Friedrich Brittner, Peter Brittner v. Minister of National Revenue, [1973] CTC 2129, 73 DTC 109

Roland St-Onge:—These are income tax appeals in respect of the appellants’ 1964 taxation year. Upon notices of objection duly signed and filed the Minister of National Revenue confirmed both assessments on April 14, 1970.

The appeals were heard on common evidence before Mr J O Weldon, QC, and judgment was reserved. Before Mr Weldon could reach a decision, his term of office expired. Accordingly by consent of both parties, this Board has now been given jurisdiction to issue its decision and judgment on the basis of the transcript of the evidence and the argument taken before Mr Weldon, without further representation by counsel and the matter has come to me for adjudication.

The appellants were engaged in the construction business along with Messrs C E Stevens and W Stevens under the partnership name of Westland Housing Construction (hereinafter referred to as “the partnership”). On July 16, 1962, Westland Housing Corporation Ltd (hereinafter referred to as “Westland”) was incorporated to take over the business of the partnership as a going concern. The net worth of the partnership at the date of dissolution was $19,592.76. This amount less $40 representing 40 shares of issued and fully-paid stock in Westland was credited on the books of Westland to “Loans from shareholders”. Westland executed a 6% interest-bearing chattel mortgage in favour of the former partners on all the chattels, personal property, inventory, tools and vehicles purchased from the partnership. The amount owing by Wesiland was shown on the books of Brittner Brothers (a partnership) as an Investment Receivable.

The appellants performed construction work for Westland and sums received as fees or on account of drawings or salaries were reported as income of the partners. The Reply to Notice of Appeal reads in part as follows:

In the fiscal period of the company, from June 1st, 1963, to May 31st, 1964, Westland Housing Construction Ltd received the following charges and made the following payments to the appellants —

Accounts rendered
Invoices rendered	$43,490.99
Salary 12 x $1,000.00	12,000.00	$55,490.99
Accounts paid
Paid on invoices	$28,355.93
Paid on salary	10,500,00	$38,855.93
Balance receivable May 31, 1964		$16,635.06

As indicated above, total charges against Westland amounted to $55,490.99 and collections to $38,855.93, leaving a balance of $16,- 635.06. During the year 1964 Westland became insolvent. The appellants claimed a bad debt loss on the following basis:

Balance (Shareholders’

loans) receivable May 31, 1963		$13,110.28
Add:
Invoices rendered	$43,490.99
Salary 12 x $1,000.00	12,000.00	55,490.99
		$68,601.27
Deduct:
Cash collected on invoices	28,355.93
Cash collected on salary	10,500.00	38,855.93
Balance receivable May 31, 1964		$29,745.34
Deduct:
Subsequent collections		4,490.86
Claimed as a bad debt		$25,254.48

Counsel for appellants in his argument contended that the sums received were sufficient to exhaust the original advances of $13,110.28 leaving a nil balance on account of capital and, in the alternative, the $13,110.28 loss was not a capital loss but a loss in the. course of business and therefore should be regarded as a loss arising from an adventure in the nature of trade.

Counsel for the respondent, in his argument, contended that the Original advance was capital and the amount of $13,110.28 contained in the total claim of $25,254.48 was not a deductible item.

In my view it was open to the appellants to arrange their affairs in a more advantageous manner by claiming the amount of $13,110.28 as a non-interest bearing unsecured receivable, entering the amounts as received from time to time from Westland as credits to this account, thereby exhausting the original advances and leaving only $40 in Investment Account. If an appropriate accounting treatment had been applied, supported by a Minute of Authorization, the original indebtedness on Westland’s books could perhaps have been liquidated, and the said appeals would in all probability never have arisen. However, this was not done and there is no evidence to support the contention of counsel for appellants that current payments on account were in fact capital repayments. Considering the situation as it existed, I do not see how the loss of funds in capital account could be regarded as a deductible loss suffered in a business adventure under any section of the Income Tax Act.

Appeals dismissed.