Ludwig Bock v. Minister of National Revenue, [1982] CTC 2463

Roland St-Onge:—The appeal of Mr Ludwig Bock came before me on April 21, 1982, in the City of Montreal, Province of Quebec, and the issue is whether the appellant is allowed to claim certain capital cost allowance deductions in his 1974, 1975, 1976 and 1977 taxation years.

The facts of this appeal are well spelled out at paragraphs 3 to 11 of the reply to the notice of appeal which read as follows:

3. In computing his net income for his 1974 to 1977 taxation years, the Appellant claimed in deduction of his income capital cost allowance (class 8) in the following amounts;

1974 — $5,555

1975 — 4,739

1976 — 3,906

1977 — 5,071

4. By reassessment, notice of which was sent to the Appellant on June 15, 1979, the Respondent assessed tax in respect of the Appellant’s income for his 1974 taxation year. By reassessments, notice of which were sent to the Appellant on March 25, 1980, the respondent assessed tax in respect of the Appellant’s income for his 1975, 1976 and 1977 taxation years. In making the said reassessments, the Respondent disallowed in part the deduction of capital cost allowance (class 8) as claimed by the Appellant in the following amounts;

	Amounts	Amounts	Amounts
Year	Claimed	Allowed	Disallowed
1974	$5,555	$ 981	$4,574
1975	4,739	1,080	3,659
1976	3,906	979	2,927
1977	5,071	2,730	2,341

and determined the Appellant’s income in the following manner;

	1974	1975	1976	1977
	$	$	$	$
Toral income
previously assessed	27,636.00	35,874.00	40,112.00	39,096.00
Add
Personal portion of
automobile expenses	1,450.50	11,594.44	1,729.01	3,000.00
Taxable capital gain	—	1,323.50	1,323.50	1,324.00
CCA disallowed	4,574.00	3,659.00	2,927.00	2,341.00
Revised total income	33,660.50	42,450.94	46,091.51	45,761.00

5. By Notice of Objection dated August 30, 1979, the Appellant objected to the respondent’s reassessment of income for his 1974 taxation year. By Notice of Objection dated June 10, 1980, the Appellant objected to the Respondent’s reassessments of income for his 1975, 1976 and 1977 taxation years;

6. By Notification of Confirmation dated October 30, 1980, the Respondent confirmed the reassessments made with respect to the Appellant’s 1974, 1975, 1976 and 1977 taxation years;

7. In reassessing the Appellant for his 1974, 1975, 1976 and 1977 taxation years, the Respondent relied, inter alia, on the following assumptions of fact;

(a) During the taxation years under appeal the Appellant was a pharmacist by profession;

(b) On December 11, 1973, the Appellant purchased by way of bulk sale agreement from Mr Maurice Berke a pharmacy business under the firm name and style of Berke’s Pharmacy situation at 1101 Ste Catherine street West, in the City of Montreal:

(c) As part of the consideration in purchasing the said pharmacy, the Appellant assumed a debt owing by the said vendor Mr Maurice Berke to Mr Leo Berco- vitch in the amount of $37,216, the aforementioned having been attested to in an affidavit annexed to the said bulk-sale agreement as a schedule of accounts payable by the Appellant;

(d) On January 2, 1974, Mr Leo Bercovitch signed a waiver and renunciation in favour of the Appellant of his claim for the debt in the amount of $37,216 and forming part of the accounts payable by the Appellant upon the purchase of the pharmacy by way of bulk-sale agreement dated December 11, 1973;

(e) the debt owed by the Appellant to Mr Leo Bercovitch in the amount of $37,216 was of a trade or business nature and as such was assumed by the Appellant upon the purchase of the said pharmacy;

(f) The Respondent applied the amount of the debt as waived in favour of the Appellant to reduce the latter’s capital cost of class “8” assets as applied to his 1974 to 1977 taxation years;

