While
counsel
for
the
respondent
appeared
to
see
in
that
case
support
for
the
view
that
charging
the
total
amount
was
not
proper,
I
fail
to
see
it
the
same
way.
The
point
at
issue
in
Timagami
(supra)
was
whether
the
amount
there
should
be
included
in
the
appellant’s
income
since
it
was
not
receivable
until
subsequent
years.
The
point
in
this
appeal
is
not
whether
the
amount
must
be
included
in
the
appellant’s
income
—
that
is
mandatory
—
but
whether
if,
after
such
inclusion,
a
reserve
is
proper.
I
hold
that
such
a
reserve
is
proper
and
that,
under
the
circumstances
of
this
case
as
described
by
Mr
Norbraten,
a
reserve
against
the
total
amount
is
proper.
It
may
well
be
that
the
non-arm’s
length
nature
of
the
basic
transactions
at
issue
in
this
appeal
(the
pervasive
presence
of
Mr
Norbraten
in
many
interrelated
roles
is
thoroughly
evident)
might
lead
the
Minister
to
conclude
that
in
some
way
either
Mr
Norbraten
personally
or
the
appellant
company
which
he
controls
would
benefit
from
this
deduction
of
the
doubtful
account
and/or
its
eventual
write-off
as
a
bad
debt.
Even
if
such
a
benefit
were
possible,
that
is
not
the
problem
before
the
Board
in
this
matter
and
if
that
is
the
Minister’s
objection,
then
it
would
require
a
different
assessment
approach.
It
might
also
be
argued
that
the
appellant
did
not
qualify
under
paragraph
12(1
)(b)
of
the
Act
to
include
the
amount
at
issue
in
income
in
the
first
place
—
because
the
appellant
was
aware
the
“account”
was
not
“receivable”
at
all.
Counsel
for
the
Minister
made
oblique
but
unconvincing
reference
to
this
possibility
but
it
remains
in
my
mind
as
an
intriguing
and
interesting
perspective.
Conclusion
On
the
basis
of
the
evidence
and
testimony,
the
appellant
is
entitled
to
the
deduction
claimed.
The
appeal
is
allowed
and
the
matter
referred
back
to
the
respondent
for
reconsideration
and
reassessment
accordingly.
Appeal
allowed.
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