Leonard Levitz v. Minister of National Revenue, [1979] CTC 2856, 79 DTC 717

Delmer E Taylor:— This is an appeal against an income tax assessment for the year 1973 in which the Minister of National Revenue disallowed as a bad debt expense, an amount of $6,208.82 claimed by the appellant against his income as a self-employed commission agent. In reassessing the appellant, the respondent relied, inter alia, upon paragraphs 18(1)(a) and 20(1)(p) of the Income Tax Act, RSC 1952, c 148 as amended by section 1 of SC 1970-71-72, c 63.

The appellant put forward the following contentions:

As an agent for General Steel Wares Limited I was required by them to guarantee a debt owed to General Steel Wares Limited by R J Gouchy Limited relating to goods released to R J Gouchy Limited. Had I not guaranteed the debt I would have lost the agency and my source of income, ie commission from General Steel Wares Limited. For several years after making the guarantee I continued to earn commissions from General Steel Wares Limited.

R J Gouchy Limited subsequently went into bankruptcy and I was required to pay the amount of $6,208.82 to General Steel Wares Limited, which I then deducted as a bad debt from my 1973 income.

Revenue Canada has disallowed the deduction on the grounds that the amount was never included in my income, with particular reference to paragraph 20(1)(p). However, I contend that my consideration for guaranteeing the debt was the subsequent commissions earned which were included in income.

In support of his claim, the appellant noted the decision in Her Majesty The Queen v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577.

Through the appellant, counsel for the respondent introduced two documents:

Exhibit R-1:

Whereas R I Grouchy Ltd, purchased appliances from you which I caused on your behalf to be released from Harvey’s Warehouse in St John’s Newfoundland by shipment or shipments on or about October 10, 1965, to the Grand Bank store of R I Grouchy Ltd. The purchase price of which was approximately $7,000 (hereinafter called “The October 10th purchase price”);

General Steel Wares Ltd,	St John’s, Nfld
St Clair Ave West	November 16,1965
Toronto 7, Ontario.

And whereas you have agreed not to commence any action against R I Grouchy Ltd for payment thereof prior to November 30, 1965;

Now therefore witnesseth that in consideration of you agreeing not to commence any action for the payment of the said October 10th purchase price prior to November 30th, 1965, I hereby guarantee to you the due payment of the October 10th purchase price together with interest thereon at the rate of 8% per annum. For purposes of this guarantee any payments made by R I Grouchy Ltd after this date shall be deemed to be applied to indebtedness other than the said October 10th purchase price personally owing by R I Grouchy Ltd to you and only after satisfaction of such other indebtedness shall payment by R I Grouchy Ltd be deemed to be on account of the said October 10th purchase price.

You shall authorize to take and release any and all collateral or other securities, to extend the time for payment to the said R I Grouchy Ltd or to any person liable upon any collateral or other securities which you may at any time hold, and to compromise or compound with R I Grouchy Ltd or persons so liable without notice to me, and without discharging or affecting my liability. You shall not be bound to exhaust your recourses against the said R I Grouchy Ltd, or other persons for the securities you may hold before being entitled to payment from me of the amount hereby guaranteed.

I shall pay my obligations under this guarantee immediately on demand made after November 30, 1965.

This guarantee and agreement on my part shall extend to and enure to the benefit of your successors and assigns.

In witness whereof I have hereunto affixed my hand and seal on the date first above written.

Witness:	signed Leonard Levitz
J B Deyell	Leonard Levitz
Signature of Witness
5 Shesley Bd
Address of Witness
Exhibit R-2:
1968 No 116

IN THE SUPREME COURT OF NEWFOUNDLAND

BETWEEN

GENERAL STEEL WARES LIMITED	PLAINTIFF
AND
LEONARD LEVITZ	DEFENDANT
STATEMENT OF CLAIM

1. The Plaintiff is a body corporate and has its Head Office in the City of Toronto in the Province of Ontario.

2. The Defendant carries on an Agency Business in St John’s, at a premises known as No 94 Bonaventure Avenue.

3. By an Agreement in writing dated the 16th day of November, AD 1965 and made between the Plaintiff herein and the Defendant herein, the Defendant guaranteed to the Plaintiff the due payment of appliances sold and delivered by the Plaintiff herein to R J Grouchy Limited on or about the 10th day of October, AD 1965 the purchase price of which was stated in the Agreement to be “approximately $7,000”. The Defendant guaranteed the payment of the said sum together with interest thereon at the rate of 8% per annum. It was further set forth in the said Agreement that the Defendant would pay his obligations under the guarantee immediately on demand made after November 30, 1965.

4. The Plaintiff has made demand on the Defendant of the monies due under the said Agreement and the Defendant has refused to pay same.

5. As of the 24th day of May, 1967 the balance owing on the said Agreement (including interest) amounted to $6,093.43 and interest on the said sum at the rate of 8% per annum is still running.

6. In addition to monies owed by the Defendant to the Plaintiff as aforesaid the Defendant owes to the Plaintiff the sum of $249.64 for the personal purchases made by the Defendant of the Plaintiff.

The Plaintiff claims:

(a) the sum of $249.64 for personal purchases

(b) $6,093.43 together with interest thereon at the rate of 8% per annum from May 24th, 1967 to date of Judgment

(c) costs.

Dated at St John’s this 17th day of February, AD 1968.

RENOUF, MERCER & GILLIES

Solicitors for the Plaintiff

ADDRESS FOR SERVICE

170 Water Street,

St John’s

TO

The Defendant.

The explanation provided by the appellant was essentially that, in error, he had released certain goods to R J Grouchy Limited (hereinafter referred to as “Grouchy”), and would have lost the General Steel Wares Limited (hereinafter referred to as “General”) account had he not agreed to sign Exhibit R-1. Nevertheless, his business arrangement with General came to an end about one year after Exhibit R-1 was signed, but merely because he had a better offer from a competitor company. He had not paid the amount until 1973 because he had continued to try to work out a better settlement with General.

Counsel for the respondent noted for the record that there was no possibility that the amount could be deductible under paragraph 20(1)(p) of the Act since it was evident it had not been included previously in income to even qualify for such consideration as a deduction. The appellant’s position at the hearing, according to counsel for the respondent, seemed to be that the amount was claimed now under the general provisions of paragraph 18(1)(a) of the Act.

As I see it, in this matter, what happened was that the appellant Levitz, against General’s policy, sold goods to Grouchy for which General could not be paid. As agent, Levitz probably had the authority to make the contract between General and Grouchy, and in effect General then had a bad debt, or certainly one which that company considered highly uncollectible. Whether or not General might have had a right of any legal action against Levitz in the event that the account receivable from Grouchy was not paid, was not touched upon at the hearing. The appellant stated at the hearing that the consideration he received for signing Exhibit R-1 was the continuation of the General agency. I find nothing therein which would support that contention and, indeed, the quid pro quo received by Levitz for his guarantee of the Grouchy account is simply that General agreed not to commence legal action against Grouchy before November 30, 1965. The appellant has not related this concession from General (not to pursue legal action against Grouchy) in any way to income earned by him at the time. The fact that he eventually made good on his guarantee is not significant, in my opinion, under these circumstances.

The appeal is dismissed.

Appeal dismissed.