B. Statutory Provisions Upon Which the Respondent Relies and the Reasons he Intends to Submit

8. The Respondent, the Minister of National Revenue, relies, inter alia, upon Sections 3, 18(1)(b), 20(1)(a), 80(1 )(b) and 248(1) of the Income Tax Act, SRC 1952, ch 148, as amended by the Income Tax Act, SC 1970-71-72, ch 63, s 1, and Section 1100, 5400 and 5401 of the Income Tax Regulations, as applicable to taxation years 1974, 1975, 1976 and 1977;

9. He submits that the principal amount of the debt in the amount of $37,216 was settled or extinguished in favour of the Appellant in his 1974 taxation year, and consequently, he was justified in applying the amount of the said debt to reduce the capital cost of depreciable property of class “8” owned by the Appellant, all in accordance with the provisions of Section 80(1 )(b) of the Income Tax Act and Sections 5400 and 5401 of the Income Tax Regulations;

10. He submits that the capital cost allowance deductions in the amounts of $981 in 1974, $1,080 in 1975, $979 in 1976 and $2,730 in 1977 have been properly determined and allowed as deduction from income of the Appellant for the said taxation years, in accordance with the provisions of Section 20(1)(a) of the Income Tax Act and Section 1100 of the Income Tax Regulations;

11. He submits that he was justified in disallowing in part the capital cost allowance claimed by the Appellant in deduction of his income for his 1974 to 1977 taxation years and consequently, has properly determined the appellant’s income as being in the amounts of $33,660.50 in 1974, $42,450.94 in 1975, $46,091.51 in 1976 and $45,761.00 in his 1977 taxation years;

At the hearing, two witnesses were heard: The seller, Mr Berke; and the appellant, Mr Bock.

Mr Berke explained that when he sold his pharmacy business to his brother-in-law, he listed all his debts, including that of $37,216 to his brother Berco, who lives in Mexico; and that all these debts were assumed by his brother-in-law Mr Bock. The debt to his brother was personal and had nothing to do with his business. When it was borrowed around 1957, he had many gambling debts. He never received any gifts from his brother Berco except $50 at his wedding, although his sisters and brothers received numerous ones. He does not remember having paid any interest on the loan to his brother.

Upon cross-examination, he admitted that at times he had many trade debts and low cash flow, but because he was a good account he was never pressed to pay and took advantage of lenient terms.

Exhibit A-1, which is the agreement between Mr Berke and Mr Bock, shows a list of Mr Berke’s personal loans, but the debt of $37,216 to his brother Berco does not figure as such.

Mr Bock testified that because his brother-in-law had financial problems they discussed a takeover of the pharmacy business and that his intention was to pay all the debts. Every Christmas he goes to visit his brother-in-law in Mexico and in 1974, Mr Berco told him to forget about the debt and to consider it as a gift. Then he filed a series of photocopies of cheques to substantiate numerous gifts of $10,000 by Mr Berco to his wife totalling some $92,000; and a letter signed by Mr Berco dated April 11, 1979, to the effect that on January 2, 1974, Mr Berco made a gift of $37,216 to the Appellant.

Mr Berco is divorced, has no children and for the past years has embarked upon a gifting programme to distribute part of his estate in advance of his death.

Upon cross-examination he admitted that the sale price includes all the debts that he had assumed as part of the sale price.

Counsel for the respondent filed a document signed by Mr Berco on January 2, 1974, to the effect that the latter renounced and abandoned any debt, any and all claims against Mr Bock resulting from the loan he made to Mr Berke in the amount of $37,216.

In answer the appellant said that this document was prepared by his lawyer and sent to his brother-in-law but that he never paid or made a cheque to Mr Berco for this amount.

Counsel for the appellant argued that because Mr Berke contracted the debt and not Mr Bock, section 80 of the Income Tax Act, SC 1970-71-72, c 63, as amended, could not apply to the assignee (appellant Mr Bock). Then he referred to the concept of novation of section 1173 of the Quebec Civil Code to say that since there was no novation there was no extension of the debt and consequently section 80 of the Act did not apply.

He also argued that there was payment of the debt by the gift and he referred to Exhibits A-2 and A-4 to substantiate the gift.

His third point was that the exception of paragraph 80(d) of the Act, does not apply since the debt was for gambling and not to produce income.

Counsel of the respondent argued that there was a debt by the appellant, Mr Bock, and it was extinguished prior to the trip to Mexico, according to the waiver signed by Mr Berco on January 2, 1974; also there was no payment whatsoever effectuated by Mr Berke and consequently he never extinguished the debt.

As to the exception of paragraph 80(d) of the Act, it does not prevent the application of section 80 of the Act, because the debt of Mr Berke was not personal.

He terminated his argument by saying that Mr Berke did not remember the circumstances of the loan, why the money was borrowed, whether it was in numerous amounts, and furthermore he was always pressed by creditors and his cash flow was always low.

According to the evidence adduced there are two debtors: Mr Berke, because he was not released by Mr Berco; and Mr Bock, because in buying the pharmacy business he assumed all Mr Berke’s debts.

It is obvious that there was no novation within the provision of the Quebec Civil Code because Mr Berco was not a party to the convention between Mr Berke and Mr Bock ad there is no evidence to show that Mr Berke was released of his debt towards Mr Berco.

On the other hand, there is a written release signed on January 2, 1974, to the effect that Mr Berco renounced and abandoned all claim against Mr Bock with respect to the loan made to Mr Berke and Mr Bock swears that he never gave any money to obtain this release.

Moreover, another document signed by Mr Berco on April 11, 1979, corroborates the fact that the renunciation or abandonment of the debt in 1974 was in fact a gift. It is obvious that this documentary evidence constitutes an extinction of the debt vis-à-vis the appellant Mr Bock.

At this juncture, and to know whether section 80 of the Act applies, it would be proper to examine carefully the said section whch reads as follows:

Debtor’s gain on settlement of debts.

Where at any time in a taxation year a debt or other obligation of a taxpayer to pay an amount is settled or extinguished after 1971 without any payment by him or by the payment of an amount less than the principal amount of the debt or obligation, as the case may be, the amount by whcih the lesser of the principal amount thereof and the amount for which the obligation was issued by the taxpayer exceeds the amount so paid, if any, shall be applied

(a) to reduce, in the following order, the taxpayer’s

(i) non-capital losses,

(ii) net capital losses, and

(iii) restricted farm losses,

for preceding taxation years, to the extent of the amount of those losses that would otherwise be deductible in computing the taxpayer’s taxable income for the year or a subsequent year, and

(b) to the extent that the excess exceeds the portion thereof required to be applied as provided in paragraph (a), to reduce in prescribed manner the capital cost to the taxpayer of any depreciable property and the adjusted cost base to him of any capital property,

(c) the taxpayer is, at that time, a bankrupt within the meaning of section 128,

(d) the debt or obligation was such that, if interest had been paid by the taxpayer in respect of it, no deduction would have been permitted by this Part in respect of that interest in computing the taxpayer’s income,

(e) section 79 is applicable in respect of the debt or obligation, or

(f) the excess is otherwise requrd to be included in computing his income for the year or to be deducted in computing the capital cost to him of any depreciable property or the adjusted cost base to him of any capital property.

As may be seen, this section 80 of the Act, was enacted with respect to a taxpayer who seeks to claim some capital cost allowance deductions. Therefore, the only one who would be interested in seeking such deduction is the appellant taxpayer and not Mr Berke. For this reason it is a fallacy to say that because Mr Berke contracted the debt and not Mr Bock section 80 of the Act, could not apply to the assignee.

Furthermore, section 80 of the Act, mentions: or an obligation contracted by a taxpayer to pay a sum.

Consequently, even if Mr Bock is not the first debtor he is an obligor to pay an amount that was settled or extinguished. Indeed, the documentary evidence is sufficient to conclude that the creditor, Mr Berco, did extinguish the obligation vis-a-vis the appellant Mr Bock, and by the same token reduced the cost of acquisition of the pharmacy business.

Having said that it becomes immaterial to decide whether the substance of the transaction was a gift or an abandonment of an obligation and whether the $37,216 was a personal debt of Mr Berke.

For these reasons, the appeal is dismissed.

Appeal dismissed.